Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
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 001-37840
COMMERCEHUB, INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
 
7372
(Primary Standard Industrial
Classification code number)
 
81-1001640
(I.R.S. Employer
Identification No.)
201 Fuller Road, 6th Floor, Albany, New York 12203
(address of principal executive office, including zip code)
Registrant's telephone number, including area code: (518) 810-0700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
 
Name of each exchange on which registered:
Series A common stock, par value $0.01 per share
 
The NASDAQ Stock Market LLC
Series C common stock, par value $0.01 per share
 
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ý No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨ No  ý
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  ý No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or 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 Exchange Act.
Large accelerated filer
ý
 
Accelerated filer
o
 
Non-accelerated filer
o
 
Smaller reporting company
o
 
 
 
 
 
 
 
 
 
Emerging growth company
o
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 Exchange Act).    Yes  ¨    No  ý
As of June 30, 2017, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of shares of the registrant’s common stock held by non-affiliates of the registrant (based upon the closing sale per-share price of $17.42 for our Series A common stock and $17.44 for our Series C common stock, in each case on the Nasdaq Global Market, and $17.40 for our Series B common stock on the OTC Markets) was approximately $711.4 million.
The number of outstanding shares of CommerceHub, Inc. common stock as of February 21, 2018 was:
 
 
Series A
Series B
Series C
CommerceHub, Inc. common stock:
 
13,599,641
707,567
29,199,753
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for its 2018 Annual Meeting of Stockholders are incorporated by reference in Part II, Item 5, and Part III of this Annual Report on Form 10-K to the extent stated herein. Such Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the Registrant's fiscal year ended December 31, 2017.
 


Table of Contents

TABLE OF CONTENTS
 
PART I.
 
PART II.
 
Part III.
 
PART IV.
 



Table of Contents

Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements about future business strategies, future financial performance, cost savings, market conditions and potential, future growth of ecommerce, customer growth and performance, sales channel expansion, international expansion and other matters that are not historical facts. In particular, statements under Item 1 "Business," Item 1A "Risk-Factors," Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 7A "Quantitative and Qualitative Disclosures About Market Risk" contain forward-looking statements. These statements involve risks, uncertainties, estimates and assumptions, many of which are beyond our control, that could cause actual results to differ materially from those expressed or implied in such statements, including, without limitation, market acceptance and performance of our products and services, competitive issues, general market conditions, regulatory matters and changes in law affecting our business, and the risk factors described in this Annual Report on Form 10-K under Item 1A "Risk Factors.” Further, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all potential risks or assess their potential effects on our business.
Forward-looking statements set forth herein speak only as of the date of this Annual Report on Form 10-K, and we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any such statement contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. There can be no assurance that any expectation or belief expressed in a forward-looking statement will occur, and you should not place undue reliance on any forward-looking statements.
As used herein, "CommerceHub," "we," "us," "our," the "Company" and similar terms include CommerceHub, Inc. and its subsidiaries, unless the context indicates otherwise.
This report contains references to our trademarks and service marks and to those belonging to other entities. Solely for convenience, trademarks and trade names referred to in this report may appear without the ® or ™ symbols, but despite the omission of such symbols we intend to assert our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies' trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.



Table of Contents

PART I.
Item 1. Business
Overview 
We are a leading provider of cloud-based ecommerce fulfillment and marketing solutions for large retailers, marketplaces, consumer brands and their suppliers. Our solutions help our customers implement strategies to increase their ecommerce revenues and create meaningful operational efficiencies within their supply chains. Our customers use our cloud-based software and service capabilities, which are tailored for specific customer business rules and processes, to more effectively fulfill consumer orders, generate consumer demand for their products and deliver those products to consumers.
Since the beginning of ecommerce, retailers and brands have faced significant financial and operational difficulties transitioning their businesses to digital environments. For example, retailers have been challenged by the task of providing their customers with the large selection of products that they expect and increasingly demand. Buying larger assortments of products from suppliers and storing them in inventory requires significant capital investment for retailers. Similarly, operating warehouses equipped with the capabilities needed to receive and prepare orders for shipment is complex and expensive. CommerceHub helps to solve these problems by helping retailers leverage the "virtual inventory" of thousands of suppliers. Through CommerceHub’s platform, retailers and suppliers can share product information and inventory data, and process customer orders that are drop-shipped with the retailer's branding and delivery speed promises. In addition, by connecting with our large network of retailers and other demand channels, brands and suppliers are able to proactively unlock new sources of demand for their products. For example, rather than relying exclusively on their legacy wholesale relationships and the consumer demand generated by their own websites, brands are able to extend their reach by selling through additional retailers and online marketplaces, such as Amazon and eBay.
We provide our solutions to our customers through two offerings that are delivered through our cloud-based CommerceHub software platform and complementary services.
CommerceHub for Retailers. Retailers and online marketplaces use CommerceHub to increase their online revenue through an “asset-light” fulfillment strategy called drop-shipping, where products are sold online by a retailer and then drop-shipped directly to a retailer’s customer by the supplier. Our platform enables retailers to expand their product offerings without the economic and logistical limitations and risks typically associated with buying, storing and shipping physical inventory. Our network of over 11,000 drop-ship-capable suppliers are able to receive orders from retailers and rapidly deliver products directly to consumers.
CommerceHub for Brands. Brands and other marketplace sellers use CommerceHub to grow their online revenue by selling their products through retailers and marketplaces. Our platform gives brands and other sellers greater exposure to consumer demand through access to, and product listing management capabilities for, many of the largest and most important sales channels in North America, including major retailers, online marketplaces and other demand channels, such as social and product advertising.
A core set of software and service capabilities underpin both our retailer and brand offerings. Our platform facilitates rapid, cost-efficient, on-time delivery of products to consumers with greater control of, and visibility into, the consumer experience through more dynamic and intelligent use of third-party logistics (“3PL”) providers and national, regional, local and specialty delivery companies. For example, our SmartShipping solution enables retailers to automatically adjust carrier service levels to help meet consumer delivery promise dates in the most cost-effective manner available based on the geographical location of the inventory and the consumer. To help reduce delivery times, our network of 3PL partners helps retailers and other sellers distribute inventory to locations that are closer to a wider distribution of their customers, enabling them to meet their customers' delivery expectations while reducing the associated delivery costs.
Complementing the software capabilities common to our retailer and brand offerings, our customers form a collective trading partner network where retailers, marketplaces, brands and their suppliers are able to conduct business with each other through the CommerceHub platform. Each trading partner on the network is able to integrate to CommerceHub using file formats and messages native to their own internal information systems, and CommerceHub acts as a centralized integration hub that translates individual messages into the format required by each of their trading partner's disparate systems. This approach is effective at reducing the overall cost and complexity of conducting business because each trading partner needs to manage only their integration to CommerceHub, instead of having to manage and maintain multiple integrations to the thousands of other trading partners also connected to CommerceHub. Additionally, the operational risk of transitioning an existing drop-ship supply chain to CommerceHub is reduced because over 11,000 brands and distributors are already connected to our network, and we have over 20 years of experience setting up and maintaining these integrations with significant operational efficiency.

1

Table of Contents

Supply Chain Transformation from the Secular Shift of Retail Spending into Ecommerce
Consumers are increasingly shopping for products online using ecommerce channels such as online retailers and marketplaces because of convenience and large product selections. As consumer spending shifts into these online channels, retailers and brands are discovering that their existing supply chains are not set up to efficiently manage the order fulfillment process. Before ecommerce, retailer and brand supply chains were focused inward and were optimized to manage the physical assets owned and managed by the retailer or brand. Coordination between trading partners took place through negotiated replenishment orders that arranged for the infrequent movement of large quantities of physical goods between parties. Warehouses owned and managed by retailers were designed to support receiving goods from brands and distributors, and shipping of goods to physical stores, in quantities that were batched into large bulk shipments. Conversely, warehouses owned and managed by brands and distributors were designed to receive goods from manufacturers and importers and to ship goods to retailers in bulk shipments. Only specialized catalog and TV-based retailers were adept at packaging single products into individual shipments to consumers at high volume.
The rise of ecommerce has fundamentally transformed, and continues to transform, supply-chain design. As traditional retailers started to sell online, they retro-fitted a portion of their warehouses to enable direct-to-consumer fulfillment. However, the growth of ecommerce order volumes has proved too much for many retailers to handle on their own. Retail organizations have faced difficult strategic decisions on whether to invest significant amounts of financial and human capital to increase fulfillment capacity by building and stocking new warehouses, or to outsource those functions to their suppliers. In many cases, shifting inventory management and fulfillment responsibilities to suppliers has benefited both retailers and suppliers. Retailers have been able to increase revenues without corresponding increases in capital investments, and their suppliers, including brands and distributors, have been able to increase their own revenues because the retailers have been able to list more of their products for sale online. This approach, called drop-shipping, has fundamentally changed the way trading partners interact as their relationships, and the supply chains built to support those relationships, have moved from low-volume replenishment orders to high-volume drop-ship orders.
The current landscape of global ecommerce requires sellers to integrate their supply chains and information systems to a variety of third parties, including retailers, online marketplaces, search engines and fulfillment sources, such as brands, distributors and 3PL providers. The relationships retailers and brands have with third parties form a network of distributed commerce where each party acts as a trading partner playing a role to support the business of other trading partners. Through CommerceHub, our customers are able to integrate their systems to our software platform to extend the reach and capability of their supply chains to include the capabilities of their other trading partners.
Software Platform and Trading Partner Network    
Our customers include over 11,600 retailers, online marketplaces, brands and other suppliers that use our platform every day to conduct business with each other, including processing orders and invoices, exchanging product information and other electronic documents, and tracking their customers’ buying experience from order through fulfillment and delivery. Our customers include many of North America’s largest retailers and brands, who use CommerceHub to generate consumer demand, fulfill customer orders and facilitate the delivery of products to customers. We estimate that, in 2017, our customers used CommerceHub to enable the fulfillment of goods worth an estimated $16 billion in gross merchandise value ("GMV"). As described in more detail below under "—Our Revenue," the majority of our revenue is variable and tied to order fees that are primarily based on the volume of customer activity we enable on our platform.
Collectively, our customers and the other trading partners on our platform comprise a vast network of retailers, brands, other suppliers, online marketplaces, demand channels and other trading partners that constitute a critical mass of many of the largest and most influential companies in North American ecommerce. This critical mass has helped us achieve a meaningful network effect, attracting new brand customers to our large network of retailers and demand channels, and attracting new retailer and demand channel customers to our network of thousands of suppliers, enabling us to grow our business with a comparatively low cost of customer acquisition.
Our Growth Strategy
In any given year, the majority of our revenue tends to come from our existing customers, and we structure our customer relationships so that the majority of our revenue is earned through order fees, which are primarily driven by the volume of customer activity on our platform. We believe there are three distinct drivers of volume growth on our platform. First is the secular shift of retail into the ecommerce channel, which has provided a natural tailwind for us where activity on our platform (and thus, our revenue) has increased as more consumers shop online. Next is our ability to increase the share of our customers’ overall ecommerce GMV that is transacted through our platform, which we refer to as our “GMV share.” When we increase our GMV share with customers, we achieve additional volume growth in excess of the organic growth rate of those customers. Finally, we have the ability to sign new retailer and brand customers, which provides additional revenue through

2

Table of Contents

setup and professional services fees, subscription fees and, as these new customers ramp up their adoption of our platform, order fees. Today, the majority of our customers are located in the United States and Canada. In 2017, we signed our first retailer customer in the United Kingdom, and we believe this was an initial step toward growing revenue through the signing of European retailer customers.
In addition, we seek to increase our revenue through a combination of upselling new software features and cross-selling opportunities with our existing customers. These opportunities include:
expanding the number of retailer-to-supplier connections within our existing customer base; 
leveraging our expansive trading partner network of retailer and marketplace customers to attract new brands and other suppliers, and leveraging our expansive network of suppliers to attract new retailer and marketplace customers; 
enabling our existing customers to more easily sell and promote their product assortments through newly emerging ecommerce channels, such as social networks; and
continuing to develop new and innovative solutions and features that help our customers capture a larger share of the growing ecommerce market to further increase the volume of ecommerce transactions processed through our platform.
Our Role as Strategic Partner
CommerceHub is generally viewed as a "mission critical" partner to our customers. Our solutions address some of the most important issues facing online sellers today. Retailers and brands that sell direct-to-consumer face a challenging market environment characterized by flat-to-declining retail store sales, more demanding consumer expectations in terms of product availability and delivery, and the proliferation of emerging search and social ecommerce channels to convert sales. Our platform and solutions enable our customers to meet these market challenges and more efficiently grow their online sales.
We have a long history of successfully helping our customers reduce the overall complexity of their trading partner relationships to help them grow their revenue through ecommerce in a capital-efficient manner. In addition, our solutions help our customers grow their online sales by facilitating more rapid fulfillment of orders and enabling them to capture more consumer demand through online marketplaces, social and product advertising and other demand channels. Many of our retailer and marketplace customers use our solutions to enable a large percentage of their overall online sales, and our brand and other supplier customers use our solutions to tap into direct-to-consumer demand. In each case, our solutions help our customers better coordinate and manage their fulfillment and delivery capabilities with greater visibility to ensure a positive consumer experience. We believe that this combination of "supply" (enabling the fulfillment of consumer orders through a network of suppliers), "demand" (connecting sellers to consumer demand by facilitating access to demand channels) and "delivery" (facilitating rapid, cost-efficient, on-time delivery to consumers) solutions is unique in our industry and provides us with a compelling platform to continue to successfully grow our business.
Because our solutions play a critical role in helping our customers manage a complex array of business relationships in a highly competitive retail environment, we have benefited from strong loyalty and enduring, long-term relationships with many of our customers. We believe we are becoming an increasingly strategic partner to our customers as we become more deeply integrated into their systems and go-to-market efforts, as our GMV share increases, and as more retailers, marketplaces, brands and suppliers connect into the CommerceHub platform.
We also enhance our platform through value-added capabilities that we continue to develop, many of which are based on feedback we receive from our customers about challenges they face in their ecommerce businesses. For example, the following capabilities solve unique issues related to virtual inventory fulfillment:
managing high drop-ship order volumes with multiple parties: each order a retailer receives must be managed with at least one third-party supplier that fulfills the order on the retailer's behalf, which is more complex than traditional direct fulfillment, as the retailer is entrusting an important part of the customer experience to an outsourced supplier, and this complexity increases exponentially when scaled across large retailer supplier networks and transaction volumes; 
retailer branding requirements: retailers frequently want the multi-party drop-ship fulfillment process be invisible to the consumer, which requires that third-party suppliers include retailer-branded packing slips and other materials in shipments to consumers; 
insight, analytics and proactive error resolution: retailers must monitor and track a high volume of drop-ship orders and identify shipments that are at risk of missing the consumer's delivery promise date; and
coordination with third-party logistics providers: our ability to integrate with 3PL providers enables retailers and suppliers to locate inventory closer to broad distributions of consumers, helping them to increase delivery speeds and reduce delivery costs.

3

Table of Contents

product content collection and compliance: before retailers can sell products online, they must collect detailed digital product information from their suppliers, including descriptions, titles, prices and images. Suppliers maintain and manage product information in disparate databases and formats that are not compliant with retail-specific requirements. Our software provides retailers with the ability to more efficiently collect product information from suppliers and then transform their digital assets into a format that can be more easily imported into a retailer’s own information systems to reduce the time it takes to post products for sale online; and
ship-to-store and omnichannel capabilities: many brick and mortar retailers are relying heavily on omnichannel strategies that provide for more effective coordination between online and offline channels. Our ship-to-store capabilities enable retailers to drop ship products directly to specific physical retail store locations, providing consumers with more flexible and convenient delivery options.
Our Industry 
Ecommerce has grown significantly over the last several years as consumers have increasingly shifted retail purchases from traditional "brick-and-mortar" stores to online stores and marketplaces. This growth has been attributable to a number of factors, including:
the availability of a broader selection of merchandise online; 
consumer convenience and ease of use; 
more competitive and transparent pricing; 
increased functionality and reliability of ecommerce websites; 
the emergence of mobile-connected devices and specialized websites; 
the proliferation of online distribution channels; and
the reduction in "brick-and-mortar" locations for many retailers.
As a result of these and other factors, consumers today have more options to discover, research and purchase products online. Although these ecommerce growth drivers create significant opportunity for sellers, they also create additional complexities and challenges. Retailers and brands seeking new avenues to expand their online sales must manage product data, transactions and delivery promises across hundreds of highly fragmented online channels with different requirements for conducting business, varying data attributes and other technical requirements, evolving business models and competitive pressure to increase the pace of innovation.
In addition to the shift toward ecommerce retailing, organic growth of the economy and consumer spending provides an additional tailwind. In this environment, well-run brick-and-mortar retailers have increasingly focused on optimizing the interplay between their physical and online storefronts. This omnichannel approach enables customers to shop and interact between channels in a more fluid manner. For example, shoppers can buy a product online but pick it up in-store, retailers can use their stores as warehouses, fulfilling online orders through in-store delivery or by shipping items from their stores, and shoppers can return products purchased online to in-store locations. An omnichannel strategy enables a retailer to position its physical storefront not as a liability, but rather as part of a strategy to provide consumers with a more consistent, convenient and effortless retail experience, regardless of how they choose to engage the retailer. As a result of their success, we believe that omnichannel strategies represent an increasingly significant component of all retailers' revenue mix.
Growth in ecommerce spending has consistently outpaced overall growth in retail sales, a trend that is expected to continue. Based on data from the U.S. Department of Commerce, ecommerce spending in the U.S. has grown at a compound annual rate of approximately 15% since 2010, exceeding $450 billion in 2017 when it amounted to approximately 8.9% of all retail sales. During the same period, total non-inflation adjusted retail sales, offline and online, grew at a compound annual rate of approximately 4.2%.
Ecommerce Fulfillment Industry Background
The ecommerce fulfillment industry enables thousands of retailers around the world to transact and grow their relationships with tens of thousands of suppliers. Additional participants in this market include 3PL providers, parcel carriers and other delivery companies, fulfillment and warehousing providers and sourcing companies. Supply chain management involves communicating data about the goods themselves, data related to the exchange of goods among these trading partners, and information about the many thousands of companies who are members of the supply chain community. At virtually every stage of the supply chain, there are inefficient, labor-intensive processes between trading partners with administrative and communication requirements, such as the exchange of product information between retailers and suppliers for the purpose of listing products for sale and verifying the status of goods before shipment, while in transit and upon delivery, to ensure that consumers receive the products they ordered by the date promised. Mistakes made during these processes negatively impact trading partners and their businesses, either through penalties that counterparties impose or through poor consumer experiences that discourage future purchases. Ecommerce fulfillment solutions must address trading partners' needs for integration,

