Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our audited consolidated financial statements and the related notes included in Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties, and our actual results could differ materially from those discussed below. See "Cautionary Note Regarding Forward-Looking Statements."
Overview
We are a leading provider of cloud-based ecommerce fulfillment and marketing solutions for large retailers, marketplaces, consumer brands and their suppliers. Our solutions help our customers implement strategies to increase their ecommerce revenues and create meaningful operational efficiencies within their supply chains. Our customers use our cloud-based software and service capabilities, which are tailored for specific customer business rules and processes, to more effectively fulfill consumer orders, generate consumer demand for their products and deliver those products to consumers.
Key Financial Metrics
Order Fee Revenue
Order fee revenue is attributable to fees charged to retailers and suppliers based on the volume of consumer orders processed through our platform using our drop-ship solutions. Order fee revenue grows as the overall volume of goods purchased online through our retailer customers increases. We track and measure order fee revenue because it corresponds to our customers' drop-ship activity on our platform.
Subscription and Other Platform Revenue
Subscription and other platform revenue is primarily attributable to subscription fees charged to retailers and suppliers for the use of our drop-ship solutions. Subscription revenue grows as new customers join the platform, connect to and create new relationships with other trading partners, adopt new features and upgrades, and ramp up their activity on the platform. Subscription and other platform revenue also includes other drop-ship platform fees for activity related to our delivery-related solutions, inventory management, third-party communication capabilities and other platform activities related to ecommerce relationships. We track and measure subscription and other platform revenue because it provides insight into the size and scope of our platform in terms of total trading partner customers, relationships among those customers and the extent of their engagement with our platform.
Set-Up and Professional Services Revenue
Set-up and professional services revenue includes fees for the configuration, design and set-up of a customer's onboarding to our platform and other services that we provide to new and existing customers, including highly targeted services that are focused on helping our customers to more quickly adopt our drop-ship solutions and maximize their utility. We track and measure set-up and professional services revenue as it is an indication of new trading partner connections, enhancements to existing customer connections and the extent of customers' engagement with our platform's capabilities.
Demand Channel Revenue
Demand channel revenue includes set-up, professional services, subscription fees and other fees related to the volume of online sales and orders that retailers, sellers and brands achieve using our demand channel solutions. We track and measure demand channel revenue because it represents the access our customers' engagement and success with our demand channel solutions.
Seasonality
The ecommerce marketplace is affected by the same seasonality as the traditional brick-and-mortar marketplace, and many of our customers typically realize a significant portion of their sales in the fourth quarter of each calendar year. Historically, the percentage of our annual revenue has been relatively uniform over the first three quarters of the year with approximately 33% to 34% of our annual revenue being generated in the fourth quarter.
Management's Use of Non-GAAP Measures
In addition to reporting financial measures calculated in accordance with U.S. generally accepted accounting principles ("GAAP"), we provide Adjusted EBITDA (as defined below), a non-GAAP financial measure that management considers in reviewing our financial performance because we feel it is a relevant measure of the overall efficiency of our business model. Adjusted EBITDA is not a substitute for, or superior to, and should be considered only in addition to, net income calculated in accordance with GAAP. Adjusted EBITDA is subject to inherent limitations and excludes significant
expenses and income that are required by GAAP to be recorded in our consolidated financial statements. Certain of these adjustments are based on estimates and assumptions of management and do not purport to reflect actual historical results. In addition, our computation of Adjusted EBITDA may not be comparable to other similarly titled measures computed by other companies, because all companies do not calculate these measures in the same fashion.
We define “Adjusted EBITDA” as net income or loss plus interest expense, income tax expense, depreciation of property and equipment, amortization of capitalized software costs and intangible assets, share-based compensation, and restructuring charges, less interest income and income tax benefit. Adjusted EBITDA excludes restructuring charges, the elimination of which does not result in a reduction of operating expenses necessary to conduct our business. By excluding these charges, we believe Adjusted EBITDA provides supplemental information that enables us and investors to better analyze our operating performance and the sustainability of our results and to compare our performance on a more consistent basis from period to period.
Updated Presentation of Key Revenue Metrics
During the year ended December 31, 2017, we updated how we present our revenue by type to better align with how we evaluate the key components, drivers and metrics influencing our total revenue. As a result, we have updated revenue by type for comparative periods to conform with our current presentation, as shown in the table below.
|
|
|
|
Component of Revenue
|
Historical Presentation
|
Current
Presentation
|
Fees for retailer orders processed using our drop-ship solutions
|
Usage revenue
|
Order fee revenue
|
Fees for marketplace and other non-retailer demand channel orders using our demand channel solutions
|
Usage revenue
|
Demand channel revenue
|
Other platform fees, including fees associated with our delivery-related solutions, inventory management and third-party communication capabilities
|
Usage revenue
|
Subscription and other platform revenue
|
Subscription fees associated with our drop-ship solutions
|
Subscription revenue
|
Subscription and other platform revenue
|
Subscription fees associated with our demand channel solutions
|
Subscription revenue
|
Demand channel revenue
|
Set-up and professional services associated with our drop-ship solutions
|
Set-up and professional services
|
Set-up and professional services revenue
|
Set-up and professional services associated with our demand channel solutions
|
Set-up and professional services
|
Demand channel revenue
|
Other Metrics
Cost of Revenue
Cost of revenue primarily consists of personnel costs, including salaries, bonuses, payroll taxes, benefits, share-based compensation expense and facility cost and overhead allocations for our teams supporting customer service, application support, customer set-up and professional services, and performance marketing. We capitalize the cost of acquired software, qualifying payroll and payroll-related costs incurred in developing and enhancing our solutions and related product offerings, such as internal tools used by our operations teams. Amortization expense related to these costs are included in cost of revenue. Additionally, facility costs for our data centers, communication service charges and depreciation expense related to computer equipment directly associated with generating revenue are captured in cost of revenue.
Research and Development Expenses
Research and development expenses consist of personnel costs, including salaries, bonuses, payroll taxes, and benefits net of amounts capitalized as developed software, share-based compensation expense and facility cost and overhead allocations for employees engaged in the design, development, testing and maintenance of our solutions. Also included are fees paid to third-party firms who assist in the development of our product solutions, net of amounts capitalized as developed software.
Sales and Marketing Expenses
Sales and marketing expenses consist of personnel expenses, including salaries, commissions, bonuses, payroll taxes, benefits, share-based compensation expense and facility cost and overhead allocations for sales, client management and marketing employees. Other expenses associated with sales and marketing include expenses incurred related to corporate
marketing, including brand awareness and trade shows. Much of our marketing effort is focused on thought leadership, as our marketing team engages with media and other industry influencers to publish and present on topics relevant to our solutions in trade publications and relevant industry conferences. Our client management expenses are attributable to our personnel and programs intended to oversee and develop comprehensive relationships with our customers and to provide strategic account management and coordination of cross-selling opportunities.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel costs, including salaries, bonuses, payroll taxes, benefits, share-based compensation expense and facility cost and overhead allocations for our corporate functions, including executive leadership, finance, legal, information technology and human resources, as well as professional service and other fees related to legal, tax and finance. Also included are costs attributable to credit card processing and bad debt expense.
New Accounting Pronouncements
Information regarding new accounting pronouncements is included in Note 4 to the accompanying audited consolidated financial statements.
Critical Accounting Policies
The preparation of our consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Listed below are the accounting policies and estimates that we believe are critical to our financial statements due to the degree of uncertainty regarding the estimates or assumptions involved and the magnitude of the asset, liability, revenue or expense reported.
Revenue and Deferred Revenue
We generate revenue through the delivery of our ecommerce fulfillment and marketing software solutions. We follow Financial Accounting Standards Board guidance set forth in Accounting Standards Codification ("ASC") Subtopic 985-605-05 related to
Hosting Arrangements
and ASC Subtopic 605-25 related to
Revenue Arrangements with Multiple Deliverables
. We recognize revenue when all of the following conditions are met: there is persuasive evidence of an arrangement, the services have been delivered to the customer, the collection of the related fees is reasonably assured and the amount of the related fees is fixed and determinable.
Revenue from new customer acquisition is generated under services agreements with multiple elements. Customers do not have the contractual right to take possession of our solutions. We evaluate each element in a multiple-element arrangement to determine whether it represents a separate unit of accounting. An element constitutes a separate unit of accounting when the delivered item has standalone value and delivery of the undelivered element is probable and within our control.
Fees charged to customers based on the level of a customer's utilization of our solutions and other platform fees attributable to inventory management and third-party communication capabilities are recognized in the period in which such fees are earned. We recognize monthly subscription fees as revenue in the period in which the subscription is earned.
Set-up fees charged to customers in connection with providing access to our solutions are billed during the implementation phase and recorded as deferred revenue until a customer's subscription period has commenced. We also provide professional services to provide certain customer-requested enhancements to our solutions as well as other professional services. Set-up and professional services fees related to customer solution enhancements do not have stand-alone value because they are sold only in conjunction with a subscription to our solutions, they are sold only by us, a customer could not resell them, and they do not represent the culmination of a separate earnings process. Set-up fees without stand-alone value are recognized over the longer of the life of the agreement or the expected customer life. We recognize revenue for professional services fees charged to customers for solution enhancement services over the estimated remaining customer life. Professional services charged to customers that do have stand-alone value are recognized in the period in which the professional services fees are earned.
In determining the estimated life of our customers, we consider our historical experience with customer contract renewals, the type of the customer, the size of the customer and the period over which the customer is expected to benefit from the related offerings. As of
December 31, 2017
, our estimated life of customers ranged from 1 to 10 years, reflecting a shorter life for smaller customers and a longer life for our largest retail customers. Deferred revenue consists of the unearned portion of deferred set-up and professional services fees and annual subscription fees.
Reimbursements of out-of-pocket expenses are recorded as revenue and cost of revenue in the consolidated statements of comprehensive income (loss).
Refer to Note 4 of the accompanying audited consolidated financial statements for further discussion on ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606),
which is effective beginning in 2018, and the effects this standard will have on our consolidated financial statements.
Capitalized Software Costs
We capitalize the cost of payroll, payroll-related costs and third-party consulting fees incurred in the direct development or enhancement of solutions as internal-use software. During 2016, we changed and further refined our methodologies and processes to estimate the portion of software development costs that is eligible to be capitalized, which is assessed at a project level. We expense development costs during the preliminary project stage, and we expense costs for requirements gathering, data conversion activities, training, maintenance and minor enhancements as such costs are incurred. We capitalize development costs incurred for the coding, configuration, interfacing, automation and testing of new functionality after the preliminary project stage is complete. Capitalized software costs are amortized on a straight-line basis over two to three years based on the nature and estimated useful life of the applicable solution. Amortization of capitalized software costs is included in cost of revenue within the consolidated statements of comprehensive income (loss).
Deferred Services Costs
We defer direct payroll, payroll-related costs and third-party consulting costs incurred for the set-up and integration of new customers on our platform and for enhancing our platform to accommodate specific customer needs. We recognize deferred services costs associated with the integration of customers on our platform over the estimated life of our customers. We recognize deferred services costs incurred to enhance our platform for specific customer needs over the estimated remaining customer life. Amortization of deferred services costs are included in cost of revenue within the consolidated statements of comprehensive income (loss).
Share-Based Compensation
Share-based awards exchanged for employee services are recorded as expense, net of estimated forfeitures, at the estimated fair value of these awards over the requisite employee service period (typically annual straight-line vesting over four years) or, where applicable for performance-based awards, over the service period when the achievement of certain performance-based conditions are considered probable, and expire after 10 years.
Prior to the Spin-Off, our share-based awards consisted of stock options and stock appreciation rights ("SARs") issued by CTI, our predecessor entity, which were classified as liability awards and were included as a share-based compensation liability on our consolidated balance sheets (see Note 3 to the accompanying audited consolidated financial statements, which further describes our accounting and fair value methodologies of these liability awards held prior to the Spin-Off, as well as Note 12, which further describes the modification of these liability awards in connection with the Spin-Off). Following the Spin-Off, we grant to our employees, directors and consultants stock options and restricted stock units ("RSUs") in respect of our Series C common stock under the CommerceHub, Inc. 2016 Omnibus Incentive Plan (as amended, amended and restated or otherwise modified from time to time, the "Omnibus Incentive Plan"), which was adopted in connection with the Spin-Off.
We estimate the fair value of stock options and awards under the CommerceHub, Inc. 2016 Employee Stock Purchase Plan (as amended, amended and restated or otherwise modified from time to time) using a Black-Scholes pricing model as further described in Note 3 to the accompanying audited consolidated financial statements. We determine the fair value of our RSU awards based on the closing market price per share of our Series C common stock on the date of grant. We estimate our forfeiture rate based on our historical turnover experience and other qualitative factors. We review and update our forfeiture rate, if necessary, at least annually, or more frequently if facts or circumstances indicate a change is necessary.
Income Taxes
We record income taxes under the asset and liability method. Deferred tax assets and liabilities reflect our estimates of the future tax consequences of temporary differences between the carrying amounts of assets and liabilities and their respective tax bases, including operating losses and tax credit carryforwards. We determine deferred income taxes based on the differences in accounting methods and timing between financial statement and income tax reporting. Accordingly, we determine the deferred tax asset or liability for each temporary difference based on the enacted tax rates expected to be in effect when we realize the underlying items of income and expense. We consider all relevant factors when assessing the likelihood of future realization of our deferred tax assets, including our recent earnings experience by jurisdiction, our expectations of future taxable income and the carry forward periods available to us for tax reporting purposes. We may establish a valuation allowance to reduce deferred tax assets to the amount we believe is more-likely-than-not to be realized. This process requires management to make judgments regarding the timing and probability of the ultimate tax impact of the various agreements and transactions to which we are party. Due to inherent complexities arising from the nature of our business, future changes in
income tax law, tax sharing agreements or variances between our actual and anticipated operating results, actual income taxes may vary materially from these estimates and could have a significant impact on our financial position.
We record liabilities to address uncertain tax positions that we have taken in previously filed tax returns or that we expect to take in a future tax return. The determination for required liabilities is based upon an analysis of each individual tax position, taking into consideration whether it is more-likely-than-not that our tax position, based on technical merits, will be sustained upon examination. When we conclude that a tax position is more-likely-than-not to be sustained, we recognize the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the taxing authority. The difference between the amount recognized and the total tax position is recorded as a liability. The ultimate resolution of these tax positions may be greater or less than the liabilities recorded.
