CHANNELADVISOR CORPORATION Certain statements contained in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words or phrases "would be," "will allow," "intends to," "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project," or similar expressions, or the negative of such words or phrases, are intended to identify "forward-looking statements." We have based these forward-looking statements on our current expectations and projections about future events. Because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. These forward-looking statements are based upon information available to us as of the date of this Quarterly Report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. Factors that could cause or contribute to these differences include those below and elsewhere in this Quarterly Report on Form 10-Q, particularly in Part II - Item 1A, "Risk Factors," and our other filings with theSecurities and Exchange Commission . This Quarterly Report on Form 10-Q includes forward-looking statements about the occurrence of events, changes or other circumstances that could delay or prevent the closing of our proposed merger withCommerceHub or could give rise to the termination of the Merger Agreement. The forward-looking statements contained herein do not assume the consummation of the proposed transaction withCommerceHub unless specifically stated otherwise. Statements made herein are as of the date of the filing of this Form 10-Q with theSecurities and Exchange Commission and should not be relied upon as of any subsequent date. Unless otherwise required by applicable law, we do not undertake, and we specifically disclaim, any obligation to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes that appear in Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and related notes for the year endedDecember 31, 2021 , which are included in our Annual Report on Form 10-K for fiscal 2021. We are a leading provider of cloud-based e-commerce solutions whose mission is to connect and optimize the world's commerce. For over two decades, we have helped brands and retailers worldwide to streamline their e-commerce operations, expand to new channels and grow their sales. Our multichannel commerce platform allows our customers to connect to hundreds of global channels, market to consumers on those channels, sell products, manage fulfillment processes, and analyze and optimize channel performance. Thousands of customers depend on us to securely power their e-commerce operations on channels such as Amazon, eBay, Facebook, Google, Shopify, Walmart and Zalando. Our platform helps global brands gain a competitive advantage with actionable insights into digital shelf performance across thousands of retailer websites and marketplaces and helps make digital campaigns shoppable. Overall, our platform provides the breadth, scalability and flexibility to facilitate billions of dollars in e-commerce transactions annually across the globe.
We serve customers across a wide range of industries and geographies. Our customers include the online businesses of brands and retailers, as well as agencies that use our solutions on behalf of their clients.
Merger Agreement and Proposed Acquisition by
OnSeptember 4, 2022 , we entered into an Agreement and Plan of Merger, or the Merger Agreement, withCommerceHub, Inc. , aDelaware corporation, orCommerceHub ,CH Merger Sub, Inc. , aDelaware corporation and a wholly owned subsidiary ofCommerceHub , providing for the merger ofCH Merger Sub, Inc. with and into the Company, with us surviving the merger as a wholly owned subsidiary ofCommerceHub . We have called a special meeting of our stockholders to be held onNovember 11, 2022 for the approval of the Merger Agreement. Under the terms of the Merger Agreement,CommerceHub will acquire all outstanding shares of our common stock in exchange for consideration of$23.10 per share in cash. The Merger Agreement contains representations and warranties customary for transactions of this type. The closing of the merger is subject to approval of our stockholders and the satisfaction or waiver of a number of customary closing conditions. The Merger Agreement providesCommerceHub and us with certain termination rights and, under certain circumstances, may require that we orCommerceHub pay a termination fee. 14
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See the section titled "Risk Factors-Risks Related to our Proposed Transaction withCommerceHub " included under Part II, Item 1A of this Quarterly Report on Form 10-Q for more information regarding the risks associated with the proposed merger. EXECUTIVE OVERVIEW FINANCIAL HIGHLIGHTS
•Total revenue of
•Revenue was comprised of 84.6% subscription revenue and 15.4% variable revenue for the three months endedSeptember 30, 2022 compared with 82.3% subscription revenue and 17.7% variable revenue for the comparable prior year period; •Revenue was comprised of 84.3% subscription revenue and 15.7% variable revenue for the nine months endedSeptember 30, 2022 compared with 78.9% subscription revenue and 21.1% variable revenue for the comparable prior year period; •Revenue from our brands customers represented 44.1% and 44.4% of total revenue for the three and nine months endedSeptember 30, 2022 , respectively, up from 42.0% and 39.0% of total revenue for the comparable prior year periods; •Revenue derived from customers located outside ofthe United States as a percentage of total revenue was 28.6% and 29.3% for the three and nine months endedSeptember 30, 2022 , respectively, compared with 29.8% and 28.7% for the comparable prior year periods;
•Gross margin was 76.4% and 75.8% for the three and nine months ended
•Operating margin was 3.9% and 6.6% for the three and nine months ended
•Net (loss) income was$(0.1) million and$3.6 million for the three and nine months endedSeptember 30, 2022 , respectively, compared with$3.5 million and$13.5 million for the comparable prior year periods; •Adjusted EBITDA, a non-GAAP measure, was$10.1 million and$26.7 million for the three and nine months endedSeptember 30, 2022 , respectively, compared with$8.2 million and$26.7 million for the comparable prior year periods;
•Cash and cash equivalents were
•Operating cash flow was
•Free cash flow, a non-GAAP measure, was$16.2 million for the nine months endedSeptember 30, 2022 compared with$22.8 million for the comparable prior year period. TRENDS IN OUR BUSINESS
The following trends have contributed to the results of our consolidated operations, and we anticipate that they will continue to affect our future results:
•Growth in Online Shopping. Consumers continue to move more of their spending
from offline to online. The continuing shift to online shopping and overall
growth has contributed to our historical growth and we expect that this online
shift will continue to benefit our business. Global efforts to implement social
distancing, including stay-at-home orders and similar mobility and gathering
restrictions, due to the COVID-19 pandemic, have increased e-commerce as
consumers have increasingly turned to online purchasing for many products they
would have purchased at brick and mortar stores. However, it is unclear to what
degree this recent shift in favor of e-commerce will continue once the public
health impacts of the COVID-19 pandemic have begun to subside or as a result of
other macroeconomic or geopolitical factors beyond our control. For example, we
have begun to see moderation of gross merchandise value, or GMV, and variable
revenue performance compared to the prior year resulting from factors beyond
COVID and government stimulus-generated tailwinds, such as the effects of
inflation on consumer shopping habits.
