CommerceHub
CommerceHub, Inc. (Form: 10-Q, Received: 11/08/2016 17:24:33)

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended  September 30, 2016
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, 6 th Floor, Albany, New York 12203
(address of principal executive office, including zip code)
Registrant's telephone number, including area code: (518) 810-0700
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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
 
Accelerated filer
o
 
Non-accelerated filer
ý
 
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes    ¨      No    ý
The number of outstanding shares of CommerceHub, Inc. common stock as of November 1, 2016 was:
 
 
Series A

Series B

Series C

CommerceHub, Inc. common stock:
 
13,522,640

711,992

28,615,203

 


Table of Contents

TABLE OF CONTENTS


 
 
 



Table of Contents

PART I. FINANCIAL INFORMATION
Item 1.    Financial Statements
COMMERCEHUB, INC.
Condensed Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)
 
September 30, 2016
 
December 31, 2015
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
17,608

 
$
19,337

Accounts receivable, net of allowances of $500 and $239, respectively
10,259

 
16,472

Prepaid income taxes
950

 

Prepaid expenses and other current assets
1,990

 
1,048

Total current assets
30,807

 
36,857

Note receivable—Parent

 
36,107

Capitalized software, net
7,460

 
7,189

Deferred services costs
5,157

 
4,956

Property and equipment, net
7,935

 
6,706

Intangibles, net
438

 
1,750

Goodwill
21,410

 
21,410

Deferred income taxes
11,045

 
38,825

Other long-term assets
1,209

 

Total assets
$
85,461

 
$
153,800

 
 
 
 
Liabilities and Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable and accrued expenses
$
3,631

 
$
3,982

Accrued payroll and related expenses
5,952

 
5,538

Due to Parent

 
9,112

Income taxes payable
1,760

 

Deferred revenue
5,085

 
4,490

Share-based compensation liability

 
94,427

Total current liabilities
16,428

 
117,549

Deferred revenue, long-term
7,521

 
7,532

Share-based compensation liability, long-term

 
1,786

Long-term debt
41,000

 

Total liabilities
64,949

 
126,867

Equity:
 

 
 

Preferred stock, $0.01 par value. Authorized shares of 50,000,000; 0 shares issued and outstanding at September 30, 2016

 

Series A common stock, $0.01 par value. Authorized shares 40,000,000; 13,521,949 shares issued and outstanding at September 30, 2016
135

 

Series B common stock, $0.01 par value. Authorized shares 1,500,000; 711,992 shares issued and outstanding at September 30, 2016
7

 

Series C common stock, $0.01 par value. Authorized shares 83,000,000; 28,613,837 shares issued and outstanding at September 30, 2016
286

 

Parent's investment

 
22,784

Additional paid-in capital
12,791

 

Retained earnings
7,293

 
4,149

Total equity
20,512

 
26,933

Total liabilities and equity
$
85,461

 
$
153,800

   See accompanying notes to these condensed consolidated financial statements

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Table of Contents

COMMERCEHUB, INC.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(In thousands, except per share data)
(Unaudited)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Revenue, including related party revenue of $1,165, $1,172, $4,526, and $4,315, respectively (note 8)
$
22,478

 
$
19,695

 
$
67,671

 
$
58,343

Cost of revenue
5,737

 
6,332

 
17,162

 
16,177

Gross profit
16,741

 
13,363

 
50,509

 
42,166

Operating expenses:
 
 
 
 
 
 
 
Research and development
5,077

 
3,378

 
13,391

 
11,016

Sales and marketing
3,023

 
2,808

 
9,024

 
7,834

General and administrative
8,008

 
8,475

 
23,207

 
28,501

Total operating expenses
16,108

 
14,661

 
45,622

 
47,351

Income (loss) from operations
633

 
(1,298
)
 
4,887

 
(5,185
)
Other (expense) income:
 
 
 
 
 
 
 
Interest expense
(361
)
 

 
(405
)
 

Interest income

 
156

 
273

 
432

Total other (expense) income
(361
)
 
156

 
(132
)
 
432

Income (loss) before income taxes
272

 
(1,142
)
 
4,755

 
(4,753
)
Income tax expense (benefit)
(438
)
 
(521
)
 
1,611

 
(1,647
)
Net income (loss)
710

 
(621
)
 
3,144

 
(3,106
)
Total comprehensive income (loss)
$
710

 
$
(621
)
 
$
3,144

 
$
(3,106
)
 
 
 
 
 
 
 
 
Earnings (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.02

 
$
(0.01
)
 
$
0.07

 
$
(0.07
)
Diluted
$
0.02

 
$
(0.01
)
 
$
0.07

 
$
(0.07
)
 
 
 
 
 
 
 
 
Shares used in computing earnings (loss) per share:
 
 
 
 
 
 
 
Basic
42,773

 
42,703

 
42,773

 
42,703

Diluted
43,559

 
42,703

 
43,559

 
42,703

   See accompanying notes to these condensed consolidated financial statements

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Table of Contents

COMMERCEHUB, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
Nine Months Ended
September 30,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income (loss)
$
3,144

 
$
(3,106
)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
 
 
 
Depreciation and amortization
7,315

 
5,715

Amortization of debt issuance costs
55

 

Share-based compensation expense
8,753

 
24,332

Deferred income taxes
17,015

 
(9,503
)
Bad debt expense
695

 
240

Accrued interest income
(273
)
 
(432
)
Loss on disposal of long-term assets
160

 

Change in operating assets and liabilities, net of acquisition:
 
 
 
Accounts receivable
5,667

 
5,577

Prepaid expenses and other assets
(956
)
 
(267
)
Prepaid income taxes
(950
)
 

Deferred costs
(201
)
 
(841
)
Deferred revenue
266

 
2,058

Accounts payable and accrued expenses
479

 
(2,679
)
Accrued payroll and related expenses
416

 
2,082

Income taxes payable
1,760

 

Share-based compensation liability payments
(86,684
)
 
(3,619
)
Parent receivables and payables, net
(9,112
)
 
(260
)
Net cash (used in) provided by operating activities
(52,451
)
 
19,297

 
 
 
 
Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(4,513
)
 
(3,555
)
Additions to capitalized software
(3,963
)
 
(4,435
)
Acquisition of business, net of cash acquired

 
(20,225
)
Collection of note receivable - Parent
36,380

 

Net cash provided by (used in) investing activities
27,904

 
(28,215
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Borrowings on revolver
50,000

 

Payments on revolver
(9,000
)
 

Cash paid for debt issuance costs
(1,100
)
 

Purchase of treasury stock
(3,600
)
 
(164
)
Cash received from exercise of stock options
248

 
26

Borrowings on note payable - Parent
28,664

 

Payments on note payable - Parent
(28,664
)
 

Contribution from Parent
6,000

 

Dividends paid to Parent
(19,730
)
 

Net cash provided by (used in) financing activities
22,818

 
(138
)
Currency effect on cash and cash equivalents

 

Net decrease in cash and cash equivalents
(1,729
)
 
(9,056
)
 
 
 
 
Cash and cash equivalents, beginning of period
19,337

 
26,385

Cash and cash equivalents, end of period
$
17,608

 
$
17,329

 
 
 
 
Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Contractual obligations for acquisition of capitalized software
$
58

 
$

See accompanying notes to these condensed consolidated financial statements

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Table of Contents

COMMERCEHUB, INC.
Condensed Consolidated Statement of Equity
(In thousands, except share data)
(Unaudited)
 
Common Stock
 
 
 
 
 
 
Series A
Series B
Series C
Amount
APIC
Parent's Investment
Retained Earnings
Total Equity
Balance at January 1, 2016



$

$

$
22,784

$
4,149

$
26,933

Net income (loss)
 
 
 
 
 
 
3,144

3,144

Exercise of stock options
 
 
 
 
 
73

 
73

Contribution from Parent
 
 
 
 
 
6,000

 
6,000

Dividends paid to Parent
 
 
 
 
 
(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
)
 

Issuance of minority shares
 
 
109,354

1

(1
)
 
 

Share-based compensation expense
 
 
 
 
2,193

 
 
2,193

Reclassification of share-based compensation liability
 
 
 
 
12,489

 
 
12,489

Forfeiture of net operating losses to Parent
 
 
 
 
(10,765
)
 
 
(10,765
)
Exercise of stock options
 
 
36,503


175

 
 
175

Issuance of restricted stock units
2

 
7



 
 

Cancellation of restricted shares
(341
)
 
(589
)


 
 

Balance at September 30, 2016
13,521,949

711,992

28,613,837

$
428

$
12,791

$

$
7,293

$
20,512

See accompanying notes to condensed consolidated financial statements.

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Table of Contents
COMMERCEHUB, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)


Note 1 - Description of Business
CommerceHub, Inc. ("CommerceHub", the "Company", "us", "we", and "our") was founded in 1997 and is headquartered in Albany, New York. The Company operates as a single segment and specializes in the electronic integration of supply chains for e-commerce fulfillment. CommerceHub's platform includes supply, demand, and delivery solutions which provide our customers with a single platform to source and market the products consumers desire and to have those products delivered more rapidly to the consumer's doorstep.
Recent Events
Spin-Off from Liberty Interactive Corporation
During November 2015, the board of directors of Liberty Interactive Corporation, our former parent company ("Liberty" or "Parent"), authorized a plan to distribute to the holders of Liberty's Series A and Series B Liberty Ventures common stock, shares of CommerceHub, Inc. (the "Spin-Off"), a newly formed Delaware corporation that, pursuant to an internal restructuring, effective July 21, 2016 became the parent 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. The Spin-Off was completed on July 22, 2016 and was effected as a pro rata dividend of shares of CommerceHub to the stockholders of Series A and Series B Liberty Ventures common stock of Liberty. The Spin-Off was structured to be tax-free.
Following the Spin-Off, 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. In connection with the Spin-Off, CommerceHub entered into certain agreements (effective the date of the Spin-Off) with Liberty and/or Liberty Media Corporation ("Liberty Media"), which are further discussed in Note 8 to these condensed consolidated financial statements. In July 2016, the Company had cash inflows and outflows in conjunction with the Spin-Off, which include:
Borrowed $50.0 million under our credit facility (see Note 13) to fund cash outflows described below;
Fully repaid our note payable due to Liberty, including accrued interest, of $28.7 million and amounts due for state taxes paid of $1.3 million ;
Paid a dividend of $18.9 million to the holders of CTI common stock, including Parent, and $0.9 million to a Parent, as holders of CTI preferred shares on the record date for the Spin-Off;
Collected amounts due from Liberty for federal tax benefits of $8.5 million (see Note 12 for further discussion of tax related transactions that occurred in connection with the Spin-Off); and
Received a contribution from Liberty of $6.0 million to compensate the Company for the dilution associated with Parent equity awards.
Note 2 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of CommerceHub, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated in the condensed consolidated financial statements, which have been prepared in conformity with U.S. generally accepted accounting principles ("GAAP") for interim financial information. Accordingly, these condensed consolidated financial statements do not include all of the information and notes required by GAAP. We have included all normal recurring adjustments considered necessary to give a fair presentation of our financial position, results of comprehensive income (loss) and cash flows, and changes in equity for the interim periods shown. Operating results for these interim periods are not necessarily indicative of the results to be expected for the full year. The December 31, 2015 consolidated balance sheet data was derived from our audited financial statements at that date. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements contained within Amendment No. 3 to the Company's Registration Statement on Form S-1 (File No. 333-210508) filed with the Securities and Exchange Commission (the "SEC") on July 14, 2016 and declared effective on July 15, 2016 (the "Registration Statement").


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Table of Contents
COMMERCEHUB, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

Use of Estimates
Preparing these condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates and assumptions.
Reclassifications
We made certain reclassifications to our condensed consolidated financial statements which include reclassifying certain sales taxes, in the amounts of $26 thousand and $492 thousand for the three- and nine -month periods ended September 30, 2015 , respectively, from cost of revenue to sales and marketing to comply with our current policy for presenting such costs.
Note 3 - Significant Accounting Policies
During the nine months ended September 30, 2016 , there were no material changes in our significant accounting policies. Please see Note 3 to our consolidated financial statements included in the Registration Statement, for additional information regarding our significant accounting policies.
Note 4 - Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers" (Topic 606) ("ASU 2014-09"). This topic provides for five principles which should be followed to determine the appropriate amount and timing of revenue recognition for the transfer of goods and services to customers. The principles in ASU 2014-09 should be applied to all contracts with customers regardless of industry. The amendments in ASU 2014-09 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, with two transition methods of adoption allowed. Early adoption for reporting periods prior to December 15, 2016 is not permitted. In March 2015, the FASB voted to defer the effective date by one year, but to allow adoption as of the original adoption date. In May 2016, FASB issued ASU No. 2016-08, "Revenue from Contracts with Customers" (Topic 606) Principal versus Agent Considerations, (Reporting Revenue Gross versus Net) . This update was to further clarify the implementation guidance on principal versus agent considerations in the previously issued ASU No. 2014-09. ASU No. 2016-08 has no impact on the adoption date of the previously issued update. We are evaluating the financial statement impacts of the guidance in ASU 2014-09 and determining which transition method we will utilize.
In February 2016, the FASB issued ASU No. 2016-02 "Leases" (Topic 842) ("ASU No. 2016-02"). This topic provides that a lessee should recognize the assets and liabilities that arise from leases. Topic 842 requires an entity to separate the lease components from the nonlease components in a contract. This ASU intended to improve financial reporting about leasing transactions. ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018. We are evaluating the financial statement impact this update will have on the consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting ("ASU No. 2016-09"), which is intended to improve the accounting for share-based payment transactions as part of the FASB's simplification initiative. ASU No. 2016-09 changed the aspects of the accounting for share-based payment award transactions, including: (1) accounting for income taxes; (2) classification of excess tax benefits on the statement of cash flows; (3) forfeitures; (4) minimum statutory tax withholding requirements; and (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. This ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within those years. Early adoption is permitted in any interim or annual period provided that the entire ASU is adopted. We are evaluating the financial statement impact this update will have on the consolidated financial statements.
Note 5 - Earnings (Loss) Per Share
For all periods prior to the Spin-Off, basic and diluted earnings (loss) per common share is computed by dividing net income (loss) for the respective period by 42,702,842 common shares, which is the aggregate number of 13,522,288 shares of Series A common stock, 711,992 shares Series B common stock, and 28,468,562 shares of Series C common stock issued upon completion of the Spin-Off on July 22, 2016 .