4

Table of Contents

collaboration, connectivity, visibility and data analytics to improve the speed, accuracy and efficiency with which goods are ordered and supplied.
The industry initially focused on electronically connecting retailers and suppliers over the Internet to avoid costly and error-prone manual, paper and fax-based communication processes. The next evolution included automating and streamlining these fulfillment transactions between retailers, suppliers and others in the supply chain, ensuring orders were placed accurately and quickly and that goods were delivered on time and in accordance with the retailer's requirements. As familiarity and acceptance of cloud-based services continues to accelerate, we believe that ecommerce participants, both large and small, will continue to turn to cloud-based solutions such as ours for their supply chain integration needs.
Traditional Solutions
Traditional ecommerce fulfillment solutions implemented using on-premise licensed software tend to focus primarily on fulfillment automation within a single facility and among a small network of trading partners. On-premise software provides connectivity between only one organization and its trading partners and typically requires significant time and technical expertise to configure, deploy and maintain, and to accommodate new trading partners added to the network. On-premise software licensors primarily link retailers and suppliers through the Electronic Data Interchange, also known as "EDI," protocol, which enables the structured electronic transmission of data between organizations. Because of set-up and maintenance costs, technical complexity and a growing volume of requirements from retailers, the traditional software model is not well-suited for many retailers and suppliers, especially where the network includes small and medium-sized suppliers with disparate systems and smaller information technology budgets.
Additionally, the traditional approach to supply chain automation involves a system architecture made up of many point-to-point connections between retailers and their suppliers. These multiple connections are inherently error-prone and can be difficult to adapt to changing requirements and market circumstances. For instance, if there is a broad trend in the market that many members of a retailing segment would like to adopt, a supplier would be faced with a series of enhancements, on a one-by-one basis, to each connection they have with their retailer relationships. Lacking flexibility, adaptability and ability to scale, traditional approaches do not have the dynamic architectural capabilities necessary for retailers and suppliers to maximize the opportunities presented by the rapid evolution of market trends.
Expansion of Product Assortments
While online retailing has removed the shelf-space constraints placed on retailers wanting to offer a large product assortment to consumers, it has not removed the physical and operational constraints of storing products in inventory and picking, packing and shipping them to consumers quickly when they are ordered. In fact, the need to offer massive numbers of products for sale online has put more pressure on retailers to substantially increase capital investments in more expansive inventories and larger, more sophisticated warehouse and distribution operations. As an alternative to expensive product and infrastructure investment, however, retailers looking to increase the number of products they offer often turn to third-party fulfillment mechanisms, specifically drop-ship fulfillment, to expand their assortments through virtual inventory. With drop-shipping, a retailer is able to take a consumer's order and provide it to a supplier that then delivers the product directly to the consumer. The consumer perceives that the product was received directly from the retailer, even though the retailer never touched the ordered item.
Each retailer imposes unique specifications on their trading partners for electronically communicating supply chain information. These specifications set the standards for transmitting and acknowledging invoices, inventory reporting, purchase orders and shipping notices. Suppliers that transact with multiple retailers need to accommodate different specifications for each retailer, which often vary based on a retailer's size, industry and technological capabilities. Suppliers that fail to comply with a retailer's specifications risk errors with processing orders and compliance fines, and recurring performance issues may cause a retailer to discontinue its relationship with a supplier. As a result, suppliers are increasingly seeking out solutions to help them manage these challenges and improve their service levels with the retailers they supply.
Before a retailer can list a supplier's products on its website, it must import the supplier's product content data, transform that data into a format that the retailer's online storefront supports, and then enhance the data in a way that makes the product appear more compelling to consumers. This process includes rewriting product titles and descriptions, creating additional data attributes that describe the products, and manipulating product images to conform to the retailer's standards. All of this work falls under the responsibility of individual retailer and supplier employees, who frequently rely on general purpose software and tools, such as email and spreadsheets, to accomplish these tasks, resulting in labor-intensive and error-prone processes with no activity tracking or management capabilities. The inefficiency of this process directly impacts a retailer's financial performance by increasing the amount of time and resources required to list products for sale online, or by reducing the number of products a retailer is able to carry online due to capacity constraints resulting from the manual tasks. A similar

5

Table of Contents

exercise takes place in the context of an online marketplace, where sellers must list products for sale and describe them in a manner that conforms to the marketplace's requirements.
Driving Demand
Ecommerce is a large and global market that continues to expand. However, it is also an increasingly complex and fragmented market due to the hundreds of channels available to sellers and the rapid pace of change and innovation across those channels. Historically, a retailer or brand might have simply established an online storefront and used a basic paid search program to drive traffic to its website. Today, however, in order to gain consumers' attention in a more crowded and competitive online marketplace, many retailers and an increasing number of consumer brands sell their merchandise through an omnichannel strategy where each channel has its own rules, requirements and specifications. In addition, retailers and brands often seek to sell their products in multiple countries, each with its own local consumer preferences and behaviors.
The fragmentation and increasing complexity of ecommerce channels are placing greater demands on retailers and brands that seek to grow their online sales. These sellers need omnichannel solutions that enable them to integrate their product offerings and inventory across multiple online channels. Traditional solutions, however, typically suffer from several limitations. In-house solutions are often costly, slow to implement and difficult to keep current. External solutions are often too narrowly tailored or aimed at helping sellers manage a single online channel or single category of channels rather than multiple platforms in a unified approach.
Delivering Products
From the consumer's perspective, an ecommerce transaction is not complete until the ordered products arrive at their doorstep. There is room for error in even the simplest fulfillment process, where a retailer is operating a single distribution facility with a small inventory of products, and the complexity of having a large network of third-party drop-ship suppliers and third-party fulfillment providers significantly increases the likelihood of error. Instead of managing a single distribution facility, a retailer must ensure that hundreds, and potentially thousands, of third-party suppliers are shipping the correct product to the correct consumer address and that the product will arrive at the consumer's doorstep by the date the retailer promised. Every ecommerce order must be split into its component "line items" and transmitted to the relevant supplier, which must then select the appropriate carrier service level to meet the delivery promise date. Unless the retailer is able to manage this process across its network of suppliers, the retailer risks uncontrolled costs as each supplier makes its own shipping decisions and then charges back to the retailer the cost of delivery. The consequences of poor supplier network performance are even more significant, as the consumer will blame the retailer for any fulfillment problems caused by the third-party supplier or fulfillment provider, thus damaging the customer's perception of the retailer's brand.
Our Solutions and Capabilities 
Our solutions are designed to fulfill our product strategy of unifying disparate sources of demand, supply and delivery. Within our CommerceHub for Retailers and CommerceHub for Brands software and service offerings, our solutions help retailers, marketplaces, brands and suppliers reduce the complexity of selling products through online sales channels, including sourcing through multiple suppliers, selling on emerging online sales channels and delivering products to consumers.
Beyond the cloud-based software required to build and operate successful ecommerce strategies, our solutions include highly targeted services that help our customers rapidly adopt and maximize the utility of our offerings. By combining our software with value-added services, we enable easier adoption of the most effective strategies and tactics for product merchandising, online marketing and product delivery.
Our solutions include:
Assortment Expansion through Drop-Ship Fulfillment.    The core CommerceHub solution enables our retailer customers to communicate electronically with their drop-ship suppliers through a single, integrated connection. Through this "virtual inventory" solution, retailers are able to link their order management systems to each supplier's system to exchange order processing data in compliant formats, allowing for better order and inventory coordination. By using our platform, retailers are able to communicate orders to their suppliers, view data indicating the inventory quantity each supplier has available, receive updates regarding the shipment of orders, view reports that describe each supplier's fulfillment performance and receive notifications when exceptions in the fulfillment process occur. Suppliers are able to receive and manage orders from multiple retailers through a web-based application (or a system-to-system connection for high-volume suppliers) and print retailer-branded packing slips for their shipments to consumers, all while complying with each retailer's unique and exacting requirements without needing to understand the retailer's underlying technical protocols. Retailers using our assortment expansion solution are able to compete more effectively in the market through the operation, at scale, of various delivery strategies, including drop-shipping, ship-to-store, in-store special orders and optimized delivery.

6

Table of Contents

Our assortment expansion solutions include the following capabilities:
Distributed Inventory Management—Our inventory management capability enables retailers to receive aggregated and geographically identified inventory data feeds from a large network of suppliers. Instead of manually receiving and processing individual inventory feeds separately for each of their suppliers, our inventory management capability aggregates disparate inventory data files and provides the resulting output to the retailer in a transformed file format that can be imported directly into the retailer's inventory management software to provide an updated view of the products available for sale from its suppliers and to avoid listing out-of-stock products as available for sale. Including geographic location information in the inventory data feed enables retailers to select more efficient and cost-effective delivery methods, facilitating product shipment from warehouses that are closer to the delivery destination. 
Compliance Management—Our compliance management capability tracks supplier delivery performance, which is then aggregated and presented to the retailer in the form of performance reports and supplier "scorecards." These scorecards provide a snapshot of each supplier's fulfillment performance, helping our retailer customers better manage and assess the performance of their supplier network. Retailers can also use this enhanced visibility to identify trends and address systemic issues across their supplier network to improve the consumer experience by increasing the pace and accuracy of order fulfilment. This capability also benefits suppliers by helping them improve performance and increase their volumes with retailers. 
Returns Management—Our returns management capability helps retailers manage the process of accepting returns from consumers. 
LTL and Special Order Management—Our "Less-Than-Truckload" ("LTL") shipping and special order capabilities provide detailed visibility and management tools to facilitate the fulfillment of complex orders that require the coordination of several parties, including third-party delivery agents and installers. 
Product Content Collection, Management and Syndication—Our product content capabilities enable retailers to automate the process of communicating their product content specifications to suppliers and enable suppliers to more efficiently upload their product catalog into CommerceHub's cloud-based environment in a format that complies with the retailer's requirements, thereby reducing the time and effort required for retailers to list new products for sale. Through our cloud-based software, the retailer is able to efficiently collect and manipulate product content so that it meets the retailer's specifications and then export the compliant content to its website to expedite the process of adding products to their assortment.
Consumer Demand Generation.    Our demand channel solutions enable sellers to upload their entire product catalog to our platform and then transform and syndicate that product catalog to a wide array of ecommerce demand channels to facilitate consumer demand generation. Unlike competing solutions, our platform acts as the single source for a seller's entire product offering with the capability to transform product data into a format that is tailored to each demand channel's unique requirements. Instead of the time-consuming process of managing point-to-point integrations with online demand channels, sellers can upload their product catalog once and then create content rules that transform and map the data in a way that is optimized for each channel.
Our demand channel solutions facilitate multiple revenue-enhancing strategies for retailers and brands and include the following capabilities:
Cross-Channel Optimization for Online Marketplaces—Our channel optimization capabilities provide the ability for retailers and brands to sell through an array of online marketplaces, such as Amazon, eBay, Walmart Marketplace and Jet.com, while maintaining compliance with each marketplace's technical requirements. Sellers list the products they have for sale and provide price and inventory updates to the marketplace on an ongoing basis. When consumers buy products, our cloud-based software tracks the orders from the marketplaces to the seller for fulfillment. 
Cross-Channel Optimization for Digital Advertising—Our channel optimization capabilities for digital advertising manage the listing and configuration of product advertisements on a variety of different ecommerce marketing channels, including Google and social networks such as Facebook and Pinterest. Leveraging the data provided by the product catalog capability of our demand channel solutions, the digital advertising capability enables sellers to optimize performance on supported ecommerce marketing channels by simplifying the process of managing a large number of online advertisement campaigns per channel. A seller that wants to create and manage hundreds of online advertisement campaigns on Google can significantly reduce their workload through one process, managed through our software, which uses content rules to replicate campaign configuration across hundreds of campaigns.

7

Table of Contents

Enhanced Delivery Experience.    Our solutions for enhanced delivery experience help retailers and suppliers improve the efficiency of their consumer delivery networks through the application of algorithms that optimize shipping decisions and more effectively allocate physical product inventory across fulfillment locations.
Our solutions for enhanced delivery experience include the following capabilities:
Shipping Optimization—Our shipping optimization capability enables retailers to use efficient algorithms to make shipping decisions that help our retailer customers reduce costs and delivery times and meet consumer promise dates. For example, retailers can use our solutions to automatically downgrade a shipment from the two-day priority service level to the more cost-effective ground service level if shipment via ground will meet the consumer's delivery promise date. Alternatively, a retailer can upgrade the service level of shipments that are at risk of arriving to the consumer late, based on the geographic location of the consumer, the supplier shipping the product and the date by which the consumer was promised delivery. 
Integrated Third-Party Logistics Providers—Our integrated 3PL capability enables retailers and suppliers to partner with 3PL providers and place physical inventory in warehouses located closer to a broader distribution of consumers. These integrated 3PL providers are then able to act as suppliers to the retailer or supplier and ship products to consumers that are located near the 3PL providers' facilities, which reduces delivery costs and increases delivery speeds.
Our Revenue
Our revenue primarily consists of fees charged to retailers and suppliers utilizing our CommerceHub for Retailers and CommerceHub for Brands offerings, including use of our drop-ship and demand channel solutions. Our “core drop-ship revenue” represents retailer, supplier and brand revenue derived from our customer relationships with retailers and includes order fees, subscription and other platform fees and set-up and professional services fees. Our revenue also consists of fees charged to consumer brands, distributors, retailers and other marketplace sellers using our demand channel and related solutions, which we refer to as "demand channel revenue."
Order fee revenue accounted for 54% of our total revenue for the year ended December 31, 2017 and is attributable to fees charged to retailers and suppliers based on the volume of consumer orders processed through our platform using our drop-ship solutions. We charge these fees on a per-order basis, or pursuant to minimum order commitments required to be maintained by a customer under their contract with us. Order fee revenue grows as the overall volume of goods purchased online through our retailer customers increases. We track and measure order fee revenue because it corresponds to our customers' drop-ship activity on our platform.
Subscription and other platform revenue accounted for 32% of our total revenue for the year ended December 31, 2017 and is attributable to subscription fees charged to retailers and suppliers for the use of our drop-ship solutions. A customer's subscription and other platform fees are based on several factors, including, for example, the number and type of trading partners that a customer is connected to through our platform and the adoption of certain available feature upgrades that enhance the functionality of our platform. Subscription and other platform revenue tends to grow as new customers join the platform, connect to and create new relationships with other trading partners, adopt new features and upgrades, and ramp up their activity on the platform. Subscription and other platform revenue also includes other drop-ship platform fees for activity related to our delivery-related solutions, inventory management, third-party communication capabilities and other platform activities related to ecommerce relationships. We track and measure subscription and other platform revenue because it provides insight into the size and scope of our platform in terms of total trading partner customers, relationships among those customers and the extent of their engagement with our platform.
Set-up and professional services revenue accounted for 6% of our total revenue for the year ended December 31, 2017 and includes fees for the configuration, design and set-up of a customer's onboarding to our drop-ship solution and other services that we provide to new and existing customers on our drop-ship solution, including highly targeted services that are focused on helping our customers to more quickly adopt our drop-ship solutions and maximize their utility. We track and measure set-up and professional services revenue as it is an indication of new trading partner connections, enhancements to existing customer connections and the extent of customers' engagement with our platform's capabilities.
Demand channel revenue accounted for 8% of our total revenue for the year ended December 31, 2017 and includes set-up, professional services, subscription fees and other fees related to the volume of online sales and orders that retailers, sellers and brands achieve using our demand channel solutions. We track and measure demand channel revenue because it represents our customers' engagement and success with our demand channel solutions.
Our revenue is currently generated primarily from the United States and Canada. For financial information related to the geographic areas in which we do business, see Note 2 to the accompanying audited consolidated financial statements.

8

Table of Contents

No single customer accounted for more than 10% of our total revenue in any of the years ended December 31, 2017, 2016 or 2015. However, our revenue model is primarily based on retailer and supplier program relationships whereby many revenue-generating supplier transactions conducted through our platform may be attributable to a single retailer ("Total Program Revenue"). For the year ended December 31, 2017, there were seven customers with Total Program Revenue that accounted for more than 5% each of our total revenue, two of which had Total Program Revenue that accounted for between 10% and 15% each of our total revenue.
Seasonality
Ecommerce is affected by the same seasonality as traditional brick-and-mortar retail, and many of our customers typically realize a significant portion of their sales in the fourth quarter of each calendar year. Although our customers do not all experience the same seasonal variation, and some customers may have seasonal peaks that occur in periods other than the fourth quarter, the seasonality of our customers' businesses impacts our financial results and may become more concentrated as we continue to expand our solutions to more customers. If our customer base changes to include more customers that experience more concentrated seasonal variation, our revenue may fluctuate significantly among quarters. Historically, the percentage of our annual revenue has been relatively uniform over the first three quarters of the year with approximately 33% to 34% of our annual revenue being generated in the fourth quarter.
Regulatory Matters
General
Various laws and regulations in the United States and foreign countries apply, both directly and indirectly, to our business, including laws and regulations regarding privacy, online commerce and communications, taxation, intellectual property and the provision of goods and services through the Internet. U.S. and foreign laws and regulations are subject to the actions of a range of governing and legislative bodies and regulatory entities and to the interpretations of a range of courts, making their application to our business uncertain and subject to change.
Data Privacy and Security
We are subject to laws governing the collection, use, retention, security and transfer of personally identifiable information about our customers. The enactment, interpretation and application of user data protection and privacy laws are in a state of flux, and the interpretation and application of such laws may vary from country to country. For example, in 2015, the Court of Justice of the European Union ("EU") invalidated the "Safe Harbor Framework," which had allowed companies to collect and process personal data in EU nations for use in the United States. In August 2016, the EU-U.S. Privacy Shield, a new data transfer framework agreed upon by EU and U.S. authorities, became fully operational. However, the validity of Privacy Shield framework has been challenged in EU courts, and the long-term viability of the Privacy Shield remains uncertain. In addition, the European Commission proposed new regulations regarding privacy and electronic communications in 2017, including additional regulation of the Internet tracking tools known as “cookies.” Finally, the new European General Data Protection Regulation (the "GDPR") will take effect in May 2018. The GDPR includes operational requirements for companies that receive or process personal data of residents of the EU that are different than those currently in place in the EU, and will include significant penalties for non-compliance.
     In the United States, the Federal Trade Commission has released a privacy policy framework and principles and has called for federal legislation to require organizations that suffer a breach of security related to personal information to provide notice of such breach. In the absence of federal legislation, most states and the District of Columbia and Puerto Rico have adopted laws requiring notification to users when there is a security breach affecting personal data. Complying with differing national and state requirements may cause our business to incur substantial costs. In addition, online commerce businesses such as ours have publicly available privacy policies and practices regarding the collection, use and disclosure of user data. A failure to adequately disclose all relevant company data collection and usage practices in such privacy policies, or to comply with such privacy policies or with the requirements of federal, state or foreign privacy laws, could result in proceedings or actions by governmental agencies or others (such as class action litigation), which could adversely affect our business. Technical violations of certain privacy laws can result in significant penalties, including statutory penalties. In 2012, the Federal Communications Commission (the "FCC") amended its regulations under the Telephone Consumer Protection Act (the "TCPA"), which could subject our business to increased liability for certain telephonic communications with customers, including but not limited to text messages to mobile phones. Under the TCPA, plaintiffs may seek recovery for actual monetary loss or statutory damages of $500 per violation, whichever is greater, and courts may treble such damage awards for willful or knowing violations. Data collection, privacy and security continue to be significant and growing public concerns. Congress and individual states and foreign legislative bodies may consider additional online privacy legislation.