Results of Operations for the Years Ended
December 31, 2017
and
2016
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
Year Ended December 31,
|
|
Change
|
|
2017
|
|
2016
|
|
$
|
%
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
Core Drop-Ship Revenue
|
|
|
|
|
|
|
|
Order fee revenue
|
$
|
59,788
|
|
|
$
|
52,095
|
|
|
$
|
7,693
|
|
|
15
|
%
|
Subscription and other platform revenue
|
35,224
|
|
|
32,617
|
|
|
2,607
|
|
|
8
|
%
|
Set-up and professional services revenue
|
7,047
|
|
|
5,692
|
|
|
1,355
|
|
|
24
|
%
|
Total core drop-ship revenue
|
102,059
|
|
|
90,404
|
|
|
11,655
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
Demand channel revenue
|
9,062
|
|
|
10,148
|
|
|
(1,086
|
)
|
|
(11
|
)%
|
Total revenue
|
$
|
111,121
|
|
|
$
|
100,552
|
|
|
$
|
10,569
|
|
|
11
|
%
|
Order fee revenue represented
54%
and
52%
of our total revenue for the years ended
December 31, 2017
and
2016
, respectively. The increase in our order fee revenue was primarily driven by a 16% increase in the volume of customer orders processed through our platform, mainly from existing customers.
Subscription and other platform revenue represented
32%
of our total revenue for the years ended
December 31, 2017
and
2016
, and is primarily attributable to subscription fees charged to retailers and suppliers for the use of our drop-ship solutions. The increase in our subscription fees for the year ended
December 31, 2017
, as compared to
2016
, was primarily driven by an increase in the number of retailer and supplier selling relationships on our platform, which was primarily attributable to a 15% increase in our total customer count. The increase in other platform fees for the year ended December 31, 2017, as compared to 2016, is attributable to an increase in the volume of transactions processed through our platform, mainly from existing customers.
Set-up and professional services revenue represented
6%
of our total revenue for each of the years ended
December 31, 2017
and
2016
. The increase in our set-up and professional services revenue for the year ended
December 31, 2017
, as compared to
2016
, was driven by an increase in the number of retailer and supplier selling relationships on our platform, which was primarily attributable to a 15% increase in our total customer count, as well as the acceleration of deferred revenue in connection with the termination of customers from our platform, including due to bankruptcies.
Demand channel revenue represented
8%
and
10%
of our total revenue for the years ended
December 31, 2017
and
2016
, respectively. The decrease in our demand channel revenue for the year ended
December 31, 2017
, as compared to
2016
, was primarily driven by a decrease in the volume of online demand channel sales and orders processed through our platform, attributable to attrition of customers as we have focused our business strategy away from certain digital marketing services.
Cost of Revenue and Gross Profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
|
Year Ended December 31,
|
|
Change
|
|
|
2017
|
|
2016
|
|
$
|
|
%
|
Cost of revenue
|
|
$
|
21,600
|
|
|
$
|
23,057
|
|
|
$
|
(1,457
|
)
|
|
(6
|
)%
|
Gross profit
|
|
$
|
89,521
|
|
|
$
|
77,495
|
|
|
$
|
12,026
|
|
|
16
|
%
|
Gross margin
|
|
81
|
%
|
|
77
|
%
|
|
4
|
%
|
|
|
The decrease in cost of revenue for the year ended December 31,
2017
, as compared to 2016, was primarily driven by a $0.9 million reduction in personnel costs, largely attributable to lower headcount, and a $0.8 million decrease in intangible asset amortization. In addition, there was a $0.2 million decrease in amortization expense related to capitalized software costs, which, as of December 31, 2017, we expect will continue to decrease in 2018 by approximately $2.6 million, as we changed and further refined our methodologies and processes to estimate the portion of software development eligible to be capitalized in 2016. This decrease was partially offset by a $0.5 million increase in restructuring charges incurred in connection with our 2017 restructuring plan (see Note 16 to the accompanying audited consolidated financial statements for a detailed description of our 2017 restructuring plan), which did not occur in 2016.
Gross profit increased for the year ended
December 31, 2017
, as compared to
2016
, primarily due to increased profit as we create leverage through our scalable platform and existing personnel while increasing revenues.
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
|
Year Ended December 31,
|
|
Change
|
|
|
2017
|
|
2016
|
|
$
|
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
25,559
|
|
|
$
|
19,187
|
|
|
$
|
6,372
|
|
|
33
|
%
|
Sales and marketing
|
|
8,576
|
|
|
11,334
|
|
|
(2,758
|
)
|
|
(24
|
)%
|
General and administrative
|
|
28,920
|
|
|
30,282
|
|
|
(1,362
|
)
|
|
(4
|
)%
|
Total operating expenses
|
|
$
|
63,055
|
|
|
$
|
60,803
|
|
|
$
|
2,252
|
|
|
4
|
%
|
Research and development expenses.
Research and development expenses increased due to a $5.1 million increase in personnel costs, of which $3.1 million was attributable to a reduction in the amount of software development projects capitalized in 2017, as we changed and further refined our methodologies and processes to estimate the portion of software development eligible to be capitalized in 2016, and $2.0 million was attributable to the expansion of our development teams, net of costs deferred in connection with the integration of customers onto our platform. In addition, we incurred $1.3 million of restructuring charges in connection with our 2017 restructuring plan.
Sales and marketing expenses.
Sales and marketing expenses decreased due to a $2.2 million decrease in commissions expense and a $1.2 million decrease in personnel costs, in each case primarily attributable to lower headcount on our sales team. The decrease was partially offset by $0.4 million of restructuring charges incurred in connection with our 2017 restructuring plan and a $0.4 million increase in professional services costs.
General and administrative expenses.
General and administrative expenses decreased due to a $1.0 million decrease in intangible asset amortization and a $2.3 million reduction in share-based compensation expense resulting from the mark-to-market adjustment of liability-based awards in 2016, which resulted in higher expense in 2016 as compared to the equity-based awards in 2017, which are not marked-to-market. This decrease was partially offset by a $1.3 million increase in professional services costs, primarily attributable to becoming a public company, and a $0.6 million increase in bad debt expense due, in part, to customer bankruptcies in 2017.
Other Expenses and Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
|
Year Ended December 31,
|
|
Change
|
|
|
2017
|
|
2016
|
|
$
|
|
%
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
(738
|
)
|
|
$
|
(707
|
)
|
|
$
|
(31
|
)
|
|
4
|
%
|
Interest income
|
|
6
|
|
|
273
|
|
|
(267
|
)
|
|
(98
|
)%
|
Total other (expense) income
|
|
$
|
(732
|
)
|
|
$
|
(434
|
)
|
|
$
|
(298
|
)
|
|
69
|
%
|
Other expense increased primarily due to increased interest expense, including commitment fees, incurred in connection with borrowings outstanding under our revolving credit facility, coupled with a decrease in interest earned, which in 2016 was primarily generated under our promissory note receivable due from Liberty that was fully repaid in June 2016.
Income Taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
|
Year Ended December 31,
|
|
Change
|
|
|
2017
|
|
2016
|
|
$
|
|
%
|
Income tax expense
|
|
$
|
15,876
|
|
|
$
|
7,162
|
|
|
$
|
8,714
|
|
|
122
|
%
|
Effective tax rate
|
|
62
|
%
|
|
44
|
%
|
|
18
|
%
|
|
|
The increase in income tax expense was primarily due to pre-tax book income of
$25.7 million
in the year ended
December 31, 2017
as compared to pre-tax book income of
$16.3 million
in 2016. For the year ended
December 31, 2017
, actual income tax expense was greater than the amounts computed by applying the U.S. federal income tax rate of 35% due to an adjustment recorded in the fourth quarter of 2017 associated with the U.S. Tax Cuts and Jobs Act ("Tax Act"). The Tax Act was enacted on December 22, 2017 and introduces significant changes to U.S. income tax law. Effective in 2018, the Tax Act reduces our U.S. statutory tax rate from 35% to 21%, among other changes. Accordingly, we have adjusted our deferred income taxes as of December 22, 2017 to reflect the reduced rate that will apply in future periods when these deferred taxes are settled or realized, which resulted in deferred tax expense of
$3.2 million
, or a
12%
increase in our 2017 effective tax rate.
In addition, actual income tax expense for the year ended
December 31, 2017
was greater than the federal income tax rate of 35% due to an immaterial error correction recorded in 2017 associated with limitations on deductions under Section 162(m) of the Internal Revenue Code (the “IRC”) with respect to certain share-based compensation awards granted prior to the Spin-Off, which limit the Company’s future deductions on these share-based compensation awards in our stand-alone provision beginning at the Spin-Off. The
$3.3 million
effect of this error was not material, and was corrected in the fourth quarter of 2017 and is incorporated in our 2017 tax expense.
For the year ended December 31, 2016, actual income tax expense was greater than the amounts computed by applying the U.S. federal income tax rate of 35% primarily because of an immaterial error correction recorded in 2016 associated with a change in tax law in New York State (“NY”) that updated the method used to determine the NY apportionment. Under the new method, our income allocated to NY was decreased, resulting in a reduction to current state tax expense post-2016 but an increase in deferred tax expense in 2016 due to the reduction in the value of our deferred state tax assets. The
$1.5 million
net effect of this error was not material, and was corrected in the fourth quarter of 2016 and is incorporated in our 2016 tax expense.
Net Income and Adjusted EBITDA:
Net Income
Net income for the year ended
December 31, 2017
increased, as compared to
2016
, primarily due to a
$10.6 million
increase in revenue, while leveraging our scalable platform and existing personnel, among other changes in cost of revenue and operating expenses as further described above, all of which collectively contributed to a
$9.8 million
increase in income from operations. This increase in income from operations was partially offset by changes in interest expense and income tax expense as further described above.
Net income for the year ended December 31, 2017 is inclusive of
$2.3 million
of restructuring charges, primarily termination and retention benefits, associated with our 2017 restructuring plan. For the year ended December 31, 2017, we recognized $1.2 million of impairment and cash compensation charges, net of savings, associated with our 2017 restructuring plan, consisting of $2.3 million of gross restructuring charges, offset by $1.1 million of savings from permanent headcount reductions and open positions transitioning to our corporate headquarters.
For the year ending December 31, 2018, we expect up to $1.0 million of cash compensation charges, net of savings, depending on the pace of hiring. This estimate consists of approximately $4.0 million of gross restructuring charges, offset by approximately $3.5 million of cash savings from permanent headcount reductions, reduced cost of positions transitioned to our corporate headquarters, and open positions during that transition.
For the year ending December 31, 2019, we expect approximately $3.0 million to $4.0 million in net cash savings, from permanent headcount reductions and reduced cost of positions transitioned to our corporate headquarters.
In addition to the above, we realized a $0.3 million reduction in share-based compensation for fiscal 2017, and we expect a $0.3 million reduction in share-based compensation for each of fiscal 2018 and fiscal 2019.
For the year ended December 31, 2017, restructuring charges included in the statements of comprehensive income (loss) were as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenue
|
|
Research and Development
|
|
Sales and Marketing
|
|
General and Administrative
|
|
Total Restructuring Expenses
|
Termination & retention benefits
|
$
|
295
|
|
|
$
|
1,345
|
|
|
$
|
384
|
|
|
$
|
64
|
|
|
$
|
2,088
|
|
Impairment of capitalized software
|
191
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
191
|
|
Total restructuring expenses
|
$
|
486
|
|
|
$
|
1,345
|
|
|
$
|
384
|
|
|
$
|
64
|
|
|
$
|
2,279
|
|
Adjusted EBITDA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
|
Year Ended December 31,
|
|
Change
|
|
|
2017
|
|
2016
|
|
$
|
|
%
|
Net income and Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
9,858
|
|
|
$
|
9,096
|
|
|
$
|
762
|
|
|
8
|
%
|
Interest expense, net
|
|
732
|
|
|
434
|
|
|
298
|
|
|
69
|
%
|
Income tax expense
|
|
15,876
|
|
|
7,162
|
|
|
8,714
|
|
|
122
|
%
|
Depreciation and amortization
|
|
8,032
|
|
|
9,803
|
|
|
(1,771
|
)
|
|
(18
|
)%
|
Share-based compensation
|
|
8,629
|
|
|
11,290
|
|
|
(2,661
|
)
|
|
(24
|
)%
|
Restructuring charges (1)
|
|
2,279
|
|
|
—
|
|
|
2,279
|
|
|
100
|
%
|
Adjusted EBITDA
|
|
$
|
45,406
|
|
|
$
|
37,785
|
|
|
$
|
7,621
|
|
|
20
|
%
|
|
|
(1)
|
Restructuring charges include termination and retention benefits and the impairment of certain capitalized software projects in connection with our 2017 restructuring plan described in Note 16 to the accompanying audited consolidated financial statements.
|
Adjusted EBITDA for the year ended
December 31, 2017
increased, as compared to 2016, due to increased operating profit on higher revenue as we continued to leverage our scalable platform and existing personnel. This increase was also attributable to a $2.2 million decrease in commissions expense primarily attributable to lower headcount on our sales team. This increase was partially offset by a $2.9 million reduction in the amount of software development costs capitalized, net of related amortization, increased ongoing professional services costs of $1.3 million, primarily attributable to becoming a public company, and increased bad debt expense of $0.6 million, due in large part to customer bankruptcies in 2017.
Results of Operations for the Years Ended
December 31, 2016
and
2015
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
Year Ended December 31,
|
|
Change
|
|
2016
|
|
2015
|
|
$
|
|
%
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
Core Drop-Ship Revenue
|
|
|
|
|
|
|
|
Order fee revenue
|
$
|
52,095
|
|
|
$
|
45,269
|
|
|
$
|
6,826
|
|
|
15
|
%
|
Subscription and other platform revenue
|
32,617
|
|
|
27,498
|
|
|
5,119
|
|
|
19
|
%
|
Set-up and professional services revenue
|
5,692
|
|
|
4,293
|
|
|
1,399
|
|
|
33
|
%
|
Total core drop-ship revenue
|
90,404
|
|
|
77,060
|
|
|
13,344
|
|
|
17
|
%
|
|
|
|
|
|
|
|
|
Demand channel revenue
|
10,148
|
|
|
10,554
|
|
|
(406
|
)
|
|
(4
|
)%
|
Total revenue
|
$
|
100,552
|
|
|
$
|
87,614
|
|
|
$
|
12,938
|
|
|
15
|
%
|
Order fee revenue represented
52%
of our total revenue for the years ended December 31, 2016 and 2015. The increase in our order fee revenue was primarily driven by a 16% increase in the volume of customer orders processed through our platform, mainly from existing customers.
Subscription and other platform revenue represented
32%
and
31%
of our total revenue for the years ended December 31, 2016 and 2015, respectively, and is primarily attributable to subscription fees charged to retailers and suppliers for the use of our drop-ship solutions. The increase in our subscription fees for the year ended December 31, 2016, as compared to 2015, was primarily driven by an increase in the number of retailer and supplier selling relationships on our platform, which
was primarily attributable to an increase in our total customer count. The increase in other platform fees for the year ended December 31, 2017, as compared to 2016, is attributable to an increase in the volume of transactions processed through our platform, mainly from existing customers.