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Table of Contents
COMMERCEHUB, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

The shares used in the calculation of diluted earnings per share for periods prior to the Spin-Off exclude the following issuances, which occurred following the Spin-Off and subsequent to such periods (a) 109,354 shares of common stock issued to pre-Spin-Off minority shareholders of CTI; and (b) 7,362,933 outstanding awards to purchase shares of our common stock.

For all periods occurring after the Spin-Off, basic earnings (loss) per common share is computed by dividing net income (loss) for the respective period by the weighted average number of common shares outstanding for the period beginning at the Spin-Off through the last day of the reporting period. Diluted earnings (loss) per share gives effect to all dilutive potential shares outstanding resulting from employee stock options, restricted stock units, and performance share units during that period.
The following table sets forth net income (loss) and the basic and diluted shares used to calculate earnings per share for the three and nine months ended September 30, 2016 and 2015 (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Net income (loss)
$
710

 
$
(621
)
 
$
3,144

 
$
(3,106
)
 
 
 
 
 
 
 
 
Basic - weighted average shares outstanding
42,773

 
42,703

 
42,773

 
42,703

Effect of dilutive potential securities
786

 

 
786

 

Diluted - weighted average shares outstanding
43,559

 
42,703

 
43,559

 
42,703

 
 
 
 
 
 
 
 
Anti-dilutive securities
5,034

 

 
5,034

 

The shares used in the calculation of diluted earnings per share for periods following the Spin-Off exclude (a) options to purchase shares where the exercise price was greater than the average market price of common shares for the period, using the treasury-stock method, and therefore the effect of the inclusion would be anti-dilutive and (b) performance share units where the performance criteria has not been met as of the reporting date.
Note 6 - Acquisition of Mercent Corporation
On January 8, 2015, the Company acquired 100% of the shares of Mercent Corporation ("Mercent"), an online marketing technology and service company that helps merchants optimize performance across online channels, for total cash consideration of approximately $20.2 million , net of cash acquired.
During the nine -month period ended September 30, 2015 , the Company incurred transaction-related costs of approximately $166 thousand , which are included in general and administrative expenses. No additional transaction-related costs were incurred in the nine -month period ended September 30, 2016 .
Under the acquisition method of accounting, the Company allocated the purchase price to the identifiable assets and liabilities based on their estimated fair value, as follows (in thousands):
Cash
$
41

Accounts receivable
2,559

Prepaid expenses
87

Property and equipment
336

Customer relationships
2,000

Developed software technology
1,500

Deferred tax assets
3,580

Goodwill
12,390

Accounts payable and accrued expenses
(2,015
)
Deferred revenue
(212
)
 
20,266

Methodologies used in valuing the intangible assets included, but were not limited to, the multiple period excess earnings method for developed software technology and customer relationships. The excess of the purchase price over the total net identifiable assets has been recorded as goodwill, which includes synergies expected from the expanded service capabilities and the value of the assembled work force. For federal income tax purposes, the transaction is treated as a stock acquisition and the goodwill is no t deductible.

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COMMERCEHUB, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

Note 7 - Concentrations of Significant Customers and Credit Risk
Our revenue model, in large part, is based on retailer and supplier program relationships whereby many supplier transactions may be attributable to a single retailer. Significant customer concentrations contemplate the total program revenues (retailers and related suppliers) and receivables generated by these customers. In each of the nine -month periods ended September 30, 2016 and September 30, 2015 , one customer's total program revenues accounted for more than 10% of total revenue. No customer represented more than 10% of accounts receivable at September 30, 2016 .
Note 8 - Related Party Transactions
(a)   Transactions with QVC
We provide our solutions to QVC, Inc. (“QVC”), which is a wholly owned subsidiary of Liberty. For future reporting on periods that do not include pre-Spin-Off periods, we do not expect QVC to be a related person of CommerceHub because neither Liberty nor CommerceHub has any stock ownership, beneficial or otherwise, in the other following the Spin-Off.
For each of the nine -month periods ended September 30, 2016 and 2015 , total program revenues with QVC (including QVC and suppliers transacting with QVC on our platform) accounted for approximately 7% of total revenue. We had receivables relating to ordinary business with QVC of approximately $248 thousand and $511 thousand at September 30, 2016 and December 31, 2015 , respectively.
(b)   Transactions with Liberty
In previous periods, we had outstanding a promissory note as a lender to Liberty, presented as note receivable - Parent on the condensed consolidated balance sheets. This note carried an interest rate based on one-year LIBOR plus 100 basis points . In the three months ended June 30, 2016, Liberty fully repaid amounts outstanding of $36.4 million pursuant to this promissory note, including accumulated interest of $2.4 million.
During June 2016, to assist the Company in meeting its financial obligations under the SAR Plan and Liquidity Program (see Note 11), the Company entered into a funding arrangement with Liberty pursuant to a previously established intercompany funding agreement, under which Liberty agreed to loan the Company cash at current market interest rates, or make additional equity investments in common stock. During the three-months ended September 30, 2016 , amounts outstanding pursuant to this arrangement, including accumulated interest, were repaid to Liberty by the Company using borrowings under our credit facility (see Note 13). The funding agreement between the Company and Liberty was terminated as of the Spin-Off.
CommerceHub entered into certain agreements (effective July 22, 2016) with Liberty and/or Liberty Media, including a reorganization agreement, a services agreement and a tax sharing agreement. The reorganization agreement provides for, among other things, the principal corporate transactions (including the internal restructuring) required to effect the Spin-Off, certain conditions to the Spin-Off and provisions governing the relationship between CommerceHub and Liberty with respect to and resulting from the Spin-Off. The tax sharing agreement provides for the allocation and indemnification of tax liabilities and benefits between Liberty and CommerceHub and other agreements related to tax matters. Pursuant to the services agreement, Liberty Media provides CommerceHub with general and administrative services including legal, tax, accounting, treasury and investor relations support related to necessary public-company functions. CommerceHub must reimburse Liberty Media for direct, out-of-pocket expenses incurred by Liberty Media in providing these services, and CommerceHub will pay a services fee to Liberty Media under the services agreement. Liberty Media and CommerceHub will evaluate all charges under the services agreement for reasonableness on a quarterly basis and make such adjustments to these charges as the parties mutually agree. Amounts owed to Liberty at September 30, 2016 of $446 thousand in connection with these agreements is included in accounts payable and accrued expenses on the condensed consolidated balance sheet.






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COMMERCEHUB, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

Note 9 - Capitalized Software Costs
Capitalized software costs, net is comprised of the following (in thousands):
 
September 30,
2016
 
December 31,
2015
Capitalized software costs
$
42,051

 
$
41,120

Less accumulated amortization
(34,591
)
 
(33,931
)
Capitalized software costs, net
$
7,460

 
$
7,189

Amortization expense related to capitalized software costs is included in cost of revenue and was approximately $3.8 million and $2.4 million for the nine -month periods ended September 30, 2016 and 2015 , respectively.
Future amortization expense of existing capitalized software costs as of September 30, 2016 is expected to be as follows for the years ending December 31, (in thousands):
Remainder of 2016
$
1,262

2017
4,290

2018
1,737

2019
171

2020 and thereafter

 
$
7,460

Note 10 - Intangible Assets
Intangibles assets acquired as of September 30, 2016 and December 31, 2015 , respectively, are as follows (in thousands):
September 30, 2016
Weighted Average
Life (Years)
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Book
Value
Developed technology
2.0
 
$
1,500

 
$
(1,312
)
 
$
188

Customer relationships
2.0
 
2,000

 
(1,750
)
 
250

Total

 
$
3,500

 
$
(3,062
)
 
$
438

December 31, 2015
Weighted Average
Life (Years)
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Book
Value
Developed technology
2.0
 
$
1,500

 
$
(750
)
 
$
750

Customer relationships
2.0
 
2,000

 
(1,000
)
 
1,000

Total
 
 
$
3,500

 
$
(1,750
)
 
$
1,750

Amortization expense related to intangible assets was $1.3 million for the nine -month periods ended September 30, 2016 and 2015 . Future amortization expense for intangible assets as of September 30, 2016 is $438 thousand , and is expected to be recognized during the remainder of 2016 .
Note 11 - Share-Based Awards
The Company grants, to certain of its employees, board members and consultants, awards to purchase shares of its common stock. Prior to the Spin-Off, the Company's share-based awards consisted of stock options and stock appreciation rights ("SARs") (collectively, "CommerceHub Options and SARs"). Some of these awards contain service conditions (typically 4 years ) and some of these awards contain both service- and milestone-based conditions.
    



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COMMERCEHUB, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

Included in the condensed consolidated statements of comprehensive income (loss) are the following amounts of share-based compensation (amounts in thousands):
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
 
2016
2015
2016
2015
Cost of revenue
$
(49
)
$
806

$
(207
)
$
1,383

Research and development
584

1,215

1,697

4,347

Sales and marketing
103

870

704

2,411

General and administrative
1,555

4,623

6,559

16,191

 
$
2,193

$
7,514

$
8,753

$
24,332

The Company estimates the fair value of the stock options and SARs granted using a Black-Scholes pricing model. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results differ from the Company's estimates, such amounts are recorded as an adjustment in the period estimates are revised.
In valuing share-based awards, significant judgment is required in determining the fair value of the Company's share price, the expected volatility of common stock, and the expected term individuals will hold their share-based awards prior to exercise. With the assistance of an independent third-party advisory firm, for the three and nine months ended September 30, 2015 and the three months ended March 31, 2016, we estimated share-price based on an internal valuation using income and market based approaches. For the three months ended June 30, 2016, the estimated share-price input was based on the fair market value of CommerceHub's Series C common stock traded immediately following the Spin-Off. For awards granted subsequent to the Spin-Off, the share-price input is based on the closing price of our Series C common stock on the date of grant. Expected volatility of the stock is based on the Company's peer group in the industry in which the Company does business because the Company does not have sufficient historical volatility data for its own stock. The expected term of the options is based on evaluations of historical and expected future employee exercise behavior.
Additionally, the Black-Scholes pricing model requires the input of other assumptions, including the risk-free interest rate and dividend yield. The risk-free interest rate assumption is based upon observed interest rates for constant maturity U.S. Treasury securities consistent with the expected term of the Company's share-based awards. The Company assumed a zero dividend yield as, following the Spin-Off, we do not expect to pay any cash dividends in the foreseeable future.
Prior to the Spin-Off all of the Company's share-based awards were classified as liability awards as the SARs could have been settled in cash and the stock options could have been settled in cash at the option of the holder under the Liquidity Program as discussed below. The Company measured the cost of services received in exchange for a liability classified award based on the current fair value of the award, and remeasured the fair value of the award at each reporting date.
In connection with the Spin-Off, the outstanding CTI equity incentive awards were adjusted, such that each holder of an option award or a SAR with respect to shares of CTI common stock received an option award to purchase shares of our Series C common stock, with the exercise price and number of shares subject to such new option awards based on the exercise price of and number of shares subject to the original CTI option or original SAR and the exchange ratio used in the internal restructuring with respect to the CTI minority holders. On July 22, 2016, 45,450 options and 2,042,220 SARs then-outstanding were converted to 99,151 options and 4,455,460 options to purchase shares of our Series C common stock, respectively.
Unlike the original CommerceHub Options and SARs, which were able to be settled in cash prior to completion of the Spin-Off, the new option awards resulting from the conversion of the original CommerceHub Options and SARs may only be settled in shares of CommerceHub's Series C common stock. Except as described above, the terms of these new option awards (including, for example, the vesting terms thereof) are, in all material respects, the same as those of the corresponding original option or SAR award.
Additionally, our internal restructuring in connection with the Spin-Off resulted in a modification of the terms and conditions of the outstanding equity awards upon the Spin-Off, and the classification of the awards from liability to equity awards. As of the July 21, 2016 modification date, the Company performed a fair value analysis of the awards immediately before and immediately after the restructuring. As the Company’s pre-Spin-Off share-based award plans (further described below) contained antidilution provisions, there was no incremental fair value or compensation expense as a result of the restructuring. The fair value of these awards immediately before and immediately after the Spin-Off was approximately $12.5 million . The value of these awards at the time of the restructuring was reclassified from share-based compensation liability to

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COMMERCEHUB, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

additional paid in capital. The remaining unvested compensation expense is recognized over the remaining service period or, for those awards with milestone-based conditions, the period in which such milestones are expected to be achieved.
There were 344,456 new Parent option awards (as defined below) to purchase shares of our Series A common stock, with a weighted average exercise price of $7.42 , outstanding at September 30, 2016. There was no other activity subsequent to the Spin-Off related to these awards and there is no unrecognized compensation cost related to awards to purchase shares of our Series A common stock as these awards are held by employees of Liberty and any related compensation expense is incurred by Liberty.
There were 172,882 new Parent option awards to purchase shares of our Series B common stock, with a weighted average exercise price of $11.89 , outstanding at September 30, 2016. There was no other activity subsequent to the Spin-Off related to these awards and there is no unrecognized compensation cost related to awards to purchase shares of our Series B common stock as these awards are held by an employee of Liberty and any related compensation expense is incurred by Liberty.
The following table summarizes the share-based award activity of options to purchase shares of our Series C under the Legacy Stock Appreciation Rights Plan and Legacy Stock Option Plans (as further described below) from the time of Spin-Off through the last day of the reporting period:
 
Number of
Options
 
Weighted
average
exercise
price
 
Weighted
average
remaining
contractual life
 
Aggregate
intrinsic value
 
 
 
 
 
(in years)
 
(in thousands)
CommerceHub Options and SARs outstanding at Spin-Off
5,811,150

 
$
12.81

 
 
 
 

Grants
48,281

 
$
14.85

 
 
 
 
Exercised
(33,738
)
 
$
4.81

 
 
 
 

Forfeited
(139,628
)
 
$
10.17

 
 
 
 
Outstanding at September 30, 2016
5,686,065

 
$
12.94

 
8.47
 
$
18,543

Exercisable at September 30, 2016
280,000

 
$
4.93

 
5.05
 
$
3,074

As of September 30, 2016 , unrecognized compensation cost related to options to purchase shares of Series C common stock was approximately $18.5 million , including $0.6 million related to milestone-based awards, and is expected to be recognized over a weighted average remaining vesting period of approximately 2.81 years .     
The following table summarizes the share-based award activity of options to purchase shares of our Series C under the Transitional Stock Adjustment Plan (as further described below) from the time of Spin-Off through the last day of the reporting period:
 
Number of
Options
 
Weighted
average
exercise
price
 
Weighted
average
remaining
contractual life
 
Aggregate
intrinsic value
 
 
 
 
 
(in years)
 
(in thousands)
New Parent option awards outstanding at Spin-Off
1,032,817

 
$
8.87

 
 
 
 

Grants

 
$

 
 
 
 
Exercised
(2,765
)
 
$
4.62

 
 
 
 

Forfeited

 
$

 
 
 
 
Outstanding at September 30, 2016
1,030,052

 
$
8.88

 
4.26
 
$
7,242

Exercisable at September 30, 2016
549,978

 
$
6.30

 
2.96
 
$
5,284

The new Parent option awards outstanding do not carry unrecognized compensation cost, as any related compensation expense is incurred by Liberty. The activity of the new Parent RSUs and new Parent restricted stock awards under the Transitional Stock Adjustment Plan from the time of Spin-Off through the last day of the reporting period was not material during the period.