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•Product Offering Expansion. As online shopping evolves, we continue to expand our product offerings to reflect the needs of companies seeking to attract consumers. We continue to enhance our product offerings by increasing online shopping channel integrations, including marketplace and first-party retail programs, and providing capabilities that allow brands and retailers to be more competitive. This includes support for advertising, advanced algorithmic repricing, machine learning-based demand forecasting, analytics capabilities, fulfillment features and user experience. Product expansion and enhancement has been key to our strategic focus and success with brands. •Channel Expansion. We have experienced substantial growth in GMV on our platform from large channels like Zalando, Target Plus and Shopify, as well as numerous smaller marketplaces that we refer to collectively as our long tail of marketplaces. Many of our brands customers see a significant opportunity in expanding their reach to more consumers via global channel expansion. We implemented a strategic plan at the beginning of 2021 to add at least 80 additional channel connections across the globe over an 18-month period to help our customers with this opportunity. We exceeded this goal by adding over 100 new channels by the end of the first quarter of 2022. We intend to continue to add new channel connections over the remainder of 2022. •Growth in Mobile Usage. We believe the shift toward mobile commerce will increasingly favor aggregators such as Amazon, eBay, Google and Walmart, all of which are focal points of our platform. These systems understand the identity of the buyer, helping to reduce friction in the mobile commerce process, while offering a wide selection of merchandise in a single location. We believe that the growth in mobile commerce may result in increased revenue for us. •Evolving Fulfillment Landscape. Consumers have been conditioned to expect fast, efficient delivery of products. We believe that determining and executing on a strategy to more expeditiously receive, process and deliver online orders, which we refer to collectively as fulfillment, is critical to success for online sellers. Therefore, it will be increasingly important for us to facilitate and optimize fulfillment services on behalf of our customers, which in turn may result in additional research and development investment. •Focus on Employees. We strive to provide competitive compensation and benefits programs to help attract and retain employees who are focused on facilitating the success of our customers. We believe the human capital programs we have in place are market competitive and recognized by our employees, as evidenced by our having been recognized byTriangle Business Journal as a member of the 2022 class of "Best Places to Work" in the Triangle region ofNorth Carolina , the eighth time we have won this recognition. We have implemented a formal global flexible work policy that provides many of our employees the ability to determine whether they will continue to work from home or from the office, even as our offices around the world reopen following closures during the COVID-19 pandemic. We are not dependent on our physical office locations or travel for our business operations. Refer to "Employees andHuman Capital Resources " included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 for additional information on employees and human capital resources. •Seasonality. Our revenue fluctuates as a result of seasonal variations in our business, principally due to the peak consumer demand and related increased volume of our customers' GMV during the year-end holiday season. As a result, we have historically had higher revenue in our fourth quarter than other quarters due to increased GMV processed through our platform, resulting in higher variable fees.
OPPORTUNITIES AND RISKS
•Brands. We believe the digital transformation to e-commerce has changed the way brands interact with their customers, which is why we have identified that growing our brands business represents a significant strategic opportunity for us. We generally categorize a customer as a brand if it primarily focuses on selling its own proprietary products. Brands tend to have longer customer life cycles, stronger financial stability and overall better unit economics than retailers, which we consider to be companies focused primarily on selling third-party products. Brands also offer increased expansion opportunities to grow their e-commerce business through our platform; however they tend to have longer sales cycles. To help drive our future growth, we have made significant investments in our sales capacity and incentives to focus on acquiring new, and then expanding business with, brands customers. In addition, we have invested in our services organization to establish a higher level of service for our brands customers and we have prioritized our R&D resources to focus on innovations that enable the success of our brands clients. We believe these investments will improve client results, growing revenue through attracting new prospects and improved retention and expansion with existing customers.