Set-up and professional services revenue represented
6%
and
5%
of our total revenue for the years ended December 31, 2016 and 2015, respectively. The increase in our set-up and professional services revenue for the year ended December 31, 2016, as compared to 2015, was driven by an increase in the number of retailer and supplier selling relationships on our platform, which was primarily due to an increase in our total customer count.
Demand channel revenue represented
10%
and
12%
of our total revenue for the years ended December 31, 2016 and 2015, respectively. The decrease in our demand channel revenue for the year ended December 31, 2016, as compared to 2015, was primarily driven from a decrease in the volume of online demand channel sales and orders processed through our platform, attributable to attrition of customers as we have focused our business strategy away from certain digital marketing services.
Cost of Revenue and Gross Profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
|
Year Ended December 31,
|
|
Change
|
|
|
2016
|
|
2015
|
|
$
|
|
%
|
Cost of revenue
|
|
$
|
23,057
|
|
|
$
|
22,700
|
|
|
$
|
357
|
|
|
2
|
%
|
Gross profit
|
|
$
|
77,495
|
|
|
$
|
64,914
|
|
|
$
|
12,581
|
|
|
19
|
%
|
Gross margin
|
|
77
|
%
|
|
74
|
%
|
|
3
|
%
|
|
|
The increase in cost of revenue in 2016 was primarily driven by a $1.6 million increase in amortization of capitalized software and a $1.3 million increase in recognized deferred services cost, in each case as compared to 2015. This increase was offset by lower share-based compensation expense of approximately $2.5 million due to a larger mark-to-market adjustment on awards, and resulting expense, in 2015, as compared to 2016. Gross profit increased for the year ended December 31, 2016, as compared to 2015, as we continued to leverage our existing platform and personnel while increasing revenues.
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
|
Year Ended December 31,
|
|
Change
|
|
|
2016
|
|
2015
|
|
$
|
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
19,187
|
|
|
$
|
16,304
|
|
|
$
|
2,883
|
|
|
18
|
%
|
Sales and marketing
|
|
11,334
|
|
|
11,287
|
|
|
47
|
|
|
—
|
%
|
General and administrative
|
|
30,282
|
|
|
44,271
|
|
|
(13,989
|
)
|
|
(32
|
)%
|
Total operating expenses
|
|
$
|
60,803
|
|
|
$
|
71,862
|
|
|
$
|
(11,059
|
)
|
|
(15
|
)%
|
Research and development expenses.
The increase in research and development expenses was mainly attributable to higher personnel-related costs of $7.4 million, of which $5.3 million was attributable to the expansion of our development team to support continued investment in our platform, with the remaining $2.1 million attributable to a reduction in the amount of software development costs capitalized as we changed and refined our methodologies and processes to estimate the portion of software development costs that is eligible to be capitalized. This increase was partially offset by a $5.0 million reduction in share-based compensation expense due to a larger mark-to-market adjustment on awards, and resulting expense, in 2015, as compared to 2016.
Sales and marketing expenses
. Sales and marketing expenses remained flat year-over-year. We experienced an increase in personnel-related costs of approximately $1.2 million from the expansion of our sales and marketing teams and a $1.6 million increase in commission expense to our sales team in 2016 as compared to 2015. We also experienced an increase in sales tax expense, driven by a $0.6 million benefit in connection with a favorable state tax ruling in 2015 that did not recur in 2016. However, these increases were offset by a share-based compensation expense reduction of $3.3 million due to a larger mark-to-market adjustment on awards, and resulting expense, in 2015, coupled with reduction in value of performance-based awards, as compared to 2016.
General and administrative expenses
. The decrease in general and administrative expenses resulted from a $20.2 million reduction in share-based compensation expense due to a larger mark-to-market adjustment on awards, and resulting expense, in 2015, as compared to 2016. This decrease was partially offset by a $1.2 million increase in personnel-related expenses due to increased headcount, a $1.1 million increase in payroll-related taxes due to exercises of SARs and
option awards and a $4.3 million increase in professional services expenses associated with the Spin-Off and other public company costs.
Other Expenses and Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
|
Year Ended December 31,
|
|
Change
|
|
|
2016
|
|
2015
|
|
$
|
|
%
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
(707
|
)
|
|
$
|
—
|
|
|
$
|
(707
|
)
|
|
—
|
%
|
Interest income
|
|
273
|
|
|
600
|
|
|
(327
|
)
|
|
(55
|
)%
|
Total other (expense) income
|
|
$
|
(434
|
)
|
|
$
|
600
|
|
|
$
|
(1,034
|
)
|
|
(172
|
)%
|
The increased expense in other (expense) income was attributable to interest expense, including commitment fees, incurred in 2016 on borrowings under our credit facility and amounts owed to Liberty under our promissory note, which we entered into in June 2016, coupled with a decrease in interest earned under our promissory note receivable due from Liberty, which was fully repaid in June 2016.
Income Taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
|
Year Ended December 31,
|
|
Change
|
|
|
2016
|
|
2015
|
|
$
|
|
%
|
Income tax (benefit) expense
|
|
$
|
7,162
|
|
|
$
|
(1,881
|
)
|
|
$
|
9,043
|
|
|
nm
|
Effective tax rate
|
|
44
|
%
|
|
30
|
%
|
|
14
|
%
|
|
|
The increase in income tax expense was primarily due to pre-tax book income of $16.3 million in the year ended December 31, 2016 as compared to a pre-tax book loss of $6.3 million in 2015. For the year ended December 31, 2016, actual income tax benefit was greater than the amounts computed by applying the U.S. federal income tax rate of 35% primarily because of an immaterial error correction recorded in 2016 associated with a change in NY tax law that updated the method used to determine the NY apportionment. Under the new method our income allocated to NY was decreased, resulting in a reduction to current state tax expense post-2016 but an increase in deferred tax expense in 2016 due to the reduction in the deferred state tax assets. The $1.5 million net effect of this error was not material, and was recorded in the fourth quarter of 2016 and is incorporated in our 2016 tax expense. For the year ended December 31, 2015, the difference between actual income tax expense and the computed tax was driven primarily by market adjustments for stock options exercised under CTI's share-based compensation programs.
Net Income and Adjusted EBITDA:
Net income increased by
$13.6 million
for the year ended December 31, 2016, as compared to 2015. The increase was primarily due to a $23.6 million increase in income from operations, which was attributable to increased gross profit while we continued to leverage our scalable platform and existing personnel while increasing revenues, and a decrease in operating expenses, primarily attributable to a $30.9 million decrease in share-based compensation expense.
The primary driver of the decrease in share-based compensation expense was the mark-to-market adjustment, primarily generated by the change in underlying share price, for each period. For both the year ended December 31, 2015 and the three months ended March 31, 2016, the estimated share price, which was based on an internal valuation using the assistance of a third-party advisory firm, increased and resulted in higher expense. For the nine months ended December 31, 2016, the estimated share price was based on the fair market value of our Series C common stock traded immediately following the Spin-Off (for shares granted prior to the Spin-Off) or the fair market value of our Series C common stock on the grant date (for shares granted after the Spin-Off), which decreased as compared to our most recent internal valuation and resulted in a reduction to expense as compared to the prior period.
The net income increase was partially offset by a
$9.0 million
increase in income tax expense, which was attributable to higher pre-tax book income and the NY state tax law change described above, and a
$1.0 million
increase in net interest expense on our outstanding borrowings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
|
Year Ended December 31,
|
|
Change
|
|
|
2016
|
|
2015
|
|
$
|
|
%
|
Net income and Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
9,096
|
|
|
$
|
(4,467
|
)
|
|
$
|
13,563
|
|
|
nm
|
|
Interest expense (income)
|
|
434
|
|
|
(600
|
)
|
|
1,034
|
|
|
(172
|
)%
|
Income tax expense (benefit)
|
|
7,162
|
|
|
(1,881
|
)
|
|
9,043
|
|
|
nm
|
|
Depreciation and amortization
|
|
9,803
|
|
|
7,794
|
|
|
2,009
|
|
|
26
|
%
|
Share-based compensation
|
|
11,290
|
|
|
42,150
|
|
|
(30,860
|
)
|
|
(73
|
)%
|
Adjusted EBITDA
|
|
$
|
37,785
|
|
|
$
|
42,996
|
|
|
$
|
(5,211
|
)
|
|
(12
|
)%
|
Adjusted EBITDA decreased for the year ended December 31, 2016, as compared to 2015. Commencing in 2016, we incurred approximately $4.3 million of incremental expenses relating to resources and other costs required to support the Spin-Off and public company compliance. The decrease was also attributable to an increase of $1.4 million in payroll-related taxes on exercises of CTI SARs and options, and a $2.1 million reduction in the amount of software development costs capitalized, as we changed and refined our methodologies and processes to estimate the portion of software development costs that is eligible to be capitalized. Further, for the year ended December 31, 2015, we recognized a benefit in connection with a favorable state sales tax ruling of $0.6 million, which did not recur in 2016. These decreases were partially offset by increased operating profit on higher revenues in 2016, as compared to 2015.
Liquidity and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in thousands)
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
38,101
|
|
|
$
|
(48,122
|
)
|
|
$
|
24,534
|
|
Investing activities
|
|
(2,562
|
)
|
|
26,840
|
|
|
(30,867
|
)
|
Financing activities
|
|
$
|
(22,172
|
)
|
|
$
|
8,416
|
|
|
$
|
(715
|
)
|
Historically, the cash we generate from operations has been sufficient to fund our working capital requirements and capital expenditures. Substantially all of our cash and cash equivalents are held within the U.S. Cash generated internally is used for our international working capital needs. At
December 31, 2017
, we had
$19.8 million
of cash and cash equivalents, no borrowings under our revolving credit facility and available borrowings under the facility of $125.0 million. Our cash is invested in money market deposit accounts that are currently providing only a minimal return. Historically, we have not entered into investments, but we may do so in the future. Effective in 2018, assuming a similar tax and business structure, we anticipate a reduction in income taxes paid and accrued as a result of the Tax Act. The Tax Act reduces our U.S. federal statutory tax rate from 35% to 21%. We expect that cash from operations and available borrowings under our revolving credit facility will be sufficient to meet our cash flow requirements for the foreseeable future.
Cash Flow from Operating Activities
The increase in cash flows from operating activities for the year ended December 31, 2017, as compared to 2016, was primarily attributable to:
|
|
•
|
$86.7 million of cash payments in 2016 for the settlement of share-based awards, which no longer occur following the modification of CTI's share-based compensation plans in connection with the Spin-Off; and
|
|
|
•
|
a
$0.8 million
improvement in net income and a
$19.7 million
net increase in cash flows generated from other working capital related accounts, largely as a result of a reduction in cash outflows associated with income taxes (including the settlement of taxes due to Liberty at the Spin-Off, which is included in our net payables due to Liberty in 2016).
|
The increase was partially offset by a
$21.0 million
net decrease in non-cash expenses (primarily forfeiture of net operating losses included in deferred income taxes attributed to the Spin-Off in 2016, share-based compensation, depreciation and amortization).
The decrease in cash flows from operating activities for the year ended December 31, 2016, as compared to 2015, was primarily attributable to:
|
|
•
|
a $79.2 million increase in cash payments for the settlement of share-based awards; and
|
|
|
•
|
a $12.6 million decrease in cash flows generated from other working capital related accounts, largely as a result of a reduction in cash outflows associated with our net payables due to Liberty and income taxes.
|
The decrease was partially offset by a $13.6 million increase in net income and a $5.5 million increase in non-cash expenses (primarily depreciation, amortization, share-based compensation, deferred income taxes and other).
Cash Flow from Investing Activities
The decrease in cash flows from investing activities for the year ended December 31, 2017, as compared to 2016, was primarily attributable to a $36.4 million reduction in cash inflows from collections on our note receivable due from Liberty in 2016. This decrease was partially offset by
|
|
•
|
a $3.7 million reduction in cash outflows for property and equipment purchases, primarily attributable to 2016 leasehold improvements and outfitting of our new corporate headquarters, which did not recur in 2017; and
|
|
|
•
|
a $3.3 million decrease in our capitalization of internally developed software, due to the reduction in software development costs eligible to be capitalized as described above.
|
The increase in cash flows from investing activities for the year ended December 31, 2016, as compared to 2015, was primarily attributable to:
|
|
•
|
the collection of $36.4 million owed to us under the intercompany promissory note receivable due from Liberty, which was fully repaid in June 2016;
|
|
|
•
|
the use of $20.2 million to fund the acquisition of Mercent in 2015 (Note 6); and
|
|
|
•
|
a $1.9 million decrease in capitalized software costs in 2016.
|
The increase was partially offset by increased cash outflows for property and equipment purchases of $0.8 million, primarily associated with $2.4 million in leasehold improvements and outfitting of our new corporate headquarters in 2016.
Cash Flow from Financing Activities
The decrease in cash flows from financing activities for the year ended
December 31, 2017
, as compared to 2016, was driven by:
|
|
•
|
a $32.7 million reduction in net cash inflows in connection with the Spin-Off, which were attributable to borrowings under our revolving credit facility and various financing activities involving Liberty and other pre-Spin-Off shareholders; and
|
|
|
•
|
a $2.0 million increase in repayments under our credit facility, as we repaid $26.0 million under our credit facility during 2017.
|
The decrease was partially offset by:
|
|
•
|
a $3.0 million increase in net cash inflows from the exercise of stock options, employee stock purchases and the issuance of deferred stock units; and
|
|
|
•
|
a $1.1 million reduction in cash outflows for debt issuance costs incurred in connection with our credit facility.
|
The increase in cash flows from financing activities for the year ended December 31, 2016, as compared to 2015, was primarily driven by:
|
|
•
|
a $33.4 million increase in net cash inflows in connection with the Spin-Off, which were attributable to borrowings under our revolving credit facility and various financing activities involving Liberty and other pre-Spin-Off shareholders; and
|
|
|
•
|
a $0.8 million increase in cash received from the exercise of stock options.
|
The increase was partially offset by:
|
|
•
|
a $24.0 million increase in repayments under our credit facility; and
|
|
|
•
|
a $1.1 million increase in net cash outflows for debt issuance costs incurred in connection with our credit facility.
|
Contractual Obligations
Our principal commitments consist of lease obligations for our office space and purchase obligations for software subscriptions and other services. The following table summarizes these contractual obligations at
December 31, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment due by period
|
|
Total
|
|
Less than
1 year
|
|
1-3 years
|
|
3-5 years
|
|
More than
5 years
|
Operating lease obligations (1)
|
$
|
9,537
|
|
|
$
|
2,652
|
|
|
$
|
4,384
|
|
|
$
|
2,501
|
|
|
$
|
—
|
|
Purchase obligations
|
1,148
|
|
|
1,029
|
|
|
119
|
|
|
—
|
|
|
—
|
|
Total contractual obligations
|
$
|
10,685
|
|
|
$
|
3,681
|
|
|
$
|
4,503
|
|
|
$
|
2,501
|
|
|
$
|
—
|
|
(1) Operating lease obligations exclude $2.4 million in rental income from sub-tenants, of which $0.6 million is due within one year, $1.2 million is due within one to three years and $0.6 million is due within three to five years.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk in the normal course of business due to our ongoing investing and financial activities and the conduct of operations in different foreign countries. Market risk refers to the risk of loss arising from adverse changes in stock prices, interest rates and foreign currency exchange rates. The risk of loss can be assessed from the perspective of adverse changes in fair values, cash flows and future earnings.