9

Table of Contents

Online Commerce
Our business also must comply with other federal, state and foreign laws, rules and regulations regarding online communications and commerce to the extent applicable to our business. For example, the Children's Online Privacy Protection Act prohibits web sites directed at children under the age of 13 from collecting personally identifiable information online from such children without parental consent and imposes a number of operational requirements. Certain email activities are subject to the Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003, commonly known as the "CAN-SPAM" Act. The CAN-SPAM Act regulates the sending of unsolicited commercial email by requiring the email sender, among other things, to comply with specific disclosure requirements and to provide an "opt-out" mechanism for recipients. Both of these laws include statutory penalties for non-compliance. The Digital Millennium Copyright Act limits, but does not eliminate, liability for listing or linking to third-party websites that may include content that infringes on copyrights or other rights so long as our business complies with the statutory requirements. Various U.S. states also have adopted laws regulating certain aspects of Internet communications, websites, marketing and online commerce. Federal legislation enacted in 2016 permanently extended the moratorium on state and local taxes on Internet access and commerce. The EU has enacted a variety of Directives (separately implemented by each EU member state via local legislation) and Regulations (directly applicable to all EU member states) relating to online commerce, including Directive 2000/31/EC on Electronic Commerce, Directive 2011/83/EU on Consumer Rights, and the GDPR.
Additional Internet-related laws, rules and regulations may be adopted in the future on issues such as emerging commerce technologies and marketing approaches, Internet access, cross-border online transactions, defamatory speech, copyright infringement, pricing and characteristics and quality of products and services. Such additional laws or regulations may slow the growth of ecommerce services and the Internet, which could in turn cause a decline in the demand for our customers' online commerce business, and increase our cost (or our customers' cost) of doing business or otherwise have an adverse effect on our business, prospects, results of operations, financial condition and/or cash flows. Moreover, the applicability of existing laws governing issues such as property ownership, libel, personal privacy and taxation to commercial online services and the Internet is uncertain and could expose our business to substantial liability.
In 2015, the FCC adopted rules in its open Internet proceeding that restricted the ability of broadband providers to block or otherwise disadvantage our business. Among other things, the open Internet (or "net neutrality") rules prohibited Internet service providers from: (1) blocking access to, or impairing or degrading, legal content, applications, services or non-harmful devices; and (2) favoring selected Internet traffic. On December 14, 2017, the FCC adopted a Declaratory Ruling, Report and Order, and Order (the “2017 Order”) that, among other things, eliminates these prohibitions. The 2017 Order does require Internet service providers to disclose information to consumers regarding practices such as throttling, paid prioritization and affiliated prioritization. We expect that various parties will challenge the 2017 Order in court and at the FCC. Legislative proposals regarding the open Internet rules also are pending in Congress.
Proposed Changes in Law and Regulation
The regulation of Internet services and access, privacy, data protection, ecommerce and related matters is subject to the political process, has been in constant flux over the past decade and is expected to remain in flux. Further material changes in the law and regulatory requirements must be anticipated, and there can be no assurance that our business will not be adversely affected by future legislation, regulation or deregulation.
Intellectual Property 
We rely on a combination of trademarks, copyrights, domain names, trade dress and trade secrets to protect our proprietary technology, our software code, our performance data and our brand. Certain of our intellectual property rights have been acquired through third-party licenses and agreements. We protect our intellectual property by relying on confidentiality procedures and contractual provisions, as well as on international, national, state and common law rights. In addition, we enter into confidentiality and invention assignment agreements with employees and contractors and confidentiality agreements with other third parties. We protect our brands through trademark registration of our core brands, maintenance of our trademark portfolio, contractual trademark rights protection and reliance on common law trademark rights. We also register copyrights and domain names as necessary.
Research and Development
For financial information related to our research and development activities, see the discussion of our operating expenses for the years ended December 31, 2017, 2016 and 2015 included in Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and see our consolidated statements of comprehensive income (loss) and the related notes included in Item 8, "Financial Statements and Supplementary Data."

10

Table of Contents

Competition 
We compete with other SaaS providers servicing the ecommerce industry and with in-house developed solutions used by retailers that choose to build and maintain their own proprietary integrations to suppliers and online channels, using a combination of order management, custom written software and value-added networks. The competitive dynamics of our market are unpredictable because it is fragmented and rapidly evolving. Due to the nature of our business and the variety of products we offer, we do not believe there is any particular competitor or small group of competitors that compete with our business as a whole. Rather, our competitors vary by our solutions and offerings.
We believe that there are several factors unique to our business that differentiate our solutions in the competitive marketplace, including:
the network effect of our existing connections and relationships with a diverse group of leading online retailers, suppliers, 3PL providers and other trading partners;
the fulfillment management capabilities of our solutions that enable retailers to operate large scale drop-ship fulfillment programs with a high degree of consumer satisfaction;
our history of long-term relationships with a blue-chip retailer customer base and our deep experience successfully serving and contributing to the growth of large retailers, which engenders trust in our capabilities as prospective retailers and suppliers consider engaging our services; 
the breadth of our platform's existing integrations and support for a wide variety of online demand generation channels, including retailers and marketplaces; 
our focus on data-quality software and services to structure product data in an optimized format for each online channel; 
a history of establishing and maintaining reliable integration connections with our trading partners; 
a proven, scalable technology with easy-to-use and accessible software and services; 
our brand recognition and reputation in the markets in which we operate; and 
the reliability and performance of our cloud-based software.
While no single competitor currently offers all of the solutions that we offer, we do have competitors with longer operating histories, larger customer bases and greater financial, technical, marketing and other resources than we have, and if one or more of our competitors were to acquire, merge with or partner with another of our competitors, our ability to compete effectively could suffer. In addition, a number of competitive factors could cause us to lose potential sales or to sell our solutions at lower prices or at reduced margins. See Item 1A "Risk Factors—Risks Relating to Our Business—We may not be able to compete successfully against current and future competitors" for more information.
Employees 
As of December 31, 2017, we had approximately 323 full-time and part-time employees, substantially all of whom are located in the United States. None of our employees were represented by a labor union or covered by a collective bargaining agreement. We believe that our employee relations are good.
Corporate History 
Our Company was founded in 1997 in Albany, New York by our President and Chief Executive Officer, Francis Poore, and our Chief Technology Officer, Richard Jones. It was acquired by an affiliate of Liberty Interactive Corporation, our former parent company ("Liberty"), in 2006 and became a subsidiary of Liberty in 2010.
During November 2015, the board of directors of Liberty authorized a plan to distribute shares of our Company to holders of its Liberty Ventures common stock (the "Spin-Off"). CommerceHub, Inc. was a newly formed Delaware corporation that, pursuant to an internal restructuring, effective July 21, 2016, became the parent company of Commerce Technologies, LLC, a Delaware limited liability company that, as a result of the restructuring, is the successor to Commerce Technologies, Inc. ("CTI"), the entity through which CommerceHub transacted prior to the Spin-Off. Following the completion of the Spin-Off on July 22, 2016, CommerceHub now operates as a stand-alone publicly traded company and neither Liberty nor CommerceHub has any stock ownership, beneficial or otherwise, in the other.
Our Series A and Series C common stock began trading on the Nasdaq Global Market on July 25, 2016 under the symbols "CHUBA" and "CHUBK," respectively, and our Series B common stock began trading on the OTC Markets on July 25, 2016 under the symbol “CHUBB.”
Our headquarters and principal executive offices are located at ZEN Building, 201 Fuller Road, 6th Floor, Albany, New York, 12203, and our telephone number is (518) 810-0700.

11

Table of Contents

Available Information 
Our website is located at www.commercehub.com, and our Investor Relations website is located at ir.commercehub.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and amendments thereto filed or furnished with the Securities and Exchange Commission (the "SEC") pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), are available through our Investor Relations website, free of charge, after we file them with the SEC. We also provide a link to the section of the SEC's website at www.sec.gov that has all of the reports and other information that we file or furnish with the SEC. You may read and copy any materials we file or furnish with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. You can get information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
In addition to the reports and other information we file and furnish with the SEC, investors and others should note that we use our Investor Relations website, located at ir.commercehub.com, as a means of disclosing material non-public information, including material financial and operating information, to the investment community and for complying with our disclosure obligations under Regulation FD of the Exchange Act. We webcast via our Investor Relations website our earnings calls and certain other events we participate in or host with members of the investment community. Our Investor Relations website also provides notifications of news and/or announcements regarding our financial performance, including SEC filings, investor events, press and earnings releases and other information we may post on our Investor Relations website from time to time. In addition, we use social media and our blog (located at www.commercehub.com/blog) to communicate with the public about our Company, and it is possible that information we post on social media or our blog could be deemed to be material. Accordingly, in addition to following our SEC filings, press releases and public conference calls and webcasts, investors should monitor and review closely the information we post on our Investor Relations website, the social media channels listed on our Investor Relations website and our blog.
The contents of the websites referred to above are not incorporated into this filing. Further, our references to the URLs for these websites are intended to be inactive textual references only.

12

Table of Contents

Item 1A. Risk Factors
You should consider carefully the risks described below and all of the other information included in this Annual Report on Form 10-K, including the section entitled "Cautionary Note Regarding Forward-Looking Statements," in evaluating our Company. Any of the following risks, if realized, could have a material adverse effect on our business, prospects, financial condition, results of operations and/or cash flows. The risks described below are those we consider the most material, although they are not the only ones we face. Additional risks and uncertainties not currently known to us or that we currently view as immaterial could also materially adversely affect us.
Risks Relating to Our Business
Consolidation or simplification of the ecommerce industry could diminish demand for our solutions.
The ecommerce industry is complex and fragmented, and our solutions are designed to help customers navigate this complexity, including disparate online channels. Although the number and variety of online channels available to retailers and their suppliers have generally been increasing, the share of online sales made through a small number of larger channels, particularly Amazon, has also been increasing. If the trend toward consolidation around a few large online channels accelerates, the difficulties faced by retailers and brands, which our solutions are designed to address, could decline, and more companies could potentially maintain competing solutions in-house or through on-premise software solutions they manage. We have also seen certain large retailers expand their own online distribution channels, including Walmart's launch of the Walmart Marketplace and acquisition of Jet.com and a number of other online retailers. If our solutions become less important to retailers and their suppliers or brands and other sellers, our sales and opportunities for growth could decline and our business, prospects, financial condition, results of operations and/or cash flows could be negatively impacted.
We may not be able to compete successfully against current and future competitors.
The market for ecommerce solutions, applications and services is very competitive. While no single competitor currently offers all of the solutions that we offer, we do have competitors with longer operating histories, larger customer bases and greater financial, technical, marketing and other resources than we have. 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 business, prospects, financial condition, results of operations and/or cash flows.
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, among others:
current and potential customers may develop or expand their existing use of competing in-house solutions or may acquire external solutions or providers of solutions, rather than pay for our solutions;
marketplaces, retailers and other demand channels, which typically offer software tools, often for free, that allow trading partners seeking to sell on these channels to connect to them, may decide to compete more vigorously with us or make it easier for our customers to self-service their omnichannel strategies, rather than relying on our offerings to assist their efforts;
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;
current and potential competitors may establish cooperative relationships among themselves or with third parties to enhance their products and expand their markets;
new competitors or alliances among competitors may emerge and rapidly acquire significant market share;
current and potential competitors may offer technology or services that address one or more ecommerce needs 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
software vendors could bundle ecommerce solutions with other solutions or offer such products and services at a lower price as part of a larger product sale.
In addition, if one or more of our competitors were to acquire, merge with or partner with another of our competitors, our ability to compete effectively could suffer. Our competitors may also establish or strengthen cooperative relationships with our current or future strategic partners or other parties with whom we or our customers or prospects have relationships, thereby limiting our ability to promote our solutions. Consolidation in our industry is likely to increase and could negatively impact our business.
Competition in our industry may also intensify as our competitors raise additional capital and enter into business combinations or alliances. New competitors may also emerge as established companies in other market segments or

13

Table of Contents

geographic markets expand into our market segments or geographic markets. If we cannot compete successfully, our business, prospects, financial condition, results of operations and/or cash flows could be adversely affected.
The loss, poor performance or financial difficulty of one or more of our larger customers could have a material adverse effect on our financial results.
Some of our customers and their trading partners have experienced financial difficulties, particularly certain traditional brick-and-mortar retailers. Insolvency, credit problems or other financial difficulties confronting our customers could expose us to financial risk. Additionally, if our customers reduce the volume or size of the ecommerce sales they process or generate through our platform, for example, as a result of declines in our customers' overall sales or greater reliance on fulfillment methods that do not utilize our services, our business, prospects, financial condition, results of operations and/or cash flows could be materially adversely affected.
Our revenue model, in large part, is based on retailer and supplier program relationships whereby many revenue-generating supplier transactions conducted through our platform may be attributable to a single retailer. Although no single customer accounted for more than 10% of our total revenue in either of the years ended December 31, 2017, 2016, or 2015, for the year ended December 31, 2017 there were seven customers with Total Program Revenue that accounted for greater than 5% each of our total revenue, two of which had Total Program Revenue that accounted for between 10% and 15% each of our total revenue.
Our customers have no obligation to renew their subscriptions with us after the term expires, and even if they renew they may not do so on the same or on more profitable terms. As a result, our ability to grow depends in part on subscription renewals and our ability to meet or exceed our customers' expectations. In addition, a significant portion of our revenue is based on the volume of transactions our customers complete using our platform. This volume often directly correlates to demand for our customers’ products, so if our customers are unable to generate and maintain demand for and sales of their products, they may send fewer transactions through our platform, resulting in lower revenue to us. Furthermore, many of our contracts are non-exclusive, and it is possible that our customers could send fewer transactions through our platform at any time during the contract term, for any reason. We may not be able to accurately predict future trends in customer renewals or transaction volumes, and our customers' renewal rates or volumes may decline or fluctuate because of several factors, including but not limited to the cost of our services, dissatisfaction with our services, the cost or nature of services offered by our competitors, reductions in our customers' spending levels, internalization of alternative technology solutions by our customers or changes in demand for our customers' products. If our customers do not renew their subscriptions, if they renew on less favorable terms, complete fewer transactions or fail to grow their business using our platform, or if they do not purchase additional offerings to complement their existing services, our business, prospects, financial condition, results of operations and/or cash flows could be materially adversely affected.
The ecommerce market changes rapidly, and our inability to respond to changes in a timely manner could have a material adverse effect on our business.
The ecommerce market can change rapidly in multiple ways through frequent new product and service introductions, frequent changes in rules, specifications and other requirements and evolving industry standards. Our ability to attract new customers and retain and increase revenue from existing customers is dependent on our ability to understand the changes that are affecting the ecommerce marketplace and to adapt our solutions at a rapid pace to address those changing market conditions. To achieve market acceptance for our solutions, we must effectively anticipate and offer solutions that meet changing customer demands, sales and marketing channels and third-party requirements in a timely manner. Customers and the ecommerce channels that they utilize may require features and capabilities that our current solutions do not have. If we fail to develop solutions that satisfy customer preferences in a timely and cost-effective manner, our ability to renew our contracts with existing customers and our ability to create or increase demand for our solutions will be impaired.
We may experience difficulties with software development, industry standards, design or marketing that could delay or prevent our development, introduction or implementation of new solutions and enhancements. In addition, the introduction of new solutions by competitors, the emergence of new industry standards or the development of entirely new technologies to replace existing offerings could render our existing or future solutions obsolete.
As the ecommerce industry continues to evolve, new demand channels and new technologies will emerge to offer consumers new ways to purchase products. We monitor these new demand channels and technologies and attempt to predict which channels are likely to be successful to select projects we anticipate will generate a positive return on our development investment. Our software development activities can be significant, and recovering our investment may take a significant amount of time, if it occurs at all. Our customers may expect us to support a broader array of demand channels than may be commercially feasible, especially emerging channels that are considered likely to be successful by popular opinion, the media and other industry experts. We may therefore be compelled to invest heavily in development resources to enhance our offerings

14

Table of Contents

to support new channels that fail to attract consumer usage, take an unexpectedly long time to attract consumer usage, or are successful for our customers and consumers but are disproportionately costly for us to develop, maintain and support. We expect to continue making significant investments in software development, and we may devote resources to advancements that are ultimately unsuccessful, at the expense of other projects that may be more successful, incurring significant opportunity cost to do so. If we deploy significant resources to particular platforms that ultimately fail to attract market participants or materialize as anticipated, we may incur costs that we never recover.
If we are unable to successfully develop or acquire new capabilities and functionality, enhance our existing solutions to anticipate and meet customer preferences and rapidly evolving industry requirements or sell our solutions into new markets, if we fail to realize returns on development initiatives, or if our customers require that we service technologies that are too costly to maintain, our business, prospects, financial condition, results of operations and/or cash flows could suffer a material adverse effect.
If fewer retailers elect to rely on drop-ship delivery as a means to expand their product assortments, demand for our solutions could decline.
We generate a substantial portion of our revenue from the sale and usage of our drop-ship solutions that enable retailers to increase their online product offerings through virtual inventory and leverage suppliers to ship those products directly to consumers. While the market has trended towards increased adoption of drop-ship solutions as a means to offer more products without making large capital investments in inventory and warehouse space and assuming associated inventory risk, use of drop-ship delivery requires retailers to entrust order fulfillment and delivery to third-party suppliers that ship on their behalf. If more retailers elect instead to expand their own warehouses and inventory to assume greater control over order fulfillment, rather than employing drop-ship solutions, or if other methods of fulfillment emerge that are perceived as more effective than drop-shipping, demand for our solutions could decline, which could have a material adverse effect on our business, prospects, financial condition, results of operations and/or cash flows.
Conditions in the global economy, the geographic markets we serve and the financial markets may adversely affect us.
Our business is sensitive to general economic conditions. Slower global economic growth, the credit market crisis and European debt crisis, uncertainty relating to the Euro and British Pound Sterling, particularly in light of the United Kingdom's intended exit from the EU and uncertainty regarding the terms of such exit, high levels of unemployment globally, reduced levels of capital expenditures, changes in government fiscal and monetary policies, government deficit reduction and budget negotiation dynamics, sequestration, other austerity measures and other challenges affecting the global economy adversely affect us and our customers, including having the effect of:
reducing demand for our products and services and limiting the financing available to our customers, resulting in longer sales cycles and slower adoption of new technologies;
increasing the difficulty in collecting accounts receivable;
increasing price competition in the markets we serve;
increasing the risk that we could be required to record charges relating to restructuring costs or the impairment of assets; and
increasing the risk that our counterparties will become insolvent or otherwise unable to fulfill their contractual obligations to us, which, in addition to increasing the risks identified above, could result in preference actions against us.
Improvement in the global economy remains uneven and uncertain. If slower growth in the global economy or in any of the geographic markets we serve continues for a significant period, if there is significant deterioration in the global economy or any of the markets we serve or if improvements in the global economy do not benefit the markets we serve and our customers, our business, prospects, financial condition, results of operations and/or cash flow could be materially adversely affected.
Our business is dependent on our ability to maintain and scale our technical infrastructure.
As our customer base and the amount and types of information shared on our platform continue to grow, we must be able to increase our technical infrastructure, including network capacity and computing power, to satisfy the growing needs of our customers. If we fail to effectively scale and grow our technical infrastructure to accommodate these increased demands, our customers could experience degraded service, which could harm our reputation and negatively impact our business and prospects.
We have experienced significant growth in the scope of our business operations, which has the potential to place significant strain on our managerial, administrative, operational, financial and other resources, and these trends may continue.