•Dynamic E-commerce Landscape. We need to continue to innovate in the face of a rapidly changing e-commerce landscape if we are to remain competitive.
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•Strategic Partnerships. Our business development team's mission is to expand our sales and market opportunities through strategic partner relationships. We plan to continue to invest in initiatives to expand our strategic partnership base to further enhance our offerings for customers and to help support our indirect sales channel efforts. The goal of these strategic partnerships is to further improve the value of our platform for our customers and, when possible, provide us opportunities for incremental revenue streams. •Increasing Complexity of E-commerce. Although e-commerce continues to expand as brands and retailers continue to increase their online sales, it is also becoming more complex due to the hundreds of channels available to brands and retailers and the rapid pace of change and innovation across those channels. In order to gain consumers' attention in a more crowded and competitive online marketplace, an increasing number of brands and retailers sell their merchandise through multiple online channels, each with its own rules, requirements and specifications. In particular, third-party marketplaces are an increasingly important driver of growth for a number of brands and large online retailers. As a result, we need to continue to support multiple channels in a variety of geographies in order to support our targeted revenue growth, and we intend to continue making strategic investments focused on channel expansion. •Global Growth in E-commerce. We believe the growth in e-commerce globally presents an opportunity for brands and retailers to engage in international sales. However, country-specific marketplaces are often a market share leader in their regions, as is the case for Zalando inEurope , for example. In order to help our customers capitalize on this potential market opportunity, and to address our customers' needs with respect to cross-border trade, we intend to continue to invest in our international operations. However, doing business overseas involves substantial challenges, including management attention and resources needed to adapt to multiple languages, cultures, laws and commercial infrastructure.
Our senior management continuously focuses on these and other trends and challenges, and we believe that our culture of innovation and our history of growth and expansion will contribute to the success of our business.
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--------------------------------------------------------------------------------Table of Contents RESULTS OF OPERATIONS
The following tables set forth our condensed consolidated statement of operations data and such data expressed as a percentage of revenues for each of the periods indicated.
Three Months Ended September 30 , Nine Months Ended September 30 , Period-to-Period Change Period-to-Period Change
2022 2021 2022 2021 Q3 2022 to Q3 2021 YTD 2022 to YTD 2021
(dollars in thousands)
Revenue $ 43,490 $ 41,575 $ 128,589 $ 122,284 $ 1,915 4.6 % $ 6,305 5.2 %
Cost of revenue 10,273 10,100 31,062 28,041 173 1.7 3,021 10.8
Gross profit 33,217 31,475 97,527 94,243 1,742 5.5 3,284 3.5
Operating expenses:
Sales and marketing 16,143 15,482 48,245 45,273 661 4.3 2,972 6.6
Research and development 5,389 5,364 16,192 16,799 25 0.5 (607) (3.6)
General and administrative 9,984 7,075 24,654 18,792 2,909 41.1 5,862 31.2
Total operating expenses 31,516 27,921 89,091 80,864 3,595 12.9 8,227 10.2
Income from operations 1,701 3,554 8,436 13,379 (1,853) (52.1) (4,943) (36.9)
Other income (expense):
Interest income (expense) 234 (30) 251 (96) 264 * 347 *
Other income (expense) 5 (29) 5 (164) 34 * 169 *
Total other income (expense) 239 (59) 256 (260) 298 * 516 *
Income before income taxes 1,940 3,495 8,692 13,119 (1,555) (44.5) (4,427) (33.7)
Income tax expense (benefit) 2,039 (34) 5,130 (427) 2,073 * 5,557 *
Net (loss) income $ (99) $ 3,529 $ 3,562$ 13,546 $ (3,628) (102.8) % $ (9,984) (73.7) % * Not meaningful 18
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Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
(as a percentage of revenue) (as a percentage of revenue)
Revenue 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenue 23.6 24.3 24.2 22.9
Gross profit 76.4 75.7 75.8 77.1
Operating expenses:
Sales and marketing 37.1 37.2 37.5 37.0
Research and development 12.4 12.9 12.6 13.7
General and administrative 23.0 17.0 19.2 15.4
Total operating expenses 72.5 67.2 69.3 66.1
Income from operations 3.9 8.5 6.6 10.9
Other income (expense):
Interest income (expense) 0.5 (0.1) 0.2 (0.1)
Other income (expense) 0.0 0.0 0.0 (0.1)
Total other income (expense) 0.5 (0.1) 0.2 (0.2)
Income before income taxes 4.5 8.4 6.8 10.7
Income tax expense (benefit) 4.7 (0.1) 4.0 (0.3)
Net (loss) income (0.2) % 8.5 % 2.8 % 11.1 %
Depreciation and Amortization
Depreciation and amortization expense is included in the following line items in the accompanying unaudited condensed consolidated statements of operations for the three and nine months endedSeptember 30, 2022 and 2021 (in thousands): Three Months EndedSeptember 30 ,
Nine Months Ended
2022 2021 2022 2021
Cost of revenue $ 1,186 $ 1,100 $ 3,500 $ 3,409
Sales and marketing 76 85 221 356
Research and development 30 32 93 139
General and administrative 205 368 647 1,160
Total depreciation and amortization
expense $ 1,497 $ 1,585 $ 4,461 $ 5,064
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REVENUE
[[Image Removed: ecom-20220930_g1.jpg]]
We derive the majority of our revenue from subscription fees paid to us by our
customers for access to and usage of our software solutions for a specified
contract term, which is typically one year. A customer typically pays a
recurring subscription fee based on a specified minimum amount of GMV or
advertising spend that the customer expects to process through our platform.