We are exposed to changes in interest rates primarily as a result of borrowings we may make under our revolving credit facility used to maintain liquidity and to fund business operations. The amount of our long-term debt is expected to vary as a result of future funding requirements, cash generation, market conditions and other factors. We have not entered into any interest rate swap arrangements to manage our exposure to interest rate risk, although we may do so in the future if and when we deem appropriate. We performed a sensitivity analysis on our exposure to interest rate risk as of December 31, 2017, and we do not believe a 1.00% increase or decrease in interest rate would have a material impact on our interest expense, primarily because we had no long-term debt at that date.
Although not significant, we have revenue, expenses, assets and liabilities that are denominated in currencies other than the U.S. dollar, including the British pound sterling and the Canadian dollar. As we expand internationally, our results of operations and cash flows will continue to be impacted by foreign currency fluctuations. We have not used any forward contracts or currency borrowings to hedge our exposure to foreign currency exchange risk, although we may do so in the future.
Item 8. Financial Statements and Supplementary Data
COMMERCEHUB, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of CommerceHub, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of CommerceHub, Inc. and subsidiaries (“CommerceHub”) as of
December 31, 2017
and
2016
, and the related consolidated statements of comprehensive income (loss), equity and cash flows for each of the years in the three-year period ended
December 31, 2017
, and the related notes (collectively, the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of CommerceHub as of
December 31, 2017
and
2016
, and the results of their operations and their cash flows for each of the years in the three-year period ended
December 31, 2017
, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), CommerceHub’s internal control over financial reporting as of
December 31, 2017
, based on criteria established in
Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated
March 1, 2018
expressed an unqualified opinion on the effectiveness of CommerceHub’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of CommerceHub’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to CommerceHub in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the auditor of CommerceHub, Inc. since 2013.
/s/ KPMG LLP
Albany, New York
March 1, 2018
Report of Independent Registered Public Accounting Firm
The Shareholders and Board of Directors of CommerceHub, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited CommerceHub, Inc. and subsidiaries’ (“CommerceHub”) internal control over financial reporting as of
December 31, 2017
, based on criteria established in
Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, CommerceHub maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2017
, based on criteria established in
Internal Control-Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of CommerceHub as of
December 31, 2017
and
2016
, and the related consolidated statements of comprehensive income (loss), equity and cash flows for each of the years in the three-year period ended
December 31, 2017
, and the related notes (collectively, the “consolidated financial statements”) and our report dated
March 1, 2018
expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
CommerceHub’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting (Item 9A). Our responsibility is to express an opinion on CommerceHub’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to CommerceHub in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definitions and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Albany, New York
March 1, 2018
COMMERCEHUB, INC.
Consolidated Balance Sheets
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Assets
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
19,841
|
|
|
$
|
6,471
|
|
Accounts receivable, net of allowances of $1,084 and $200, respectively
|
21,310
|
|
|
18,109
|
|
Prepaid income taxes
|
—
|
|
|
4,311
|
|
Prepaid expenses and other current assets
|
1,652
|
|
|
1,549
|
|
Total current assets
|
42,803
|
|
|
30,440
|
|
Capitalized software, net
|
2,850
|
|
|
6,716
|
|
Deferred services costs
|
4,853
|
|
|
4,989
|
|
Property and equipment, net
|
6,066
|
|
|
7,629
|
|
Goodwill
|
21,410
|
|
|
21,410
|
|
Deferred income taxes
|
5,798
|
|
|
7,714
|
|
Other long-term assets
|
1,339
|
|
|
1,122
|
|
Total assets
|
$
|
85,119
|
|
|
$
|
80,020
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable and accrued expenses
|
$
|
3,360
|
|
|
$
|
2,135
|
|
Accrued payroll and related expenses
|
9,429
|
|
|
7,435
|
|
Income taxes payable
|
962
|
|
|
7
|
|
Deferred revenue
|
5,339
|
|
|
5,149
|
|
Total current liabilities
|
19,090
|
|
|
14,726
|
|
Deferred revenue, long-term
|
8,272
|
|
|
7,581
|
|
Other long-term liabilities
|
3,210
|
|
|
1,135
|
|
Long-term debt
|
—
|
|
|
26,000
|
|
Total liabilities
|
30,572
|
|
|
49,442
|
|
Equity:
|
|
|
|
|
|
Preferred stock, $0.01 par value. Authorized shares of 50,000,000; 0 shares issued and outstanding at December 31, 2017 and 2016
|
—
|
|
|
—
|
|
Series A common stock, $0.01 par value. 40,000,000 shares authorized; 13,599,641 and 13,536,502 shares issued and outstanding at December 31, 2017 and 2016, respectively
|
136
|
|
|
135
|
|
Series B common stock, $0.01 par value. 1,500,000 shares authorized; 707,567 and 711,992 shares issued and outstanding at December 31, 2017 and 2016, respectively
|
7
|
|
|
7
|
|
Series C common stock, $0.01 par value. 83,000,000 shares authorized; 29,171,981 and 28,672,805 shares issued and outstanding at December 31, 2017 and 2016, respectively
|
292
|
|
|
287
|
|
Additional paid-in capital
|
31,010
|
|
|
16,904
|
|
Accumulated other comprehensive loss
|
(1
|
)
|
|
—
|
|
Retained earnings
|
23,103
|
|
|
13,245
|
|
Total equity
|
54,547
|
|
|
30,578
|
|
Total liabilities and equity
|
$
|
85,119
|
|
|
$
|
80,020
|
|
See accompanying notes to these consolidated financial statements
COMMERCEHUB, INC.
Consolidated Statements of Comprehensive Income (Loss)
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Revenue (Note 8)
|
$
|
111,121
|
|
|
$
|
100,552
|
|
|
$
|
87,614
|
|
Cost of revenue
|
21,600
|
|
|
23,057
|
|
|
22,700
|
|
Gross profit
|
89,521
|
|
|
77,495
|
|
|
64,914
|
|
Operating expenses:
|
|
|
|
|
|
Research and development
|
25,559
|
|
|
19,187
|
|
|
16,304
|
|
Sales and marketing
|
8,576
|
|
|
11,334
|
|
|
11,287
|
|
General and administrative
|
28,920
|
|
|
30,282
|
|
|
44,271
|
|
Total operating expenses
|
63,055
|
|
|
60,803
|
|
|
71,862
|
|
Income (loss) from operations
|
26,466
|
|
|
16,692
|
|
|
(6,948
|
)
|
Other (expense) income:
|
|
|
|
|
|
Interest expense
|
(738
|
)
|
|
(707
|
)
|
|
—
|
|
Interest income
|
6
|
|
|
273
|
|
|
600
|
|
Total other (expense) income
|
(732
|
)
|
|
(434
|
)
|
|
600
|
|
Income (loss) before income taxes
|
25,734
|
|
|
16,258
|
|
|
(6,348
|
)
|
Income tax expense (benefit)
|
15,876
|
|
|
7,162
|
|
|
(1,881
|
)
|
Net income (loss)
|
9,858
|
|
|
9,096
|
|
|
(4,467
|
)
|
Currency translation adjustment
|
(1
|
)
|
|
—
|
|
|
—
|
|
Total comprehensive income (loss)
|
$
|
9,857
|
|
|
$
|
9,096
|
|
|
$
|
(4,467
|
)
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
Basic
|
$
|
0.23
|
|
|
$
|
0.21
|
|
|
$
|
(0.10
|
)
|
Diluted
|
$
|
0.22
|
|
|
$
|
0.21
|
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
Shares used in computing earnings (loss) per share:
|
|
|
|
|
|
Basic
|
43,204
|
|
|
42,831
|
|
|
42,703
|
|
Diluted
|
45,230
|
|
|
44,343
|
|
|
42,703
|
|
See accompanying notes to these consolidated financial statements
COMMERCEHUB, INC.
Consolidated Statements of Equity
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of Common Stock
|
|
|
|
|
|
|
|
Series A
|
Series B
|
Series C
|
Par Value
|
APIC
|
Parent's Investment
|
AOCL
|
Retained Earnings
|
Total Equity
|
Balance at January 1, 2015
|
—
|
|
—
|
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
22,915
|
|
$
|
—
|
|
$
|
9,200
|
|
$
|
32,115
|
|
Issuance of common stock for exercised options
|
|
|
|
|
|
33
|
|
|
|
33
|
|
Repurchase of outstanding shares
|
|
|
|
|
|
(164
|
)
|
|
|
(164
|
)
|
Cash dividends paid
|
|
|
|
|
|
|
|
(584
|
)
|
(584
|
)
|
Net income (loss)
|
|
|
|
|
|
|
|
(4,467
|
)
|
(4,467
|
)
|
Balance at December 31, 2015
|
—
|
|
—
|
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
22,784
|
|
$
|
—
|
|
$
|
4,149
|
|
$
|
26,933
|
|
Net income (loss)
|
|
|
|
|
|
|
|
9,096
|
|
9,096
|
|
Exercise of stock options
|
|
|
|
|
|
73
|
|
|
|
73
|
|
Contribution from Parent
|
|
|
|
|
|
6,000
|
|
|
|
6,000
|
|
Cash dividends paid to Parent and others
|
|
|
|
|
|
(19,730
|
)
|
|
|
(19,730
|
)
|
Change in capitalization in connection with the Spin-Off
|
13,522,288
|
|
711,992
|
|
28,468,562
|
|
427
|
|
8,700
|
|
(9,127
|
)
|
|
|
—
|
|
Reclassification of share-based compensation liability
|
|
|
|
|
12,489
|
|
|
|
|
12,489
|
|
Issuance of minority shares
|
|
|
109,354
|
|
1
|
|
(1
|
)
|
|
|
|
—
|
|
Forfeiture of net operating losses to Parent
|
|
|
|
|
(9,785
|
)
|
|
|
|
(9,785
|
)
|
Share-based compensation expense
|
|
|
|
|
4,730
|
|
|
|
|
4,730
|
|
Exercise of stock options
|
15,268
|
|
|
96,917
|
|
1
|
|
772
|
|
|
|
|
773
|
|
Excess tax deduction from the exercise of stock options
|
|
|
|
|
(1
|
)
|
|
|
|
(1
|
)
|
Issuance of restricted stock units
|
2
|
|
|
7
|
|
|
|
|
|
|
—
|
|
Cancellation of restricted shares
|
(1,056
|
)
|
|
(2,035
|
)
|
|
|
|
|
|
—
|
|
Balance at December 31, 2016
|
13,536,502
|
|
711,992
|
|
28,672,805
|
|
$
|
429
|
|
$
|
16,904
|
|
$
|
—
|
|
$
|
—
|
|
$
|
13,245
|
|
$
|
30,578
|
|
Net income (loss)
|
|
|
|
|
|
|
|
9,858
|
|
9,858
|
|
Share-based compensation expense
|
|
|
|
|
8,629
|
|
|
|
|
8,629
|
|
Adjustment to net operating loss forfeiture to Parent
|
|
|
|
|
1,655
|
|
|
|
|
1,655
|
|
Exercise of stock options
|
61,248
|
|
|
345,727
|
|
4
|
|
3,285
|
|
|
|
|
3,289
|
|
Issuance of common stock under employee stock purchase plan
|
|
|
36,298
|
|
1
|
|
463
|
|
|
|
|
464
|
|
Issuance of deferred stock units
|
|
|
|
|
75
|
|
|
|
|
75
|
|
Issuance of restricted stock units
|
151
|
|
|
123,977
|
|
1
|
|
(1
|
)
|
|
|
|
—
|
|
Cancellation of restricted shares
|
(2,685
|
)
|
|
(6,826
|
)
|
|
|
|
|
|
—
|
|
Conversion of Series B shares to Series A shares
|
4,425
|
|
(4,425
|
)
|
|
|
|
|
|
|
—
|
|
Other comprehensive loss
|
|
|
|
|
|
|
(1
|
)
|
|
(1
|
)
|
Balance at December 31, 2017
|
13,599,641
|
|
707,567
|
|
29,171,981
|
|
$
|
435
|
|
$
|
31,010
|
|
$
|
—
|
|
$
|
(1
|
)
|
$
|
23,103
|
|
$
|
54,547
|
|
See accompanying notes to these consolidated financial statements.
COMMERCEHUB, INC.