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COMMERCEHUB, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

Share-based award plans pre-Spin-Off
1999 Plan
During 1999, the Company adopted an incentive and nonqualified stock option plan (the "1999 Plan"). The 1999 Plan authorized grants of options to purchase up to 4,000,000 shares of authorized but unissued common stock. Options granted under the 1999 Plan were to vest over a period of four years and expire ten  years from the date of grant. No shares of common stock are available for grants, or have been available for grants under the 1999 Plan, since September 2009 when the 1999 Plan expired.
Liquidity Program
During 2006, the Compensation Committee of CTI adopted a stock option liquidity program (the "Liquidity Program") for eligible holders of stock options and certain eligible common shares (shares issued as a result of an option exercise). The Liquidity Program provided eligible option holders and stockholders the ability to tender their vested options or sell their eligible common shares in exchange for cash payment. Eligible option holders and stockholders had the opportunity to tender eligible options or shares at any time except for when valuations were being performed. Cash consideration for the purchase and exercises of tendered stock options was based on the fair value of the Company's underlying common stock less the option exercise price. Cash consideration for tendered eligible common shares was based upon the fair value of the common shares.
The Company made total cash payments of approximately $13.5 million and $1.5 million in exchange for the exercise of vested stock options, and $3.6 million and $0.2 million to repurchase shares outstanding from minority shareholders, under this program during the nine -month periods ended September 30, 2016 and 2015 , respectively. The Liquidity Program terminated effective as of the completion of the Spin-Off.
SAR Plan
During 2010, the Company instituted the 2010 Stock Appreciation Rights Plan (the "SAR Plan"). Pursuant to the SAR Plan, a committee appointed by the Company's Board of Directors (or in the absence of such a committee, the Board of Directors acting in the capacity of such committee) was authorized to grant stock appreciation rights ("SARs") to employees, board members and consultants of the Company. The SAR Plan authorized grants of up to 6 million SARs, which included and was not in addition to shares previously issued, or shares issuable in respect of awards previously issued, under the 1999 Plan. The SARs issued under the SAR Plan typically vested over a period of four years and expired 10  years from the date of grant for service-based awards. SARs that included both service and milestone-based conditions vested based on the satisfaction of service requirements and achievement of performance milestones over the period specified in the applicable award agreement, which ranged from 1 to 4 years at the time of the Spin-Off. We make certain assumptions regarding the probability of achieving these milestones each period and adjust the value of the awards in the period our estimates are revised. Actual results can vary from expected results.
The Company made total cash payments of approximately $73.2 million and $2.1 million during the nine -month periods ended September 30, 2016 and 2015 , respectively, to settle exercised SARs. The SAR Plan was terminated and replaced with the CommerceHub, Inc. Legacy Stock Appreciation Rights Plan (the "Legacy SAR Plan") in connection with the completion of the Spin-Off. Future grants under the Legacy SAR Plan are not permitted following the Spin-Off.
Share-based award plans post-Spin-Off
CommerceHub, Inc. 2016 Omnibus Incentive Plan
In connection with the Spin-Off, we adopted the CommerceHub, Inc. 2016 Omnibus Incentive Plan (as amended, amended and restated or otherwise modified from time to time, the “Omnibus Plan”). We amended and restated the Omnibus Plan on October 13, 2016 in order to permit the compensation committee of the Company’s board of directors to delegate award granting authority under the Omnibus Plan. The Omnibus Plan is designed to provide additional remuneration to officers, employees, nonemployee directors and independent contractors for service to CommerceHub and to encourage each plan participant’s investment in CommerceHub. Stock options, SARs, restricted shares, restricted stock units, cash awards, performance awards or any combination of the foregoing may be granted under the Omnibus Plan (collectively, "awards"). The maximum number of shares of our common stock with respect to which awards may be granted under the Omnibus Plan is 13,200,000 shares of Series C common stock, subject to anti-dilution and other adjustment provisions of the Omnibus Plan. The Omnibus Plan is administered by the compensation committee of the Company’s board of directors with regard to awards granted under the Omnibus Plan other than awards granted to the nonemployee directors which are administered by the full

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COMMERCEHUB, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

board of directors, and the compensation committee and its designees (and the board with respect to awards granted to non-employee directors) have full power and authority to determine the terms and conditions of such awards.
Legacy Stock Appreciation Rights Plan and Legacy Stock Option Plan
In connection with the Spin-Off, all of the new option awards with respect to our Series C common stock that were issued as a result of the Spin-Off to holders of SARs and options outstanding immediately prior to the Spin-Off were issued pursuant to the Legacy SAR Plan and the Legacy Stock Option Plan, respectively. The Legacy SAR Plan and the Legacy Stock Option Plan govern the terms and conditions of these new option awards but will not be used to make any new grants following the Spin-Off.
Employee Stock Purchase Plan
We have adopted an Employee Stock Purchase Plan (“ESPP”) that was approved by our shareholders prior to the Spin-Off, under which we have reserved  900,000 shares of our Series C common stock for issuance to our employees.  Subject to certain restrictions, the ESPP provides employees with the opportunity to invest a portion of their annual eligible compensation to purchase shares of our Series C common stock at a purchase price equal to  85%  of the lower of (a) the fair market value of the common stock at the beginning of the six -month offering period, and (b) the fair market value of the common stock at the end of the six -month offering period.
Transitional Stock Adjustment Plan
All of the new Parent option awards, new Parent restricted stock units and new Parent restricted stock awards (each as defined below) were issued pursuant to the CommerceHub, Inc. Transitional Stock Adjustment Plan (the “Transitional Plan”). The Transitional Plan governs the terms and conditions of the Parent incentive awards described below but will not be used to make any grants following the Spin-Off.
New Parent options
Liberty has granted to certain directors, officers, employees and consultants of Liberty stock options to purchase shares of Liberty Ventures common stock pursuant to applicable incentive plans in place at Liberty. Each holder of an outstanding option to purchase shares of Liberty Ventures common stock (an "original Ventures option award") on the record date for the Spin-Off (the "record date") who was a member of the Liberty board of directors or an officer of Liberty holding the position of Vice President or above received (i) an option to purchase shares of the corresponding series of our common stock and an option to purchase shares of our Series C common stock (such new option awards, "new Parent option awards") and (ii) an adjustment to the exercise price of and the number of shares subject to the original Ventures option award (as so adjusted, an "adjusted Ventures option award"). The exercise prices of and the number of shares subject to the new Parent option awards and the related adjusted Ventures option award were determined based on the exercise price of and the number of shares subject to the original Ventures option award, the distribution ratios used in the Spin-Off, the pre-Spin-Off trading price of Liberty Ventures common stock (determined using the volume weighted average price of the applicable series of Liberty Ventures common stock over the three -consecutive trading days immediately preceding the Spin-Off) and the relative post-Spin-Off trading prices of Liberty Ventures common stock and our common stock (determined using the volume weighted average price of the applicable series of common stock over the three -consecutive trading days beginning on the first trading day following the Spin-Off on which both the Liberty Ventures common stock and our common stock traded in the "regular way" (meaning once the common stock trades using a standard settlement cycle)), such that the pre-Spin-Off intrinsic value of the original Ventures option award was allocated between the new Parent option awards and the adjusted Ventures option award.
All other holders of original Ventures option awards did not receive any new Parent option awards as a result of the distribution. Rather, the holders' original Ventures option awards were adjusted so as to preserve the pre-Spin-Off intrinsic value of the original Ventures option award based on the exercise price of and number of shares subject to such original Ventures option award, the distribution ratios used in the Spin-Off, the pre-Spin-Off trading price of Liberty Ventures common stock and the post-Spin-Off trading price of Liberty Ventures common stock (determined as described above).
Except as described above, all other terms of an adjusted Ventures option award and the new Parent option awards (including, for example, the vesting terms thereof) are, in all material respects, the same as those of the corresponding original Ventures option award.
New Parent restricted stock units
Each holder of a restricted stock unit with respect to shares of Series A or Series B Liberty Ventures common stock (an “original Ventures RSU”) on the record date received in the distribution 0.1 of a restricted stock unit with respect to shares of the corresponding series of CommerceHub common stock and 0.2 of a restricted stock unit with respect to shares of

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COMMERCEHUB, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

CommerceHub Series C common stock (such new restricted stock unit awards, new “Parent RSUs”) for each original Ventures RSU held by them as of the record date, with cash paid in lieu of fractional new Parent RSUs. Except as described herein, the terms of all of the new Parent RSUs (including, for example, the vesting terms thereof) are, in all material respects, the same as those of the corresponding original Ventures RSU.
New Parent restricted stock awards
Each holder of a restricted stock award with respect to shares of Series A or Series B Liberty Ventures common stock (an “original Ventures RSA” and, together with the original Ventures option awards and the original Ventures RSUs, the "original Ventures equity awards") received in the distribution (i) 0.1 of a restricted share of the corresponding series of CommerceHub common stock and (ii) 0.2 of a restricted share of CommerceHub Series C common stock (such new restricted stock awards, new “Parent restricted stock awards”) for each restricted share of Liberty Ventures common stock held by them as of the record date, with cash paid in lieu of fractional new Parent restricted stock awards. Except as described herein, all new Parent restricted stock awards (including, for example, the vesting terms thereof) are, in all material respects, the same as those of the corresponding original Ventures RSA.
As of July 22, 2016, following the Spin-Off, there were 13,447 new Parent restricted stock awards, 534 new Parent RSUs and 344,456 new Parent option awards, with a weighted average exercise price of $7.42 , to purchase shares of our Series A common stock, 172,882 new Parent option awards, with a weighted average exercise price of $11.89 , to purchase shares of our Series B common stock, and 30,409 new Parent restricted stock awards, 1,094 new Parent RSUs and 1,032,817 new Parent option awards, with a weighted average exercise price of $8.87 , to purchase shares of our Series C common stock, issued to holders of original Ventures equity awards. Substantially all of Liberty's outstanding and exercisable options relate to employees of Liberty who received CommerceHub options on the Spin-Off. The compensation expense relating to these employees of Liberty will continue to be recorded at Liberty.
Note 12 - Income Taxes
During the three months ended September 30, 2016 the Company recorded an income tax benefit of $(0.4) million on income before taxes of $0.3 million . The benefit recorded, despite the pre-tax income, was primarily from federal tax research credits. The credits created both a discrete benefit from finalizing 2015 tax returns during the quarter and a benefit from a favorable adjustment to the estimated 2016 annual effective rate.
The estimated annual effective tax rate for the three- and nine-month periods ended September 30, 2016 was lower than the federal tax rate of 35% due to the federal tax research credits, partially offset by the effect of state and local income taxes. The annual effective tax rate for the three and nine months ended September 30, 2015, was higher than the federal tax rate of 35% due to the effect of state and local income taxes.
As of December 31, 2015, the Company's net deferred tax asset was primarily attributed to temporary differences related to share-based compensation awards. The exercise of a significant portion of share-based compensation awards during the nine months ended September 30, 2016 created a tax deductible expense, and reduced the deferred tax asset by $32.4 million . The deductions generated an estimated gross federal net operating loss (“NOL”) of approximately $79.8 million , primarily attributed to the exercise of share-based compensation awards. As allowed under the tax sharing agreement between the Company and Liberty entered into prior to the Spin-Off, $49.1 million of this NOL was utilized to refund federal income taxes paid to Liberty in the prior two tax years. In accordance with the same tax sharing agreement, the remaining federal NOLs of $30.7 million , subject to finalizing our 2016 pre-spin federal tax return, were forfeited and recorded as an equity distribution to Liberty upon the Spin-Off.
State NOLs were also created and the Company intends to file amended state income tax returns for prior years in 2017 to request a refund of approximately $3.0 million of state taxes previously paid in states which allow a carryback claim. The remaining state NOLs generated of $0.3 million (tax-effected) are available to offset state income for 2016 and in future periods.
Note 13 - Long-Term Debt
On June 28, 2016, we entered into a credit agreement governing a  $125.0 million  revolving credit facility which expires on June 28, 2021. At September 30, 2016 we had $41.0 million in borrowings and no letters of credit outstanding under the facility, and our available borrowings under the facility were $84.0 million . Subsequent to September 30, 2016 we repaid an additional $10.0 million in borrowings under the facility. At September 30, 2016 the fair value of our debt, which is based on Level 2 valuation inputs, approximated cost.