15

Table of Contents

We intend to expand our overall business, customer base, headcount and operations both domestically and internationally, with no assurance that we will be successful in these efforts or that our business or revenue will continue to grow in any event.
We have also experienced significant growth in the number of users and transactions and the amount of data that our infrastructure supports. We seek to maintain adequate excess capacity in our infrastructure to be sufficiently flexible and scalable to meet the needs of all of our customers, to facilitate the rapid provision of new customer deployments and the expansion of existing customer deployments and to handle spikes in usage, but the provision of new network infrastructure requires significant lead time. If we do not accurately predict our infrastructure capacity requirements, particularly during periods of increased traffic, or if customer traffic patterns significantly change, our customers could experience service degradation or disruption that could result in customer losses and may subject us to financial penalties and liabilities. If our cloud network infrastructure capacity fails to keep pace with increased sales and customer expansion, customers may experience delays as we seek to obtain additional capacity, which could harm our reputation and adversely affect our business and prospects.
Our future success will depend, in part, upon our ability to manage growth effectively. If we do not effectively manage our growth, the quality of our solutions and services may suffer, which could negatively affect our reputation and demand for our solutions and have a material adverse effect on our business, prospects, financial condition, results of operations and/or cash flows.
Cybersecurity incidents could harm our business and negatively impact our financial results.
Our business involves the collection and use of confidential and otherwise sensitive information of our customers and their trading partners, including, for example, consumer shipping information and purchasing habits. The collection and use of this information sometimes requires us to integrate with our customers' information systems and other systems operated by our partners and third-party technology providers. We serve as a conduit for transmitting information between our customers and their trading partners, as well as third-party platforms they use, and cannot operationally control the nature of the information transmitted through our systems. In addition, given our critical role as a service provider to the retail industry, we may be an attractive target for cyber attacks. If third parties are able to gain unauthorized access to our system or data we process or to systems operated by our customers, partners or third-party providers, our customers' trust in our security practices and our business could be impaired.
We cannot assure you that our efforts to prevent unauthorized access to or use of information we process or control will always be successful. Our security measures may be breached as a result of third-party action, including intentional misconduct by computer hackers, employee error or misconduct, malfeasance or otherwise, and any such breach may result in one or more third parties obtaining unauthorized access to our customers' data or our data, including our intellectual property and other confidential or otherwise sensitive information, or our information technology ("IT") systems. Additionally, we may be subject to social engineering or other tactics that attempt to fraudulently induce our employees, vendors, technology partners or customers into disclosing sensitive information such as usernames, passwords or other information in order to gain access to our customers' data or our data or IT systems. Because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently and generally are not recognized until launched against a target or in some cases long thereafter, we may be unable to anticipate or detect these techniques or to implement adequate preventative measures. Malicious parties may also conduct attacks designed to temporarily deny customers access to our services or our customers' websites.
If our information security efforts are compromised, or if we fail to detect and appropriately respond to a data security breach, we could be subject to legal or regulatory action, including direct claims by customers or other injured parties, class actions, shareholder derivative suits and governmental action. A data security breach may also negatively affect our reputation, increase our insurance costs or result in loss of coverage, and we may need to incur other significant costs to protect against information security breaches in the future. In addition, because of the critical nature of data security, any perceived breach of our security measures or harm to our reputation could cause existing or potential customers not to use our solutions. Any of these outcomes could have a material adverse effect on our business, prospects, financial condition, results of operations and/or cash flows.
In addition, our customers' or partners' online and other sales may be significantly impacted by cybersecurity incidents limiting the number of revenue-generating transactions they conduct through our platform. For example, our customers or partners may experience "denial-of-service" type attacks that could make all or portions of such customers' or partners' websites unavailable for periods of time, or consumer purchases could decline because of mistrust in customers' or partners' security practices. Because a significant portion of our revenue is derived from transactions effected on or through our customers' and partners' websites, operational disruptions such as these could cause our revenue to decline.

16

Table of Contents

We may experience service failures or interruptions due to defects in the hardware, software, infrastructure, third-party components or processes that comprise our solutions.
Our solutions are complex and may contain undetected defects in the hardware, software, infrastructure, third-party components or processes that comprise such solutions. Our solutions are designed to automate various order fulfillment and product listing functions across multiple online channels for large volumes of our customers' sales, as well as to ensure that their sales comply with the policies of each channel, and sometimes to dynamically determine or communicate product pricing and inventory levels at any given moment. If our solutions do not function properly, errors could occur, including that our customers might sell more inventory than they have in stock, make sales that violate channel policies or underprice or overprice their offerings. Overselling inventory could force our customers to cancel orders at rates that violate channel policies, underpricing could result in material losses to our customers and overpricing could result in lost sales. Any of these results or other errors could reduce demand for our solutions and hurt our business reputation.
If any defects in our solutions lead to service failures, we could experience delays or lost revenue, diversion of software engineering and management resources, material monetary and non-monetary concessions, damage to our reputation with customers and prospective customers, negative media attention or increased service costs as a result of performance claims during the period required to correct the cause of any such defects. In addition, one or more of our customers could seek recourse against us. Although most of our customer contracts limit our liability for these defects, disruptions and errors, we nonetheless could be subject to litigation for actual or alleged losses to our customers' businesses. Where a particular defect is replicated across multiple large customers (as may conceivably occur in the context of a multi-tenant SaaS hosting environment), individual contractual liability caps may be aggregated across multiple claimants to create a much larger exposure. Defending a lawsuit, regardless of its merit, could be costly and divert management's attention and could cause our business to suffer.
We cannot be certain that defects will not be found in new solutions or upgraded solutions, resulting in loss of, or delay in, market acceptance. Our insurance providers could deny coverage of claims resulting from an error or defect in our technology or a resulting disruption in our solutions, and our insurance coverage might not be adequate to cover all of the damages and other costs associated with such a claim. Moreover, we cannot assure you that our current liability insurance policies will continue to be available to us on acceptable terms or at all. The successful assertion against us of one or more large claims that exceeds our insurance coverage, or the occurrence of changes in our liability insurance coverage terms, including an increase in premiums or imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, prospects, financial condition, results of operations and/or cash flows.
We use a limited number of data centers to deliver a significant portion of our services, and any disruption of service or security breach at these facilities could harm our business.
We manage our services and serve our customers from a limited number of data center facilities. We engineer and architect the computer and storage systems upon which our platform runs, and own and operate our primary data center, in Albany, New York. We also lease redundant (or back-up) data center colocation facilities in Albany, New York and greater Chicago, Illinois, and we do not control the physical operation of these back-up facilities. The owners of these back-up facilities have no obligation to renew their lease 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 locate alternative back-up facilities, and we may incur significant costs and temporary loss of high-availability or disaster recovery services in connection with doing so.
Our data centers are vulnerable to damage or interruption from human error, intentional bad acts, earthquakes, hurricanes, floods, fires, war, terrorist attacks, labor strikes, health epidemics, power losses, hardware failures, systems failures, telecommunications failures, cyber attacks, such as misconduct by computer hackers, unauthorized intrusions, computer viruses and denial of service attacks, and similar events. The occurrence of a natural disaster or an act of terrorism, 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 solutions or impair their functionality. Because we operate a multi-tenant SaaS environment shared by many large customers, such an event, if it occurred, would not be confined to a single customer or small number of customers, but instead would impact a significant portion of our customer base collectively. The occurrence of any such event, or any other events that may cause our customers and potential customers to lose confidence in the reliability of our solutions, could have a material adverse effect on our business, prospects, financial condition, results of operations and/or cash flows.
Although we plan to expand our use of third-party cloud-based offerings and are moving portions of our service offerings away from traditional data centers, these third-party cloud-based offerings have defined service boundaries in which they operate, and we have minimal, if any, ability to manage how those services are provided. We are dependent on the administrative, physical and procedural safeguards put in place by these third-party providers to protect our confidential

17

Table of Contents

information and customer information. The services and features provided by these third-party providers may not continue to be available to us on commercially reasonable terms, or at all. If we are unable to maintain the right to use these services or are unable to upgrade our arrangements with these providers to accommodate the scalability of our business, our customers could experience a degradation or disruption of service or be unable to access features within our solutions until we can obtain and integrate a functionally equivalent replacement technology. Any available alternatives could be more difficult or costly than currently available third-party offerings. In addition, integration of such alternatives into our platform could require significant work and substantial time and resources. Any delays or failures associated with integrating such alternatives into our platform could injure our reputation with customers and potential customers and could have a material adverse effect on our business, prospects, financial condition, results of operations and/or cash flows.
As our customers continue to scrutinize and refine their own data security practices, the security and confidentiality obligations they seek to impose on their SaaS and ecommerce providers are becoming increasingly onerous.
Many of our customers and potential customers are prominent merchants that process large volumes of sensitive consumer and business data. As such, they are increasingly targeted for cybersecurity attacks and, in turn, they are increasingly seeking to shift these risks by pursuing more onerous contractual terms in their agreements with third-party service providers, including burdensome security procedures, reporting, notification and audit rights, additional warranties, guarantees and other contractual assurances, indemnification provisions, specialized remedies and liability limitation exclusions. Our customers may also seek to require our adherence to customer-specific operational protocols and procedures that may compromise our ability to operate and scale our business efficiently or that may be unworkable. As a result, we are contractually obligated in many cases, and otherwise under intense commercial pressure, to continuously enhance our security programs and incur increased compliance costs to provide current and potential customers with the protections they expect. This contractual and commercial pressure also makes it more difficult to obtain new customers, as we experience longer sales cycles to negotiate mutually acceptable terms, and increases the cost and complexity of our compliance procedures. If we are unsuccessful in our attempts to negotiate acceptable outcomes or meet expectations in this area, we could experience customer erosion, increased compliance requirements and associated costs to satisfy more onerous contractual terms and/or impositions on our ability to grow our sales and attract new customers, which could have a material adverse effect on our business, prospects, financial condition, results of operations and/or cash flows.
Our business is substantially dependent upon the continued acceptance of SaaS solutions as a viable option for providing information technology services.
We generate a substantial amount of our revenue from the sale of our solutions and related revenue sources, which are delivered under a SaaS or SaaS-plus model. As a result, continued widespread use and acceptance of this business model is critical to our future growth and success. With increasing concerns around cybersecurity and access to data, some companies are predisposed to maintaining control of their IT systems and infrastructure, and our customers may become increasingly resistant to accessing software functionality that involves transmission of their sensitive data through a third-party platform. In addition, customers may seek to build and utilize in-house software and service solutions for their ecommerce programs where they believe they can do so more effectively or where they seek to reduce long-term dependence on third-party services for these programs. Existing and new market participants may also introduce new types of solutions and different approaches to enable organizations to address their needs. If the market for our SaaS solutions fails to grow or grows more slowly than we currently anticipate, demand for our solutions and our business, prospects, financial condition, results of operations and/or cash flows could be negatively impacted.
Our business and financial results may be impacted by the seasonality of our customers' businesses.
The ecommerce marketplace is affected by the same seasonality as the traditional brick-and-mortar marketplace, and many of our customers typically realize a significant portion of their sales in the fourth quarter of each calendar year during the holiday season. Although our customers do not all experience the same seasonal variation, and some customers may have seasonal peaks that occur in periods other than the fourth quarter, the seasonality of our customers' businesses impacts our financial results and may become more concentrated as we continue to expand our solutions to more customers. Historically, the percentage of our annual revenue has been relatively uniform over the first three quarters of the year with approximately 33% to 34% of our annual revenue being generated in the fourth quarter. If our customer base changes to include more customers that experience more concentrated seasonal variation, our revenue may become even more concentrated in the fourth quarter. Any negative impact on the fourth quarter results, and particularly the holiday season sales, of our major retailer customers, whether resulting from negative economic conditions, natural disasters, acts of war or terrorism or other force majeure events, or even unseasonably inclement weather, could have a material adverse effect on our business, prospects, financial condition, results of operations and/or cash flow.

18

Table of Contents

Our growth depends, in part, on the success of our strategic relationships with third parties.
We anticipate that we will continue to depend on our relationships with various third parties to grow our business, including online marketplaces, other demand channels and other technology and service providers, such as 3PL and fulfillment services providers. Identifying, negotiating and documenting relationships with third parties requires significant time and resources, as does integrating third-party content and technology with our solutions. If the third-party content or technology integrated with our solutions is not well received by our customers, our brand and reputation could be negatively affected. Our agreements with third-party business partners are typically non-exclusive and generally do not prohibit them from working with our competitors or from offering competing services. To the extent that any of these third parties compete with us, it could hurt our business and prospects.
In addition, a significant number of the transactions that our customers process through our platform are generated from sales on online marketplaces and other demand channels with which we have strategic relationships. As a result, we rely on these relationships with third-party demand channels for a significant portion of our revenue. When a demand channel leaves our platform, not only do we lose revenue from that demand channel but we also lose revenue from customers that have trading partner connections associated with that particular demand channel. In many cases, these demand channels have no obligation to do business with us or to allow us or our customers access to their systems, and they may decide at any time and for any reason or no reason to significantly curtail or preclude our ability to integrate our solutions with their platforms. If our connection to a particular demand channel represents a significant portion of the perceived value of our platform to a customer, our loss of that demand channel may jeopardize our relationship with that customer. Consequently, the loss of a demand channel could have a material adverse effect on our business, prospects, financial condition, results of operations and/or cash flows.
Additionally, these demand channels 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 or desire to use our solutions to sell their products on those channels, or may adversely affect the number of transactions that our customers can process through those channels or reduce the desirability of selling on those channels. Further, these channels could decide to compete with us. Finally, service outages at our demand channel partners could prevent, or severely disrupt, the ability for consumers to make purchases from our customers on those demand channels. In such a scenario, the order volume and associated transaction fee revenue we would have anticipated receiving from those demand channels may decrease significantly, or cease altogether. Any of the foregoing results could cause our customers to reevaluate the value of our products and services and potentially terminate their relationships with us, which could have a material adverse effect on our business, prospects, financial condition, results of operations and/or cash flows.
The loss of key personnel or an inability to attract and retain highly skilled personnel may adversely affect our business and limit our ability to implement our business plan successfully.
Our future success is dependent, in large part, upon our ability to attract and retain highly qualified managerial, technical, sales and professional personnel. We face intense competition for qualified individuals from numerous technology and ecommerce companies, which may be able to offer more lucrative compensation packages than we can. The replacement of any key employee, such as our Chief Executive Officer, or group of key employees likely would involve significant time and costs, and the loss of any one or more key employees may significantly delay or prevent the achievement of our business objectives or result in a loss of important institutional knowledge. In addition, our headquarters have been located in Albany, New York since 1997 and, although we have been successful in attracting and retaining high-quality managerial, technical, sales and professional personnel, the pool of available local talent with the specialized skills required for our business is smaller than in larger cities, and we may struggle to find adequate replacements if any of our key personnel were to leave. In September 2017, we commenced a restructuring process to consolidate software development and other corporate activities in our Albany headquarters (the "2017 restructuring plan"), which included the immediate reduction of certain positions in our Seattle, Washington office, the retention of certain Seattle-based engineers for a transition period and the gradual replacement of many of those positions in Albany. The 2017 restructuring plan also included the long-term retention of a Seattle-based account services team dedicated to brands and marketplace customers. We may have difficulties finding adequate engineering replacements in Albany and/or retaining our Seattle-based account services team and, as a result, may not realize the anticipated benefits of the 2017 restructuring plan. Our inability to attract and retain key personnel could have a material adverse effect on our business, prospects, financial condition, results of operations and/or cash flow.
We have expanded, and may expand in the future, by acquiring or investing in other companies, which may divert our management's attention, result in dilution to our stockholders and consume significant resources.
Our business strategy has included, and may include in the future, acquiring complementary services, solutions, technologies or businesses. For example, in January 2015, we acquired Mercent Corporation ("Mercent") to expand our demand channel offerings and capabilities. We also have entered into, and may enter into in the future, relationships with other

19

Table of Contents

businesses to expand our service offerings, which could involve preferred or exclusive licenses, additional channels of distribution, discount pricing or investments in other companies. Negotiating these transactions can be time-consuming, difficult and expensive, and our ability to close these transactions may often be subject to conditions or approvals that are beyond our control. Consequently, these transactions, even if undertaken and announced, may not close.
Current or future acquisitions, investments or new business relationships may result in unforeseen operating difficulties and expenditures. Acquisitions may also disrupt our business, divert our resources and require significant management attention that would otherwise be available for the development of our business. Moreover, the anticipated benefits of any acquisition, investment or business relationship may not be realized or may expose us to unknown liabilities. In addition, any acquisition or investment may require us to use significant amounts of cash, issue potentially dilutive equity securities or incur indebtedness (which may be on unfavorable terms or which we may be unable to repay).
Acquisitions involve numerous risks, any of which could harm our business, including:
difficulties in integrating the businesses, technologies, products, personnel or operations of acquired companies, especially if those businesses operate outside of our core competency of providing ecommerce SaaS and SaaS-plus solutions;
potential loss of key employees of acquired businesses;
cultural challenges associated with integrating employees from acquired businesses into our organization;
ineffectiveness or incompatibility of acquired technologies or services;
failure to successfully further develop the acquired technology in order to recoup our investment;
inability to maintain the key business relationships and reputations of acquired businesses due to changes in management or otherwise;
diversion of management's attention from other business concerns;
litigation or assumed liabilities related to activities of acquired businesses, including assumption of liability for violation of law or other compliance issues, or claims from terminated employees, customers, former stockholders or other third parties;
obligations and/or restrictions assumed under contracts of the acquired business that could negatively impact us;
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;
costs necessary to establish and maintain effective internal controls or other procedures and policies for acquired businesses;
increased fixed costs; and
adverse tax consequences, substantial depreciation or deferred compensation charges.
Any of these outcomes could have a material adverse effect on our business, prospects, financial condition, results of operations and/or cash flow.
Our long-term success depends, in part, on our ability to expand the sales of our ecommerce solutions to customers located outside of the United States, and thus our business is susceptible to risks associated with international sales and operations.
Outside of the United States, we currently maintain offices and have sales personnel in the United Kingdom and also service customers in Canada and Europe. We intend to continue to expand our international operations as part of our long-term strategy, but any such efforts may not be successful. In addition, conducting international operations in new markets will require considerable management attention and resources and will subject us to numerous challenges and risks associated with supporting a rapidly growing business in a cross-border environment, including but not limited to:
disparate government regulations from multiple nations relating to ecommerce and other services, electronic devices, data privacy and competition;
restrictive governmental actions (such as trade protection measures, including export duties and quotas and custom duties and tariffs), nationalization and restrictions on foreign ownership;
limited fulfillment and technology infrastructure;
lower levels of consumer spending and fewer opportunities for growth compared to the United States;
difficulty with localizing our solutions, including translation into foreign languages and adaptation for regulatory requirements and local practices;
lack of familiarity, and the burdens of complying, with applicable foreign laws, regulations and legal practices;
lack of familiarity with local customs and cultures;
unexpected changes in regulatory requirements, taxes, trade laws, tariffs, export quotas, custom duties or other trade restrictions;
differing technology standards and internationalization/localization requirements;
longer accounts receivable payment cycles and difficulties in collecting accounts receivable;