Consolidated Statements of Cash Flows
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Cash flows from operating activities:
|
|
|
|
|
|
Net income (loss)
|
$
|
9,858
|
|
|
$
|
9,096
|
|
|
$
|
(4,467
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
8,032
|
|
|
9,803
|
|
|
7,794
|
|
Amortization of debt issuance costs
|
221
|
|
|
111
|
|
|
—
|
|
Share-based compensation expense
|
8,629
|
|
|
11,290
|
|
|
42,150
|
|
Deferred income taxes
|
3,571
|
|
|
21,326
|
|
|
(12,289
|
)
|
Bad debt expense
|
1,269
|
|
|
629
|
|
|
481
|
|
Accrued interest income
|
—
|
|
|
(273
|
)
|
|
(600
|
)
|
Impairment and loss on disposal of long-term assets
|
310
|
|
|
179
|
|
|
—
|
|
Change in operating assets and liabilities, net of acquisition:
|
|
|
|
|
|
Accounts receivable
|
(4,470
|
)
|
|
(2,326
|
)
|
|
(816
|
)
|
Prepaid expenses and other assets
|
(532
|
)
|
|
(599
|
)
|
|
(40
|
)
|
Income taxes, net
|
5,266
|
|
|
(4,304
|
)
|
|
—
|
|
Deferred costs
|
136
|
|
|
(33
|
)
|
|
(1,094
|
)
|
Deferred revenue
|
883
|
|
|
708
|
|
|
2,031
|
|
Accounts payable and accrued expenses
|
2,210
|
|
|
166
|
|
|
(2,683
|
)
|
Accrued payroll and related expenses
|
2,718
|
|
|
1,901
|
|
|
2,097
|
|
Share-based compensation liability payments
|
—
|
|
|
(86,684
|
)
|
|
(7,507
|
)
|
Parent receivables and payables, net
|
—
|
|
|
(9,112
|
)
|
|
(523
|
)
|
Net cash provided by (used in) operating activities
|
38,101
|
|
|
(48,122
|
)
|
|
24,534
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Purchases of property and equipment
|
(1,315
|
)
|
|
(4,995
|
)
|
|
(4,158
|
)
|
Additions to capitalized software
|
(1,247
|
)
|
|
(4,545
|
)
|
|
(6,484
|
)
|
Acquisition of business, net of cash acquired
|
—
|
|
|
—
|
|
|
(20,225
|
)
|
Collection of note receivable - Parent
|
—
|
|
|
36,380
|
|
|
—
|
|
Net cash (used in) provided by investing activities
|
(2,562
|
)
|
|
26,840
|
|
|
(30,867
|
)
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Borrowings on revolver
|
—
|
|
|
50,000
|
|
|
—
|
|
Payments on revolver
|
(26,000
|
)
|
|
(24,000
|
)
|
|
—
|
|
Cash paid for debt issuance costs
|
—
|
|
|
(1,100
|
)
|
|
—
|
|
Purchase of treasury stock
|
—
|
|
|
(3,600
|
)
|
|
(164
|
)
|
Cash received from exercise of stock options
|
3,289
|
|
|
846
|
|
|
33
|
|
Cash received from employee stock purchase plan
|
464
|
|
|
—
|
|
|
—
|
|
Cash received from deferred stock units
|
75
|
|
|
—
|
|
|
—
|
|
Borrowings on note payable - Parent
|
—
|
|
|
28,664
|
|
|
—
|
|
Payments on note payable - Parent
|
—
|
|
|
(28,664
|
)
|
|
—
|
|
Contribution from Parent
|
—
|
|
|
6,000
|
|
|
—
|
|
Dividends paid to Parent and other pre-Spin-Off shareholders
|
—
|
|
|
(19,730
|
)
|
|
(584
|
)
|
Net cash (used in) provided by financing activities
|
(22,172
|
)
|
|
8,416
|
|
|
(715
|
)
|
Currency effect on cash and cash equivalents
|
3
|
|
|
—
|
|
|
—
|
|
Net increase (decrease) in cash and cash equivalents
|
13,370
|
|
|
(12,866
|
)
|
|
(7,048
|
)
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period
|
6,471
|
|
|
19,337
|
|
|
26,385
|
|
Cash and cash equivalents, end of period
|
$
|
19,841
|
|
|
$
|
6,471
|
|
|
$
|
19,337
|
|
Supplemental disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
Contractual obligations for acquisition of fixed assets
|
$
|
360
|
|
|
$
|
—
|
|
|
$
|
876
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
Cash paid for interest
|
$
|
462
|
|
|
$
|
531
|
|
|
$
|
—
|
|
Cash paid for taxes
|
$
|
8,505
|
|
|
$
|
7,809
|
|
|
$
|
11,723
|
|
Collection of federal tax benefit from Parent
|
$
|
—
|
|
|
$
|
8,522
|
|
|
$
|
—
|
|
See accompanying notes to these consolidated financial statements
COMMERCEHUB, INC.
Notes to Consolidated Financial Statements
Note 1 - Description of Business
CommerceHub, Inc. ("CommerceHub," the "Company," "us," "we" and "our") was founded in 1997 (then known as Commerce Technologies, Inc. ("CTI")) and is headquartered in Albany, New York, with additional locations in Seattle, Washington and Hertford, England. We are a leading provider of cloud-based ecommerce fulfillment and marketing solutions for large retailers, marketplaces, consumer brands and their suppliers. Our solutions help our customers implement strategies that increase their ecommerce revenues and create meaningful operational efficiencies within their supply chains. The customized solutions we create for specific customer types utilize our cloud-based software and service capabilities to more effectively fulfill consumer orders, generate consumer demand for products and deliver products to consumers.
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 (the "Spin-Off"). At the time, CommerceHub was 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 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 Liberty's Series A and Series B Liberty Ventures common stock. The Internal Revenue Service (“IRS”) has completed its review of the Spin-Off and has notified Liberty that it agreed with the nontaxable characterization of the Spin-Off.
Following the Spin-Off, CommerceHub operates as a stand-alone publicly traded company, and neither Liberty nor CommerceHub has any stock ownership, beneficial or otherwise, in the other.
Note 2 - Basis of Presentation
The consolidated financial statements include the accounts of CommerceHub and its subsidiaries. All intercompany accounts and transactions have been eliminated in the consolidated financial statements, which have been prepared in conformity with U.S. generally accepted accounting principles ("GAAP").
Use of Estimates
Preparing these 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates and assumptions.
Segment and Geographic Information
Operating segments are components of our business for which discrete financial information is available and evaluated by the chief operating decision maker ("CODM") for purposes of allocating resources and evaluating financial performance. Our Chief Executive Officer, who is our CODM, reviews the Company's consolidated financial information results to allocate resources and evaluate performance. As such, the Company operates as a single segment.
The following table summarizes revenue by type (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Revenue:
|
|
|
|
|
|
|
|
|
Core Drop-Ship Revenue
|
|
|
|
|
|
Order fee revenue
|
$
|
59,788
|
|
|
$
|
52,095
|
|
|
$
|
45,269
|
|
Subscription and other platform revenue
|
35,224
|
|
|
32,617
|
|
|
27,498
|
|
Set-up and professional services revenue
|
7,047
|
|
|
5,692
|
|
|
4,293
|
|
Total core drop-ship revenue
|
102,059
|
|
|
90,404
|
|
|
77,060
|
|
|
|
|
|
|
|
Demand channel revenue
|
9,062
|
|
|
10,148
|
|
|
10,554
|
|
Total revenue
|
$
|
111,121
|
|
|
$
|
100,552
|
|
|
$
|
87,614
|
|
COMMERCEHUB, INC.
Notes to Consolidated Financial Statements
We generate nearly all of our revenue in the United States and Canada. For the years ended
December 31, 2017
, 2016 and 2015, we generated approximately
96%
of our revenue from customers located in the United States. Substantially all of our assets are located within the United States.
Updated Presentation of Revenue by Type
During the year ended December 31, 2017, we updated the way in which we present revenue by type. The table below provides revenue by type for previously reported periods under our current presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended:
|
|
9/30/2017
|
6/30/2017
|
3/31/2017
|
12/31/2016
|
9/30/2016
|
6/30/2016
|
3/31/2016
|
12/31/2015
|
9/30/2015
|
6/30/2015
|
3/31/2015
|
Revenue by type:
|
|
|
|
|
|
|
|
|
|
|
|
Core drop-ship revenue:
|
|
|
|
|
|
|
|
|
|
|
|
Order fee revenue
|
$
|
12,276
|
|
$
|
12,901
|
|
$
|
12,038
|
|
$
|
19,569
|
|
$
|
10,900
|
|
$
|
11,227
|
|
$
|
10,399
|
|
$
|
17,070
|
|
$
|
9,414
|
|
$
|
9,683
|
|
$
|
9,102
|
|
Subscription and other platform revenue
|
8,544
|
|
8,432
|
|
8,451
|
|
9,195
|
|
8,053
|
|
7,827
|
|
7,542
|
|
7,728
|
|
6,767
|
|
6,529
|
|
6,474
|
|
Set-up and professional services revenue
|
1,713
|
|
1,622
|
|
1,725
|
|
1,387
|
|
1,431
|
|
1,491
|
|
1,383
|
|
1,238
|
|
1,106
|
|
1,055
|
|
894
|
|
Total core drop-ship revenue
|
22,533
|
|
22,955
|
|
22,214
|
|
30,151
|
|
20,384
|
|
20,545
|
|
19,324
|
|
26,036
|
|
17,287
|
|
17,267
|
|
16,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand channel revenue
|
2,081
|
|
2,253
|
|
2,354
|
|
2,730
|
|
2,094
|
|
2,558
|
|
2,766
|
|
3,235
|
|
2,408
|
|
2,591
|
|
2,320
|
|
Total
|
$
|
24,614
|
|
$
|
25,208
|
|
$
|
24,568
|
|
$
|
32,881
|
|
$
|
22,478
|
|
$
|
23,103
|
|
$
|
22,090
|
|
$
|
29,271
|
|
$
|
19,695
|
|
$
|
19,858
|
|
$
|
18,790
|
|
Note 3 - Significant Accounting Policies
Cash and Cash Equivalents
The Company considers all highly liquid securities with original maturities of 90 days or less to be cash equivalents, including bank and money market accounts. Cash and cash equivalents at
December 31, 2017
consisted principally of cash and money market accounts held at financial institutions in the United States that management believes to be reputable. Cash and cash equivalents at December 31,
2016
consisted principally of cash held at such financial institutions. At times, our accounts exceed insured limits. Money market accounts are carried at cost, which approximates fair value.
Accounts Receivable and Allowance for Doubtful Accounts
The Company grants credit to customers in the normal course of business without collateral. Accounts receivable are stated net of allowances for doubtful accounts, which represent estimated losses resulting from the inability of certain customers to make the required payments. When determining the allowances for doubtful accounts, we take several factors into consideration, including the overall composition of the accounts receivable aging, our prior history of accounts receivable write-offs, the types of customers and our experience with specific customers. We write off accounts receivable when they are determined to be uncollectible. Changes in the allowances for doubtful accounts are recorded as bad debt expense and are included in general and administrative expenses in our consolidated statements of comprehensive income (loss).
Our allowance for doubtful accounts activity, included in accounts receivable, net, was as follows for the years ended December 31, (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Balances as of January 1
|
|
$
|
200
|
|
|
$
|
239
|
|
|
$
|
233
|
|
Provision for doubtful accounts
|
|
1,269
|
|
|
629
|
|
|
481
|
|
Write-offs
|
|
(385
|
)
|
|
(668
|
)
|
|
(475
|
)
|
Balances as of December 31
|
|
$
|
1,084
|
|
|
$
|
200
|
|
|
$
|
239
|
|
COMMERCEHUB, INC.
Notes to Consolidated Financial Statements
The increase in our provision for doubtful accounts for the year ended December 31, 2017 is due, primarily, to customer bankruptcies.
Property and Equipment
Property and equipment are stated at cost. Equipment under capital leases are stated at the present value of minimum lease payments. Repairs and maintenance costs are expensed as incurred. Depreciation of property and equipment is computed using the straight-line method over the following estimated useful lives:
|
|
|
|
Computer equipment
|
|
3 to 5 years
|
Furniture and fixtures
|
|
5 years
|
Leasehold improvements
|
|
lesser of remaining lease term or estimated useful life
|
Capitalized Software Costs
The Company capitalizes the cost of payroll, payroll-related costs and third-party consulting fees incurred in the direct development or enhancement of solutions as internal-use software. During
2016
, we changed and further refined our methodologies and processes to estimate the portion of software development costs that is eligible to be capitalized, which is assessed at a project level. Development costs incurred during the preliminary project stage or costs incurred for requirements gathering, data conversion activities, training, maintenance and minor enhancements are expensed as incurred. Development costs incurred for the coding, configuration, interfacing, automation and testing of new functionality after the preliminary project stage is complete are capitalized. Capitalized software costs are amortized on a straight-line basis over
two
to
three
years, based on the nature and estimated useful life of the applicable solution. Amortization of capitalized software costs is included in cost of revenue within the consolidated statements of comprehensive income (loss).
Deferred Services Costs
The Company defers direct payroll, payroll-related costs and third-party consulting costs incurred for the set-up and integration of new customers on our platform and for enhancements we make to our platform that are particular to specific customers. Deferred services costs associated with the integration of customers on our platform are recognized over the estimated life of such customers. Deferred services costs incurred to enhance existing customers' platforms are recognized over the estimated remaining customer life. Amortization of deferred services costs is included in cost of revenue within the consolidated statements of comprehensive income (loss).
Impairment of Long-Lived Assets
Long-lived assets, such as property and equipment, capitalized software costs, deferred services costs and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group to be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value may be determined through various valuation techniques, including discounted cash flow models, quoted market values and independent third-party appraisals, as considered necessary or appropriate.
Goodwill
Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Goodwill is reviewed for impairment at least annually as of October 1, and more frequently if events or changes in circumstances indicate that goodwill might be impaired.
GAAP provides the option to perform a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount prior to performing the two-step goodwill impairment test. If it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the two-step goodwill impairment test is required. If it is more-likely-than-not that the fair value of a reporting unit is greater than its carrying amount, the two-step goodwill impairment test is not required.
For the year ended
December 31, 2017
, we performed step one of the goodwill impairment test utilizing the market capitalization approach to determine whether the fair value of our reporting unit is less than its carrying amount. Based upon our assessment, we believe the fair value exceeds the carrying value, and
no
impairment loss was recorded in
2017
.
COMMERCEHUB, INC.
Notes to Consolidated Financial Statements
Revenue and Deferred Revenue
The Company generates revenue through delivery of its ecommerce fulfillment and marketing software solutions. The Company follows Financial Accounting Standards Board ("FASB") guidance set forth in Accounting Standards Codification ("ASC") Subtopic 985-605-05 related to
Hosting Arrangements
and ASC Subtopic 605-25 related to
Revenue Arrangements with Multiple Deliverables
. The Company recognizes revenue when all of the following conditions are met: there is persuasive evidence of an arrangement, the services have been delivered to the customer, the collection of the related fees is reasonably assured and the amount of the related fees is fixed and determinable.
Revenue from new customer acquisition is generated under services agreements with multiple elements. Customers do not have the contractual right to take possession of our solutions. We evaluate each element in a multiple-element arrangement to determine whether it represents a separate unit of accounting. An element constitutes a separate unit of accounting when the delivered item has standalone value and delivery of the undelivered element is probable and within our control.
Fees charged to customers based on the level of a customer's utilization of our solutions and other platform fees attributable to inventory management and third-party communication capabilities are recognized in the period in which such fees are earned. We recognize monthly subscription fees as revenue in the period in which the subscription is earned.
Set-up fees provide customers access to our solutions through production launch. They are billed during the implementation phase and recorded as deferred revenue until a customer's subscription period has commenced. We also provide professional services to provide certain customer-requested enhancements to our solutions as well as other professional services. Set-up and professional services fees related to customer solution enhancements do not have stand-alone value because they are sold only in conjunction with a subscription to our solutions, they are sold only by us, a customer could not resell them, and they do not represent the culmination of a separate earnings process. Set-up fees without stand-alone value are recognized over the longer of the life of the agreement or the expected customer life. We recognize revenue for professional services fees charged to customers for solution enhancement services over the estimated remaining customer life. Professional services charged to customers that do have stand-alone value are recognized in the period in which the professional services fees are earned.
In determining the estimated life of our customers, we consider our historical experience with customer contract renewals, the type of customer, the size of the customer and the period over which the customer will benefit from the related offerings. As of
December 31, 2017
, the estimated life of certain customers ranges from
1
to
10 years
, reflecting a shorter life for smaller customers and a longer life for our largest retail customers. Deferred revenue consists of the unearned portion of deferred set-up and professional services fees and annual subscription fees.
Reimbursement payments received for out-of-pocket expenses are recorded as revenue and cost of revenue in the consolidated statements of comprehensive income (loss).