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COMMERCEHUB, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

The interest rate applicable to our initial borrowings is LIBOR plus a yield of 1.75% . Interest on the revolving credit facility is based on a base rate or Eurodollar rate plus an applicable margin that increases as our total leverage ratio increases, with the base rate margin ranging from 0.75% to 1.25% and the Eurodollar rate margin ranging from 1.75% to 2.25% respectively. The revolving credit facility also carries a commitment fee of  0.25%  to  0.50%  per annum on the unused portion. In conjunction with entering into this agreement, we incurred charges totaling  $1.1 million . These charges are included in other long-term assets on the condensed consolidated balance sheet and will be recognized over the term of the credit facility.
Borrowings under the credit facility are collateralized by substantially all of our assets. The credit agreement contains covenants and restrictions which, among other things, require the maintenance of certain financial ratios, including a total leverage ratio and an interest coverage ratio, and restrict dividend payments and the incurrence of certain indebtedness and other activities, including acquisitions and dispositions. We were in compliance with these covenants and restrictions as of  September 30, 2016 .
Note 14 - Commitments and Contingencies    
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, financial condition or operating results.
Leases
Amounts accrued for deferred rent of $850 thousand and $0 at September 30, 2016 and December 31, 2015 , respectively, are included in accounts payable and accrued expenses on the condensed consolidated balance sheet. At September 30, 2016 , future minimum payments under operating leases were as follows (in thousands):
Remainder of 2016
$
560

2017
2,120

2018
2,132

2019
2,157

2020
2,183

Thereafter
2,139

 
$
11,291


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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information concerning our results of operations and financial condition. This discussion should be read in conjunction with our accompanying condensed consolidated financial statements and the notes thereto.
Forward-Looking Statements
Certain statements in this quarterly report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include information concerning our possible or assumed future results of operations, including descriptions of our business strategy, market potential and future financial performance of our company and our subsidiaries, and other matters. These statements often include words such as “may,” “will,” “should,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate” or similar expressions. You should not place undue reliance on any forward-looking statements. Forward-looking statements inherently involve many risks and uncertainties that could cause actual results to differ materially from those projected in these statements, all of which are difficult to predict and many of which are beyond our control. Although we believe that the forward-looking statements contained herein are based upon reasonable assumptions, you should be aware that many factors, including those described under the heading “Risk Factors” in the Registration Statement, could affect our actual results and could cause actual results to differ materially from those in the forward-looking statements. The following include some but not all of the factors that could cause actual results or events to differ materially from those anticipated:
customer demand for products and services and the ability of our company to adapt to changes in demand;
competitor responses to products and services;
the levels of online traffic to our customer’s websites and their ability to convert visitors into customers;
the growth of the e-commerce industry and the SaaS enterprise application software market in general and particularly in our markets;
the growth of non-traditional e-commerce devices and platforms, including mobile devices and social networking applications;
the achievement of advances in and expansion of our platform and our solutions;
our ability to predict future commerce trends and technology;
the impact of changes in search engine algorithms and dynamics or search engine disintermediation;
changes to technologies used in our platform or new versions or upgrades of operating systems and internet browsers impacting the process by which merchants and customers interface with our platform;
uncertainties inherent in the development and integration of new business lines and business strategies;
our future financial performance, including availability, terms and deployment of capital;
our ability to successfully integrate and recognize anticipated efficiencies and benefits from the businesses we acquire;
the ability of suppliers and vendors to deliver products, equipment, software and services;
availability of qualified personnel;
changes in, or failure or inability to comply with, government regulations, including, without limitation, adverse outcomes from regulatory proceedings;
changes in the nature of key strategic relationships with partners and vendors;
general economic and business conditions and industry trends including the current economic downturn;
consumer spending levels, including the availability and amount of individual consumer debt;
costs related to the maintenance and enhancement of brand awareness by our subsidiaries;
advertising spending levels;
rapid technological changes;
the regulatory and competitive environment of the industries in which our company operates; and
fluctuations in foreign currency exchange rates and threatened terrorist attacks, political and economic unrest in international markets and ongoing military action around the world.

For additional risk factors, please see the Registration Statement. 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. These forward-looking statements speak only as of the date of this quarterly report on Form 10-Q, and we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein, any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based. All subsequent written and oral forward-looking statements attributable to

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us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this quarterly report.
Overview
We are a cloud-based distributed commerce network for retailers and their suppliers, including brands and distributors. Our software platform allows trading partners—our customers—to sell more products online, promote products through retailers, marketplaces and digital advertising channels, and deliver products to customers quickly. Approximately 9,700 trading partners use our platform to exchange critical information with each other, including orders, invoices, product information and other electronic documents. Collectively, our trading partner customers constitute a vibrant network of the largest retailers, marketplaces and brands in North America.
Our software-as-a-service offerings leverage our trading partner platform and include capabilities that enable virtual inventory (or "drop-ship") fulfillment, e-commerce marketing and consumer demand generation (e.g., the syndication of seller product listings to relevant e-commerce channels), and shipping and delivery management.
Through our solutions we help our customers solve many of the most critical problems in today's e-commerce market. Our customers use our platform and solutions to expand the breadth of their product assortment so they can offer the products consumers want and market those products on marketplaces, search engines, and emerging e-commerce channels such as Facebook and Pinterest. In addition, because no e-commerce transaction is complete until the consumer has received the product they ordered, we help our customers orchestrate more rapid and cost-effective delivery of products.
We built our Company by first focusing on solutions for large omni-channel retailers. Our offering for retailers enables them to offer more products for sale through the "virtual inventory" provided by an integrated network of drop-ship suppliers. In January 2015, we acquired Seattle-based Mercent to extend the reach of our platform to demand solutions that help our customers sell their products using marketplaces, search engines, and other emerging e-commerce channels, such as social networks.
Our solutions unite supply, demand and delivery and provide our customers, consisting of retailers and suppliers, with a single platform to source and market the products consumers desire and to have those products delivered more rapidly to the consumer's doorstep. Specifically, we provide the following solutions:
Supply Solutions :    enable retailers to expand their product offerings without the economic and logistical limitations or risks typically associated with carrying physical inventory;

Demand Solutions :    provide retailers and suppliers with a single platform to gain greater access to shopper demand through a single connection to retail channels, marketplaces, paid search, social and advertising channels; and

Delivery Solutions :    facilitate rapid, cost-efficient, on-time delivery with greater control of, and visibility into, the consumer experience by leveraging our solutions to allow our customers to coordinate more effectively with delivery providers.
CommerceHub's platform exhibits significant network effects by connecting leading online retailers to thousands of suppliers to enable order fulfillment and the generation of consumer demand through leading digital advertising platforms. Our expanding number of retail trading partners makes it more attractive for additional suppliers to join our platform, and the more suppliers we have on the platform the more attractive CommerceHub will be to additional retailers. This network effect provides powerful incentives for additional customers to join our platform, which we believe has produced a comparatively low customer acquisition cost. Our platform enables our customers to establish selling relationships that, in many cases, generates recurring subscription fees, in addition to usage fees related to the trading partner activity across each selling relationship. Examples of usage fees include fees related to the processing of orders and the exchange of inventory information and product information.
The majority of our revenue is derived from usage fees that are based on the volume of activity our customers achieve through our platform, as well as recurring subscription fees. The remaining portion of our revenue comes from services we provide to new and existing customers, including highly targeted services that are focused on helping our customers quickly adopt our solutions and then maximize their utility.
CommerceHub's customer base is diversified among different retail segments, including general merchandise, home improvement, office supplies, toys, electronics, furniture and perishables. As such, our revenue does not closely track the seasonality trend for any one specific retail segment. Historically, the percentage of our annual revenue has been relatively

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uniform over the first three quarters of the year with approximately 33% to 34% of our annual revenue being generated in the fourth quarter.
Key Financial Metrics
Usage Revenue
Usage revenue is derived primarily from fees charged to retailers and suppliers for their use of our platform to conduct business with their trading partners. These usage fees are primarily influenced by the volume of customer orders related to our Supply Solutions that are processed through our platform. Usage revenue also consists of fees for activity related to Demand Solutions, Delivery Solutions, inventory management, third-party communication and variable fees related to the amount of online sales our customers achieve on our platform and solutions that are above minimum volume requirements.
Total usage revenue grows as the overall volume of goods purchased online through our retailers and supported demand channels increases, new trading partners are added to the platform, and current trading partners connect and create relationships with other trading partners. We track and measure total usage revenue because it measures the value that our customers receive through their adoption of our platform.
Subscription Revenue
A customer's subscription fee is based on several factors, including the number and type of trading partners (online retailers) that a customer is connected to through our platform, the number and type of demand channels (marketplace, digital advertising channel or social network) a customer accesses through our platform and the adoption of certain available feature upgrades that further enhance the functionality of our platform. Subscription fees are charged on a stand-alone basis or in association with a minimum usage level required to be maintained by a customer in connection with our Demand Solutions.
Total subscription revenue grows as new trading partner customers join the platform, as those trading partners connect and create relationships with other trading partners and as our customers adopt new features and upgrades that we make available. We track and measure total recurring subscription revenue because it represents the size of our platform in terms of total trading partner customers and relationships between those customers, and the scope of their engagement with us in terms of their adoption of available feature upgrades.
Set-up and Professional Services Revenue
Set-up fees include on-boarding services for the configuration, program, and design of a customer's access to our platform. On a limited basis, during a retailer's subscription term, the Company provides professional services to enhance the retailer's use of our solutions. We track and measure set-up and professional services as they provide an indication of new supplier connections and enhancements to existing customer connections.
Domestic vs. Foreign Revenue Streams
CommerceHub generates all of its revenue in North America (United States and Canada). For the nine -month period ended September 30, 2016 , approximately 96% of our revenue was generated from customers located in the United States. To date, we have not generated revenue from operations outside of North America; however, we have established an office in the United Kingdom to pursue the overseas market.
Cost of Revenue
Cost of revenue primarily consists of personnel costs including salaries, bonuses, payroll taxes, benefit costs and share-based payments for our teams supporting customer set-up and onboarding, customer service, application support and performance marketing. We capitalize the cost of acquired software, 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 the Company's data centers, communication service charges and depreciation expense related to computer equipment directly associated with generating revenue are captured in cost of revenue.
Research & Development Expense
Research and development expense consists of personnel costs, including salaries and benefits net of amounts capitalized as developed software, share-based compensation expense and bonuses 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, and facility costs.


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Table of Contents

Sales & Marketing Expenses
Sales and marketing expense consists of personnel expenses, including salaries, commissions, benefits, share-based compensation and bonuses for sales, client management and marketing employees. Other costs associated with sales and marketing include expenses incurred related to corporate marketing, including brand awareness and trade shows, and facility costs. 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 CommerceHub's solutions in trade publications and relevant industry conferences.
Our client management expenses are attributable to our client executive organization the primary role of which is to oversee and develop comprehensive relationships with our customers and to provide strategic account management and coordination of cross-selling opportunities.
General & Administrative Expenses
General and administrative expenses consist primarily of personnel costs, including salaries and benefits, share-based compensation expense and bonus, 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, accounting and internal audit services. Other costs include facility costs, expenses attributable to credit card processing, and bad debt expense. Commencing in 2016, we expect incremental general and administrative expenses relating to resources and other costs required to support the Spin-Off and public company compliance, to be approximately $5 million per year.
Other income and expense
Other income and expense includes interest income and expense from the promissory notes with Liberty and interest expense under our credit facility (see Note 8 and 13 to the accompanying condensed consolidated financial statements).
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, a non-GAAP financial measure that excludes certain expenses and income. Adjusted EBITDA should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP, including net income or loss. Non-GAAP financial measures are subject to inherent limitations and exclude significant expenses and income that are required by GAAP to be recorded in our financial statements. We define “Adjusted EBITDA” as net income or loss, plus depreciation of property and equipment and amortization of capitalized software costs and intangible assets, interest expense, income tax expense, and share-based compensation expense, less interest income.
Our management considers Adjusted EBITDA in reviewing our financial performance because we feel it is a relevant measure of the overall efficiency of our business model. Adjusted EBITDA should be considered in addition to financial measures calculated in accordance with GAAP and is not a substitute for GAAP results. Certain adjustments used in calculating Adjusted EBITDA may be based on estimates and assumptions of management and do not purport to reflect actual historical results. In addition, you should be aware when evaluating Adjusted EBITDA that in the future we may incur expenses similar to those excluded when calculating Adjusted EBITDA. Our computation of Adjusted EBITDA may not be comparable to other similarly titled measures computed by other companies, because all companies do not calculate Adjusted EBITDA in the same fashion.
New Accounting Pronouncements
Information regarding new accounting pronouncements is included in Note 4 to our condensed consolidated financial statements in this quarterly report on Form 10-Q.
Critical Accounting Policies
Preparation of our condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Please see the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" within the Registration Statement, which describes the significant accounting policies used in preparation of the consolidated financial statements. On an ongoing basis, we evaluate the critical accounting policies used to prepare our condensed consolidated financial statements. There have been no material changes in these aforementioned critical accounting policies.




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Results of operations for the three months ended September 30, 2016 and September 30, 2015
Revenue:
 (amounts in thousands)
 
Three Months Ended
September 30,
Change
 
 
2016
 
2015
 
$
 
%
Revenue:
 
 

 
 

 
 

 
 

Usage revenue
 
$
14,563

 
$
13,148

 
$
1,415

 
11
%
Subscription revenue
 
6,420

 
5,435

 
985

 
18
%
Set-up and professional services
 
1,495

 
1,112

 
383

 
34
%
Total revenue
 
$
22,478

 
$
19,695

 
$
2,783

 
14
%
Our 14% revenue increase for the three months ended September 30, 2016 , as compared to the same period in the prior year, was attributable to a $1.4 million , or 11% , increase in our usage revenue, a $1.0 million , or 18% , increase in our subscription revenue, and a $0.4 million , or 34% , increase in our set-up and professional services revenue and is inclusive of a decline in revenue attributable to attrition of certain legacy customers of Mercent where there was a mismatch between customer needs and our objectives. As part of the integration of Mercent, we have attempted to align the services being provided to acquired customers with our business objectives, and as is natural and expected after such a process, there has been some attrition of these former Mercent customers. We expect this realignment to continue as we refocus our business strategy away from certain digital marketing services related to our Demand Solutions and more towards our platform-based technology offering. Excluding all revenue attributable to customers acquired through our acquisition of Mercent, our revenue increased by 18% for the three months ended September 30, 2016 as compared to the same period in 2015.
Usage revenue represented 65% and 67% of our total revenue for the three months ended September 30, 2016 and 2015 , respectively, and is inclusive of a decline in usage revenue attributable to attrition of certain legacy customers of Mercent as described above. Excluding all usage revenue attributable to customers acquired through our acquisition of Mercent, our usage revenue increased by 19% for the three months ended September 30, 2016 as compared to the prior period. The increase in our usage revenue was mainly driven by a 16% increase in the volume of customer orders, primarily from existing customers, processed through our platform during the three months ended September 30, 2016 , as compared to the same period in the prior year. In addition, we experienced growth from expanded use of our platform within other solutions charged on a usage basis.
Subscription revenue represented 29% and 28% of our total revenue for the three months ended September 30, 2016 and 2015 , respectively. The growth in our subscription revenue was primarily driven by a 7% increase in the number of trading partner customers on our platform.
Revenue generated from set-up and professional services represented 7% and 6% of our total revenue for the three months ended September 30, 2016 and 2015 , respectively. This increase was driven by an increase in the number of retailer and supplier selling relationships on our platform.
Cost of Revenue and Gross Profit:
   (amounts in thousands)
 
Three Months Ended
September 30,
Change
 
 
2016
 
2015
 
$
%
Cost of revenue
 
$
5,737

 
$
6,332

 
$
(595
)
 
(9
)%
Gross profit
 
$
16,741

 
$
13,363

 
$
3,378

 
25
 %
Gross profit %
 
74
%
 
68
%
 
6
%
 
 
Cost of revenue decreased $0.6 million , or 9% , for the three months ended September 30, 2016 , as compared to the same period in the prior year. The decrease was due to lower share-based compensation expense of approximately $0.9 million compared to the same period in 2015 due to a larger mark-to-market adjustment of awards in 2015 , which resulted in higher expense in the three months ended September 30, 2015 as compared to the same period in 2016. This decrease was offset by a $0.4 million increase in amortization of capitalized software costs in the 2016 period.