Subscription fees may also include implementation fees such as launch assistance
and training fees. The remaining portion of a customer's fee is variable and is
based on a specified percentage of GMV or advertising spend processed through
our platform in excess of the customer's specified minimum GMV or advertising
spend amount. In most cases, the specified percentage of excess GMV or
advertising spend on which the variable fee is based is fixed and does not vary
depending on the amount of the excess.
Because our customer contracts generally contain both subscription and variable
pricing components, changes in GMV between periods do not translate directly or
linearly into changes in our revenue. We use customized pricing structures for
each of our customers depending upon the individual situation of the customer.
For example, some customers may commit to a higher specified minimum GMV amount
per month in exchange for a lower percentage fee on that committed GMV. In
addition, the percentage fee assessed on the variable GMV in excess of the
committed minimum for each customer is typically higher than the fee on the
committed portion. As a result, our overall revenue could increase or decrease
even without any change in overall GMV between periods, depending on which
customers generated the GMV. In addition, changes in GMV from month to month for
any individual customer that are below the specified minimum amount would have
no effect on our revenue from that customer, and each customer may alternate
between being over the committed amount or under it from month to month. For
these reasons, while GMV is an important qualitative and long-term directional
indicator, we do not regard it as a useful quantitative measurement of our
historic revenues or as a predictor of future revenues.
[[Image Removed: ecom-20220930_g2.jpg]]We recognize subscription fees and implementation fees ratably over the contract period beginning on the date the customer has access to the software. In determining the amount of revenue to be recognized, we apply the following steps:
•Identify the promised services in the contract;
•Determine whether the promised services are performance obligations, including whether they are distinct in the context of the contract;
•Determine the transaction price;
•Allocate the transaction price to the performance obligations based on estimated selling prices; and
•Recognize revenue as we satisfy each performance obligation. We generally invoice our customers for subscription fees in advance, in monthly, quarterly, semi-annual or annual installments. We generally also invoice our customers for any implementation fees at the inception of the arrangement. Fees that have been invoiced in advance are initially recorded as deferred revenue and are generally recognized ratably over the contract term.
In general, we invoice and recognize variable revenue in the period in which the related GMV or advertising spend is processed.
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[[Image Removed: ecom-20220930_g3.jpg]]
Our customers are categorized as follows:
•Brands. We generally categorize a customer as a brand if it primarily focuses on selling its own proprietary products.
•Retailers. We generally categorize a customer as a retailer if it primarily focuses on selling third-party products.
•Other. Other is primarily comprised of strategic partnerships.
Comparison of Q3 2022 to Q3 2021
Revenue increased by 4.6%, or$1.9 million , to$43.5 million for the three months endedSeptember 30, 2022 compared with$41.6 million for the prior year period. The change was primarily due to a$2.6 million increase in subscription revenue compared to the prior year period, driven by positive net bookings, particularly from brands customers. Revenue from our brands customers increased 9.8%, or$1.7 million , compared to the prior year period, driven by an increase in new customers and expansions with existing customers. For the three months endedSeptember 30, 2022 , brands customers represented approximately 44% of our total revenue and 49% of total subscription revenue compared to approximately 42% and 47%, respectively, for the prior year period. Variable revenue decreased$0.7 million compared to the prior year period due to customers converting their variable fees to subscription fees upon their annual renewal.