20

Table of Contents

difficulties in managing and staffing international operations and differing employer/employee relationships, including recruiting and retaining employees in foreign countries;
fluctuations in currency exchange rates that may increase the volatility of our foreign-based revenue;
compliance with the laws of numerous foreign taxing jurisdictions, potential double taxation of our international earnings and potentially adverse tax consequences, including the complexities of foreign value added tax (or other tax) systems or due to changes in applicable U.S. and foreign tax laws, and restrictions on the repatriation of earnings;
increased costs to establish and maintain effective controls at foreign locations;
the greater potential for corruption and bribery, which may adversely impact our compliance with anti-bribery and anti-corruption laws of foreign jurisdictions;
uncertain political and economic climates;
reduced or varied protection for intellectual property rights in some countries; and
overall higher costs of doing business internationally.
These factors may cause our international costs of doing business to exceed our comparable domestic costs, and there is no guarantee that the financial performance of our operations in international markets will be similar to our historical performance. A variety of factors, including different pricing models and costs related to building out additional operational infrastructure in international markets, could result in lower gross margins, operating margins or cash flow. Any negative impact from our international business efforts could have a material adverse effect on our business, prospects, financial condition, results of operations and/or cash flow.
Our business is subject, directly and indirectly, to a variety of U.S. and foreign laws and regulations that are continuously evolving.
We and our customers are or may become subject to a variety of laws and regulations in the United States and abroad that involve matters central to our business, including laws and regulations relating to ecommerce, privacy, data protection, data security, data retention, consumer protection, antitrust, advertising, intellectual property, manufacturing, taxes, anti-bribery and anti-corruption, and economic or other trade prohibitions or sanctions. These laws and regulations are continuously evolving and developing, and the scope and interpretation of the laws and regulations that are or may be applicable to us are often uncertain and may be conflicting.
For example, the collection of state and local sales taxes with respect to ecommerce and SaaS sales is an evolving and complex area of law, and an increasing number of states have considered or adopted laws that attempt to require out-of-state ecommerce and SaaS sellers to collect sales taxes on their behalf. We cannot predict whether further state or federal legislation will ultimately be adopted or what form it might take if adopted, and disparate rules, interpretations and positions across jurisdictions could make it more difficult and costly to do business. In January 2018, the U.S. Supreme Court agreed to hear a case about whether states can require out-of-state online retailers to collect sales taxes on their behalf. If attempts to require ecommerce and SaaS sellers to collect state or local sales taxes on out-of-state purchases are successful, our business and the businesses of many of our customers could be negatively impacted. Similar issues exist outside of the United States, where the application of value-added tax, goods and services tax or other indirect taxes on online retailers and companies like ours that facilitate ecommerce is uncertain and evolving.
In addition, there are numerous U.S. federal, state and local laws and regulations, and foreign laws and regulations, relating to privacy and the collection, sharing, use, processing, disclosure and protection of personal information and other user data, the scope of which is changing and subject to differing and inconsistent interpretations. We strive to comply with all applicable laws, policies, legal obligations, and industry codes of conduct relating to privacy, data security and data protection, but given that the scope, interpretation and application of these laws and regulations are often uncertain and sometimes conflicting, our obligations could be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. It may be difficult for us to adjust our policies and procedures to respond to rapid changes in privacy laws, rules and regulations governing privacy, data protection and data processing in and between certain countries, such as the invalidation of the EU-US Safe Harbor Framework in 2015. In addition, the GDPR becomes effective in May 2018. The GDPR will include operational requirements for companies that receive or process personal data of residents of the EU that are different than those currently in place in the EU. Efforts to comply with the law may require substantial expense and the diversion of resources from other projects, and non-compliance with the GDPR may result in monetary penalties of up to 4% of worldwide revenue. Any failure or perceived failure to comply with our privacy or security policies or privacy-related legal obligations by us or third-party service providers, or any compromise of security that results in the unauthorized release or transfer of personally identifiable information or other user data, could result in governmental enforcement actions, litigation and/or negative publicity, which could have a material adverse effect on our business, prospects, financial condition, results of operations and/or cash flows.

21

Table of Contents

Although many regulations might not apply to us directly, laws regulating the solicitation, collection or processing of personal and consumer information could affect our or our customers' ability to use and share data, potentially reducing demand for our solutions and services. Moreover, if future laws and regulations limit or overly burden our customers' ability to use and share consumer data or our ability to store, process and share data with our customers over the Internet, demand for our solutions could decrease and our costs could increase. In addition, any increased fees and costs for Internet usage or other limits to access imposed by government agencies or by private organizations, which could be more likely following the FCC's repeal of net neutrality rules in December 2017, or regulations imposing increased taxes on the services we provide or restricting information exchanged over the Internet, could result in a decline in the use and viability of Internet-based services, like ours.
Taxing authorities may successfully assert that we should have collected or in the future should collect sales and use, value added or similar taxes, and we could be subject to liability with respect to past or future sales, which could adversely affect our financial results.    
Sales and use, value added and similar tax laws and rates vary greatly by jurisdiction. Based on our belief that certain of these taxes are not applicable to our sales in certain jurisdictions, we do not collect such taxes in all jurisdictions in which we have sales. However, certain jurisdictions in which we do not collect such taxes may assert that such taxes are applicable, which could result in tax assessments, penalties and interest, and we may be required to collect such taxes in the future. Such tax assessments, penalties and interest or future requirements may have an adverse effect on our business, prospects, results of operations, financial condition and/or cash flows.
We are subject to disparate and complex regulatory and contractual restrictions regarding our rights to use data that we process or produce.
We are subject to complex and differing regulatory and contractual restrictions governing our use of data that we process or produce. This includes restrictions in contracts with our customers, vendors and other third parties, as well as our privacy policy and other internal policies and applicable privacy and data security legislation and regulation to which we are subject. We rely on data we process and information derived from it to provide services to customers, develop new offerings and, where appropriate and permissible, report on industry trends and elsewhere in our marketing efforts. Although we monitor these restrictions and have procedures in place to maintain compliance, there can be no assurance that our compliance efforts will always be effective, and third parties may seek to assert claims that our use of such data in a particular manner is unauthorized. Future litigation may be necessary to defend ourselves or to determine the scope, enforceability and/or validity of such restrictions or to establish our proprietary rights. Claimants may have substantially greater resources than we do and may be able to sustain the costs of complex litigation to a greater degree and for longer periods of time than us. Regardless of whether such claims have any merit, these claims are time-consuming and costly to evaluate and defend and could:
hurt our reputation;
adversely affect our relationships with current or prospective customers;
cause delays or stoppages in providing our services or developing new services;
divert management's attention and resources;
require costly changes to our software and/or business practices;
subject us to significant liabilities; and
require us to cease some or all of our activities.
In addition to liability for monetary damages against us, which may be unlimited by contract or regulation and which may include attorneys' fees or governmental fines, we may be prohibited from operating portions of our business or operating in jurisdictions that are dependent on obtaining such data use rights unless we obtain licenses from, and pay royalties to, the holders of such rights, which may not be possible on commercially reasonable terms, or at all. If we are required to make substantial payments or undertake other changes or actions as a result of misappropriation claims against us or any obligation to indemnify our customers or other third parties for such claims, such payments, changes or other actions could have a material adverse effect on our business, prospects, financial condition, results of operations and/or cash flows.
We could incur substantial costs in protecting our intellectual property from infringement, and any failure to protect our intellectual property could impair our business.
We regard the protection of our intellectual property, which includes trade secrets, copyrights, trademarks and domain names, 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. In addition, we have sought protection for some of our technologies and currently have registered trademarks in the CommerceHub name and several of our product names. We also

22

Table of Contents

have copyright protection with respect to our software code and protect trade secrets through non-disclosure agreements and employee confidentiality training.
Despite our efforts to protect our intellectual property, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Effective intellectual property protection is expensive to develop and maintain, both in terms of initial and ongoing registration requirements and the costs of defending our rights on an ongoing basis. Monitoring unauthorized use of our intellectual property is difficult, and we may be required to protect our intellectual property in an increasing number of domestic and foreign jurisdictions and through additional means, including patent and other filings. These protective measures are expensive and time-consuming, and in the end may not prevent the misappropriation of our intellectual property. As a result, we may not pursue these protections in every location where our intellectual property is threatened. Further, we may not be able to detect unauthorized use of, or take appropriate steps to enforce, our intellectual property rights.
In some cases, litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity. Such litigation could be extremely costly, time-consuming and distracting to management, resulting in a diversion of resources. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights, which could result in the potential impairment or loss of portions of our intellectual property.
Despite our precautions, it may be possible for unauthorized third parties to copy our solutions and use information that we regard as proprietary to create products and services that compete with ours. Some license provisions protecting against unauthorized use, copying, transfer and disclosure of our licensed solutions may be unenforceable under applicable laws. Further, the laws of some countries do not protect proprietary rights to the same extent as the laws of the United States. To the extent we expand our international activities, our exposure to unauthorized copying and use of our solutions and proprietary information may increase.
There can be no assurance that we will be able to adequately protect our intellectual property or that our competitors will not independently develop similar technology and information. If we fail to meaningfully protect our intellectual property, then our business, prospects, financial condition, results of operations and/or cash flow could be materially adversely affected.
Our lengthy sales and implementation cycles make it difficult to predict our future revenue and cause variability in our operating results.
Our sales and implementation cycles can vary substantially from customer to customer, depending on the size and complexity of the opportunity. A number of factors influence the length and variability of our sales and implementation cycles, including, for example:
the need to educate potential customers about the uses and benefits of our solutions;
the commitments customers make in their agreements with us;
the discretionary nature of potential customers' purchasing and budget cycles and decisions;
the competitive nature of potential customers' evaluation and purchasing processes;
evolving ecommerce needs, budgets and functionality demands of potential customers;
announcements or planned introductions of new products by us or our competitors;
the length of purchasing approval processes of, and contract negotiations with, potential customers; and
the complexity of the implementations and integrations with customer and third-party systems.
In addition, with larger enterprise customers, we face greater costs, longer sales cycles and less predictability in completing some of our sales. The customer's decision to use our service may be an enterprise-wide decision and, if so, these types of sales would require us to provide greater levels of education regarding the use and benefits of our solutions.
Lengthy sales and implementation cycles make it difficult to predict the quarter in which revenue from a new customer may first be recognized. Further, our potential customers frequently need to obtain approvals from multiple decision makers before making purchase decisions. Delays in our sales or implementation cycles could cause significant variability in our revenue and operating results for any particular period.
We may have a significant indemnity obligation to Liberty if the Spin-Off is treated as a taxable transaction.
In connection with the Spin-Off, Liberty received an opinion of its tax counsel to the effect that, for U.S. federal income tax purposes, the Spin-Off will qualify as a tax-free transaction to Liberty and to the holders of its Liberty Ventures common stock under Section 355 of the Internal Revenue Code of 1986, as amended (the “Code”), except with respect to the receipt of cash in lieu of fractional shares. An opinion of tax counsel is not binding on the Internal Revenue Service (the "IRS")

23

Table of Contents

or a court, and there can be no assurance that the IRS will not challenge the conclusions reached in the tax opinion or that a court would not sustain such a challenge.
Even if the Spin-Off otherwise qualifies under Section 355 of the Code, the Spin-Off would result in a significant U.S. federal income tax liability to Liberty (but not to holders of Liberty Ventures common stock) under Section 355(e) of the Code if one or more persons acquire, directly or indirectly, a 50% or greater interest (measured by vote or value) in the stock of Liberty or our Company (or any successor corporation) as part of a plan or series of related transactions that includes the Spin-Off. Generally, under Section 355(e) of the Code, an acquisition of the stock of Liberty or our Company will be presumed to be part of a plan (or series of related transactions) with the Spin-Off if such acquisition occurs within two years before or after the Spin-Off; however, this presumption may be rebutted under certain circumstances. The process for determining whether an acquisition is part of a plan under these rules is complex, inherently factual in nature and subject to a comprehensive analysis of the facts and circumstances of the particular case. Notwithstanding the opinion of tax counsel described above, Liberty or we might inadvertently cause or permit a prohibited change in ownership of Liberty or our Company, thereby triggering tax liability to Liberty.
If, for any reason, it is determined that the Spin-Off does not qualify for tax-free treatment (except with respect to the receipt of cash in lieu of fractional shares of our common stock), Liberty and/or the holders of its Liberty Ventures common stock could incur significant tax liabilities.
Prior to the Spin-Off, we entered into a tax sharing agreement with Liberty. Under this agreement, we are required to indemnify Liberty, its subsidiaries and certain related persons for taxes and losses resulting from the failure of the Spin-Off to qualify as a tax-free transaction under Section 355 of the Code to the extent that such taxes and losses (i) result primarily from, individually or in the aggregate, the breach of certain covenants made by us (applicable to actions or failures to act by our Company and our subsidiaries following the completion of the Spin-Off) or (ii) result from the application of Section 355(e) of the Code to the Spin-Off as a result of the treatment of the Spin-Off as part of a plan (or series of related transactions) pursuant to which one or more persons acquire, directly or indirectly, a 50% or greater interest (measured by vote or value) in the stock of our Company (or any successor corporation). Our indemnification obligations to Liberty, its subsidiaries and certain related persons are not limited in amount or subject to any cap. If we are required to indemnify Liberty, its subsidiaries or such related persons under the circumstances set forth in the tax sharing agreement, we may be subject to substantial liabilities, which could materially adversely affect our financial position.
To preserve the tax-free treatment of the Spin-Off, we may determine to forgo certain transactions that might have otherwise been advantageous to our company, including certain asset dispositions or other strategic transactions, for some period of time following the Spin-Off. In addition, our indemnity obligation under the tax sharing agreement might discourage, delay or prevent our entering into a change of control transaction for some period of time following the Spin-Off.
Risks Relating to our Common Stock and the Securities Market
Our stock price may be volatile.
The market price of our common stock may fluctuate significantly due to a number of factors, some of which may be beyond our control, including:
actual or anticipated fluctuations in our operating results;
changes in earnings estimates by securities analysts or our ability to meet those estimates;
the operating and stock price performance of comparable companies and/or our customers;
the relatively low trading volumes of each series of our common stock; and
domestic and foreign economic conditions.

Furthermore, in recent years the stock market has experienced significant price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies, including companies in our industry. The changes frequently appear to occur without regard to the operating performance of the affected companies. As such, the price of our common stock could fluctuate based upon factors that have little or nothing to do with us, and these fluctuations could materially reduce the price of our common stock and materially affect the value of your investment.
Transactions in our common stock by our directors, officers and employees could depress the market price of our common stock.
Our directors, officers and employees own shares of, and equity incentive awards with respect to, our common stock. Sales of, or other transactions relating to, shares of our common stock by our directors, officers or employees could cause a perception in the marketplace that our stock price has peaked or that adverse events or trends have occurred or may be occurring at our Company. This perception can result notwithstanding any personal financial motivation for these insider

24

Table of Contents

transactions, and the effect could be magnified by the relatively low trading volumes of each series of our common stock. As a result, insider transactions could depress the market price for shares of our common stock.
It may be difficult for a third party to acquire us, even if doing so may be beneficial to our stockholders.
Certain provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a change in control of our Company that a stockholder may consider favorable. These provisions include the following:
a capital structure with multiple series of common stock: a Series B that entitles the holders to ten votes per share, a Series A that entitles the holders to one vote per share and a Series C that, except as otherwise required by applicable law, entitles the holders to no voting rights;
the availability of "blank check" preferred stock, which could be issued by our board of directors to increase the number of outstanding shares and thwart a takeover attempt;
a classified board of directors with staggered three-year terms, which may lengthen the time required to gain control of our board of directors;
limits on who may call special meetings of stockholders;
the prohibition of stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of the stockholders;
advance notice requirements for nominations of candidates for election to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings;
required stockholder approval by holders of (a) at least 66 2/3% of our combined voting power or (b) a majority of our combined voting power together with the approval of at least 75% of our board of directors, in each case with respect to certain extraordinary matters, such as a merger or consolidation of our Company, a sale of all or substantially all of our assets or an amendment to our certificate of incorporation; and
the existence of authorized and unissued stock which would allow our board of directors to issue shares to persons friendly to current management, thereby protecting the continuity of management, or which could be used to dilute the stock ownership of persons seeking to obtain control of us.
We may be controlled by one principal stockholder.
As of December 31, 2017, John C. Malone beneficially owned shares of our common stock entitling him to in excess of 30% of the aggregate voting power of the outstanding shares of all series of our common stock. Mr. Malone's rights to vote or dispose of his equity interest in our Company are not subject to any restrictions in favor of our Company other than as may be required by applicable law.
Holders of a single series of our common stock may not have any remedies if an action by our board of directors has an adverse effect on only that series of our common stock.
Principles of Delaware law and the provisions of our certificate of incorporation may protect decisions of our board of directors that have a disparate impact upon holders of any single series of our common stock. Under Delaware law, the board of directors has a duty to act with due care and in the best interests of all of our stockholders, including the holders of all series of our common stock. Principles of Delaware law established in cases involving differing treatment of multiple classes or series of stock provide that a board of directors owes an equal duty to all common stockholders regardless of class or series and does not have separate or additional duties to any group of stockholders. As a result, in some circumstances, our directors may be required to make a decision that is viewed as adverse to the holders of one series of our common stock. Under the principles of Delaware law and the business judgment rule, holders may not be able to successfully challenge decisions that they believe have a disparate impact upon the holders of one series of our common stock if our board of directors is disinterested and independent with respect to the action taken, is adequately informed with respect to the action taken and acts in good faith and in the honest belief that the board is acting in the best interest of all of our stockholders.
Although our Series B common stock trades on the OTC Markets, there is no meaningful trading market for the stock.
Our Series B common stock is not widely held, with over 90% of the outstanding shares as of December 31, 2017 beneficially owned by John C. Malone, the Chairman of the Board of Liberty. Although it is quoted on the OTC Markets, it is sparsely traded and does not have an active trading market. The OTC Markets tend to be highly illiquid, in part, because there is no national quotation system by which potential investors can track the market price of shares except through information received or generated by a limited number of broker-dealers that make markets in particular stocks. There is also a greater chance of market volatility for securities that trade on the OTC Markets as opposed to a national exchange or quotation system. This volatility is attributable to a variety of factors, including a lack of readily available price quotations, lower trading volumes, absence of consistent administrative supervision of “bid” and “ask” quotations and other market conditions. Each share of our Series B common stock is convertible, at any time at the option of the holder, into one share of our Series A common stock, which is listed and traded on the Nasdaq Global Market under the symbol "CHUBA."

25

Table of Contents

Our bylaws designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders' ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees.
Our bylaws provide that, unless we consent in writing to an alternative forum, the Court of Chancery of the State of Delaware (or, if the Court of Chancery does not have jurisdiction, any state or federal court located within the State of Delaware) shall be the sole and exclusive forum for substantially all disputes between us (including our directors, officers, employees, and agents) and our stockholders, including, among others, any action asserting claims for breach of fiduciary duty, claims arising pursuant to the General Corporation Law of the State of Delaware and claims governed by the internal affairs doctrine. Any person purchasing or otherwise acquiring any interest in any shares of our capital stock shall be deemed to have notice of and to have consented to this provision of our bylaws. This choice-of-forum provision may limit our stockholders' ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits. Alternatively, if a court were to find this provision of our bylaws inapplicable or unenforceable with respect to one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties    
Our Company leases approximately 49,500 square feet in Albany, New York to house our corporate headquarters, executive offices and data centers. We also lease two properties in Seattle, Washington, one approximately 19,000 square feet and serving as office space, and the other approximately 20,000 square feet, which we sub-lease to another tenant. We lease shared office and executive office facilities in Hertford, England. Our primary data center is located in our offices in Albany, New York. Additionally, we have co-location arrangements with third-party data center providers that house equipment we own and maintain at their facilities in Albany, New York and Chicago, Illinois to house secondary and disaster recovery data center facilities capable of continuing our operations in the event of a disruption at our corporate headquarters.
Item 3. Legal Proceedings    
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. We are currently not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, prospects, financial condition, results of operations and/or cash flows.
Item 4. Mine Safety Disclosures
Not applicable.