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Table of Contents


Operating Expenses:
   (amounts in thousands)
 
Three Months Ended
September 30,
 
Change
 
 
2016
 
2015
 
$
 
%
Operating expenses:
 
 

 
 

 
 

 
 

Research and development
 
$
5,077

 
$
3,378

 
$
1,699

 
50
 %
Sales and marketing
 
3,023

 
2,808

 
215

 
8
 %
General and administrative
 
8,008

 
8,475

 
(467
)
 
(6
)%
Total operating expenses
 
$
16,108

 
$
14,661

 
$
1,447

 
10
 %
Research and development expenses.     Research and development expenses increased $1.7 million , or 50% , for the three months ended September 30, 2016 , as compared to the same period in the prior year. This increase was driven by an increase in personnel costs of $2.2 million, of which $1.7 million is attributable to a reduction in the amount of software development efforts capitalized, with the remaining $0.5 million increase attributable to the expansion of our development teams. During the quarter, we changed and further refined our methodologies and processes to estimate the portion of software development eligible to be capitalized. Based on the change in our methodology, we expect the amount of capitalized software development costs as a percentage of research and development expenses in future periods to be generally in line with the results of this quarter, subject to variability in our mix of projects. This increase was partially offset by a $0.6 million reduction in share-based compensation expense due to a larger mark-to-market adjustment of awards in 2015 , which resulted in higher expense in the three months ended September 30, 2015 as compared to the same period in 2016.
Sales and marketing expenses.     Sales and marketing expense increased $0.2 million , or 8% , for the three months ended September 30, 2016 , as compared to the same period in the prior year. This increase was driven by a $0.9 million increase in commissions expense to our sales team. This increase was offset by a decrease of $0.8 million in share-based compensation expense due to a larger mark-to-market adjustment of awards in 2015 , which resulted in higher expense in the three months ended September 30, 2015 as compared to the same period in 2016.
General and administrative expenses.     General and administrative expense decreased $0.5 million , or 6% , for the three months ended September 30, 2016 , as compared to the same period in the prior year. The decrease was driven by lower share-based compensation expense of approximately $3.1 million due to a larger mark-to-market adjustment of awards in 2015 , which resulted in higher expense in the three months ended September 30, 2015 as compared to the same period in 2016. This decrease was partially offset by a $1.5 million increase in professional services expenses attributable to becoming a public company, a $0.7 million increase in personnel costs from the expansion of the legal and finance teams, and increases of $0.4 million in bad debt expense.
Other income and expenses:
   (amounts in thousands)
 
Three Months Ended
September 30,
 
Change
 
 
2016
 
2015
 
$
 
%
Other income (expense):
 
 

 
 

 
 

 
 

Interest expense
 
$
(361
)
 
$

 
$
(361
)
 
100
 %
Interest income
 

 
156

 
(156
)
 
(100
)%
Total other income (expense)
 
$
(361
)
 
$
156

 
$
(517
)
 
(331
)%
Other income (expense) decreased $517 thousand for the three months ended September 30, 2016 , as compared to the same period in the prior year. This decrease was attributable to interest expense incurred in respect of 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 due from Liberty, which was fully repaid in June 2016, resulting in less interest earned in 2016, as compared to 2015 .
Income Taxes:
   (amounts in thousands)
 
Three Months Ended
September 30,
 
Change
 
 
2016
 
2015
 
$
 
%
Income tax expense (benefit)
 
$
(438
)
 
$
(521
)
 
$
83

 
nm
Effective tax rate
 
(161
)%
 
46
%
 
(207
)%
 
 

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Our income tax benefit was $0.1 million less during the three months ended September 30, 2016 , as compared to the same period in the prior year. The lower benefit was primarily due to pre-tax book income in the three months ended September 30, 2016 as compared to a pre-tax book loss in the same period in 2015 .
During the three months ended September 30, 2016 we generated an income tax benefit of $(0.4) million , despite $0.3 million pre-tax income, primarily as a result of federal tax research credits. The credits created both a discrete benefit from finalizing 2015 tax returns during the quarter and a benefit from a favorable adjustment to the estimated 2016 annual effective rate.
The estimated annual effective tax rate for the three -month period ended September 30, 2016 was lower than the federal tax rate of 35% due to the federal tax research credits, partially offset by the effect of state and local income taxes. The effective tax rate for the three months ended September 30, 2015, was higher than the federal tax rate of 35% due to the effect of state and local income taxes.
Adjusted EBITDA:
   (amounts in thousands)
 
Three Months Ended
September 30,
 
Change
 
 
2016
 
2015
 
$
 
%
Adjusted EBITDA:
 
 

 
 

 
 

 
 

Net income (loss)
 
$
710

 
$
(621
)
 
$
1,331

 
nm

Depreciation and amortization
 
2,453

 
1,992

 
461

 
23
 %
Interest expense (income)
 
361

 
(156
)
 
517

 
nm

Income tax expense (benefit)
 
(438
)
 
(521
)
 
83

 
(16
)%
Share-based compensation expense
 
2,193

 
7,514

 
$
(5,321
)
 
(71
)%
Adjusted EBITDA
 
$
5,279

 
$
8,208

 
$
(2,929
)
 
(36
)%
   
Adjusted EBITDA decreased approximately $2.9 million , or 36% , for the three months ended September 30, 2016 , as compared to the same period in the prior year. For the three months ended September 30, 2016 , the decrease was primarily due to a $1.7 million reduction in the amount of software development costs capitalized, as we changed and further refined our methodologies and processes to estimate the portion of software development that is eligible to be capitalized. This decrease is further driven by increased professional services costs of $1.4 million, associated with the Spin-Off and becoming a public company, and increased bad debt expense of $0.4 million. These cost increases were partially offset by increased operating profit on higher revenue for the three months ended September 30, 2016 as compared to the same period in the prior year.
The primary driver of the change in share-based compensation expense is the mark-to-market adjustment, primarily generated by the change in underlying share value, for each period. For the three months ended September 30, 2015 , the estimated share-price input, based on an internal valuation using the assistance of a third-party advisory firm, discounted cash flow projections and comparable market valuations, increased and resulted in expense. For the three months ended September 30, 2016 the estimated share-price input was based on the fair market value of CommerceHub's Series C common stock traded immediately following the Spin-Off (for shares granted prior to the Spin-Off) or the fair market value of CommerceHub's 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. Following the Spin-Off, the awards under the Legacy Stock Appreciation Rights Plan and Legacy Stock Option Plan are no longer classified as liability awards, and the fair value of these awards will no longer be remeasured at each reporting period.
Results of operations for the nine months ended September 30, 2016 and September 30, 2015
Revenue:
   (amounts in thousands)
 
Nine Months Ended
September 30,
Change
 
 
2016
 
2015
 
$
%
Revenue:
 
 

 
 

 
 

 
 

Usage revenue
 
$
44,437

 
$
39,384

 
$
5,053

 
13
%
Subscription revenue
 
18,766

 
15,898

 
2,868

 
18
%
Set-up and professional
 
4,468

 
3,061

 
1,407

 
46
%
Total revenue
 
$
67,671

 
$
58,343

 
$
9,328

 
16
%
Our revenue increased $9.3 million , or 16% , for the nine months ended September 30, 2016 , as compared to the same period in the prior year. This increase was attributable to a $5.1 million , or 13% , increase in our usage revenue, a $2.9 million , or 18% , increase in our subscription revenue, and a $1.4 million , or 46% , increase in our set-up and professional services

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Table of Contents

revenue and is inclusive of a decline in revenue attributable to attrition of certain legacy customers of Mercent where there was a mismatch between customer needs and our objectives. As part of the integration of Mercent, we have attempted to align the services being provided to customers acquired through our acquisition with our business objectives, and as is natural and expected after such a process, there has been some attrition of these former Mercent customers. We expect this realignment to continue as we refocus our business strategy away from certain digital marketing services related to our Demand Solutions and more towards our platform-based technology offering. Excluding all revenue attributable to customers acquired through our acquisition of Mercent, our revenue increased by 18% for the nine months ended September 30, 2016 as compared to the same period in 2015.
Usage revenue represented 66% and 68% of our total revenue for the nine months ended September 30, 2016 and 2015 , respectively and is inclusive a decline in usage revenue attributable to attrition of certain legacy customers of Mercent as described above. Excluding all usage revenue attributable to customers acquired through our acquisition of Mercent, our usage revenue increased by 18% for the nine months ended September 30, 2016 as compared to the same period in 2015. The increase in our usage revenue was mainly driven by a 15% increase in the volume of customer orders processed through our platform during the nine months ended September 30, 2016 , as compared to the same period in the prior year. This volume increase was primarily driven by increases in order volume from existing customer orders. The remaining increase being attributable to incremental revenue related to our other solutions charged on a per usage basis.
Subscription revenue represented 28% and 27% of our total revenue for the nine months ended September 30, 2016 and 2015 , respectively. The growth in our subscription revenue was driven by a 7% increase in our number of trading partner customers on our platform.
Revenue generated from set-up and professional services represented 7% and 5% of our total revenue for the nine months ended September 30, 2016 and 2015 , respectively. This increase was driven by an increase in the number of retailer and supplier selling relationships on our platform.
Cost of Revenue and Gross Profit:
   (amounts in thousands)
 
Nine Months Ended
September 30,
Change
 
 
2016
 
2015
 
$
 
%
Cost of revenue
 
$
17,162

 
$
16,177

 
$
985

 
6
%
Gross profit
 
$
50,509

 
$
42,166

 
$
8,343

 
20
%
Gross profit %
 
75
%
 
72
%
 
3
%
 
 
Cost of revenue increased $1.0 million , or 6% , for the nine months ended September 30, 2016 , as compared to the same period in the prior year. The increase in cost of revenue for the nine -month period in 2016 was primarily driven by an increase of $1.4 million in amortization of capitalized software and a $0.7 million increase in personnel-related costs due to increased headcount, as compared to the same period in 2015. This increase was offset by lower share-based compensation expense of approximately $1.6 million due to a larger mark-to-market adjustment of awards in 2015, which resulted in higher expense in the nine months ended September 30, 2015 as compared to the same period in 2016.
Operating Expenses:
   (amounts in thousands)
 
Nine Months Ended
September 30,
 
Change
 
 
2016
 
2015
 
$
 
%
Operating expenses:
 
 

 
 

 
 

 
 

Research and development
 
$
13,391

 
$
11,016

 
$
2,375

 
22
 %
Sales and marketing
 
9,024

 
7,834

 
1,190

 
15
 %
General and administrative
 
23,207

 
28,501

 
(5,294
)
 
(19
)%
Total operating expenses
 
$
45,622

 
$
47,351

 
$
(1,729
)
 
(4
)%
Research and development expenses.     Research and development expenses increased $2.4 million , or 22% , for the nine months ended September 30, 2016 , as compared to the same period in the prior year. The increase was driven by higher personnel-related costs of $4.8 million, of which $4.3 million is attributed to the expansion of the development team to support continued investment in our platform, with the remaining $0.5 million was due to a reduction in the amount of software development costs capitalized. During the quarter, we changed and further 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 reduction of $2.6 million in share-based compensation expense due to a larger mark-to-market adjustment of awards in 2015 , which resulted in higher expense in the nine months ended September 30, 2015 as compared to the same period in 2016.

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Table of Contents

Sales and marketing expenses.     Sales and marketing expense increased $1.2 million , or 15% , for the nine months ended September 30, 2016 , as compared to the same period in the prior year. The increase in sales and marketing expenses was driven by an increase in personnel-related costs of approximately $0.8 million from the expansion of our sales and marketing teams and an $1.5 million increase in commission expense to our sales team in 2016, as compared to 2015. This was offset by a lower share-based compensation expense of $1.7 million due to a larger mark-to-market adjustment of awards in 2015 , coupled with reduction in value of performance based awards, which resulted in higher expense in the nine months ended September 30, 2015 as compared to the same period in 2016. Further, a $0.6 million favorable state tax ruling resulting in reduced sales tax expenses in 2015 which did not recur in 2016.
General and administrative expenses.     General and administrative expense decreased $5.3 million , or 19% , for the nine months ended September 30, 2016 , as compared to the same period in the prior year. This decrease was driven by lower share-based compensation expense of $9.6 million due to a larger mark-to-market adjustment of awards in 2015, which resulted in higher expense in the nine months ended September 30, 2015 as compared to the same period in 2016. This decrease was partially offset by a $1.1 million increase in payroll-related taxes due to exercises of SARs and option awards, a $2.3 million increase in professional services expenses associated with the Spin-Off and becoming a public company, and a $0.5 million increase in bad debt expense.
Other income and expense:
   (amounts in thousands)
 
Nine Months Ended
September 30,
 
Change
 
 
2016
 
2015
 
$
 
%
Other income (expense):
 
 

 
 

 
 

 
 

Interest expense
 
$
(405
)
 
$

 
$
(405
)
 
100
 %
Interest income
 
273

 
432

 
(159
)
 
(37
)%
Total other income (expense)
 
$
(132
)
 
$
432

 
$
(564
)
 
(131
)%
      
Other income and expense decreased $564 thousand for the nine months ended September 30, 2016 , as compared to the same period in the prior year. This decrease was attributable to interest expense incurred in respect of 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 due from Liberty, which was fully repaid in June 2016, resulting in less interest earned in 2016, as compared to 2015 .
Income Taxes:
   (amounts in thousands)
 
Nine Months Ended
September 30,
 
Change
 
 
2016
 
2015
 
$
 
%
Income tax expense (benefit)
 
$
1,611

 
$
(1,647
)
 
$
3,258

 
nm
Effective tax rate
 
34
%
 
35
%
 
(1
)%
 
 
The increase in the income tax expense is primarily due to pre-tax book income of $4.8 million in the nine months ended September 30, 2016 as compared to a pre-tax book (loss) of $(4.8) million in the same period in 2015.
For the nine months ended September 30, 2015 and September 30, 2016 , actual income tax benefit was consistent with the amounts computed by applying the U.S. Federal income tax rate of 35% to income (loss) before income taxes.
Adjusted EBITDA:
   (amounts in thousands)
 
Nine Months Ended
September 30,
 
Change
 
 
2016
 
2015
 
$
 
%
Adjusted EBITDA:
 
 

 
 

 
 

 
 

Net income (loss)
 
$
3,144

 
$
(3,106
)
 
$
6,250

 
nm

Depreciation and amortization
 
7,315

 
5,715

 
1,600

 
28
 %
Interest expense (income)
 