Comparison of YTD 2022 to YTD 2021
Revenue increased by 5.2%, or$6.3 million , to$128.6 million for the nine months endedSeptember 30, 2022 compared with$122.3 million for the prior year period. The change was primarily due to a$11.9 million increase in subscription revenue compared to the prior year period, driven by positive net bookings, particularly from brands customers. Revenue from our brands customers increased 19.8%, or$9.5 million , compared to the prior period, driven by an increase in new customers and expansions with existing customers. For the nine months endedSeptember 30, 2022 , brands customers represented approximately 44% of our total revenue and 49% of total subscription revenue compared to approximately 39% and 44%, respectively, for the prior year period. Variable revenue decreased$5.6 million compared to the prior year period due to customers converting their variable fees to subscription fees upon their annual renewal, as well as moderation in GMV driven by factors such as federal stimulus occurring in the prior year. COST OF REVENUE [[Image Removed: ecom-20220930_g4.jpg]]
Cost of revenue primarily consists of:
•Salaries and personnel-related costs for employees providing services to our customers and supporting our platform infrastructure, including benefits, bonuses and stock-based compensation;
•Co-location facility costs for our data centers;
•Infrastructure maintenance costs; and
•Fees we pay to credit card vendors in connection with our customers' payments to us.
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Comparison of Q3 2022 to Q3 2021
Cost of revenue increased by 1.7%, or$0.2 million , to$10.3 million for the three months endedSeptember 30, 2022 compared with$10.1 million for the prior year period. The change was comprised primarily of compensation and employee-related costs due to an increase in headcount to support the growth of our business and a higher level of service for brands.
Comparison of YTD 2022 to YTD 2021
Cost of revenue increased by 10.8%, or$3.0 million , to$31.1 million for the nine months endedSeptember 30, 2022 compared with$28.0 million for the prior year period. The change was comprised primarily of: •$2.1 million in compensation and employee-related costs due to an increase in headcount to support the growth of our business and a higher level of service for brands; •$0.6 million in contractor costs primarily to support data scraping and our client services team; and •$0.3 million in software and website maintenance costs to support the growth of our business. OPERATING EXPENSES SALES AND MARKETING EXPENSE
[[Image Removed: ecom-20220930_g5.jpg]]Sales and marketing expense consists primarily of:
•Salaries and personnel-related costs for our sales and marketing employees, including benefits, bonuses and stock-based compensation;
•Amortization of capitalized sales commissions and related incentive payments over their expected term of benefit;
•Marketing, advertising and promotional event programs; and
•Corporate communications.
Comparison of Q3 2022 to Q3 2021
Sales and marketing expense increased by 4.3%, or$0.7 million , to$16.1 million for the three months endedSeptember 30, 2022 compared with$15.5 million for the prior year period. The change was comprised primarily of: •$1.2 million in compensation and employee-related costs due to an increase in headcount, as we continued to invest in resources to support the growth of our business; partially offset by •$(0.5) million in marketing and advertising driven by the timing of our promotional event programs.
Comparison of YTD 2022 to YTD 2021
Sales and marketing expense increased by 6.6%, or$3.0 million , to$48.2 million for the nine months endedSeptember 30, 2022 compared with$45.3 million for the prior year period. The change was comprised primarily of: •$3.3 million in compensation and employee-related costs due to an increase in headcount, as we continued to invest in resources to support the growth of our business; partially offset by •$(0.4) million in marketing and advertising driven by the timing of our promotional event programs. 22
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RESEARCH AND DEVELOPMENT EXPENSE
[[Image Removed: ecom-20220930_g6.jpg]]Research and development expense consists primarily of:
•Salaries and personnel-related costs for our research and development employees, including benefits, bonuses and stock-based compensation;
•Costs related to the development, quality assurance and testing of new technology and enhancement of our existing platform technology; and
•Infrastructure and cloud computing expenses to support our platform.
Comparison of Q3 2022 to Q3 2021
Research and development expense was$5.4 million for each of the three months endedSeptember 30, 2022 and 2021, with no significant changes as compared to the prior year period.
Comparison of YTD 2022 to YTD 2021
Research and development expense decreased by 3.6%, or$0.6 million , to$16.2 million for the nine months endedSeptember 30, 2022 compared with$16.8 million for the prior year period. The change was comprised primarily of compensation and employee-related costs, driven by a larger proportion of our research and development resources being staffed in lower cost locations.