Advertising Expenses
The Company incurs advertising expense consisting of promotions and public relations to promote our solutions. Advertising is expensed as incurred and was
$295 thousand
,
$100 thousand
and
$314 thousand
for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
Share-Based Compensation
Share-based awards exchanged for employee services are recorded as expense, net of estimated forfeitures, at the estimated fair value of these awards over the requisite employee service period (typically with annual straight-line vesting over
4 years
), or where applicable for performance-based awards, over the service period, when the achievement of certain performance-based conditions are considered probable, and expire after
10 years
.
Pre-Spin-Off Valuation Inputs and Methodologies
Prior to the Spin-Off, the Company's share-based awards consisted of CTI-issued stock options and stock appreciation rights ("SARs"), which were classified as liability awards and were included as a share-based compensation liability on the consolidated balance sheets. We estimated the fair value of these awards using a Black-Scholes pricing model. We measured the cost of services received in exchange for these awards based on the fair value of the award, and remeasured the fair value of the award at each reporting date.
In valuing these 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 for which individuals will hold their share-based
COMMERCEHUB, INC.
Notes to Consolidated Financial Statements
awards prior to exercise. The estimation of these 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 in which estimates are revised. With the assistance of an independent third-party advisory firm, for the year ended
December 31, 2015
and the
three
months ended
March 31, 2016
, we estimated share-price based on an internal valuation using a combination of three different approaches:
|
|
•
|
Market Multiple Approach
- this approach involves the capitalization of revenue and earnings before interest, taxes, depreciation and amortization, and option expense. Multiples are determined through an analysis of certain publicly traded companies, selected based on operational and economic similarity with the principal business and operational revenue model of CommerceHub. Multiples are calculated for the comparative companies based upon their trading prices. The risk analysis incorporates quantitative and qualitative risk factors, which relate to, among other things, the nature of the industry in which we and the other comparative companies are engaged, relative size, profitability and growth rates.
|
|
|
•
|
Guideline Transaction Approach
- this approach is similar to the Market Multiple Approach in that it involves a consideration of multiples of revenue and Adjusted EBITDA. However, multiples used for this approach were determined through the analysis of transactions involving controlling interests in companies with operations similar to CommerceHub's business.
|
|
|
•
|
Discounted Cash Flow ("DCF") Approach
- internally prepared financial projections are used to develop the DCF Approach, a valuation method that estimates the present value of the projected cash flows to be generated from the business. In the DCF Approach, a discount rate, reflecting all risks of ownership and associated risks of realizing the stream of projected future cash flows, is applied to the stream of projected cash flows.
|
For the
three
months ended
June 30, 2016
, the estimated share-price was based on the fair market value of our Series C common stock traded immediately following the Spin-Off. In connection with the Spin-Off, the outstanding CTI share-based 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. Unlike the original CTI 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 CTI options and SARs may be settled only in shares of our Series C common stock (see Note 12).
Post-Spin-Off Valuation Inputs and Methodologies
Following the Spin-Off, we grant to our employees stock options and restricted stock units ("RSUs") in respect of our Series C common stock under the CommerceHub, Inc. 2016 Omnibus Incentive Plan (as amended, amended and restated or otherwise modified from time to time, the "Omnibus Plan"), which was adopted in connection with the Spin-Off.
The Company determined the fair value of RSU awards based on the closing market price per share of our Series C common stock on the date of grant.
The Company estimates the fair value of stock options using a Black-Scholes pricing model. For awards granted subsequent to the Spin-Off, the share-price is based on the closing price of our Series C common stock on the date of grant. Expected volatility of the stock was based on our industry peer group because we did not have sufficient historical volatility data for our stock. The expected term of the options considers our historical and expected future employee exercise behavior and was determined using the simplified method, which was considered to be our best estimate of expected future term as we lacked sufficient history of exercise activity as a stand-alone public company. Further, our historical exercise experience is not considered to be representative of our future expected term based on the significant exercise activity that occurred in 2016 in anticipation of the Spin-Off. The risk-free interest rate assumption was 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.
COMMERCEHUB, INC.
Notes to Consolidated Financial Statements
The following table summarizes the assumptions used for estimating the fair value of stock options and SAR awards granted during the years ended December 31:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
Post Spin-Off
|
|
2016
Pre Spin-Off
|
|
2015
|
Risk-free interest rate
|
1.93% - 2.25%
|
|
1.36% - 2.27%
|
|
1.23% - 1.44%
|
|
1.76%
|
Expected term (years)
|
6.3
|
|
6.3
|
|
5.9 - 6.3
|
|
5.3 - 6.2
|
Expected volatility
|
40.16% - 41.60%
|
|
41.51% - 41.89%
|
|
42.12%
|
|
30% - 31%
|
Dividend yield
|
—%
|
|
—%
|
|
—%
|
|
—%
|
Weighted average grant-date fair value
|
$7.25
|
|
$6.22
|
|
$15.18
|
|
$14.13
|
The awards outstanding at the time of the Spin-Off were converted at an exchange ratio of approximately
2.18
, which reduced the underlying share price and resulting grant date fair value of awards granted after the Spin-Off. For awards granted prior to the Spin-Off, as these awards were classified as liability-based awards and were marked-to-market each reporting period, the weighted after grant date fair value in the table above represents the most recent marked-to-market fair value of such awards.
The Company also grants employees rights to purchase discounted shares of our Series C common stock under the CommerceHub, Inc. 2016 Employee Stock Purchase Plan (as amended, amended and restated or otherwise modified from time to time, the "ESPP"). We estimate the fair value of ESPP rights based on the market price of our Series C common stock at the beginning of each offering period and the Black-Scholes option pricing model.
The following table summarizes the assumptions used for estimating the fair value of ESPP rights granted during the year ended
December 31, 2017
:
|
|
|
Volatility
|
41.16% - 41.51%
|
Term (in years)
|
0.5
|
Risk-free interest rate
|
0.82% - 1.17%
|
Dividend yield
|
—%
|
The Company estimates the forfeiture rate for share-based awards based on our historical turnover experience and other qualitative factors. We review and update our forfeiture rate, if necessary, at least annually, or more frequently if facts or circumstances indicate a change is necessary or appropriate.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. A tax valuation allowance is established, as needed, to reduce deferred tax assets to the amount expected to be realized. In the event it becomes more-likely-than-not that some or all of the deferred tax asset allowances will not be needed, the valuation allowance will be adjusted.
In the ordinary course of business, there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based upon management's evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where it is more-likely-than-not that a tax benefit will be sustained, we have determined the amount of the tax benefit to be recognized by estimating the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more-likely-than-not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. Interest and penalties related to unrecognized tax benefits are recognized as a component of income tax expense when settled.
COMMERCEHUB, INC.
Notes to Consolidated Financial Statements
Business Combinations
Assets acquired and liabilities assumed in a business combination are recognized at their estimated fair values as of the acquisition date. Transaction costs associated with a business combination are expensed as incurred. Any excess of the acquisition price over the estimated fair value of individually identifiable net assets acquired is recorded as goodwill. Assets acquired may also include identifiable intangible assets, such as subscriber relationships, which are recognized separately from goodwill.
We make estimates and assumptions to value assets acquired and liabilities assumed at the acquisition date, including deferred income taxes, uncertain tax positions and tax-related valuation allowances. These estimates are inherently uncertain and subject to refinement, and they typically include the calculation of an appropriate discount rate and projection of the cash flows associated with each acquired asset. As a result, during the measurement period, which may be up to one year after the acquisition date, we may record adjustments to assets acquired and liabilities assumed with a corresponding offset to goodwill. Upon the conclusion of the one year measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of comprehensive income (loss).
Note 4 - Recent Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
("ASU No. 2014-09"). This standard is effective for fiscal years beginning after December 15, 2017, with
two
transition methods of adoption allowed: a full retrospective or modified retrospective. 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 issued to further clarify the implementation guidance on principal versus agent considerations in ASU No. 2014-09. In April 2016, FASB issued ASU No. 2016-10,
Identifying Performance Obligations and Licensing
, which clarifies implementation guidance on the identification of performance obligations and the licensing implementation guidance in ASU No. 2014-09. In May 2016, FASB issued ASU No. 2016-12,
Narrow-Scope Improvements and Practical Expedients
, which clarifies the guidance on assessing collectability, presentation of sales taxes, non-cash consideration and completed contracts and contract modifications at transition. In December 2016, FASB issued ASU No. 2016-20,
Technical Corrections and Improvements to Topic 606
, which clarifies certain narrow aspects of ASU No. 2014-09.
We continue to evaluate the impacts of this new standard on our business processes, information technology systems and associated internal controls. We have developed an implementation plan to adopt this standard, and, as part of this plan, we continue to assess the impacts this standard is expected to have on our financial statements and related disclosures. We will adopt this standard using the modified retrospective transition method effective January 1, 2018. The adoption of this standard will not significantly impact our recognition of order fee revenue and subscription and other platform revenue associated with our drop-ship and demand channel solutions. In addition, the adoption of this standard will impact our accounting for certain set-up and professional services revenue and the periods over which this revenue and the related deferred services costs are recognized. Further, this standard will impact how we account for costs to acquire a contract. We expect that applying this standard will result in the deferral of additional costs, including certain commission expenses to sales representatives directly associated with acquiring a new revenue contract, which we expect to recognize over the estimated customer life. We do not expect these impacts to set-up and professional services revenue and related deferred service costs and commissions will be significant to our consolidated financial statements. Based on our impact analysis performed to date, we estimate approximately a
$0.3 million
reduction to retained earnings upon the adoption of this standard on January 1, 2018.
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 and requires an entity to separate the lease components from the non-lease components in a contract. ASU No. 2016-02 is intended to improve financial reporting on lease transactions and is effective for fiscal years beginning after December 15, 2018. We are evaluating the financial statement impact this update will have on our 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 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. We adopted ASU No. 2016-09 in the first quarter of 2017, which did not have a significant impact on our consolidated financial statements.
COMMERCEHUB, INC.
Notes to Consolidated Financial Statements
In August 2016, the FASB issued ASU No. 2016-15,
Classification of Certain Cash Receipts and Cash Payments (Topic 230)
("ASU No. 2016-15")
,
which addresses eight specific cash flow matters with the objective of reducing diversity in practice in how certain cash receipts and cash payments are classified in statements of cash flows. ASU No. 2016-15 is effective for fiscal years beginning after December 15, 2017. We are adopting ASU No. 2016-15 in the first quarter of 2018, which we do not expect to have a significant impact on our consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18,
Restricted Cash
("ASU No. 2016-18")
,
which requires that entities show changes in total of cash, cash equivalents and restricted cash in the statement of cash flows. Transfers between cash, cash equivalents and restricted cash should not be presented as cash flow activities on the statement of cash flows. ASU No. 2016-18 is effective for fiscal years beginning after December 15, 2017. We are adopting ASU 2016-18 in the first quarter of 2018, which we do not expect to have a significant impact on the consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment
("ASU No. 2017-04"), which removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. An impairment charge will now equal the amount by which the reporting unit's carrying value exceeds its fair value. ASU No. 2017-04 is effective for fiscal years beginning after December 15, 2019. We do not expect the adoption of this standard will have a significant impact on our consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09,
Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting
("ASU No. 2017-09"), which clarifies what constitutes a modification of a share-based payment award. ASU No. 2017-09 is effective for fiscal years beginning after December 15, 2017. We are adopting ASU No. 2017-09 in the first quarter of 2018, which we do not expect to have a significant impact on the consolidated financial statements.
Note 5 - Earnings (Loss) Per Share
For the years ended
December 31, 2017
and
2016
, basic earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding during that period (excluding pre-Spin-Off periods in 2016). For the year ended
December 31, 2015
, 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 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. The shares used in the calculation of diluted earnings (loss) per share for 2015 exclude issuances of
109,354
shares of common stock issued to pre-Spin-Off minority shareholders of CTI and
7,362,933
outstanding awards to purchase shares of our common stock, which occurred after the Spin-Off.
Diluted earnings per share gives effect to all dilutive potential shares attributable to outstanding share-based awards during the applicable period. The shares used in the calculation of diluted earnings per share exclude options to purchase shares where the exercise price was greater than the average market price of such share for the period, awards where the effect of their inclusion would have an anti-dilutive effect, and awards with performance-based conditions where the performance criteria had not been met as of the reporting date.
The following table sets forth net income (loss) and the basic and diluted shares used to calculate earnings per share (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Net income (loss)
|
$
|
9,858
|
|
|
$
|
9,096
|
|
|
$
|
(4,467
|
)
|
|
|
|
|
|
|
Basic - weighted average shares outstanding
|
43,204
|
|
|
42,831
|
|
|
42,703
|
|
Effect of dilutive potential securities
|
2,026
|
|
|
1,512
|
|
|
—
|
|
Diluted - weighted average shares outstanding
|
45,230
|
|
|
44,343
|
|
|
42,703
|
|
|
|
|
|
|
|
Anti-dilutive securities
|
3,837
|
|
|
4,222
|
|
|
—
|
|
Note 6 - Business Combinations
On January 8, 2015, we acquired
100%
of the shares of Mercent Corporation ("Mercent"), an online marketing technology and service company that helped merchants optimize performance across online channels, for total cash consideration of approximately
$20.2 million
, net of cash acquired. During the year ended
December 31, 2015
, we incurred
COMMERCEHUB, INC.
Notes to Consolidated Financial Statements
transaction-related costs of approximately
$166 thousand
, which are included in general and administrative expenses on the consolidated statements of comprehensive income (loss).
Under the acquisition method of accounting, the Company allocated the purchase price to the identifiable assets and liabilities based on their estimated fair value, including customer relationships and developed software technology. 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.
Note 7 - Concentrations of Significant Customers and Credit Risk
No single customer accounted for more than 10% of our total revenue in any of the years ended December 31, 2017, 2016 or 2015. However, our revenue model is primarily based on retailer and supplier program relationships whereby many revenue-generating supplier transactions conducted through our platform may be attributable to a single retailer ("Total Program Revenue"). For the year ended
December 31, 2017
, there were
seven
customers with Total Program Revenue that accounted for more than 5% each of our total revenue,
two
of which had Total Program Revenue that accounted for between
10%
and
15%
each of our total revenue.
No
customer represented more than
10%
of accounts receivable at
December 31, 2017
.
Note 8 - Related Party Transactions
Prior to the Spin-Off, Liberty, QVC, Inc. (“QVC”), which is a wholly owned subsidiary of Liberty, and other subsidiaries and equity investments of Liberty were related parties of CommerceHub for GAAP purposes and related persons of CommerceHub for purposes of Regulation S-K under the Securities Exchange Act of 1934, as amended. As a result, because this report includes pre-Spin-Off periods, we have disclosed activities with these entities during such periods. For the year ended December 31, 2017 and future periods that do not include pre-Spin-Off periods, based on current facts and circumstances, we do not expect Liberty, QVC or other subsidiaries or equity investments of Liberty to be related parties or related persons of CommerceHub, but we will continue to monitor and evaluate these relationships and other potential relationships with related parties and/or related persons.