132

 
(432
)
 
564

 
(131
)%
Income tax expense (benefit)
 
1,611

 
(1,647
)
 
3,258

 
nm

Share-based compensation expense
 
8,753

 
24,332

 
(15,579
)
 
(64
)%
Adjusted EBITDA
 
$
20,955

 
$
24,862

 
$
(3,907
)
 
(16
)%
     
Adjusted EBITDA decreased approximately $3.9 million , or 16% , for the nine months ended September 30, 2016 , as compared to the same period in the prior year. The decrease was primarily due to increased costs of $2.3 million associated

24

Table of Contents

with professional services associated with the Spin-Off and becoming a public company, an increase of $1.4 million in payroll-related taxes on exercises of SARs and options, and a $0.5 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 nine months ended September 30, 2015 , we recognized a benefit for sales tax of $0.6 million that did not occur in the same period in the current year. This decrease was offset by increased operating profit on higher revenues for the nine months ended September 30, 2016 as compared to the same period in the prior year.
The primary driver of the change in share-based compensation expense is the mark-to-market adjustment, primarily generated by the change in underlying share value, for each period. For the nine months ended September 30, 2015 , the estimated share-price input, based on an internal valuation using the assistance of a third-party advisory firm, discounted cash flow projections and comparable market valuations, increased and resulted in higher expense. For the three months ended March 31, 2016, the estimated share-price input, based on an internal valuation using the assistance of a third-party advisory firm, discounted cash flow projections and comparable market valuations, increased and resulted in higher expense. For the remainder of the nine months ended September 30, 2016 , the estimated share-price input was based on the fair market value of CommerceHub's Series C common stock traded immediately following the Spin-Off (for shares granted prior to the Spin-Off) or the fair market value of CommerceHub's 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. Following the Spin-Off, the awards under the Legacy Stock Appreciation Rights Plan and Legacy Stock Option Plan are no longer classified as liability awards, and the fair value of these awards will no longer be remeasured at each reporting period.
Liquidity and Capital Resources
   (amounts in thousands)
 
Nine Months Ended
September 30,
Change
 
 
2016
 
2015
$
%
Net cash provided by (used in):
 
 

 
 

 
 

 
 
Operating activities
 
$
(52,451
)
 
$
19,297

 
$
(71,748
)
 
nm
Investing activities
 
27,904

 
(28,215
)
 
56,119

 
nm
Financing activities
 
$
22,818

 
$
(138
)
 
$
22,956

 
nm
Historically, the cash we generate from operations has been sufficient to fund our working capital requirements and capital expenditures. For the nine -month period ended September 30, 2016 , cash flow from operations includes payments made to employees for share-based awards. As a result of exercises and settlements of share-based awards during 2016 (see Note 11 to the accompanying condensed consolidated financial statements), the Company made payments of approximately $86.7 million, reducing the share-based compensation liability. To fund these payments, in addition to existing cash balances and cash from operations, the Company used funds from Liberty's repayment of the promissory note and borrowed additional funds under the new intercompany funding arrangement with Liberty described in Note 8 to the accompanying condensed consolidated financial statements. Subsequent to the Spin-Off, we settle share-based arrangements using shares of our equity issuable under stock plans that were adopted at the time of the Spin-Off. We expect that cash from operations and available borrowings on our credit facility will be sufficient to meet our cash flow requirements in the foreseeable future.
Cash Flow from Operating Activities
Net cash from operating activities decreased $71.7 million for the nine months ended September 30, 2016 , as compared to the same period in the prior year. As discussed above, the primary driver for the decrease was increased cash payments for the settlement of share-based awards of $83.1 million and amounts paid in settlement of obligations due to Parent of $8.9 million. This was partially offset by the improvement in net income of $6.3 million and the increase in non-cash expenses (depreciation, amortization, share-based compensation and deferred income taxes) of $13.2 million and reductions in working capital related accounts of $0.6 million.
Cash Flow from Investing Activities
Cash flow from investing activities increased approximately $56.1 million for the nine months ended September 30, 2016 , as compared to the same period in the prior year. This increase was primarily attributable to collection of amounts owed to us by Liberty under the intercompany note in the amount of $36.4 million, which was fully repaid in June 2016. Amounts collected were used to fund our operating cash outflows associated with the settlement of share based awards. The increase in cash flow from investing activities was also attributable to use of cash of $20.2 million for the acquisition of Mercent during the first quarter of 2015. This increase was partially offset by increased cash outflows for property and equipment purchases of $1.0 million, primarily associated with $2.4 million in leasehold improvements and outfitting of our new corporate headquarters as compared to the same period in the prior year.


25

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Cash Flow from Financing Activities
Cash flow from financing activities increased $23.0 million for the nine months ended September 30, 2016 . This increase was primarily driven by the borrowings under our credit facility of $50.0 million and intercompany funding arrangement of $28.7 million to fund our operating cash outflows associated with the settlement of share-based awards, coupled with a cash contribution from Liberty of $6.0 million to compensate us for dilution from equity award adjustments in connection with the Spin-Off. This increase was partially offset by payments on our credit facility of $9.0 million and intercompany funding arrangement of $28.7 million, payments of dividends to Liberty of $19.7 million, increased cash outflows for share repurchases of $3.4 million associated with our Liquidity Program and payments of debt issuance costs associated with our new credit facility of $1.1 million.
Item 3. 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 our borrowings 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 requirements, cash generation, market conditions and other factors.

Although not significant, we have revenue, expenses, assets and liabilities that are denominated in currencies other than the U.S. dollar, including British pound sterling and Canadian dollars. As we expand internationally, our results of operations and cash flows will 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.

Item 4. Controls and Procedures
     
As we are an emerging growth company and a newly public company, we have not prepared a formal management’s report on internal control over financial reporting, as would otherwise be required by Section 404 of the Sarbanes-Oxley Act of 2002, nor have we engaged an independent registered public accounting firm to perform an audit of our internal control over financial reporting as of any balance sheet date or for any period reported in our condensed consolidated financial statements. Our compliance with Section 404 of the Sarbanes-Oxley Act will first be subject to management’s assessment regarding internal control over financial reporting in connection with the filing of our Annual Report on Form 10-K for the fiscal year ending December 31, 2017 (assuming we are no longer an emerging growth company at such time).
    
In accordance with Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company carried out an evaluation, under the supervision and with the participation of management, including its chief executive officer and its chief financial officer (the "Executives"), of the effectiveness of its disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Executives concluded that the Company's disclosure controls and procedures were not effective as of September 30, 2016 to provide reasonable assurance that information required to be disclosed in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.

Remediation Plan for Material Weakness in Internal Control over Financial Reporting
    
We have identified a material weakness in our internal control over financial reporting relating to the processes and controls to properly identify and account for transactions of a complex and non-routine nature. We are taking active steps towards fully remediating the material weakness through the hiring of appropriate individuals, including the hiring of our Chief Accounting Officer whose employment with our Company commenced in May 2016 and who is responsible for identifying the staffing and other needs of our Company required to remediate the material weakness. In July 2016 we also hired an SEC Reporting and Technical Accounting Manager who is responsible for external reporting requirements and review of non-routine or complex transactions. In August 2016 we also appointed a Director of Internal Audit who is responsible for designing and testing our internal controls over financial reporting. During the quarter, we continued to implement certain new policies and processes, refined existing processes and expanded the use of our financial systems. We are working to remediate the material weakness as quickly and efficiently as possible and expect that the material weakness will be remediated by the end of fiscal 2016. Notwithstanding the material weaknesses described above, our management has concluded that the financial statements

26

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included elsewhere in this quarterly report on Form 10-Q present fairly, in all material respects, our financial position, results of operation and cash flows in conformity with generally accepted accounting principles.

Changes in Internal Control over Financial Reporting

In addition, other than the items noted above, no changes occurred in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the quarter ended  September 30, 2016  that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

27

Table of Contents

PART II. OTHER INFORMATION

Item 1 - 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, financial condition or operating results.

Item 1A - Risk Factors

In addition to information set forth in this report, you should carefully consider the factors discussed in the Registration Statement. There have been no material changes to the risk factors previously disclosed in our Registration Statement on Form S-1.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3.    Defaults on Senior Securities
None.

Item 4.    Mine Safety Disclosures
None.
Item 5.    Other Information
None.


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Item 6. Exhibits
Listed below are the exhibits which are filed as a part of this Report (according to the number assigned to them in Item 601 of Regulation S-K):
Exhibit
Number
Exhibit Description
Ex. 2.1
Reorganization Agreement, dated as of July 15, 2016, between Liberty Interactive Corporation and CommerceHub, Inc. (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K (File No. 001-37840), as filed on July 26, 2016 (the “8-K”)).
Ex. 3.1
Restated Certificate of Incorporation of CommerceHub, Inc. (incorporated by reference to Exhibit 3.1 to the
8-K).
Ex. 3.2
Bylaws of CommerceHub, Inc. (incorporated by reference to Exhibit 3.2 to the 8-K).
Ex. 4.1
Joinder Agreement, dated July 22, 2016, between CommerceHub, Inc. and JPMorgan Chase Bank, N.A. (incorporated by reference to Exhibit 4.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 (File No. 001-37840) as filed on August 22, 2016).
Ex. 4.2
Specimen Certificate for shares of Series A Common Stock, par value $.01 per share, of the Registrant (incorporated by reference to Exhibit 4.1 to Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 (File No. 333-210508), as filed on June 28, 2016 (the “S-1/A No. 2”)).
Ex. 4.3
Specimen Certificate for shares of Series B Common Stock, par value $.01 per share, of the Registrant (incorporated by reference to Exhibit 4.2 to the S-1/A No. 2).
Ex. 4.4
Specimen Certificate for shares of Series C Common Stock, par value $.01 per share, of the Registrant (incorporated by reference to Exhibit 4.3 to the S-1/A No. 2).
Ex. 10.1
Amended and Restated CommerceHub, Inc. 2016 Omnibus Incentive Plan.*
Ex. 10.2
Form of Nonqualified Stock Option Agreement for use with the 2016 Omnibus Incentive Plan.*
Ex. 10.3
Form of Restricted Stock Unit Agreement for use with the 2016 Omnibus Incentive Plan.*
Ex. 10.4
CommerceHub, Inc. Non-Employee Director Deferred Compensation Plan.*
Ex. 10.5
Form of Indemnification Agreement by and between the Registrant and its executive officers/directors (incorporated by reference to Exhibit 10.5 to Amendment No. 3 to the Registrant’s Registration Statement on Form S-1 (File No. 333-210508), as filed on July 14, 2016 (the “S-1/A No. 3”)).
Ex. 10.6
Form of Commerce Technologies, Inc. 1999 Stock Option Plan Nonqualified Stock Option Agreement (incorporated by reference to Exhibit 10.7 to the S-1/A No. 2).
Ex. 10.7
Form of Commerce Technologies, Inc. 2010 Stock Appreciation Rights Plan (incorporated by reference to Exhibit 10.8 to the S-1/A No. 2).
Ex. 10.8
Form of Commerce Technologies, Inc. 2010 Stock Appreciation Rights Plan Evidence of Stock Appreciation Right (time vesting) (incorporated by reference to Exhibit 10.9 to the S-1/A No. 2).
Ex. 10.9
Form of CommerceHub, Inc. Legacy Stock Appreciation Rights Plan Stock Option Agreement (incorporated by reference to Exhibit 10.17 to the S-1/A No. 3).
Ex. 10.10
CommerceHub, Inc. Legacy Stock Appreciation Rights Plan (incorporated by reference to Exhibit 10.3 to the 8-K).
Ex. 10.11
Form of CommerceHub, Inc. Legacy Stock Appreciation Rights Plan Stock Option Agreement for Francis Poore (Relating to Conversion of Existing SARs) (incorporated by reference to Exhibit 10.18 to the S-1/A No. 3).
Ex. 10.12
Form of CommerceHub, Inc. Legacy Stock Appreciation Rights Plan Stock Option Agreement for Francis Poore (Relating to Conversion of New SARs) (incorporated by reference to Exhibit 10.19 to the S-1/A No. 3).
Ex. 10.13
CommerceHub, Inc. Legacy Stock Option Plan (incorporated by reference to Exhibit 10.4 to the 8-K).
Ex. 10.14
CommerceHub, Inc. 2016 Employee Stock Purchase Plan (incorporated by reference to Exhibit 99.3 to the Registrant’s Registration Statement on Form S-8 (File No. 333-212646), as filed on July 22, 2016).
Ex. 10.15
CommerceHub, Inc. Transitional Stock Adjustment Plan (incorporated by reference to Exhibit 99.1 to the Registrant’s Registration Statement on Form S-8 (File No. 333-213115), as filed on August 12, 2016).
Ex. 10.16
Tax Sharing Agreement, dated as of July 22, 2016, between Liberty Interactive Corporation and CommerceHub, Inc. (incorporated by reference to Exhibit 10.1 to the 8-K).
Ex. 10.17
Services Agreement, dated as of July 22, 2016, by and between Liberty Media Corporation and CommerceHub, Inc. (incorporated by reference to Exhibit 10.2 to the 8-K).
Ex. 31.1
Certification pursuant to Rule 13a-14(a) or 15d-14 under the Securities Exchange Act of 1934.*
Ex. 31.2
Certification pursuant to Rule 13a-14(a) or 15d-14 under the Securities Exchange Act of 1934.*

29

Table of Contents

Ex. 32.1
Certification of Chief Executive Officer pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
Ex. 32.2
Certification of Chief Financial Officer pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
Ex. 101.INS
XBRL Instance Document*
Ex. 101.SCH
XBRL Taxonomy Extension Schema Document*
Ex. 101.CAL
XBRL Taxonomy Calculation Linkbase Document*
Ex. 101.LAB
XBRL Taxonomy Label Linkbase Document*
Ex. 101.PRE
XBRL Taxonomy Presentation Linkbase Document*
Ex. 101.DEF
XBRL Taxonomy Definition Document*
_______________________
* Filed herewith.
** Furnished herewith.


30

Table of Contents

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
COMMERCEHUB, INC.
 