26

Table of Contents

PART II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 
Market Information for Our Common Stock
On July 25, 2016, the first business day following the Spin-Off, our Series A and Series C common stock began trading on the Nasdaq Global Market under the symbols “CHUBA" and "CHUBK," respectively. The following table sets forth, for the periods indicated, the high and low sale prices for our Series A and Series C common stock on the Nasdaq Global Market. 
 
CHUBA
 
CHUBK
 
High
 
Low
 
High
 
Low
Year ended December 31, 2017
 
 
 
 
 
 
 
Fourth Quarter
$
23.85

 
$
19.87

 
$
22.40

 
$
18.78

Third Quarter
$
24.53

 
$
16.73

 
$
22.50

 
$
16.75

Second Quarter
$
18.48

 
$
14.94

 
$
18.57

 
$
14.85

First Quarter
$
17.23

 
$
13.74

 
$
17.37

 
$
13.73

 
 
 
 
 
 
 
 
Year ended December 31, 2016
 
 
 
 
 
 
 
Fourth Quarter
$
16.69

 
$
13.24

 
$
16.40

 
$
13.14

Third Quarter (beginning July 25, 2016)
$
16.62

 
$
11.91

 
$
15.98

 
$
11.90

Our Series B common stock is not listed, but it is quoted and traded in the OTC Markets under the symbol "CHUBB." Although it is quoted on the OTC Markets, it is sparsely traded and does not have an active trading market. There is a greater chance of market volatility for securities that trade on the OTC Markets as opposed to a national exchange or quotation system, which is due to a variety of factors, including a lack of readily available price quotations, lower trading volume, absence of consistent administrative supervision of “bid” and “ask” quotations, and market conditions. The following table sets forth, for the periods indicated, the range of high and low bid information for our Series B common stock as reported by the OTC Markets. The information below represents inter-dealer prices without dealer mark-ups, mark-downs or commissions, and may not be indicative of the value of the common stock or the existence of an active market.
 
CHUBB
 
High
 
Low
Year ended December 31, 2017
 
 
 
Fourth Quarter
$
25.95

 
$
20.35

Third Quarter
$
24.85

 
$
17.40

Second Quarter
$
19.18

 
$
16.06

First Quarter
$
19.67

 
$
14.45

 
 
 
 
Year ended December 31, 2016
 
 
 
Fourth Quarter
$
20.00

 
$
14.63

Third Quarter (beginning July 25, 2016)
$
18.00

 
$
11.35

Holders of Record
As of February 21, 2018, there were 893, 46 and 952 holders of record of our Series A, Series B and Series C common stock, respectively. The foregoing numbers of record holders do not include the number of stockholders whose shares are held nominally by banks, brokerage houses or other institutions, but include each such institution as one holder.
Dividends
We have not paid any cash dividends on our common stock since the Spin-Off, and we do not expect to pay any cash dividends in the foreseeable future. All decisions regarding the payment of dividends by our Company in the future will be made by our board of directors in accordance with applicable law after taking into account various factors, including our

27

Table of Contents

financial condition, results of operations, current and anticipated cash needs, plans for expansion and possible loan covenants which may restrict or prohibit our payment of dividends.
Securities Authorized for Issuance under Equity Compensation Plans
The information required by this item is incorporated herein by reference to our Proxy Statement for our 2018 Annual Meeting of Stockholders (the "2018 Proxy Statement") to be filed with the SEC within 120 days of the fiscal year ended December 31, 2017.
Stock Performance Graph
The graph below compares the cumulative total shareholder return on our Series A and Series C common stock with the cumulative total returns of the Nasdaq Composite Index and the Nasdaq Computer Index. The graph tracks the performance of a $100 investment in our Series A and Series C common stock and in each index (although the graph assumes the reinvestment of all dividends, the Company paid no dividends during this period) from July 25, 2016 (the date our Series A and Series C common stock commenced trading on the Nasdaq Global Market) through December 31, 2017. The stock price performance depicted in the following graph is not indicative of future stock price performance.
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12098280&doc=20
 
7/25/2016
9/30/2016
12/31/2016
3/31/2017
6/30/2017
9/30/2017
12/31/2017
CommerceHub, Inc. - Series A
$100
$116
$115
$119
$134
$174
$169
CommerceHub, Inc. - Series C
$100
$118
$117
$121
$136
$167
$161
NASDAQ Composite Index
$100
$102
$106
$116
$120
$127
$135
NASDAQ Computer Index
$100
$108
$109
$123
$128
$140
$152
This performance graph shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or incorporated by reference into any filing of CommerceHub under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference to this performance graph in such filing.
Recent Sales of Unregistered Securities
None.

28

Table of Contents

Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
Item 6. Selected Financial Data
The following selected financial data is derived from our audited consolidated financial statements, and should be read together with Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations and our audited consolidated financial statements and the related notes appearing in Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
 
 
Years ended December 31,
 
 
2017
 
2016
 
2015
 
2014
 
 
amounts in thousands,
except per share amounts
Consolidated Statement of Operations Data:
 
 

 
 

 
 

 
 
Revenue
 
$
111,121

 
$
100,552

 
$
87,614

 
$
65,761

Gross profit
 
89,521

 
77,495

 
64,914

 
53,109

Income (loss) from operations
 
26,466

 
16,692

 
(6,948
)
 
6,595

Net income (loss)
 
$
9,858

 
$
9,096

 
$
(4,467
)
 
$
4,307

 
 
 
 
 
 
 
 
 
Earnings (loss) per basic share:
 
$
0.23

 
$
0.21

 
$
(0.10
)
 
$
0.10

Earnings (loss) per diluted share:
 
$
0.22

 
$
0.21

 
$
(0.10
)
 
$
0.10

 
 
As of December 31,
 
 
2017
 
2016
 
2015
 
2014
 
 
amounts in thousands
Consolidated Balance Sheets Data:
 
 

 
 

 
 

 
 
Cash and cash equivalents
 
$
19,841

 
$
6,471

 
$
19,337

 
$
26,385

Note receivable—Parent
 

 

 
36,107

 
35,507

Deferred income taxes
 
5,798

 
7,714

 
38,825

 
22,956

Total assets
 
85,119

 
80,020

 
153,800

 
120,401

Deferred revenue
 
13,611

 
12,730

 
12,022

 
9,779

Share-based compensation liability
 

 

 
96,213

 
61,570

Long-term debt
 
$

 
$
26,000

 
$

 
$

 

29

Table of Contents

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our audited consolidated financial statements and the related notes included in Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties, and our actual results could differ materially from those discussed below. See "Cautionary Note Regarding Forward-Looking Statements."
Overview
We are a leading provider of cloud-based ecommerce fulfillment and marketing solutions for large retailers, marketplaces, consumer brands and their suppliers. Our solutions help our customers implement strategies to increase their ecommerce revenues and create meaningful operational efficiencies within their supply chains. Our customers use our cloud-based software and service capabilities, which are tailored for specific customer business rules and processes, to more effectively fulfill consumer orders, generate consumer demand for their products and deliver those products to consumers.
Key Financial Metrics
Order Fee Revenue
Order fee revenue is attributable to fees charged to retailers and suppliers based on the volume of consumer orders processed through our platform using our drop-ship solutions. Order fee revenue grows as the overall volume of goods purchased online through our retailer customers increases. We track and measure order fee revenue because it corresponds to our customers' drop-ship activity on our platform.
Subscription and Other Platform Revenue
Subscription and other platform revenue is primarily attributable to subscription fees charged to retailers and suppliers for the use of our drop-ship solutions. Subscription revenue grows as new customers join the platform, connect to and create new relationships with other trading partners, adopt new features and upgrades, and ramp up their activity on the platform. Subscription and other platform revenue also includes other drop-ship platform fees for activity related to our delivery-related solutions, inventory management, third-party communication capabilities and other platform activities related to ecommerce relationships. We track and measure subscription and other platform revenue because it provides insight into the size and scope of our platform in terms of total trading partner customers, relationships among those customers and the extent of their engagement with our platform.
Set-Up and Professional Services Revenue
Set-up and professional services revenue includes fees for the configuration, design and set-up of a customer's onboarding to our platform and other services that we provide to new and existing customers, including highly targeted services that are focused on helping our customers to more quickly adopt our drop-ship solutions and maximize their utility. We track and measure set-up and professional services revenue as it is an indication of new trading partner connections, enhancements to existing customer connections and the extent of customers' engagement with our platform's capabilities.
Demand Channel Revenue
Demand channel revenue includes set-up, professional services, subscription fees and other fees related to the volume of online sales and orders that retailers, sellers and brands achieve using our demand channel solutions. We track and measure demand channel revenue because it represents the access our customers' engagement and success with our demand channel solutions.
Seasonality
The ecommerce marketplace is affected by the same seasonality as the traditional brick-and-mortar marketplace, and many of our customers typically realize a significant portion of their sales in the fourth quarter of each calendar year. Historically, the percentage of our annual revenue has been relatively uniform over the first three quarters of the year with approximately 33% to 34% of our annual revenue being generated in the fourth quarter.
Management's Use of Non-GAAP Measures
In addition to reporting financial measures calculated in accordance with U.S. generally accepted accounting principles ("GAAP"), we provide Adjusted EBITDA (as defined below), a non-GAAP financial measure that management considers in reviewing our financial performance because we feel it is a relevant measure of the overall efficiency of our business model. Adjusted EBITDA is not a substitute for, or superior to, and should be considered only in addition to, net income calculated in accordance with GAAP. Adjusted EBITDA is subject to inherent limitations and excludes significant

30

Table of Contents

expenses and income that are required by GAAP to be recorded in our consolidated financial statements. Certain of these adjustments are based on estimates and assumptions of management and do not purport to reflect actual historical results. In addition, our computation of Adjusted EBITDA may not be comparable to other similarly titled measures computed by other companies, because all companies do not calculate these measures in the same fashion.
We define “Adjusted EBITDA” as net income or loss plus interest expense, income tax expense, depreciation of property and equipment, amortization of capitalized software costs and intangible assets, share-based compensation, and restructuring charges, less interest income and income tax benefit. Adjusted EBITDA excludes restructuring charges, the elimination of which does not result in a reduction of operating expenses necessary to conduct our business. By excluding these charges, we believe Adjusted EBITDA provides supplemental information that enables us and investors to better analyze our operating performance and the sustainability of our results and to compare our performance on a more consistent basis from period to period.
Updated Presentation of Key Revenue Metrics
During the year ended December 31, 2017, we updated how we present our revenue by type to better align with how we evaluate the key components, drivers and metrics influencing our total revenue. As a result, we have updated revenue by type for comparative periods to conform with our current presentation, as shown in the table below.
Component of Revenue
Historical Presentation
Current
Presentation
Fees for retailer orders processed using our drop-ship solutions
Usage revenue
Order fee revenue
Fees for marketplace and other non-retailer demand channel orders using our demand channel solutions
Usage revenue
Demand channel revenue
Other platform fees, including fees associated with our delivery-related solutions, inventory management and third-party communication capabilities
Usage revenue
Subscription and other platform revenue
Subscription fees associated with our drop-ship solutions
Subscription revenue
Subscription and other platform revenue
Subscription fees associated with our demand channel solutions
Subscription revenue
Demand channel revenue
Set-up and professional services associated with our drop-ship solutions
Set-up and professional services
Set-up and professional services revenue
Set-up and professional services associated with our demand channel solutions
Set-up and professional services
Demand channel revenue
Other Metrics
Cost of Revenue
Cost of revenue primarily consists of personnel costs, including salaries, bonuses, payroll taxes, benefits, share-based compensation expense and facility cost and overhead allocations for our teams supporting customer service, application support, customer set-up and professional services, and performance marketing. We capitalize the cost of acquired software, qualifying payroll and payroll-related costs incurred in developing and enhancing our solutions and related product offerings, such as internal tools used by our operations teams. Amortization expense related to these costs are included in cost of revenue. Additionally, facility costs for our data centers, communication service charges and depreciation expense related to computer equipment directly associated with generating revenue are captured in cost of revenue.
Research and Development Expenses
Research and development expenses consist of personnel costs, including salaries, bonuses, payroll taxes, and benefits net of amounts capitalized as developed software, share-based compensation expense and facility cost and overhead allocations for employees engaged in the design, development, testing and maintenance of our solutions. Also included are fees paid to third-party firms who assist in the development of our product solutions, net of amounts capitalized as developed software.
Sales and Marketing Expenses
Sales and marketing expenses consist of personnel expenses, including salaries, commissions, bonuses, payroll taxes, benefits, share-based compensation expense and facility cost and overhead allocations for sales, client management and marketing employees. Other expenses associated with sales and marketing include expenses incurred related to corporate

31

Table of Contents

marketing, including brand awareness and trade shows. Much of our marketing effort is focused on thought leadership, as our marketing team engages with media and other industry influencers to publish and present on topics relevant to our solutions in trade publications and relevant industry conferences. Our client management expenses are attributable to our personnel and programs intended to oversee and develop comprehensive relationships with our customers and to provide strategic account management and coordination of cross-selling opportunities.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel costs, including salaries, bonuses, payroll taxes, benefits, share-based compensation expense and facility cost and overhead allocations for our corporate functions, including executive leadership, finance, legal, information technology and human resources, as well as professional service and other fees related to legal, tax and finance. Also included are costs attributable to credit card processing and bad debt expense.
New Accounting Pronouncements
Information regarding new accounting pronouncements is included in Note 4 to the accompanying audited consolidated financial statements.
Critical Accounting Policies
The preparation of our consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Listed below are the accounting policies and estimates that we believe are critical to our financial statements due to the degree of uncertainty regarding the estimates or assumptions involved and the magnitude of the asset, liability, revenue or expense reported.
Revenue and Deferred Revenue
We generate revenue through the delivery of our ecommerce fulfillment and marketing software solutions. We follow Financial Accounting Standards Board guidance set forth in Accounting Standards Codification ("ASC") Subtopic 985-605-05 related to Hosting Arrangements and ASC Subtopic 605-25 related to Revenue Arrangements with Multiple Deliverables. We recognize revenue when all of the following conditions are met: there is persuasive evidence of an arrangement, the services have been delivered to the customer, the collection of the related fees is reasonably assured and the amount of the related fees is fixed and determinable.
Revenue from new customer acquisition is generated under services agreements with multiple elements. Customers do not have the contractual right to take possession of our solutions. We evaluate each element in a multiple-element arrangement to determine whether it represents a separate unit of accounting. An element constitutes a separate unit of accounting when the delivered item has standalone value and delivery of the undelivered element is probable and within our control.
Fees charged to customers based on the level of a customer's utilization of our solutions and other platform fees attributable to inventory management and third-party communication capabilities are recognized in the period in which such fees are earned. We recognize monthly subscription fees as revenue in the period in which the subscription is earned.
Set-up fees charged to customers in connection with providing access to our solutions are billed during the implementation phase and recorded as deferred revenue until a customer's subscription period has commenced. We also provide professional services to provide certain customer-requested enhancements to our solutions as well as other professional services. Set-up and professional services fees related to customer solution enhancements do not have stand-alone value because they are sold only in conjunction with a subscription to our solutions, they are sold only by us, a customer could not resell them, and they do not represent the culmination of a separate earnings process. Set-up fees without stand-alone value are recognized over the longer of the life of the agreement or the expected customer life. We recognize revenue for professional services fees charged to customers for solution enhancement services over the estimated remaining customer life. Professional services charged to customers that do have stand-alone value are recognized in the period in which the professional services fees are earned.
In determining the estimated life of our customers, we consider our historical experience with customer contract renewals, the type of the customer, the size of the customer and the period over which the customer is expected to benefit from the related offerings. As of December 31, 2017, our estimated life of customers ranged from 1 to 10 years, reflecting a shorter life for smaller customers and a longer life for our largest retail customers. Deferred revenue consists of the unearned portion of deferred set-up and professional services fees and annual subscription fees.
Reimbursements of out-of-pocket expenses are recorded as revenue and cost of revenue in the consolidated statements of comprehensive income (loss).