Transactions with QVC
We provide our solutions to QVC in the ordinary course of business. For the years ended
December 31, 2016
and
2015
, Total Program Revenue with QVC accounted for approximately
7%
and
8%
of total revenue, respectively. We had accounts receivable owing from QVC of approximately
$784 thousand
at
December 31, 2016
.
Transactions with Liberty
In previous periods, we had outstanding a promissory note as a lender to Liberty, which carried an interest rate based on one-year LIBOR plus
100 basis points
. In the years ended
December 31, 2016
and
2015
, we earned interest of
$273 thousand
and
$600 thousand
on this promissory note, respectively. During the second quarter of 2016, Liberty fully repaid the
$36.4 million
outstanding under this promissory note, including accumulated interest of
$2.4 million
.
During June 2016, we entered into a funding arrangement with Liberty pursuant to a previously established intercompany funding agreement. Under this arrangement, Liberty agreed to loan us
$28.7 million
, at current market interest rates, so we could fulfill our obligations under the predecessor plan to the CommerceHub, Inc. Legacy Stock Appreciation Rights Plan and our related liquidity program. In July 2016, we fully repaid amounts outstanding pursuant to this arrangement, including accumulated interest, to Liberty using borrowings under our credit facility, and the funding agreement between us and Liberty was terminated as of the completion of the Spin-Off.
In July 2016, in conjunction with the Spin-Off, we collected amounts due from Liberty for federal tax benefits of
$8.5 million
and fully repaid amounts due for state taxes paid of
$1.3 million
. Further, we received a contribution from Liberty of
$6.0 million
to compensate the Company for the dilution associated with Parent equity awards, we paid a dividend of
$18.9 million
to the holders of CTI common stock, including Parent, as a return on investment, and we paid an additional dividend of
$0.9 million
to Parent, as the holder of CTI preferred shares. Amounts owed to Liberty of
$33 thousand
at December 31, 2016 are included in accounts payable and accrued expenses within the consolidated balance sheets.
COMMERCEHUB, INC.
Notes to Consolidated Financial Statements
Note 9 - Capitalized Software
Capitalized software, net was comprised of the following at
December 31
(in thousands):
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Capitalized software
|
$
|
31,650
|
|
|
$
|
32,506
|
|
Less accumulated amortization
|
(28,800
|
)
|
|
(25,790
|
)
|
Capitalized software, net
|
$
|
2,850
|
|
|
$
|
6,716
|
|
During
2017
, we recorded impairment charges totaling
$254 thousand
, included within cost of revenue in the consolidated statements of comprehensive income (loss), for capitalized software projects that will no longer be pursued. A portion of these charges was incurred in connection with our 2017 restructuring plan (see Note 16).
Amortization expense related to capitalized software is included in cost of revenue and was approximately
$4.9 million
,
$5.0 million
and
$3.4 million
, for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
Future amortization expense of existing capitalized software as of
December 31, 2017
is expected to be as follows for the years ending
December 31
(in thousands):
|
|
|
|
|
2018
|
$
|
2,288
|
|
2019
|
477
|
|
2020
|
85
|
|
|
$
|
2,850
|
|
Note 10 - Property and Equipment
Property and equipment consisted of the following at
December 31
(in thousands):
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Computer equipment
|
$
|
14,068
|
|
|
$
|
14,892
|
|
Furniture and fixtures
|
1,130
|
|
|
1,101
|
|
Leasehold improvements
|
3,028
|
|
|
2,965
|
|
Total
|
18,226
|
|
|
18,958
|
|
Less accumulated depreciation
|
(12,160
|
)
|
|
(11,329
|
)
|
Property and equipment, net
|
$
|
6,066
|
|
|
$
|
7,629
|
|
Depreciation of property and equipment totaled approximately
$3.2 million
,
$3.0 million
and
$2.6 million
during the years ended
December 31, 2017
,
2016
and
2015
, respectively.
Note 11 - Goodwill and Intangible Assets
There were
no
changes in the carrying amount of goodwill during the years ended
December 31, 2017
and
2016
.
Intangible assets acquired as of
December 31, 2017
and
2016
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
Life (Years)
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
Developed technology
|
2.0
|
|
$
|
1,500
|
|
|
$
|
(1,500
|
)
|
|
$
|
—
|
|
Customer relationships
|
2.0
|
|
2,000
|
|
|
(2,000
|
)
|
|
—
|
|
Total
|
|
|
$
|
3,500
|
|
|
$
|
(3,500
|
)
|
|
$
|
—
|
|
There was
no
amortization expense related to intangible assets acquired for the year ended
December 31, 2017
and there was
$1.8 million
for each of the years ended
December 31, 2016
and
2015
. Intangible assets acquired were fully amortized as of
December 31, 2016
.
COMMERCEHUB, INC.
Notes to Consolidated Financial Statements
Note 12 - Share-Based Awards
We grant equity incentive awards to certain of our employees (including our executive officers), directors and consultants. Following the Spin-Off, all of the awards we have granted have been stock options and RSUs relating to shares of our Series C common stock. Most of these awards contain service-based vesting conditions (typically annual vesting over
four years
), and some of these awards contain both service- and milestone-based vesting conditions. We also grant deferred stock units ("DSUs") in respect of our Series C common stock to our directors under the Omnibus Incentive Plan and the CommerceHub, Inc. Non-Employee Director Deferred Compensation Plan (the "Deferred Compensation Plan").
Included in the consolidated statements of comprehensive income (loss) are the following amounts of share-based compensation, net of estimated forfeitures, for the years ended December 31 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Cost of revenue
|
$
|
396
|
|
|
$
|
(102
|
)
|
|
$
|
2,361
|
|
Research and development
|
1,728
|
|
|
2,261
|
|
|
7,229
|
|
Sales and marketing
|
553
|
|
|
834
|
|
|
4,098
|
|
General and administrative
|
5,952
|
|
|
8,297
|
|
|
28,462
|
|
|
$
|
8,629
|
|
|
$
|
11,290
|
|
|
$
|
42,150
|
|
Gross tax-related benefits of
$3.6 million
,
$87.2 million
and
$7.5 million
were also recognized for the years ended
December 31, 2017
,
2016
and
2015
, respectively. Cash received from exercises of stock options totaled
$3.3 million
,
$0.8 million
, and
$33 thousand
for the years ended
December 31, 2017
,
2016
and
2015
, respectively, and is included in financing activities in the consolidated statements of cash flows.
CommerceHub Employee Plans
Legacy Plans
Prior to the Spin-Off, CTI issued share-based awards pursuant to an incentive and nonqualified stock option plan adopted in 1999 (the "1999 Plan") and its 2010 Stock Appreciation Rights Plan (the "SAR 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. The SAR Plan authorized grants of up to
6,000,000
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
ten
years from the date of grant for service-based awards. SARs that included both service and performance-based conditions vested based on the satisfaction of service requirements and achievement of performance conditions over the period specified in the applicable award agreement. The SAR Plan was terminated in connection with the Spin-Off.
All of the Company's share-based awards under these plans 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, in each case under a liquidity program. 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
2,663,616
CTI awards then outstanding, consisting of
33,950
options and
2,629,666
SARs, were converted at an exchange ratio of approximately
2.18
, into
5,811,150
options to purchase shares of our Series C common stock. Unlike the original CTI options and SARs, which were able to be settled in cash prior to completion of the Spin-Off, the option awards resulting from the conversion of the original CTI options and SARs may be settled only in shares of our Series C common stock. Except as described above, the terms of these awards (including, for example, the vesting terms thereof) are, in all material respects, the same as those of the corresponding original CTI option or SAR award. These awards were issued pursuant to the CommerceHub, Inc. Legacy Stock Option Plan and the CommerceHub, Inc. Legacy SAR Plan (together, the "Legacy Plans"). The Legacy Plans govern the terms and conditions of these option awards but will not be used to make any new grants following the Spin-Off.
The foregoing conversion of these awards as part of our internal restructuring in connection with the Spin-Off resulted in a modification of the terms and conditions of the pre-Spin-Off awards, and the reclassification of the awards from liability to equity awards. As of the July 21, 2016 modification date, we performed a fair value analysis of the awards immediately before
COMMERCEHUB, INC.
Notes to Consolidated Financial Statements
and immediately after the restructuring. Because the 1999 Plan and the SAR Plan 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 additional paid in capital. The remaining unvested compensation expense is recognized over the remaining service period or, for those awards with performance-based conditions, the service period when such performance conditions are considered probable.
CommerceHub, Inc. 2016 Omnibus Incentive Plan
In connection with the Spin-Off, we adopted 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"). On January 1, 2017, the number of shares available for issuance under the Omnibus Plan was increased by
2,146,064
shares, or
5.0%
of the outstanding shares of our common stock on
December 31, 2016
, to
15,346,064
shares of our Series C common stock, subject to anti-dilution, annual share-reserve increases 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 board of directors, and the compensation committee and its designees (and the board of directors with respect to awards granted to non-employee directors) have full power and authority to determine the terms and conditions of such awards. 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. On June 16, 2017, our public stockholders approved the Second Amended and Restated Omnibus Plan at our 2017 Annual Meeting of Stockholders.
Options Activity under the Omnibus Plan and Legacy Plans (Series C)
The following tables summarize the share-based award activity of options to purchase shares of our common stock under our Omnibus Plan and Legacy Plans for the year ended
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CommerceHub Employee Plans
|
|
Omnibus Plan
|
|
Legacy Plans
|
|
Series C
|
|
Weighted Average Exercise Price
|
|
Series C
|
|
Weighted Average Exercise Price
|
Outstanding at January 1, 2017
|
193,998
|
|
|
$
|
14.59
|
|
|
5,580,109
|
|
|
$
|
12.96
|
|
Granted
|
364,075
|
|
|
$
|
16.56
|
|
|
—
|
|
|
$
|
—
|
|
Exercised
|
(3,544
|
)
|
|
$
|
14.85
|
|
|
(205,963
|
)
|
|
$
|
10.38
|
|
Forfeited
|
(229,437
|
)
|
|
$
|
15.68
|
|
|
(453,925
|
)
|
|
$
|
15.53
|
|
Outstanding at December 31, 2017
|
325,092
|
|
|
$
|
16.02
|
|
|
4,920,221
|
|
|
$
|
12.83
|
|
Weighted average remaining contractual life (in years)
|
9.0
|
|
|
|
|
7.2
|
|
|
|
Aggregate intrinsic value (in thousands)
|
$
|
1,502
|
|
|
|
|
$
|
38,187
|
|
|
|
Exercisable at December 31, 2017
|
28,274
|
|
|
$
|
14.55
|
|
|
2,457,076
|
|
|
$
|
9.61
|
|
Weighted average remaining contractual life (in years)
|
7.7
|
|
|
|
|
5.9
|
|
|
|
Aggregate intrinsic value (in thousands)
|
$
|
171
|
|
|
|
|
$
|
26,978
|
|
|
|
Vested and expected to vest at December 31, 2017
|
285,180
|
|
|
$
|
15.99
|
|
|
4,643,090
|
|
|
$
|
12.62
|
|
Weighted average remaining contractual life (in years)
|
9.0
|
|
|
|
|
7.1
|
|
|
|
|
Aggregate intrinsic value (in thousands)
|
$
|
1,325
|
|
|
|
|
$
|
36,999
|
|
|
|
|
The aggregate intrinsic value of options exercised under the Omnibus Plan during
2017
was
$23 thousand
. There were no exercises under the Omnibus Plan during 2016.
We do not issue new grants under the Legacy Plans. The aggregate intrinsic value of options exercised under the Legacy Plans was
$1.7 million
during
2017
and
$0.5 million
during the post-Spin-Off period in
2016
. The aggregate intrinsic value of options exercised under the 1999 Plan and the SAR Plan was
$86.7 million
during the pre-Spin-Off period in
2016
and
$7.5 million
during the year ended
December 31, 2015
.
COMMERCEHUB, INC.
Notes to Consolidated Financial Statements
As of
December 31, 2017
, unrecognized compensation cost related to options to purchase shares of our Series C common stock under the Omnibus Plan and Legacy Plans was approximately
$1.4 million
and
$9.9 million
, respectively, and is expected to be recognized over weighted-average remaining vesting periods of approximately
3.2 years
and
2.6 years
, respectively.
RSU Activity Under the Omnibus Plan (Series C)
The following table summarizes the share-based award activity of RSUs relating to our Series C common stock granted under the Omnibus Plan for the year ended
December 31, 2017
:
|
|
|
|
|
|
|
|
|
Number of
awards
|
|
Weighted
average
grant-date fair value
|
Outstanding at January 1, 2017
|
505,831
|
|
|
$
|
14.35
|
|
Granted
|
442,263
|
|
|
$
|
17.31
|
|
Vested
|
(123,645
|
)
|
|
$
|
14.34
|
|
Forfeited
|
(280,954
|
)
|
|
$
|
15.36
|
|
Outstanding at December 31, 2017(1)
|
543,495
|
|
|
$
|
16.15
|
|
(1) Includes
40,850
DSUs relating to our Series C common stock issued to our directors. These DSUs are vested, but the underlying shares of Series C common stock will not be issued until delivery pursuant to the Deferred Compensation Plan.
The weighted average grant-date fair value of RSUs granted under the Omnibus Plan during
2016
was
$14.35
. The total fair value as of the respective vesting dates of RSUs vested during
2017
was
$2.3 million
and there were
no
RSUs vested for both years ended
December 31, 2016
and
2015
.
As of
December 31, 2017
, unrecognized compensation cost in respect of RSUs relating to shares of Series C common stock was approximately
$4.3 million
and is expected to be recognized over a weighted average remaining vesting period of approximately
2.8 years
.
CommerceHub, Inc. Employee Stock Purchase Plan
In connection with the Spin-Off, we also adopted the ESPP, which 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 our Series C common stock at the beginning of the applicable six-month offering period, and (b) the fair market value of our Series C common stock at the end of the applicable six-month offering period. We originally reserved
900,000
shares of our Series C common stock for issuance under the ESPP, which was increased to
1,329,212
shares on January 1, 2017 and is increased annually on the first day of each calendar year by the lesser of
one percent
of our total outstanding common stock on the last day of the immediately preceding calendar year or such other amount determined by the plan administrator. The first offering period under the ESPP began on January 1, 2017. For the year ended
December 31, 2017
, we recorded approximately
$302 thousand
of share-based compensation expense associated with the ESPP. During
2017
, employees purchased
36,298
shares of Series C common stock under the ESPP and total cash received from ESPP purchases was
$464 thousand
.