 
 
 
(Registrant)
 
 
 
 
 
Date:
 
November 8, 2016
 
/ S / FRANCIS POORE
 
 
 
 
Francis Poore
President and Chief Executive Officer
(Principal Executive Officer)
 
 
 
 
 
Date:
 
November 8, 2016
 
/ S / MARK GREENQUIST
 
 
 
 
Mark Greenquist
Chief Financial Officer
(Principal Financial Officer)
 
 
 
 
 
Date:
 
November 8, 2016
 
/ S / MICHAEL TRIMARCHI
 
 
 
 
Michael Trimarchi
Chief Accounting Officer
(Principal Accounting Officer)

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Table of Contents

EXHIBIT INDEX
Exhibit
Number
Exhibit Description
Ex. 2.1
Reorganization Agreement, dated as of July 15, 2016, between Liberty Interactive Corporation and CommerceHub, Inc. (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K (File No. 001-37840), as filed on July 26, 2016 (the “8-K”)).
Ex. 3.1
Restated Certificate of Incorporation of CommerceHub, Inc. (incorporated by reference to Exhibit 3.1 to the
8-K).
Ex. 3.2
Bylaws of CommerceHub, Inc. (incorporated by reference to Exhibit 3.2 to the 8-K).
Ex. 4.1
Joinder Agreement, dated July 22, 2016, between CommerceHub, Inc. and JPMorgan Chase Bank, N.A. (incorporated by reference to Exhibit 4.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 (File No. 001-37840) as filed on August 22, 2016).
Ex. 4.2
Specimen Certificate for shares of Series A Common Stock, par value $.01 per share, of the Registrant (incorporated by reference to Exhibit 4.1 to Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 (File No. 333-210508), as filed on June 28, 2016 (the “S-1/A No. 2”)).
Ex. 4.3
Specimen Certificate for shares of Series B Common Stock, par value $.01 per share, of the Registrant (incorporated by reference to Exhibit 4.2 to the S-1/A No. 2).
Ex. 4.4
Specimen Certificate for shares of Series C Common Stock, par value $.01 per share, of the Registrant (incorporated by reference to Exhibit 4.3 to the S-1/A No. 2).
Ex. 10.1
Amended and Restated CommerceHub, Inc. 2016 Omnibus Incentive Plan.*
Ex. 10.2
Form of Nonqualified Stock Option Agreement for use with the 2016 Omnibus Incentive Plan.*
Ex. 10.3
Form of Restricted Stock Unit Agreement for use with the 2016 Omnibus Incentive Plan.*
Ex. 10.4
CommerceHub, Inc. Non-Employee Director Deferred Compensation Plan.*
Ex. 10.5
Form of Indemnification Agreement by and between the Registrant and its executive officers/directors (incorporated by reference to Exhibit 10.5 to Amendment No. 3 to the Registrant’s Registration Statement on Form S-1 (File No. 333-210508), as filed on July 14, 2016 (the “S-1/A No. 3”)).
Ex. 10.6
Form of Commerce Technologies, Inc. 1999 Stock Option Plan Nonqualified Stock Option Agreement (incorporated by reference to Exhibit 10.7 to the S-1/A No. 2).
Ex. 10.7
Form of Commerce Technologies, Inc. 2010 Stock Appreciation Rights Plan (incorporated by reference to Exhibit 10.8 to the S-1/A No. 2).
Ex. 10.8
Form of Commerce Technologies, Inc. 2010 Stock Appreciation Rights Plan Evidence of Stock Appreciation Right (time vesting) (incorporated by reference to Exhibit 10.9 to the S-1/A No. 2).
Ex. 10.9
Form of CommerceHub, Inc. Legacy Stock Appreciation Rights Plan Stock Option Agreement (incorporated by reference to Exhibit 10.17 to the S-1/A No. 3).
Ex. 10.10
CommerceHub, Inc. Legacy Stock Appreciation Rights Plan (incorporated by reference to Exhibit 10.3 to the 8-K).
Ex. 10.11
Form of CommerceHub, Inc. Legacy Stock Appreciation Rights Plan Stock Option Agreement for Francis Poore (Relating to Conversion of Existing SARs) (incorporated by reference to Exhibit 10.18 to the S-1/A No. 3).
Ex. 10.12
Form of CommerceHub, Inc. Legacy Stock Appreciation Rights Plan Stock Option Agreement for Francis Poore (Relating to Conversion of New SARs) (incorporated by reference to Exhibit 10.19 to the S-1/A No. 3).
Ex. 10.13
CommerceHub, Inc. Legacy Stock Option Plan (incorporated by reference to Exhibit 10.4 to the 8-K).
Ex. 10.14
CommerceHub, Inc. 2016 Employee Stock Purchase Plan (incorporated by reference to Exhibit 99.3 to the Registrant’s Registration Statement on Form S-8 (File No. 333-212646), as filed on July 22, 2016).
Ex. 10.15
CommerceHub, Inc. Transitional Stock Adjustment Plan (incorporated by reference to Exhibit 99.1 to the Registrant’s Registration Statement on Form S-8 (File No. 333-213115), as filed on August 12, 2016).
Ex. 10.16
Tax Sharing Agreement, dated as of July 22, 2016, between Liberty Interactive Corporation and CommerceHub, Inc. (incorporated by reference to Exhibit 10.1 to the 8-K).
Ex. 10.17
Services Agreement, dated as of July 22, 2016, by and between Liberty Media Corporation and CommerceHub, Inc. (incorporated by reference to Exhibit 10.2 to the 8-K).
Ex. 31.1
Certification pursuant to Rule 13a-14(a) or 15d-14 under the Securities Exchange Act of 1934.*
Ex. 31.2
Certification pursuant to Rule 13a-14(a) or 15d-14 under the Securities Exchange Act of 1934.*
Ex. 32.1
Certification of Chief Executive Officer pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

32

Table of Contents

Ex. 32.2
Certification of Chief Financial Officer pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
Ex. 101.INS
XBRL Instance Document*
Ex. 101.SCH
XBRL Taxonomy Extension Schema Document*
Ex. 101.CAL
XBRL Taxonomy Calculation Linkbase Document*
Ex. 101.LAB
XBRL Taxonomy Label Linkbase Document*
Ex. 101.PRE
XBRL Taxonomy Presentation Linkbase Document*
Ex. 101.DEF
XBRL Taxonomy Definition Document*
______________
* Filed herewith.
** Furnished herewith.



33

Exhibit 10.1
AMENDED AND RESTATED COMMERCEHUB, INC.
2016 OMNIBUS INCENTIVE PLAN
ARTICLE I
PURPOSE OF PLAN; EFFECTIVE DATE
1.1      Purpose . The purpose of the Plan is to promote the success of the Company by providing a method whereby (i)  eligible officers and employees of the Company and its Subsidiaries, (ii) directors and independent contractors, and (iii) employees of Liberty Media Corporation or Liberty Interactive Corporation, in each case, providing services to the Company and its Subsidiaries, may be awarded additional remuneration for services rendered and may be encouraged to invest in capital stock of the Company, thereby increasing their proprietary interest in the Company’s businesses, encouraging them to remain in the employ or service of the Company or its Subsidiaries, and increasing their personal interest in the continued success and progress of the Company and its Subsidiaries. The Plan is also intended to aid in (i) attracting Persons of exceptional ability to become officers and employees of the Company and its Subsidiaries and (ii) inducing directors, independent contractors, or employees of Liberty Media Corporation or Liberty Interactive Corporation to agree to provide services to the Company and its Subsidiaries. The purposes of the amendment and restatement of the Plan as of the Amendment Date (as defined below) is to permit the delegation of the powers and authority of the Committee hereunder, subject to applicable law, to one or more committees and/or officers of the Company that have been approved for such delegation by the Board.
1.2      Effective Date . The Plan shall be effective as of July 22, 2016 (the “Effective Date”) and shall be amended and restated effective as of October 13, 2016 (the “Amendment Date”).
ARTICLE II

DEFINITIONS
2.1      Certain Defined Terms . Capitalized terms not defined elsewhere in the Plan shall have the following meanings (whether used in the singular or plural):
“Account” has the meaning ascribed thereto in Section 8.2.
“Affiliate” of the Company means any corporation, partnership or other business association that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the Company.
“Agreement” means a stock option agreement, stock appreciation rights agreement, restricted shares agreement, restricted stock units agreement, cash award agreement or an

1


agreement evidencing more than one type of Award, specified in Section 10.6, as any such Agreement may be supplemented or amended from time to time.
“Approved Transaction” means any transaction in which the Board (or, if approval of the Board is not required as a matter of law, the stockholders of the Company) shall approve (i) any consolidation or merger of the Company, or binding share exchange, pursuant to which shares of Common Stock of the Company would be changed or converted into or exchanged for cash, securities, or other property, other than any such transaction in which the common stockholders of the Company immediately prior to such transaction have the same proportionate ownership of the Common Stock of, and voting power with respect to, the surviving corporation immediately after such transaction, (ii) any merger, consolidation or binding share exchange to which the Company is a party as a result of which the Persons who are common stockholders of the Company immediately prior thereto have less than a majority of the combined voting power of the outstanding capital stock of the Company ordinarily (and apart from the rights accruing under special circumstances) having the right to vote in the election of directors immediately following such merger, consolidation or binding share exchange, (iii) the adoption of any plan or proposal for the liquidation or dissolution of the Company, or (iv) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company.
“Award” means a grant of Options, SARs, Restricted Shares, Restricted Stock Units, Performance Awards, Cash Awards and/or cash amounts under the Plan.
“Board” means the Board of Directors of the Company.
“Board Change” means, during any period of two consecutive years, individuals who at the beginning of such period constituted the entire Board cease for any reason to constitute a majority thereof unless the election, or the nomination for election, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period.
“Cash Award” means an Award made pursuant to Section 9.1 of the Plan to a Holder that is paid solely on account of the attainment of one or more Performance Objectives that have been pre-established by the Committee.
“Code” means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute or statutes thereto. Reference to any specific Code section shall include any successor section.
“Committee” means the committee of the Board appointed pursuant to Section 3.1 to administer the Plan.
“Common Stock” means each or any (as the context may require) series of the Company’s common stock.

2


“Company” means CommerceHub, Inc., a Delaware corporation.
“Control Purchase” means any transaction (or series of related transactions) in which any person (as such term is defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act), corporation or other entity (other than the Company, any Subsidiary of the Company or any employee benefit plan sponsored by the Company or any Subsidiary of the Company or any Exempt Person (as defined below)) shall become the “beneficial owner” (as such term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the then outstanding securities of the Company ordinarily (and apart from the rights accruing under special circumstances) having the right to vote in the election of directors (calculated as provided in Rule 13d-3(d) under the Exchange Act in the case of rights to acquire the Company’s securities), other than in a transaction (or series of related transactions) approved by the Board. For purposes of this definition, “Exempt Person” means each of (a) the Chairman of the Board, the President and each of the directors of the Company as of the Effective Date, and (b) the respective family members, estates and heirs of each of the Persons referred to in clause (a) above and any trust or other investment vehicle for the primary benefit of any of such Persons or their respective family members or heirs. As used with respect to any Person, the term “family member” means the spouse, siblings and lineal descendants of such Person.
Director Award Limitation has the meaning ascribed thereto in Section 4.1.
“Disability” means the inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.
“Dividend Equivalents” means, with respect to Restricted Stock Units, to the extent specified by the Committee only, an amount equal to all dividends and other distributions (or the economic equivalent thereof) which are payable to stockholders of record during the Restriction Period on a like number and kind of shares of Common Stock. Notwithstanding any provision of the Plan to the contrary, Dividend Equivalents with respect to a Performance Award may only be paid to the extent the Performance Award is actually paid to the Holder.
“Domestic Relations Order” means a domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder.
“Equity Security” shall have the meaning ascribed to such term in Section 3(a)(11) of the Exchange Act, and an equity security of an issuer shall have the meaning ascribed thereto in Rule 16a-1 promulgated under the Exchange Act, or any successor Rule.
“Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time, or any successor statute or statutes thereto. Reference to any specific Exchange Act section shall include any successor section.

3


“Fair Market Value” of a share of any series of Common Stock on any day means (i) for Option and SAR exercise transactions effected on any third-party incentive award administration system provided by the Company, the current high bid price of a share of any series of Common Stock as reported on the consolidated transaction reporting system on the principal national securities exchange on which shares of such series of Common Stock are listed on such day or if such shares are not then listed on a national securities exchange, then as quoted by OTC Markets Group Inc., or (ii) for all other purposes under the Plan, the closing price of a share of such series of Common Stock on such day (or if such day is not a trading day, on the next preceding trading day) as reported on the consolidated transaction reporting system for the principal national securities exchange on which shares of such series of Common Stock are listed on such day or if such shares are not then listed on a national securities exchange, then as quoted by OTC Markets Group Inc. If for any day the Fair Market Value of a share of the applicable series of Common Stock is not determinable by any of the foregoing means, or if there is insufficient trading volume in the applicable series of Common Stock on such trading day, then the Fair Market Value for such day shall be determined in good faith by the Committee on the basis of such quotations and other considerations as the Committee deems appropriate.
“Free Standing SAR” has the meaning ascribed thereto in Section 7.1.
“Holder” means a Person who has received an Award under the Plan.
“Nonemployee Director” means an individual who is a member of the Board and who is neither an officer nor an employee of the Company or any Subsidiary.
“Option” means a stock option granted under Article VI.
“Performance Award” means an Award made pursuant to Article IX of the Plan to a Holder that is subject to the attainment of one or more Performance Objectives.
“Performance Objective” means a standard established by the Committee to determine in whole or in part whether a Performance Award shall be earned.
“Person” means an individual, corporation, limited liability company, partnership, trust, incorporated or unincorporated association, joint venture or other entity of any kind.
“Plan” means this CommerceHub, Inc. 2016 Omnibus Incentive Plan, as modified or amended from time to time.
“Restricted Shares” means shares of any series of Common Stock awarded pursuant to Section 8.1.
“Restricted Stock Unit” means a unit evidencing the right to receive in specified circumstances one share of the specified series of Common Stock or the equivalent value in cash, which right may be subject to a Restriction Period or forfeiture provisions.