GENERAL AND ADMINISTRATIVE EXPENSE
[[Image Removed: ecom-20220930_g7.jpg]]General and administrative expense consists primarily of:
•Salaries and personnel-related costs for administrative, finance and accounting, information systems, legal and human resource employees, including benefits, bonuses and stock-based compensation;
•Consulting and professional fees;
•Insurance;
•Bad debt expense; and
•Costs associated with
Comparison of Q3 2022 to Q3 2021
General and administrative expense increased by 41.1%, or$2.9 million , to$10.0 million for the three months endedSeptember 30, 2022 compared with$7.1 million for the prior year period. The change was comprised primarily of: •$3.2 million in general and administrative costs associated with the negotiation and execution of the Merger Agreement withCommerceHub and the transactions contemplated by the Merger Agreement; and •$0.2 million in lease abandonment costs related to right of use lease assets, driven by a reduction in our leased office space; partially offset by •$(0.3) million in compensation and employee related costs driven by lower variable compensation; and •$(0.2) million in amortization of intangible assets driven by certain intangible assets becoming fully amortized in the prior year. 23
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Comparison of YTD 2022 to YTD 2021
General and administrative expense increased by 31.2%, or$5.9 million , to$24.7 million for the nine months endedSeptember 30, 2022 compared with$18.8 million for the prior year period. The change was comprised primarily of: •$3.2 million in general and administrative costs associated with the negotiation and execution of the Merger Agreement withCommerceHub and the transactions contemplated by the Merger Agreement; •$1.3 million in general and administrative costs driven by the prior year benefit from the decrease in the fair value of acquisition-related contingent consideration; •$0.8 million in compensation and employee related costs, including stock-based compensation, due to an increase in headcount to support the growth of our business; and •$0.5 million in lease abandonment costs related to right of use lease assets, driven by a reduction in our leased office space.
ADJUSTED EBITDA
[[Image Removed: ecom-20220930_g8.jpg]]
Adjusted EBITDA represents our earnings before interest income (expense), income
tax expense (benefit) and depreciation and amortization, adjusted to eliminate
stock-based compensation expense, which is a non-cash item. For some periods, we
have also adjusted for non-recurring costs, such as merger-related costs, lease
abandonment and related costs, headquarters relocation costs and the change in
fair value of acquisition-related contingent consideration.
We believe that adjusted EBITDA provides useful information to management and
others in understanding and evaluating our operating results. However, adjusted
EBITDA is not a measure calculated in accordance with GAAP and should not be
considered as an alternative to any measure of financial performance calculated
and presented in accordance with GAAP. In addition, adjusted EBITDA may not be
comparable to similarly titled measures of other companies because other
companies may not calculate adjusted EBITDA in the same manner that we do.
Our use of adjusted EBITDA has limitations as an analytical tool, and you should
not consider it in isolation or as a substitute for analysis of our results as
reported under GAAP. Some of these limitations are:
•although depreciation and amortization are non-cash charges, the assets being
depreciated and amortized may have to be replaced in the future, and adjusted
EBITDA does not reflect cash capital expenditure requirements for such
replacements or for new capital expenditure requirements;
•adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
•adjusted EBITDA does not reflect the potentially dilutive impact of equity-based compensation;
•adjusted EBITDA does not reflect interest or income tax payments that may represent a reduction in cash available to us; and
•other companies, including companies in our industry, may calculate adjusted EBITDA differently, which reduces its usefulness as a comparative measure.
Because of these and other limitations, you should consider adjusted EBITDA
together with other GAAP-based financial performance measures, including various
cash flow metrics, net (loss) income and our other GAAP results. The following
table presents a reconciliation of net (loss) income to adjusted EBITDA for each
of the periods indicated (in thousands):
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Three Months Ended September
30, Nine Months Ended
2022 2021 2022 2021
Net (loss) income $ (99) $ 3,529 $ 3,562 $ 13,546
Adjustments:
Interest (income) expense (234) 30 (251) 96
Income tax expense (benefit) 2,039 (34) 5,130 (427)
Depreciation and amortization expense 1,497 1,585 4,461 5,064
Total adjustments 3,302 1,581 9,340 4,733
EBITDA 3,203 5,110 12,902 18,279
Stock-based compensation expense 3,379 3,115 9,985 9,739
Transaction costs in connection with
CommerceHub merger 3,249 - 3,249 -
Lease abandonment and related costs 179 - 467 -
Headquarters relocation costs 76 - 76 -
Contingent consideration fair value adjustment - - - (1,313)
Adjusted EBITDA $ 10,086 $ 8,225 $ 26,679 $ 26,705
GROSS AND OPERATING MARGINS
[[Image Removed: ecom-20220930_g9.jpg]] [[Image Removed: ecom-20220930_g10.jpg]]
Comparison of Q3 2022 to Q3 2021
Gross margin improved by 70 basis points to 76.4% during the three months ended
September 30, 2022 compared with 75.7% for the prior year period as a result of
the increase in revenue of 4.6% noted above, which exceeded the 1.7% increase in
cost of revenue.
Operating margin declined by 460 basis points to 3.9% during the three months
ended September 30, 2022 compared with 8.5% for the prior year period due to
increases in operating expenses of 12.9%, primarily as a result of costs
associated with the negotiation and execution of the Merger Agreement with
CommerceHub and an increase in compensation and employee-related costs driven by
additional headcount as we invest in resources to support the growth of our
business.