32

Table of Contents

Refer to Note 4 of the accompanying audited consolidated financial statements for further discussion on ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which is effective beginning in 2018, and the effects this standard will have on our consolidated financial statements.
Capitalized Software Costs
We capitalize the cost of payroll, payroll-related costs and third-party consulting fees incurred in the direct development or enhancement of solutions as internal-use software. During 2016, we changed and further refined our methodologies and processes to estimate the portion of software development costs that is eligible to be capitalized, which is assessed at a project level. We expense development costs during the preliminary project stage, and we expense costs for requirements gathering, data conversion activities, training, maintenance and minor enhancements as such costs are incurred. We capitalize development costs incurred for the coding, configuration, interfacing, automation and testing of new functionality after the preliminary project stage is complete. Capitalized software costs are amortized on a straight-line basis over two to three years based on the nature and estimated useful life of the applicable solution. Amortization of capitalized software costs is included in cost of revenue within the consolidated statements of comprehensive income (loss).
Deferred Services Costs
We defer direct payroll, payroll-related costs and third-party consulting costs incurred for the set-up and integration of new customers on our platform and for enhancing our platform to accommodate specific customer needs. We recognize deferred services costs associated with the integration of customers on our platform over the estimated life of our customers. We recognize deferred services costs incurred to enhance our platform for specific customer needs over the estimated remaining customer life. Amortization of deferred services costs are included in cost of revenue within the consolidated statements of comprehensive income (loss).
Share-Based Compensation
Share-based awards exchanged for employee services are recorded as expense, net of estimated forfeitures, at the estimated fair value of these awards over the requisite employee service period (typically annual straight-line vesting over four years) or, where applicable for performance-based awards, over the service period when the achievement of certain performance-based conditions are considered probable, and expire after 10 years.
Prior to the Spin-Off, our share-based awards consisted of stock options and stock appreciation rights ("SARs") issued by CTI, our predecessor entity, which were classified as liability awards and were included as a share-based compensation liability on our consolidated balance sheets (see Note 3 to the accompanying audited consolidated financial statements, which further describes our accounting and fair value methodologies of these liability awards held prior to the Spin-Off, as well as Note 12, which further describes the modification of these liability awards in connection with the Spin-Off). Following the Spin-Off, we grant to our employees, directors and consultants stock options and restricted stock units ("RSUs") in respect of our Series C common stock under the CommerceHub, Inc. 2016 Omnibus Incentive Plan (as amended, amended and restated or otherwise modified from time to time, the "Omnibus Incentive Plan"), which was adopted in connection with the Spin-Off.
We estimate the fair value of stock options and awards under the CommerceHub, Inc. 2016 Employee Stock Purchase Plan (as amended, amended and restated or otherwise modified from time to time) using a Black-Scholes pricing model as further described in Note 3 to the accompanying audited consolidated financial statements. We determine the fair value of our RSU awards based on the closing market price per share of our Series C common stock on the date of grant. We estimate our forfeiture rate based on our historical turnover experience and other qualitative factors. We review and update our forfeiture rate, if necessary, at least annually, or more frequently if facts or circumstances indicate a change is necessary.
Income Taxes
We record income taxes under the asset and liability method. Deferred tax assets and liabilities reflect our estimates of the future tax consequences of temporary differences between the carrying amounts of assets and liabilities and their respective tax bases, including operating losses and tax credit carryforwards. We determine deferred income taxes based on the differences in accounting methods and timing between financial statement and income tax reporting. Accordingly, we determine the deferred tax asset or liability for each temporary difference based on the enacted tax rates expected to be in effect when we realize the underlying items of income and expense. We consider all relevant factors when assessing the likelihood of future realization of our deferred tax assets, including our recent earnings experience by jurisdiction, our expectations of future taxable income and the carry forward periods available to us for tax reporting purposes. We may establish a valuation allowance to reduce deferred tax assets to the amount we believe is more-likely-than-not to be realized. This process requires management to make judgments regarding the timing and probability of the ultimate tax impact of the various agreements and transactions to which we are party. Due to inherent complexities arising from the nature of our business, future changes in

33

Table of Contents

income tax law, tax sharing agreements or variances between our actual and anticipated operating results, actual income taxes may vary materially from these estimates and could have a significant impact on our financial position.
We record liabilities to address uncertain tax positions that we have taken in previously filed tax returns or that we expect to take in a future tax return. The determination for required liabilities is based upon an analysis of each individual tax position, taking into consideration whether it is more-likely-than-not that our tax position, based on technical merits, will be sustained upon examination. When we conclude that a tax position is more-likely-than-not to be sustained, we recognize the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the taxing authority. The difference between the amount recognized and the total tax position is recorded as a liability. The ultimate resolution of these tax positions may be greater or less than the liabilities recorded.
Results of Operations for the Years Ended December 31, 2017 and 2016
Revenue:
  (amounts in thousands)
Year Ended December 31,
 
Change
 
2017
 
2016
 
$
%
Revenue:
 

 
 

 
 

 
 

Core Drop-Ship Revenue
 
 
 
 
 
 
 
Order fee revenue
$
59,788

 
$
52,095

 
$
7,693

 
15
 %
Subscription and other platform revenue
35,224

 
32,617

 
2,607

 
8
 %
Set-up and professional services revenue
7,047

 
5,692

 
1,355

 
24
 %
Total core drop-ship revenue
102,059

 
90,404

 
11,655

 
13
 %
 
 
 
 
 
 
 
 
Demand channel revenue
9,062

 
10,148

 
(1,086
)
 
(11
)%
Total revenue
$
111,121

 
$
100,552

 
$
10,569

 
11
 %
Order fee revenue represented 54% and 52% of our total revenue for the years ended December 31, 2017 and 2016, respectively. The increase in our order fee revenue was primarily driven by a 16% increase in the volume of customer orders processed through our platform, mainly from existing customers.
Subscription and other platform revenue represented 32% of our total revenue for the years ended December 31, 2017 and 2016, and is primarily attributable to subscription fees charged to retailers and suppliers for the use of our drop-ship solutions. The increase in our subscription fees for the year ended December 31, 2017, as compared to 2016, was primarily driven by an increase in the number of retailer and supplier selling relationships on our platform, which was primarily attributable to a 15% increase in our total customer count. The increase in other platform fees for the year ended December 31, 2017, as compared to 2016, is attributable to an increase in the volume of transactions processed through our platform, mainly from existing customers.
Set-up and professional services revenue represented 6% of our total revenue for each of the years ended December 31, 2017 and 2016. The increase in our set-up and professional services revenue for the year ended December 31, 2017, as compared to 2016, was driven by an increase in the number of retailer and supplier selling relationships on our platform, which was primarily attributable to a 15% increase in our total customer count, as well as the acceleration of deferred revenue in connection with the termination of customers from our platform, including due to bankruptcies.
Demand channel revenue represented 8% and 10% of our total revenue for the years ended December 31, 2017 and 2016, respectively. The decrease in our demand channel revenue for the year ended December 31, 2017, as compared to 2016, was primarily driven by a decrease in the volume of online demand channel sales and orders processed through our platform, attributable to attrition of customers as we have focused our business strategy away from certain digital marketing services.

34

Table of Contents

Cost of Revenue and Gross Profit:
  (amounts in thousands)
 
Year Ended December 31,
 
Change
 
 
2017
 
2016
 
$
 
%
Cost of revenue
 
$
21,600

 
$
23,057

 
$
(1,457
)
 
(6
)%
Gross profit
 
$
89,521

 
$
77,495

 
$
12,026

 
16
 %
Gross margin
 
81
%
 
77
%
 
4
%
 
 
The decrease in cost of revenue for the year ended December 31, 2017, as compared to 2016, was primarily driven by a $0.9 million reduction in personnel costs, largely attributable to lower headcount, and a $0.8 million decrease in intangible asset amortization. In addition, there was a $0.2 million decrease in amortization expense related to capitalized software costs, which, as of December 31, 2017, we expect will continue to decrease in 2018 by approximately $2.6 million, as we changed and further refined our methodologies and processes to estimate the portion of software development eligible to be capitalized in 2016. This decrease was partially offset by a $0.5 million increase in restructuring charges incurred in connection with our 2017 restructuring plan (see Note 16 to the accompanying audited consolidated financial statements for a detailed description of our 2017 restructuring plan), which did not occur in 2016.
Gross profit increased for the year ended December 31, 2017, as compared to 2016, primarily due to increased profit as we create leverage through our scalable platform and existing personnel while increasing revenues.
Operating Expenses:
  (amounts in thousands)
 
Year Ended December 31,
 
Change
 
 
2017
 
2016
 
$
 
%
Operating expenses:
 
 

 
 

 
 

 
 

Research and development
 
$
25,559

 
$
19,187

 
$
6,372

 
33
 %
Sales and marketing
 
8,576

 
11,334

 
(2,758
)
 
(24
)%
General and administrative
 
28,920

 
30,282

 
(1,362
)
 
(4
)%
Total operating expenses
 
$
63,055

 
$
60,803

 
$
2,252

 
4
 %
Research and development expenses. Research and development expenses increased due to a $5.1 million increase in personnel costs, of which $3.1 million was attributable to a reduction in the amount of software development projects capitalized in 2017, as we changed and further refined our methodologies and processes to estimate the portion of software development eligible to be capitalized in 2016, and $2.0 million was attributable to the expansion of our development teams, net of costs deferred in connection with the integration of customers onto our platform. In addition, we incurred $1.3 million of restructuring charges in connection with our 2017 restructuring plan.
Sales and marketing expenses. Sales and marketing expenses decreased due to a $2.2 million decrease in commissions expense and a $1.2 million decrease in personnel costs, in each case primarily attributable to lower headcount on our sales team. The decrease was partially offset by $0.4 million of restructuring charges incurred in connection with our 2017 restructuring plan and a $0.4 million increase in professional services costs.
General and administrative expenses. General and administrative expenses decreased due to a $1.0 million decrease in intangible asset amortization and a $2.3 million reduction in share-based compensation expense resulting from the mark-to-market adjustment of liability-based awards in 2016, which resulted in higher expense in 2016 as compared to the equity-based awards in 2017, which are not marked-to-market. This decrease was partially offset by a $1.3 million increase in professional services costs, primarily attributable to becoming a public company, and a $0.6 million increase in bad debt expense due, in part, to customer bankruptcies in 2017.
Other Expenses and Income:
  (amounts in thousands)
 
Year Ended December 31,
 
Change
 
 
2017
 
2016
 
$
 
%
Other (expense) income:
 
 

 
 

 
 

 
 

Interest expense
 
$
(738
)
 
$
(707
)
 
$
(31
)
 
4
 %
Interest income
 
6

 
273

 
(267
)
 
(98
)%
Total other (expense) income
 
$
(732
)
 
$
(434
)
 
$
(298
)
 
69
 %
      

35

Table of Contents

Other expense increased primarily due to increased interest expense, including commitment fees, incurred in connection with borrowings outstanding under our revolving credit facility, coupled with a decrease in interest earned, which in 2016 was primarily generated under our promissory note receivable due from Liberty that was fully repaid in June 2016.
Income Taxes:
  (amounts in thousands)
 
Year Ended December 31,
 
Change
 
 
2017
 
2016
 
$
 
%
Income tax expense
 
$
15,876

 
$
7,162

 
$
8,714

 
122
%
Effective tax rate
 
62
%
 
44
%
 
18
%
 
 
The increase in income tax expense was primarily due to pre-tax book income of $25.7 million in the year ended December 31, 2017 as compared to pre-tax book income of $16.3 million in 2016. For the year ended December 31, 2017, actual income tax expense was greater than the amounts computed by applying the U.S. federal income tax rate of 35% due to an adjustment recorded in the fourth quarter of 2017 associated with the U.S. Tax Cuts and Jobs Act ("Tax Act"). The Tax Act was enacted on December 22, 2017 and introduces significant changes to U.S. income tax law. Effective in 2018, the Tax Act reduces our U.S. statutory tax rate from 35% to 21%, among other changes. Accordingly, we have adjusted our deferred income taxes as of December 22, 2017 to reflect the reduced rate that will apply in future periods when these deferred taxes are settled or realized, which resulted in deferred tax expense of $3.2 million, or a 12% increase in our 2017 effective tax rate.
In addition, actual income tax expense for the year ended December 31, 2017 was greater than the federal income tax rate of 35% due to an immaterial error correction recorded in 2017 associated with limitations on deductions under Section 162(m) of the Internal Revenue Code (the “IRC”) with respect to certain share-based compensation awards granted prior to the Spin-Off, which limit the Company’s future deductions on these share-based compensation awards in our stand-alone provision beginning at the Spin-Off. The $3.3 million effect of this error was not material, and was corrected in the fourth quarter of 2017 and is incorporated in our 2017 tax expense.
For the year ended December 31, 2016, actual income tax expense was greater than the amounts computed by applying the U.S. federal income tax rate of 35% primarily because of an immaterial error correction recorded in 2016 associated with a change in tax law in New York State (“NY”) that updated the method used to determine the NY apportionment. Under the new method, our income allocated to NY was decreased, resulting in a reduction to current state tax expense post-2016 but an increase in deferred tax expense in 2016 due to the reduction in the value of our deferred state tax assets. The $1.5 million net effect of this error was not material, and was corrected in the fourth quarter of 2016 and is incorporated in our 2016 tax expense.
Net Income and Adjusted EBITDA:
Net Income    
Net income for the year ended December 31, 2017 increased, as compared to 2016, primarily due to a $10.6 million increase in revenue, while leveraging our scalable platform and existing personnel, among other changes in cost of revenue and operating expenses as further described above, all of which collectively contributed to a $9.8 million increase in income from operations. This increase in income from operations was partially offset by changes in interest expense and income tax expense as further described above.
Net income for the year ended December 31, 2017 is inclusive of $2.3 million of restructuring charges, primarily termination and retention benefits, associated with our 2017 restructuring plan. For the year ended December 31, 2017, we recognized $1.2 million of impairment and cash compensation charges, net of savings, associated with our 2017 restructuring plan, consisting of $2.3 million of gross restructuring charges, offset by $1.1 million of savings from permanent headcount reductions and open positions transitioning to our corporate headquarters.
For the year ending December 31, 2018, we expect up to $1.0 million of cash compensation charges, net of savings, depending on the pace of hiring. This estimate consists of approximately $4.0 million of gross restructuring charges, offset by approximately $3.5 million of cash savings from permanent headcount reductions, reduced cost of positions transitioned to our corporate headquarters, and open positions during that transition.
For the year ending December 31, 2019, we expect approximately $3.0 million to $4.0 million in net cash savings, from permanent headcount reductions and reduced cost of positions transitioned to our corporate headquarters.
In addition to the above, we realized a $0.3 million reduction in share-based compensation for fiscal 2017, and we expect a $0.3 million reduction in share-based compensation for each of fiscal 2018 and fiscal 2019.

36

Table of Contents

For the year ended December 31, 2017, restructuring charges included in the statements of comprehensive income (loss) were as follows (amounts in thousands):
 
Cost of Revenue
 
Research and Development
 
Sales and Marketing
 
General and Administrative
 
Total Restructuring Expenses
Termination & retention benefits
$
295

 
$
1,345

 
$
384

 
$
64

 
$
2,088

Impairment of capitalized software
191

 

 

 

 
191

Total restructuring expenses
$
486

 
$
1,345

 
$
384

 
$
64

 
$
2,279

Adjusted EBITDA
  (amounts in thousands)
 
Year Ended December 31,
 
Change
 
 
2017
 
2016
 
$
 
%
Net income and Adjusted EBITDA:
 
 

 
 

 
 

 
 

Net income
 
$
9,858

 
$
9,096

 
$
762

 
8
 %
Interest expense, net
 
732

 
434

 
298

 
69
 %
Income tax expense
 
15,876

 
7,162

 
8,714

 
122
 %
Depreciation and amortization
 
8,032

 
9,803

 
(1,771
)
 
(18
)%
Share-based compensation
 
8,629

 
11,290

 
(2,661
)
 
(24
)%
Restructuring charges (1)
 
2,279

 

 
2,279

 
100
 %
Adjusted EBITDA
 
$
45,406

 
$
37,785

 
$
7,621

 
20
 %
     
(1)
Restructuring charges include termination and retention benefits and the impairment of certain capitalized software projects in connection with our 2017 restructuring plan described in Note 16 to the accompanying audited consolidated financial statements.
Adjusted EBITDA for the year ended December 31, 2017 increased, as compared to 2016, due to increased operating profit on higher revenue as we continued to leverage our scalable platform and existing personnel. This increase was also attributable to a $2.2 million decrease in commissions expense primarily attributable to lower headcount on our sales team. This increase was partially offset by a $2.9 million reduction in the amount of software development costs capitalized, net of related amortization, increased ongoing professional services costs of $1.3 million, primarily attributable to becoming a public company, and increased bad debt expense of $0.6 million, due in large part to customer bankruptcies in 2017.
Results of Operations for the Years Ended December 31, 2016 and 2015
Revenue:
  (amounts in thousands)
Year Ended December 31,
 
Change
 
2016
 
2015
 
$
 
%
Revenue:
 

 
 

 
 

 
 

Core Drop-Ship Revenue
 
 
 
 
 
 
 
Order fee revenue
$
52,095

 
$
45,269

 
$
6,826

 
15
 %
Subscription and other platform revenue
32,617

 
27,498

 
5,119

 
19
 %
Set-up and professional services revenue
5,692

 
4,293

 
1,399

 
33
 %
Total core drop-ship revenue
90,404

 
77,060

 
13,344

 
17
 %
 
 
 
 
 
 
 
 
Demand channel revenue
10,148

 
10,554

 
(406
)
 
(4
)%
Total revenue
$
100,552

 
$
87,614

 
$
12,938

 
15
 %
Order fee revenue represented 52% of our total revenue for the years ended December 31, 2016 and 2015. The increase in our order fee revenue was primarily driven by a 16% increase in the volume of customer orders processed through our platform, mainly from existing customers.
Subscription and other platform revenue represented 32% and 31% of our total revenue for the years ended December 31, 2016 and 2015, respectively, and is primarily attributable to subscription fees charged to retailers and suppliers for the use of our drop-ship solutions. The increase in our subscription fees for the year ended December 31, 2016, as compared to 2015, was primarily driven by an increase in the number of retailer and supplier selling relationships on our platform, which

37

Table of Contents

was primarily attributable to an increase in our total customer count. The increase in other platform fees for the year ended December 31, 2017, as compared to 2016, is attributable to an increase in the volume of transactions processed through our platform, mainly from existing customers.
Set-up and professional services revenue represented 6% and 5% of our total revenue for the years ended December 31, 2016 and 2015, respectively. The increase in our set-up and professional services revenue for the year ended December 31, 2016, as compared to 2015, was driven by an increase in the number of retailer and supplier selling relationships on our platform, which was primarily due to an increase in our total customer count.
Demand channel revenue represented 10% and 12% of our total revenue for the years ended December 31, 2016 and 2015, respectively. The decrease in our demand channel revenue for the year ended December 31, 2016, as compared to 2015, was primarily driven from a decrease in the volume of online demand channel sales and orders processed through our platform, attributable to attrition of customers as we have focused our business strategy away from certain digital marketing services.
Cost of Revenue and Gross Profit:
  (amounts in thousands)
 
Year Ended December 31,
 
Change
 
 
2016
 
2015
 
$
 
%
Cost of revenue
 
$
23,057

 
$
22,700

 
$
357

 
2
%
Gross profit
 
$
77,495

 
$
64,914

 
$
12,581

 
19
%
Gross margin
 
77
%
 
74
%
 
3
%
 
 
The increase in cost of revenue in 2016 was primarily driven by a $1.6 million increase in amortization of capitalized software and a $1.3 million increase in recognized deferred services cost, in each case as compared to 2015. This increase was offset by lower share-based compensation expense of approximately $2.5 million due to a larger mark-to-market adjustment on awards, and resulting expense, in 2015, as compared to 2016. Gross profit increased for the year ended December 31, 2016, as compared to 2015, as we continued to leverage our existing platform and personnel while increasing revenues.
Operating Expenses:
  (amounts in thousands)
 
Year Ended December 31,
 
Change
 
 
2016
 
2015
 
$
 
%
Operating expenses:
 
 

 
 

 
 

 
 

Research and development
 
$
19,187

 
$
16,304

 
$
2,883

 
18
 %
Sales and marketing
 
11,334

 
11,287

 
47

 
 %
General and administrative
 
30,282

 
44,271

 
(13,989
)
 
(32
)%
Total operating expenses
 
$
60,803

 
$
71,862

 
$
(11,059
)
 
(15
)%
Research and development expenses.    The increase in research and development expenses was mainly attributable to higher personnel-related costs of $7.4 million, of which $5.3 million was attributable to the expansion of our development team to support continued investment in our platform, with the remaining $2.1 million attributable to a reduction in the amount of software development costs capitalized as we changed and refined our methodologies and processes to estimate the portion of software development costs that is eligible to be capitalized. This increase was partially offset by a $5.0 million reduction in share-based compensation expense due to a larger mark-to-market adjustment on awards, and resulting expense, in 2015, as compared to 2016.
Sales and marketing expenses.    Sales and marketing expenses remained flat year-over-year. We experienced an increase in personnel-related costs of approximately $1.2 million from the expansion of our sales and marketing teams and a $1.6 million increase in commission expense to our sales team in 2016 as compared to 2015. We also experienced an increase in sales tax expense, driven by a $0.6 million benefit in connection with a favorable state tax ruling in 2015 that did not recur in 2016. However, these increases were offset by a share-based compensation expense reduction of $3.3 million due to a larger mark-to-market adjustment on awards, and resulting expense, in 2015, coupled with reduction in value of performance-based awards, as compared to 2016.
General and administrative expenses.    The decrease in general and administrative expenses resulted from a $20.2 million reduction in share-based compensation expense due to a larger mark-to-market adjustment on awards, and resulting expense, in 2015, as compared to 2016. This decrease was partially offset by a $1.2 million increase in personnel-related expenses due to increased headcount, a $1.1 million increase in payroll-related taxes due to exercises of SARs and