4


“Restriction Period” means a period of time beginning on the date of each Award of Restricted Shares or Restricted Stock Units and ending on the Vesting Date with respect to such Award.
“Retained Distribution” has the meaning ascribed thereto in Section 8.3.
“SARs” means stock appreciation rights, awarded pursuant to Article VII, with respect to shares of any specified series of Common Stock.
“Section 409A” has the meaning ascribed thereto in Section 10.19.
“Subsidiary” of a Person means any present or future subsidiary (as defined in Section 424(f) of the Code) of such Person or any business entity in which such Person owns, directly or indirectly, 50% or more of the voting, capital or profits interests. An entity shall be deemed a subsidiary of a Person for purposes of this definition only for such periods as the requisite ownership or control relationship is maintained.
“Subplan” has the meaning ascribed thereto in Section 10.14.
“Tandem SARs” has the meaning ascribed thereto in Section 7.1.
“Vesting Date,” with respect to any Restricted Shares or Restricted Stock Units awarded hereunder, means the date on which such Restricted Shares or Restricted Stock Units cease to be subject to a risk of forfeiture, as designated in or determined in accordance with the Agreement with respect to such Award of Restricted Shares or Restricted Stock Units pursuant to Article VIII. If more than one Vesting Date is designated for an Award of Restricted Shares or Restricted Stock Units, reference in the Plan to a Vesting Date in respect of such Award shall be deemed to refer to each part of such Award and the Vesting Date for such part. The Vesting Date for a particular Award will be established by the Committee and, for the avoidance of doubt, may be contemporaneous with the date of grant.
ARTICLE III     

ADMINISTRATION
3.1      Committee. The Plan shall be administered by the Compensation Committee of the Board unless a different committee is appointed by the Board. The Committee shall be comprised of not less than two Persons. The Board may from time to time appoint members of the Committee in substitution for or in addition to members previously appointed, may fill vacancies in the Committee and may remove members of the Committee. The Committee shall select one of its members as its chairman and shall hold its meetings at such times and places as it shall deem advisable. A majority of its members shall constitute a quorum and all determinations shall be made by a majority of such quorum. Any determination reduced to writing and signed by all of the members shall be as fully effective as if it had been made by a majority vote at a meeting duly called and held. The Committee may delegate any or all of its power and authority under the Plan, subject

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to applicable law, to one or more subcommittees, other committees of the Board and/or officers of the Company that have been approved for such delegation by the Board.
3.2      Powers . The Committee shall have full power and authority to grant to eligible Persons Options under Article VI of the Plan, SARs under Article VII of the Plan, Restricted Shares under Article VIII of the Plan, Restricted Stock Units under Article VIII of the Plan, Cash Awards under Article IX of the Plan and/or Performance Awards under Article IX of the Plan, to determine the terms and conditions (which need not be identical) of all Awards so granted, to interpret the provisions of the Plan and any Agreements relating to Awards granted under the Plan and to supervise the administration of the Plan. The Committee in making an Award may provide for the granting or issuance of additional, replacement or alternative Awards upon the occurrence of specified events, including the exercise of the original Award. The Committee shall have sole authority in the selection of Persons to whom Awards may be granted under the Plan and in the determination of the timing, pricing and amount of any such Award, subject only to the express provisions of the Plan. In making determinations hereunder, the Committee may take into account the nature of the services rendered by the respective employees, officers, independent contractors and directors, their present and potential contributions to the success of the Company and its Subsidiaries, and such other factors as the Committee in its discretion deems relevant.
3.3      Interpretation . The Committee is authorized, subject to the provisions of the Plan, to establish, amend and rescind such rules and regulations as it deems necessary or advisable for the proper administration of the Plan and to take such other action in connection with or in relation to the Plan as it deems necessary or advisable. Each action and determination made or taken pursuant to the Plan by the Committee, including any interpretation or construction of the Plan, shall be final and conclusive for all purposes and upon all Persons. No member of the Committee shall be liable for any action or determination made or taken by such member or the Committee in good faith with respect to the Plan.
3.4      Awards to Nonemployee Directors . The Board shall have the same powers as the Committee with respect to awards to Nonemployee Directors.
ARTICLE IV     

SHARES SUBJECT TO THE PLAN
4.1      Number of Shares . Subject to the provisions of this Article IV, the maximum number of shares of Common Stock with respect to which Awards may be granted during the term of the Plan shall be 13,200,000 shares. Subject to the provisions of this Article IV, the number of shares of Common Stock available for issuance under the Plan will be increased on the first day of each calendar year beginning with the 2017 calendar year, in an amount equal to the least of (i) 5% of the outstanding shares of all classes of the Company’s Common Stock on the last day of the immediately preceding calendar year or (ii) such number of shares of Common Stock determined by the Board. Shares of Common Stock will be made available from the authorized but unissued shares of the Company or from shares reacquired by the Company, including shares purchased in the open market. The shares of Common Stock subject to (i) any Award granted under the Plan that shall expire, terminate or be cancelled or annulled for any reason without having been exercised

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(or considered to have been exercised as provided in Section 7.2), (ii) any Award of any SARs granted under the Plan the terms of which provide for settlement in cash, and (iii) any Award of Restricted Shares or Restricted Stock Units that shall be forfeited prior to becoming vested (provided that the Holder received no benefits of ownership of such Restricted Shares or Restricted Stock Units other than voting rights and the accumulation of Retained Distributions and unpaid Dividend Equivalents that are likewise forfeited) shall again be available for purposes of the Plan. Notwithstanding the foregoing, the following shares of Common Stock may not again be made available for issuance as Awards under the Plan: (a) shares of Common Stock not issued or delivered as a result of the net settlement of an outstanding Option or SAR, (b) shares of Common Stock used to pay the purchase price or withholding taxes related to an outstanding Award, or (c) shares of Common Stock repurchased on the open market with the proceeds of an Option purchase price. Except for Awards described in Section 10.1, no Person may be granted in any calendar year Awards of Options or SARs covering more than 3,000,000 shares of Common Stock (as such amount may be adjusted from time to time as provided in Section 4.2). No Nonemployee Director may be granted during any calendar year Awards having a value determined on the date of grant in excess of $1,000,000, increased to $2,000,000 in connection with such Nonemployee Director’s initial year of service (the “Director Award Limitation”). In general, each Award is only subject to a single limitation as set forth above, and Awards granted to Nonemployee Directors shall only be subject to the Director Award Limitation.
4.2      Adjustments .
(a) If the Company subdivides its outstanding shares of any series of Common Stock into a greater number of shares of such series of Common Stock (by stock dividend, stock split, reclassification, or otherwise) or combines its outstanding shares of any series of Common Stock into a smaller number of shares of such series of Common Stock (by reverse stock split, reclassification, or otherwise) or if the Committee determines that any stock dividend, extraordinary cash dividend, reclassification, recapitalization, reorganization, stock redemption, split-up, spin-off, combination, exchange of shares, warrants or rights offering to purchase such series of Common Stock or other similar corporate event (including mergers or consolidations other than those which constitute Approved Transactions, adjustments with respect to which shall be governed by Section 10.1(b)) affects any series of Common Stock so that an adjustment is required to preserve the benefits or potential benefits intended to be made available under the Plan, then the Committee, in such manner as the Committee, in its sole discretion, deems equitable and appropriate, shall make such adjustments to any or all of (i) the number and kind of shares of stock which thereafter may be awarded, optioned or otherwise made subject to the benefits contemplated by the Plan, (ii) the number and kind of shares of stock subject to outstanding Awards, and (iii) the purchase or exercise price and the relevant appreciation base with respect to any of the foregoing, provided, however, that the number of shares subject to any Award shall always be a whole number. The Committee may, if deemed appropriate, provide for a cash payment to any Holder of an Award in connection with any adjustment made pursuant to this Section 4.2.
(b) Notwithstanding any provision of the Plan to the contrary, in the event of a corporate merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation, the Committee shall be authorized, in its discretion, (i) to provide, prior to the transaction, for the

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acceleration of the vesting and exercisability of, or lapse of restrictions with respect to, the Award and, if the transaction is a cash merger, provide for the termination of any portion of the Award that remains unexercised at the time of such transaction, or (ii) to cancel any such Awards and to deliver to the Holders cash in an amount that the Committee shall determine in its sole discretion is equal to the fair market value of such Awards on the date of such event, which in the case of Options or SARs shall be the excess of the Fair Market Value (as determined in sub-section (ii) of the definition of such term) of Common Stock on such date over the purchase price of the Options or the base price of the SARs, as applicable. For the avoidance of doubt, if the purchase price of the Options or base price of the SARs, as applicable, is greater than such Fair Market Value, the Options or SARs may be canceled for no consideration pursuant to this section.
(c) No adjustment or substitution pursuant to this Section 4.2 shall be made in a manner that results in noncompliance with the requirements of Section 409A, to the extent applicable.
ARTICLE V     

ELIGIBILITY
5.1      General . The Persons who shall be eligible to participate in the Plan and to receive Awards under the Plan shall be such Persons who are employees, directors or independent contractors of (or directors, independent contractors or employees of Liberty Media Corporation or Liberty Interactive Corporation providing services to), the Company or its Subsidiaries as the Committee shall select. Awards may be made to employees, directors or independent contractors who hold or have held Awards under the Plan or any similar or other awards under any other plan of the Company or any of its Affiliates.
ARTICLE VI     

STOCK OPTIONS
6.1      Grant of Options . Subject to the limitations of the Plan, the Committee shall designate from time to time those eligible Persons to be granted Options, the time when each Option shall be granted to such eligible Persons, the series and number of shares of Common Stock subject to such Option, and, subject to Section 6.2, the purchase price of the shares of Common Stock subject to such Option.
6.2      Option Price . The price at which shares may be purchased upon exercise of an Option shall be fixed by the Committee and may be no less than the Fair Market Value of the shares of the applicable series of Common Stock subject to the Option as of the date the Option is granted.
6.3      Term of Options . Subject to the provisions of the Plan with respect to death, retirement and termination of employment or service, the term of each Option shall be for such period as the Committee shall determine as set forth in the applicable Agreement; provided that such term may not exceed ten years. However, if the term of an Option expires when trading in the Common Stock is prohibited by law or the Company’s insider trading policy, then the term of such Option shall expire on the 30th day after the expiration of such prohibition.

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6.4      Exercise of Options . An Option granted under the Plan shall become (and remain) exercisable during the term of the Option to the extent provided in the applicable Agreement and the Plan and, unless the Agreement otherwise provides, may be exercised to the extent exercisable, in whole or in part, at any time and from time to time during such term; provided, however, that subsequent to the grant of an Option, the Committee, at any time before complete termination of such Option, may accelerate the time or times at which such Option may be exercised in whole or in part (without reducing the term of such Option).
6.5      Manner of Exercise .
(a)     Form of Payment . An Option shall be exercised by written notice to the Company upon such terms and conditions as the Agreement may provide and in accordance with such other procedures for the exercise of Options as the Committee may establish from time to time. The method or methods of payment of the purchase price for the shares to be purchased upon exercise of an Option and of any amounts required by Section 10.10 shall be determined by the Committee and may consist of (i) cash, (ii) check, (iii) promissory note (subject to applicable law), (iv) whole shares of any series of Common Stock, (v) the withholding of shares of the applicable series of Common Stock issuable upon such exercise of the Option, (vi) the delivery, together with a properly executed exercise notice, of irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds required to pay the purchase price, or (vii) any combination of the foregoing methods of payment, or such other consideration and method of payment as may be permitted for the issuance of shares under the Delaware General Corporation Law. The permitted method or methods of payment of the amounts payable upon exercise of an Option, if other than in cash, shall be set forth in the applicable Agreement and may be subject to such conditions as the Committee deems appropriate.
(b)     Value of Shares . Unless otherwise determined by the Committee and provided in the applicable Agreement, shares of any series of Common Stock delivered in payment of all or any part of the amounts payable in connection with the exercise of an Option, and shares of any series of Common Stock withheld for such payment, shall be valued for such purpose at their Fair Market Value as of the exercise date.
(c)     Issuance of Shares . The Company shall effect the transfer of the shares of Common Stock purchased under the Option as soon as practicable after the exercise thereof and payment in full of the purchase price therefor and of any amounts required by Section 10.10, and within a reasonable time thereafter, such transfer shall be evidenced on the books of the Company. Unless otherwise determined by the Committee and provided in the applicable Agreement, (i) no Holder or other Person exercising an Option shall have any of the rights of a stockholder of the Company with respect to shares of Common Stock subject to an Option granted under the Plan until due exercise and full payment has been made, and (ii) no adjustment shall be made for cash dividends or other rights for which the record date is prior to the date of such due exercise and full payment.
ARTICLE VII     

SARS

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7.1      Grant of SARs . Subject to the limitations of the Plan, SARs may be granted by the Committee to such eligible Persons in such numbers, with respect to any specified series of Common Stock, and at such times during the term of the Plan as the Committee shall determine. A SAR may be granted to a Holder of an Option (hereinafter called a “related Option”) with respect to all or a portion of the shares of Common Stock subject to the related Option (a “Tandem SAR”) or may be granted separately to an eligible Person (a “Free Standing SAR”). Subject to the limitations of the Plan, SARs shall be exercisable in whole or in part upon notice to the Company upon such terms and conditions as are provided in the Agreement.
7.2      Tandem SARs . A Tandem SAR may be granted either concurrently with the grant of the related Option or at any time thereafter prior to the complete exercise, termination, expiration or cancellation of such related Option. Tandem SARs shall be exercisable only at the time and to the extent that the related Option is exercisable (and may be subject to such additional limitations on exercisability as the Agreement may provide) and in no event after the complete termination or full exercise of the related Option. Upon the exercise or termination of the related Option, the Tandem SARs with respect thereto shall be canceled automatically to the extent of the number of shares of Common Stock with respect to which the related Option was so exercised or terminated. Subject to the limitations of the Plan, upon the exercise of a Tandem SAR and unless otherwise determined by the Committee and provided in the applicable Agreement, (i) the Holder thereof shall be entitled to receive from the Company, for each share of the applicable series of Common Stock with respect to which the Tandem SAR is being exercised, consideration (in the form determined as provided in Section 7.4) equal in value to the excess of the Fair Market Value of a share of the applicable series of Common Stock with respect to which the Tandem SAR was granted on the date of exercise over the related Option purchase price per share, and (ii) the related Option with respect thereto shall be canceled automatically to the extent of the number of shares of Common Stock with respect to which the Tandem SAR was so exercised.
7.3      Free Standing SARs . Free Standing SARs shall be exercisable at the time, to the extent and upon the terms and conditions set forth in the applicable Agreement. The base price of a Free Standing SAR may be no less than the Fair Market Value of the applicable series of Common Stock with respect to which the Free Standing SAR was granted as of the date the Free Standing SAR is granted. Subject to the limitations of the Plan, upon the exercise of a Free Standing SAR and unless otherwise determined by the Committee and provided in the applicable Agreement, the Holder thereof shall be entitled to receive from the Company, for each share of the applicable series of Common Stock with respect to which the Free Standing SAR is being exercised, consideration (in the form determined as provided in Section 7.4) equal in value to the excess of the Fair Market Value of a share of the applicable series of Common Stock with respect to which the Free Standing SAR was granted on the date of exercise over the base price per share of such Free Standing SAR. The term of a Free Standing SAR may not exceed ten years. However, if the term of a Free Standing SAR expires when trading in the Common Stock is prohibited by law or the Company’s insider trading policy, then the term of such Free Standing SAR shall expire on the 30th day after the expi