Comparison of YTD 2022 to YTD 2021
Gross margin declined by 130 basis points to 75.8% during the nine months endedSeptember 30, 2022 compared with 77.1% for the prior year period as a result of the increase in cost of revenue of 10.8% noted above, which exceeded the 5.2% increase in revenue. Operating margin declined by 430 basis points to 6.6% during the nine months endedSeptember 30, 2022 compared with 10.9% for the prior year period due to increases in operating expenses and cost of revenue of 10.2% and 10.8%, respectively, primarily as a result of costs associated with the negotiation and execution of the Merger Agreement withCommerceHub and an increase in compensation and employee-related costs driven by additional headcount as we invest in resources to support the growth of our business. 25
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INCOME TAX EXPENSE
At the end of each interim reporting period, we estimate our effective income tax rate expected to be applicable for the full year. This estimate is used to determine the income tax provision or benefit on a year-to-date basis and may change in subsequent interim periods.
Comparison of Q3 2022 to Q3 2021
Income tax expense was$2.0 million for the three months endedSeptember 30, 2022 compared with income tax benefit of$(0.03) million for the prior year period. Refer to Note 9, "Income Taxes," to our condensed consolidated financial statements included in this report for additional information regarding income tax expense.
Comparison of YTD 2022 to YTD 2021
Income tax expense was$5.1 million for the nine months endedSeptember 30, 2022 compared with income tax benefit of$(0.4) million for the prior year period. Refer to Note 9, "Income Taxes," to our condensed consolidated financial statements included in this report for additional information regarding income tax expense.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our management's discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reported period. In accordance with GAAP, we base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions, and to the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. There were no material changes to our critical accounting policies and estimates, which are disclosed in our audited consolidated financial statements for the year endedDecember 31, 2021 included in our Annual Report on Form 10-K for fiscal 2021.
Recent Accounting Pronouncements
Refer to Note 2, "Significant Accounting Policies," to our condensed consolidated financial statements included in this report for information regarding recent accounting pronouncements.
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LIQUIDITY AND CAPITAL RESOURCES
We derive our liquidity and operating capital primarily from cash flows from operations. Based on our current level of operations and anticipated growth, we believe our future cash flows from operating activities and our existing cash balances will be sufficient to meet our cash requirements for at least the next twelve months. The foregoing estimate does not give effect to any potential amounts that we may draw under our credit facility, or Credit Facility, with HSBC Bank, or HSBC, that is described in more detail below. Our principal future commitments consist of non-cancelable leases for our current and future office space and computer equipment, totaling$10.7 million as ofSeptember 30, 2022 . We believe our future cash flows from operating activities and existing cash balances, together with amounts available under the Credit Facility, will be sufficient to meet these commitments.
CASH FLOWS [[Image Removed: ecom-20220930_g11.jpg]][[Image Removed: ecom-20220930_g12.jpg]][[Image Removed: ecom-20220930_g13.jpg]] Free Cash Flow
We view free cash flow as an important financial metric as it demonstrates our
ability to generate cash and can allow us to pursue opportunities that enhance
shareholder value. Free cash flow is a non-GAAP financial measure that should be
considered in addition to, not as a substitute for, measures of our financial
performance prepared in accordance with GAAP. The following table presents a
reconciliation of cash provided by operating activities, the most directly
comparable GAAP measure, to free cash flow for each of the periods indicated (in
thousands):
Nine Months Ended September 30,
2022 2021
Cash and cash equivalents provided by operating activities $ 21,971
(2,871) (1,125)
Less: Payment of capitalized software development costs (2,890) (2,577)
Free cash flow $ 16,210 $ 22,777
Free cash flow decreased by $6.6 million to $16.2 million for the nine months
ended September 30, 2022 compared with $22.8 million for the prior year period.
The decrease in free cash flow was primarily a result of an increase in
operating expenses to support the growth of our business, costs associated with
the negotiation and execution of the Merger Agreement with CommerceHub and
changes in assets and liabilities, which are further described below.
Operating activities cash flows are largely driven by:
•The amount of cash we invest in personnel and infrastructure to support the anticipated growth of our business;
•The amount and timing of customer payments;
•The seasonality of our business, as noted above, which results in variations in the timing of invoicing and the receipt of payments from our customers; and
•The costs associated with the negotiation and execution of the Merger Agreement
with
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Investing activities cash flows are largely driven by:
•Capitalized expenditures to create internally developed software and implement software purchased for internal use; and
•Purchases of property and equipment to support the expansion of our infrastructure.
Financing activities cash flows are largely driven by:
•Proceeds from the exercises of stock options;
•Tax withholdings related to the net-share settlement of restricted stock units;
•Repurchases of our common stock;
•Payments on finance lease obligations; and
•Payment of financing costs.
YTD 2022
Operating Activities
Our cash provided by operating activities of$22.0 million consisted of net income of$3.6 million adjusted for non-cash items totaling$17.2 million , which consisted of stock-based compensation expense, depreciation and amortization expense, bad debt expense and other non-cash items, including lease abandonment costs, and cash increases of$1.2 million from changes in assets and liabilities.