38

Table of Contents

option awards and a $4.3 million increase in professional services expenses associated with the Spin-Off and other public company costs.
Other Expenses and Income:
  (amounts in thousands)
 
Year Ended December 31,
 
Change
 
 
2016
 
2015
 
$
 
%
Other (expense) income:
 
 

 
 

 
 

 
 

Interest expense
 
$
(707
)
 
$

 
$
(707
)
 
 %
Interest income
 
273

 
600

 
(327
)
 
(55
)%
Total other (expense) income
 
$
(434
)
 
$
600

 
$
(1,034
)
 
(172
)%
The increased expense in other (expense) income was attributable to interest expense, including commitment fees, incurred in 2016 on borrowings under our credit facility and amounts owed to Liberty under our promissory note, which we entered into in June 2016, coupled with a decrease in interest earned under our promissory note receivable due from Liberty, which was fully repaid in June 2016.
Income Taxes:
  (amounts in thousands)
 
Year Ended December 31,
 
Change
 
 
2016
 
2015
 
$
 
%
Income tax (benefit) expense
 
$
7,162

 
$
(1,881
)
 
$
9,043

 
nm
Effective tax rate
 
44
%
 
30
%
 
14
%
 
 
The increase in income tax expense was primarily due to pre-tax book income of $16.3 million in the year ended December 31, 2016 as compared to a pre-tax book loss of $6.3 million in 2015. For the year ended December 31, 2016, actual income tax benefit was greater than the amounts computed by applying the U.S. federal income tax rate of 35% primarily because of an immaterial error correction recorded in 2016 associated with a change in NY tax law that updated the method used to determine the NY apportionment. Under the new method our income allocated to NY was decreased, resulting in a reduction to current state tax expense post-2016 but an increase in deferred tax expense in 2016 due to the reduction in the deferred state tax assets. The $1.5 million net effect of this error was not material, and was recorded in the fourth quarter of 2016 and is incorporated in our 2016 tax expense. For the year ended December 31, 2015, the difference between actual income tax expense and the computed tax was driven primarily by market adjustments for stock options exercised under CTI's share-based compensation programs.
Net Income and Adjusted EBITDA:
Net income increased by $13.6 million for the year ended December 31, 2016, as compared to 2015. The increase was primarily due to a $23.6 million increase in income from operations, which was attributable to increased gross profit while we continued to leverage our scalable platform and existing personnel while increasing revenues, and a decrease in operating expenses, primarily attributable to a $30.9 million decrease in share-based compensation expense.
The primary driver of the decrease in share-based compensation expense was the mark-to-market adjustment, primarily generated by the change in underlying share price, for each period. For both the year ended December 31, 2015 and the three months ended March 31, 2016, the estimated share price, which was based on an internal valuation using the assistance of a third-party advisory firm, increased and resulted in higher expense. For the nine months ended December 31, 2016, the estimated share price was based on the fair market value of our Series C common stock traded immediately following the Spin-Off (for shares granted prior to the Spin-Off) or the fair market value of our Series C common stock on the grant date (for shares granted after the Spin-Off), which decreased as compared to our most recent internal valuation and resulted in a reduction to expense as compared to the prior period.

39

Table of Contents

The net income increase was partially offset by a $9.0 million increase in income tax expense, which was attributable to higher pre-tax book income and the NY state tax law change described above, and a $1.0 million increase in net interest expense on our outstanding borrowings.
  (amounts in thousands)
 
Year Ended December 31,
 
Change
 
 
2016
 
2015
 
$
 
%
Net income and Adjusted EBITDA:
 
 

 
 

 
 

 
 

Net income (loss)
 
$
9,096

 
$
(4,467
)
 
$
13,563

 
nm

Interest expense (income)
 
434

 
(600
)
 
1,034

 
(172
)%
Income tax expense (benefit)
 
7,162

 
(1,881
)
 
9,043

 
nm

Depreciation and amortization
 
9,803

 
7,794

 
2,009

 
26
 %
Share-based compensation
 
11,290

 
42,150

 
(30,860
)
 
(73
)%
Adjusted EBITDA
 
$
37,785

 
$
42,996

 
$
(5,211
)
 
(12
)%
Adjusted EBITDA decreased for the year ended December 31, 2016, as compared to 2015. Commencing in 2016, we incurred approximately $4.3 million of incremental expenses relating to resources and other costs required to support the Spin-Off and public company compliance. The decrease was also attributable to an increase of $1.4 million in payroll-related taxes on exercises of CTI SARs and options, and a $2.1 million reduction in the amount of software development costs capitalized, as we changed and refined our methodologies and processes to estimate the portion of software development costs that is eligible to be capitalized. Further, for the year ended December 31, 2015, we recognized a benefit in connection with a favorable state sales tax ruling of $0.6 million, which did not recur in 2016. These decreases were partially offset by increased operating profit on higher revenues in 2016, as compared to 2015.
Liquidity and Capital Resources
  (amounts in thousands)
 
Year Ended December 31,
 
 
2017
 
2016
 
2015
Net cash provided by (used in):
 
 

 
 

 
 
Operating activities
 
$
38,101

 
$
(48,122
)
 
$
24,534

Investing activities
 
(2,562
)
 
26,840

 
(30,867
)
Financing activities
 
$
(22,172
)
 
$
8,416

 
$
(715
)
Historically, the cash we generate from operations has been sufficient to fund our working capital requirements and capital expenditures. Substantially all of our cash and cash equivalents are held within the U.S. Cash generated internally is used for our international working capital needs. At December 31, 2017, we had $19.8 million of cash and cash equivalents, no borrowings under our revolving credit facility and available borrowings under the facility of $125.0 million. Our cash is invested in money market deposit accounts that are currently providing only a minimal return. Historically, we have not entered into investments, but we may do so in the future. Effective in 2018, assuming a similar tax and business structure, we anticipate a reduction in income taxes paid and accrued as a result of the Tax Act.  The Tax Act reduces our U.S. federal statutory tax rate from 35% to 21%. We expect that cash from operations and available borrowings under our revolving credit facility will be sufficient to meet our cash flow requirements for the foreseeable future.
Cash Flow from Operating Activities
The increase in cash flows from operating activities for the year ended December 31, 2017, as compared to 2016, was primarily attributable to:
$86.7 million of cash payments in 2016 for the settlement of share-based awards, which no longer occur following the modification of CTI's share-based compensation plans in connection with the Spin-Off; and
a $0.8 million improvement in net income and a $19.7 million net increase in cash flows generated from other working capital related accounts, largely as a result of a reduction in cash outflows associated with income taxes (including the settlement of taxes due to Liberty at the Spin-Off, which is included in our net payables due to Liberty in 2016).
The increase was partially offset by a $21.0 million net decrease in non-cash expenses (primarily forfeiture of net operating losses included in deferred income taxes attributed to the Spin-Off in 2016, share-based compensation, depreciation and amortization).

40

Table of Contents

The decrease in cash flows from operating activities for the year ended December 31, 2016, as compared to 2015, was primarily attributable to:
a $79.2 million increase in cash payments for the settlement of share-based awards; and
a $12.6 million decrease in cash flows generated from other working capital related accounts, largely as a result of a reduction in cash outflows associated with our net payables due to Liberty and income taxes.
The decrease was partially offset by a $13.6 million increase in net income and a $5.5 million increase in non-cash expenses (primarily depreciation, amortization, share-based compensation, deferred income taxes and other).
Cash Flow from Investing Activities
The decrease in cash flows from investing activities for the year ended December 31, 2017, as compared to 2016, was primarily attributable to a $36.4 million reduction in cash inflows from collections on our note receivable due from Liberty in 2016. This decrease was partially offset by
a $3.7 million reduction in cash outflows for property and equipment purchases, primarily attributable to 2016 leasehold improvements and outfitting of our new corporate headquarters, which did not recur in 2017; and
a $3.3 million decrease in our capitalization of internally developed software, due to the reduction in software development costs eligible to be capitalized as described above.
The increase in cash flows from investing activities for the year ended December 31, 2016, as compared to 2015, was primarily attributable to:
the collection of $36.4 million owed to us under the intercompany promissory note receivable due from Liberty, which was fully repaid in June 2016;
the use of $20.2 million to fund the acquisition of Mercent in 2015 (Note 6); and
a $1.9 million decrease in capitalized software costs in 2016.
The increase was partially offset by increased cash outflows for property and equipment purchases of $0.8 million, primarily associated with $2.4 million in leasehold improvements and outfitting of our new corporate headquarters in 2016.
Cash Flow from Financing Activities
The decrease in cash flows from financing activities for the year ended December 31, 2017, as compared to 2016, was driven by:
a $32.7 million reduction in net cash inflows in connection with the Spin-Off, which were attributable to borrowings under our revolving credit facility and various financing activities involving Liberty and other pre-Spin-Off shareholders; and
a $2.0 million increase in repayments under our credit facility, as we repaid $26.0 million under our credit facility during 2017.
The decrease was partially offset by:
a $3.0 million increase in net cash inflows from the exercise of stock options, employee stock purchases and the issuance of deferred stock units; and
a $1.1 million reduction in cash outflows for debt issuance costs incurred in connection with our credit facility.
The increase in cash flows from financing activities for the year ended December 31, 2016, as compared to 2015, was primarily driven by:
a $33.4 million increase in net cash inflows in connection with the Spin-Off, which were attributable to borrowings under our revolving credit facility and various financing activities involving Liberty and other pre-Spin-Off shareholders; and
a $0.8 million increase in cash received from the exercise of stock options.

41

Table of Contents

The increase was partially offset by:
a $24.0 million increase in repayments under our credit facility; and
a $1.1 million increase in net cash outflows for debt issuance costs incurred in connection with our credit facility.
Contractual Obligations
Our principal commitments consist of lease obligations for our office space and purchase obligations for software subscriptions and other services. The following table summarizes these contractual obligations at December 31, 2017 (in thousands): 
 
Payment due by period
 
Total
 
Less than
1 year
 
1-3 years
 
3-5 years
 
More than
5 years
Operating lease obligations (1)
$
9,537

 
$
2,652

 
$
4,384

 
$
2,501

 
$

Purchase obligations
1,148

 
1,029

 
119

 

 

Total contractual obligations
$
10,685

 
$
3,681

 
$
4,503

 
$
2,501

 
$

(1) Operating lease obligations exclude $2.4 million in rental income from sub-tenants, of which $0.6 million is due within one year, $1.2 million is due within one to three years and $0.6 million is due within three to five years.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk in the normal course of business due to our ongoing investing and financial activities and the conduct of operations in different foreign countries. Market risk refers to the risk of loss arising from adverse changes in stock prices, interest rates and foreign currency exchange rates. The risk of loss can be assessed from the perspective of adverse changes in fair values, cash flows and future earnings.
We are exposed to changes in interest rates primarily as a result of borrowings we may make under our revolving credit facility used to maintain liquidity and to fund business operations. The amount of our long-term debt is expected to vary as a result of future funding requirements, cash generation, market conditions and other factors. We have not entered into any interest rate swap arrangements to manage our exposure to interest rate risk, although we may do so in the future if and when we deem appropriate. We performed a sensitivity analysis on our exposure to interest rate risk as of December 31, 2017, and we do not believe a 1.00% increase or decrease in interest rate would have a material impact on our interest expense, primarily because we had no long-term debt at that date.
Although not significant, we have revenue, expenses, assets and liabilities that are denominated in currencies other than the U.S. dollar, including the British pound sterling and the Canadian dollar. As we expand internationally, our results of operations and cash flows will continue to be impacted by foreign currency fluctuations. We have not used any forward contracts or currency borrowings to hedge our exposure to foreign currency exchange risk, although we may do so in the future.

42

Table of Contents

Item 8. Financial Statements and Supplementary Data
COMMERCEHUB, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

43

Table of Contents

Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of CommerceHub, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of CommerceHub, Inc. and subsidiaries (“CommerceHub”) as of December 31, 2017 and 2016, and the related consolidated statements of comprehensive income (loss), equity and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes (collectively, the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of CommerceHub as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), CommerceHub’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 1, 2018 expressed an unqualified opinion on the effectiveness of CommerceHub’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of CommerceHub’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to CommerceHub in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the auditor of CommerceHub, Inc. since 2013.
/s/ KPMG LLP
Albany, New York
March 1, 2018









44

Table of Contents

Report of Independent Registered Public Accounting Firm
The Shareholders and Board of Directors of CommerceHub, Inc.:

Opinion on Internal Control Over Financial Reporting
We have audited CommerceHub, Inc. and subsidiaries’ (“CommerceHub”) internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, CommerceHub maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of CommerceHub as of December 31, 2017 and 2016, and the related consolidated statements of comprehensive income (loss), equity and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes (collectively, the “consolidated financial statements”) and our report dated March 1, 2018 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
CommerceHub’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting (Item 9A). Our responsibility is to express an opinion on CommerceHub’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to CommerceHub in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definitions and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ KPMG LLP

Albany, New York
March 1, 2018




45

Table of Contents

COMMERCEHUB, INC.
Consolidated Balance Sheets
(In thousands, except share data)
 
December 31,
 
2017
 
2016
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
19,841

 
$
6,471

Accounts receivable, net of allowances of $1,084 and $200, respectively
21,310

 
18,109

Prepaid income taxes

 
4,311

Prepaid expenses and other current assets
1,652

 
1,549

Total current assets
42,803

 
30,440

Capitalized software, net
2,850

 
6,716

Deferred services costs
4,853

 
4,989

Property and equipment, net
6,066

 
7,629

Goodwill
21,410

 
21,410

Deferred income taxes
5,798

 
7,714

Other long-term assets
1,339

 
1,122

Total assets
$
85,119

 
$
80,020

 
 
 
 
Liabilities and Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable and accrued expenses
$
3,360

 
$
2,135

Accrued payroll and related expenses
9,429

 
7,435

Income taxes payable
962

 
7

Deferred revenue
5,339

 
5,149

Total current liabilities
19,090

 
14,726

Deferred revenue, long-term
8,272

 
7,581

Other long-term liabilities
3,210

 
1,135

Long-term debt

 
26,000

Total liabilities
30,572

 
49,442

Equity:
 

 
 

Preferred stock, $0.01 par value. Authorized shares of 50,000,000; 0 shares issued and outstanding at December 31, 2017 and 2016

 

Series A common stock, $0.01 par value. 40,000,000 shares authorized; 13,599,641 and 13,536,502 shares issued and outstanding at December 31, 2017 and 2016, respectively
136

 
135

Series B common stock, $0.01 par value. 1,500,000 shares authorized; 707,567 and 711,992 shares issued and outstanding at December 31, 2017 and 2016, respectively
7

 
7

Series C common stock, $0.01 par value. 83,000,000 shares authorized; 29,171,981 and 28,672,805 shares issued and outstanding at December 31, 2017 and 2016, respectively
292

 
287

Additional paid-in capital
31,010

 
16,904

Accumulated other comprehensive loss
(1
)
 

Retained earnings
23,103

 
13,245

Total equity
54,547

 
30,578

Total liabilities and equity
$
85,119

 
$
80,020

See accompanying notes to these consolidated financial statements

46

Table of Contents

COMMERCEHUB, INC.
Consolidated Statements of Comprehensive Income (Loss)
(In thousands, except per share data)
 
Year Ended December 31,
 
2017
 
2016
 
2015
Revenue (Note 8)
$
111,121

 
$
100,552

 
$
87,614

Cost of revenue
21,600

 
23,057

 
22,700

Gross profit
89,521

 
77,495

 
64,914

Operating expenses:
 
 
 
 
 
Research and development
25,559

 
19,187

 
16,304

Sales and marketing
8,576

 
11,334

 
11,287

General and administrative
28,920

 
30,282

 
44,271

Total operating expenses
63,055

 
60,803

 
71,862

Income (loss) from operations
26,466

 
16,692

 
(6,948
)
Other (expense) income:
 
 
 
 
 
Interest expense
(738
)
 
(707
)
 

Interest income
6

 
273

 
600

Total other (expense) income
(732
)
 
(434
)
 
600

Income (loss) before income taxes
25,734

 
16,258

 
(6,348
)
Income tax expense (benefit)
15,876

 
7,162

 
(1,881
)
Net income (loss)
9,858

 
9,096

 
(4,467
)
Currency translation adjustment
(1
)
 

 

Total comprehensive income (loss)
$
9,857

 
$
9,096

 
$
(4,467
)
 
 
 
 
 
 
Earnings (loss) per share:
 
 
 
 
 
Basic
$
0.23

 
$
0.21

 
$
(0.10
)
Diluted
$
0.22

 
$
0.21

 
$
(0.10
)
 
 
 
 
 
 
Shares used in computing earnings (loss) per share:
 
 
 
 
 
Basic
43,204

 
42,831

 
42,703

Diluted
45,230

 
44,343

 
42,703

See accompanying notes to these consolidated financial statements

47

Table of Contents

COMMERCEHUB, INC.
Consolidated Statements of Equity
(In thousands, except share data)
 
Shares of Common Stock
 
 
 
 
 
 
 
Series A
Series B
Series C
Par Value
APIC
Parent's Investment
AOCL
Retained Earnings
Total Equity
Balance at January 1, 2015



$

$

$
22,915

$

$
9,200

$
32,115

Issuance of common stock for exercised options





33



33

Repurchase of outstanding shares





(164
)


(164
)
Cash dividends paid







(584
)
(584
)
Net income (loss)







(4,467
)
(4,467
)
Balance at December 31, 2015



$

$

$
22,784

$

$
4,149

$
26,933

Net income (loss)
 
 
 
 
 
 
 
9,096

9,096

Exercise of stock options
 
 
 
 
 
73

 
 
73

Contribution from Parent
 
 
 
 
 
6,000

 
 
6,000

Cash dividends paid to Parent and others
 
 
 
 
 
(19,730
)
 
 
(19,730
)
Change in capitalization in connection with the Spin-Off
13,522,288

711,992

28,468,562

427

8,700

(9,127
)
 
 

Reclassification of share-based compensation liability
 
 
 
 
12,489

 
 
 
12,489

Issuance of minority shares
 
 
109,354

1

(1
)
 
 
 

Forfeiture of net operating losses to Parent
 
 
 
 
(9,785
)
 
 
 
(9,785
)
Share-based compensation expense
 
 
 
 
4,730

 
 
 
4,730

Exercise of stock options
15,268

 
96,917

1

772

 
 
 
773

Excess tax deduction from the exercise of stock options
 
 
 
 
(1
)
 
 
 
(1
)
Issuance of restricted stock units
2

 
7



 
 
 

Cancellation of restricted shares
(1,056
)
 
(2,035
)


 
 
 

Balance at December 31, 2016
13,536,502

711,992

28,672,805

$
429

$
16,904

$

$

$
13,245

$
30,578

Net income (loss)







9,858

9,858

Share-based compensation expense




8,629




8,629

Adjustment to net operating loss forfeiture to Parent
 
 
 
 
1,655

 
 
 
1,655

Exercise of stock options
61,248


345,727

4

3,285




3,289

Issuance of common stock under employee stock purchase plan


36,298

1

463




464

Issuance of deferred stock units




75




75

Issuance of restricted stock units
151


123,977

1

(1
)




Cancellation of restricted shares
(2,685
)

(6,826
)






Conversion of Series B shares to Series A shares
4,425

(4,425
)







Other comprehensive loss






(1
)

(1
)
Balance at December 31, 2017
13,599,641

707,567

29,171,981