The net increase in cash of
•a
•a
•a$0.8 million decrease in prepaid expenses and other assets driven by the timing of payments to our vendors during the period. These increases in cash were partially offset by decreases in cash due to: •a$2.3 million increase in deferred contract costs consisting of sales commissions and a portion of other incentive compensation driven by net bookings performance. These contract costs are deferred and amortized to expense over the expected period of benefit. Investing Activities
Our cash used in investing activities of
•$2.9 million of capitalized software development costs; and
•$2.9 million of capital expenditures primarily related to the purchase of computer equipment.
Financing Activities
Our cash used in financing activities of
•$25.0 million in cash used for the repurchase of our common stock; and
•$3.4 million used for the payment of taxes related to the net-share settlement of restricted stock units; partially offset by
•$0.7 million in cash received upon the exercise of stock options.
YTD 2021
Operating Activities
Our cash provided by operating activities of
The net increase in cash of
•a
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•a
•a$0.1 million increase in accrued expenses and accounts payable driven by the timing of payments to our vendors during the period. These increases in cash were partially offset by decreases in cash due to:
•a
•a
Investing Activities
Our cash used in investing activities of
•$2.6 million of capitalized software development costs; and
•$1.1 million of capital expenditures primarily related to the purchase of computer equipment.
Financing Activities
Our cash provided by financing activities of
•$4.2 million in cash received upon the exercise of stock options; partially offset by
•$1.4 million used for the payment of taxes related to the net-share settlement of restricted stock units.
SHARE REPURCHASE PROGRAM InAugust 2021 , our Board of Directors approved a share repurchase program authorizing the repurchase of up to$25.0 million of our common stock throughAugust 10, 2022 . During the nine months endedSeptember 30, 2022 , 1,828,604 shares were repurchased and retired under the repurchase program at an average price of$13.67 per share for an aggregate total price of$25.0 million , which completed the share repurchase program authorized inAugust 2021 . There were no repurchases during the three months endedSeptember 30, 2022 . InJune 2022 , our Board of Directors authorized an additional share repurchase program of up to$25.0 million of our common stock throughJune 30, 2023 . We had not repurchased any shares under theJune 2022 authorization as ofSeptember 30, 2022 . Repurchases may be made from time to time on the open market at prevailing prices, including pursuant to Rule 10b5-1 trading plans, or in negotiated transactions off the market. The share repurchase program does not obligate us to repurchase any particular amount of our shares. In light of our pending merger withCommerceHub , we do not have any current plans to effect share repurchases under theJune 2022 authorization.
CREDIT FACILITY
OnAugust 5, 2020 , we established the Credit Facility with HSBC under which we may borrow up to$25 million . We may use proceeds from borrowings under the Credit Facility for working capital and general corporate purposes, including acquisitions, and up to$10 million is available for letters of credit. We may also request increases in the amount of the Credit Facility, with such increases not to exceed$10 million in the aggregate, subject to HSBC's consent. As of the date of this report, we have not drawn on, or issued any letters of credit under, the Credit Facility. The Credit Facility matures inAugust 2023 . Any borrowings under the Credit Facility will bear interest at a per annum interest rate based on a base rate plus 2.25% or LIBOR plus 3.25%. The base rate will equal the highest of (a) the prime rate as publicly announced by HSBC, (b) the sum of (i) the weighted average of the rates on overnight federal funds transactions with members of theFederal Reserve System plus (ii) 0.50%, and (c) the LIBOR rate plus 1.00% per annum, with a floor of 1.50%. The LIBOR rate will be based onLondon interbank offered rates published byICE Benchmark Administration Limited for the applicable interest period, with a floor of 0.50%. We will pay a fee on all outstanding letters of credit at a rate of 3.25% per annum. We will pay HSBC a commitment fee on the undrawn portion of the facility at a rate per annum equal to 0.50%. We may terminate the Credit Facility, or prepay any borrowings, at any time in our discretion without premium or penalty. The credit agreement for the Credit Facility, or the Credit Agreement, contains affirmative and negative covenants. For example, we may not permit the ratio of our outstanding indebtedness to consolidated EBITDA to exceed 2.50 to 1.00 as of the last day of any fiscal quarter. We also may not permit the ratio of our consolidated EBITDA (minus maintenance-related capital expenditures paid in cash and minus dividends, distributions and stock repurchases paid in cash) to consolidated interest expense to be less than 3.00 to 1.00 for any period of four consecutive fiscal quarters. 29
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The Credit Agreement contains customary events of default. Upon the occurrence
and during the continuance of an event of default, HSBC may terminate the
commitments under the Credit Facility and declare the outstanding advances and
all other obligations under the Credit Facility immediately due and payable.
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