Liberty Employee Plans
In connection with the Spin-Off, holders of option awards, RSUs and restricted stock awards ("RSAs") relating to Liberty's Liberty Ventures common stock received CommerceHub options, RSUs and RSAs, respectively, pursuant to the CommerceHub, Inc. Transitional Stock Adjustment Plan (the “Transitional Plan”). The Transitional Plan, which is administered for the benefit of Liberty employees and consultants, governs the terms and conditions of these new awards but will not be used to make any further grants.
CommerceHub, Inc. Transitional Stock Adjustment Plan
Prior to the Spin-Off, Liberty had granted to certain directors, officers, employees and consultants of Liberty options to purchase shares of Liberty Ventures common stock (each, an "original Ventures option award") pursuant to applicable incentive plans in place at Liberty. Each holder of an outstanding 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 CommerceHub option awards") and (ii) an
COMMERCEHUB, INC.
Notes to Consolidated Financial Statements
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 CommerceHub option awards and the related adjusted Ventures option awards were determined based on the exercise price of and the number of shares subject to the applicable 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 awards was allocated between the new CommerceHub option awards and the adjusted Ventures option awards.
All other holders of original Ventures option awards did not receive any new CommerceHub 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 awards based on the exercise price of and number of shares subject to such original Ventures option awards, 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 the adjusted Ventures option awards and the new CommerceHub option awards (including, for example, the vesting terms thereof) are, in all material respects, the same as those of the corresponding original Ventures option awards.
Options Activity Under the Transitional Plan (Series A and Series C)
The following table summarizes the share-based award activity of options to purchase shares of our common stock under the Transitional Plan for the year ended
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liberty Employee Plans
|
|
Transitional Plan
|
|
Series A
|
|
Weighted Average Exercise Price
|
|
Series C
|
|
Weighted Average Exercise Price
|
Outstanding at January 1, 2017
|
329,188
|
|
|
$
|
7.46
|
|
|
1,006,043
|
|
|
$
|
8.93
|
|
Granted
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
Exercised
|
(61,248
|
)
|
|
$
|
5.63
|
|
|
(136,220
|
)
|
|
$
|
5.62
|
|
Forfeited
|
(1,785
|
)
|
|
$
|
12.51
|
|
|
(3,558
|
)
|
|
$
|
12.46
|
|
Outstanding and expected to vest at December 31, 2017
|
266,155
|
|
|
$
|
7.90
|
|
|
866,265
|
|
|
$
|
9.45
|
|
Weighted average remaining contractual life (in years)
|
3.0
|
|
|
|
|
3.5
|
|
|
|
Aggregate intrinsic value (in thousands)
|
$
|
3,733
|
|
|
|
|
$
|
9,650
|
|
|
|
Exercisable at December 31, 2017
|
203,611
|
|
|
$
|
6.44
|
|
|
460,899
|
|
|
$
|
7.23
|
|
Weighted average remaining contractual life (in years)
|
2.3
|
|
|
|
|
2.6
|
|
|
|
Aggregate intrinsic value (in thousands)
|
$
|
3,149
|
|
|
|
|
$
|
6,159
|
|
|
|
We do not issue new grants under the Transitional Plan. The aggregate intrinsic value of options to purchase Series A common stock exercised under the Transitional Plan was
$0.7 million
during
2017
and
$0.1 million
during the post-Spin-Off period in 2016. The aggregate intrinsic value of options to purchase Series C common stock exercised under the Transitional Plan was
$1.5 million
during
2017
and
$0.2 million
during the post-Spin-Off period in 2016. There is
no
unrecognized compensation cost related to stock options under the Transitional Plan because they are held by employees of Liberty and any related compensation expense is incurred by Liberty.
Options Activity Under the Transitional Plan (Series B)
As of December 31, 2017, there were
172,882
new CommerceHub option awards to purchase shares of our Series B common stock outstanding, with a weighted average exercise price of
$11.89
, aggregate intrinsic value of
$2.0 million
, and weighted average remaining contractual life of
4.2 years
. There was no activity relating to these awards during the year ended
December 31, 2017
. As of December 31, 2017,
32,052
of these stock options were exercisable, with a weighted average
COMMERCEHUB, INC.
Notes to Consolidated Financial Statements
exercise price of
$12.49
, aggregate intrinsic value of
$353 thousand
and weighted average remaining contractual life of
4.9 years
. There is
no
unrecognized compensation cost related to options to purchase shares of our Series B common stock under the Transitional Plan because these awards are held by an employee of Liberty and any related compensation expense is incurred by Liberty.
RSAs and RSUs Under the Transitional Plan
Each holder of an RSU relating to shares of Series A or Series B Liberty Ventures common stock (an "original Ventures RSU") on the record date received
0.1
of an RSU relating to shares of the corresponding series of CommerceHub common stock and
0.2
of an RSU relating to shares of CommerceHub Series C common stock (such new RSU awards, "new CommerceHub RSUs") for each original Ventures RSU held by them as of the record date, with cash paid in lieu of fractional new CommerceHub RSUs. Except as described herein, the terms of all of the new CommerceHub RSUs (including, for example, the vesting terms thereof) are, in all material respects, the same as those of the corresponding original Ventures RSU.
Each holder of an RSA relating to shares of Series A or Series B Liberty Ventures common stock (an "original Ventures RSA") on the record date received (i)
0.1
of an RSA relating to the corresponding series of CommerceHub common stock and (ii)
0.2
of an RSA relating to CommerceHub Series C common stock (such new RSAs, "new CommerceHub RSAs") for each RSA relating to Liberty Ventures common stock held by them as of the record date, with cash paid in lieu of fractional new CommerceHub RSAs. Except as described herein, the terms of all new CommerceHub RSAs (including, for example, the vesting terms thereof) are, in all material respects, the same as those of the corresponding original Ventures RSA.
RSA and RSU Activity Under the Transitional Plan (Series A and Series C)
Share-based award activity for RSUs and RSAs relating to our Series A and Series C common stock issued under the Transitional Plan for the year ended
December 31, 2017
was not material. As of December 31, 2017, there were
4,357
RSAs and
118
RSUs relating to our Series A common stock outstanding, and there were
8,745
RSAs and
236
RSUs relating to our Series C common stock outstanding. There is
no
unrecognized compensation cost related to these awards because they are held by employees of Liberty and any related compensation expense is incurred by Liberty.
Note 13 - Income Taxes
For pre-Spin-Off periods, CTI was part of the Liberty federal consolidated tax group, and federal income taxes were paid to (or refunded by) Liberty pursuant to the terms of a tax sharing agreement under which taxes were computed on a separate company basis. Following the Spin-Off, CommerceHub is a separate, stand-alone federal taxpayer. The tax provision included in these consolidated financial statements has been prepared on a stand-alone basis, as if CommerceHub was not part of the Liberty consolidated group. Accordingly, the effective tax rate of the Company in future years could vary from its historical effective tax rates depending on, among other factors, the Company's legal structure and related tax elections from time to time.
Liberty filed income tax returns in the U.S. federal jurisdiction, various state jurisdictions and the United Kingdom. In the normal course of business, Liberty is subject to examination by various taxing authorities. All tax years prior to 2015 are closed. Liberty's 2015 and 2016 tax years are being examined currently under the IRS's Compliance Assurance Process ("CAP") program. The 2015 and 2016 examinations are substantially complete and are expected to be formally closed in the first quarter of 2018. The statute of limitations periods in the applicable state jurisdictions vary, but generally expire three to four years from the due date or filing of the tax return.
Beginning with the 2016 post-Spin-Off period and for subsequent periods, CommerceHub files income tax returns in the U.S. federal jurisdiction, various state jurisdictions and the United Kingdom. CommerceHub has historically filed stand-alone income tax returns in various state jurisdictions and has expanded the list of states in the post-Spin-Off period. In the normal course of business, CommerceHub is subject to examination by various taxing authorities. CommerceHub's 2016 post-Spin-Off tax return is currently "open" and is not eligible to participate in the CAP program. The statute of limitations periods in the various state jurisdictions in which CommerceHub historically filed stand-alone income tax returns vary, but generally expire three to four years from the due date or filing of the tax return.
COMMERCEHUB, INC.
Notes to Consolidated Financial Statements
Income tax expense (benefit) consists of the following at December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Current
|
|
|
|
|
|
|
|
Federal
|
$
|
10,884
|
|
|
$
|
(11,497
|
)
|
|
$
|
7,931
|
|
State and local
|
1,411
|
|
|
(2,674
|
)
|
|
2,477
|
|
Foreign
|
10
|
|
|
7
|
|
|
—
|
|
Total current
|
12,305
|
|
|
(14,164
|
)
|
|
10,408
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
2,815
|
|
|
15,869
|
|
|
(9,942
|
)
|
State and local
|
756
|
|
|
5,457
|
|
|
(2,347
|
)
|
Total deferred
|
3,571
|
|
|
21,326
|
|
|
(12,289
|
)
|
Total tax expense (benefit)
|
$
|
15,876
|
|
|
$
|
7,162
|
|
|
$
|
(1,881
|
)
|
There were
no
uncertain tax positions as of
December 31, 2017
or
December 31, 2016
. There were
no
accrued interest or penalties recognized in the consolidated balance sheet as of
December 31, 2017
and
December 31, 2016
.
Income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of
35%
to income (loss) before taxes as a result of the following for the years ended December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Computed "expected" tax expense
|
$
|
9,007
|
|
|
$
|
5,690
|
|
|
$
|
(2,222
|
)
|
Increase (decrease) resulting from:
|
|
|
|
|
|
|
|
|
Impact of the Tax Act on deferred tax assets
|
3,161
|
|
|
—
|
|
|
—
|
|
Section 162(m) adjustment
|
3,276
|
|
|
—
|
|
|
—
|
|
State tax law change
|
—
|
|
|
1,524
|
|
|
—
|
|
State and local income taxes, net of federal income tax benefit
|
852
|
|
|
284
|
|
|
(21
|
)
|
Impact of state rate change on deferred taxes
|
293
|
|
|
—
|
|
|
105
|
|
Non-deductible expenses
|
21
|
|
|
66
|
|
|
228
|
|
Excess share-based compensation deduction
|
(157
|
)
|
|
—
|
|
|
—
|
|
Market adjustment for options exercised
|
—
|
|
|
127
|
|
|
319
|
|
Write-off federal NOL
|
—
|
|
|
122
|
|
|
—
|
|
Research and development tax credits
|
(559
|
)
|
|
(649
|
)
|
|
(368
|
)
|
Other
|
(18
|
)
|
|
(2
|
)
|
|
78
|
|
Total tax expense (benefit)
|
$
|
15,876
|
|
|
$
|
7,162
|
|
|
$
|
(1,881
|
)
|
The increase in income tax expense was due to increased pre-tax book income of
$25.7 million
in the year ended
December 31, 2017
as compared to pre-tax book income of
$16.3 million
in 2016. In addition, the U.S. Tax Cuts and Jobs Act ("Tax Act") was enacted on December 22, 2017 and introduces significant changes to U.S. income tax law. Effective in 2018, the Tax Act reduces the U.S. statutory tax rate from 35% to 21%, among other changes. Accordingly, we have adjusted our deferred income taxes as of December 22, 2017 to reflect the reduced rate that will apply in future periods when these deferred taxes are settled or realized, which resulted in a deferred tax expense of
$3.2 million
.
In addition, actual income tax expense for the year ended
December 31, 2017
was greater than the federal income tax rate of 35% due to an immaterial error correction recorded in 2017 associated with limitations on deductions under Section 162(m) of the Internal Revenue Code (the “IRC”) with respect to certain share-based compensation awards granted prior to the Spin-Off, which limit the Company’s future deductions on these share-based compensation awards in our stand-alone provision beginning at the Spin-Off. The Company did not appropriately reflect these Section 162(m) limitations on our deferred tax asset at the time of the Spin-Off in 2016. As a result, fiscal 2016 deferred income tax expense was understated by approximately
$3.3 million
, with a corresponding overstatement of deferred tax assets. The
$3.3 million
effect of this error was corrected in the fourth quarter of 2017 and is incorporated in our 2017 tax expense and included in the “Section 162(m) adjustment” in the table above.
COMMERCEHUB, INC.
Notes to Consolidated Financial Statements
Furthermore, the increase in income tax expense in 2016 as compared to the benefit in 2015 is primarily due to pre-tax book income of
$16.3 million
in 2016 as compared to a pre-tax book loss of
$6.3 million
in 2015. In 2016, actual income tax expense was greater than the amounts computed by applying the U.S. federal income tax rate of
35%
, primarily due to an immaterial error correction recorded in 2016 associated with a change in tax law in New York State (“NY”). This tax law change, which was enacted in 2014 and effective in 2015, revised the method used to determine NY apportionment. We did not appropriately update the NY apportionment rate to reflect the impact of this law change in 2014. The
$1.5 million
net effect of this error was corrected in the fourth quarter of 2016 and is incorporated in our 2016 income tax expense, and included in “State tax law change” in the table above.
Based on our assessment of the quantitative and qualitative factors, these errors and related impacts, both individually and in the aggregate, were not considered material to the consolidated financial statements for any periods in which these errors originated, and correction of these errors was not considered material to our 2016 or 2017 consolidated financial statements.
The write-off of federal net operating loss carryforwards ("NOLs") is the result of forfeiting one year of IRC Section 382 limitations described below and NOLs in conjunction with the Spin-Off, as both the pre- and post-Spin-Off periods in 2016 count against the available number of periods, while the amount of NOLs we are limited to in 2016 does not change.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below (in thousands) at
December 31
:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Deferred tax assets:
|
|
|
|
|
|
Accounts receivable allowances
|
$
|
268
|
|
|
$
|
75
|
|
Deferred revenue
|
1,695
|
|
|
2,721
|
|
Accrued liabilities
|
965
|
|
|
426
|
|
Shared-based compensation
|
3,106
|
|
|
5,948
|
|
Net operating loss
|
1,852
|
|
|
3,999
|
|
Other
|
59
|
|
|
1
|
|
Total deferred tax assets
|
7,945
|
|
|
13,170
|
|
Deferred tax liabilities:
|
|
|
|
|
|
Software and deferred costs
|
1,909
|
|
|
4,372
|
|
Property and equipment
|
238
|
|
|
1,084
|
|
Total gross deferred tax liabilities
|
2,147
|
|
|
5,456
|
|
Net deferred tax asset
|
$
|
5,798
|
|
|
$
|
7,714
|
|
In assessing the realizability of deferred tax assets, management considers whether it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considered the scheduled reversal of deferred tax liabilities and projected future taxable income in making this assessment. Based upon the level of projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more-likely-than-not that the Company will realize the benefits of these deductible differences.
During the year ended December 31, 2016, the exercise of a significant portion of share-based compensation awards created a tax deductible expense, and reduced our deferred tax asset related to share-based compensation awards by
$31.3 million
. The deductions generated estimated gross federal NOLs of approximately
$74.7 million
. As allowed under the tax sharing agreement between the Company and Liberty entered into prior to the Spin-Off,
$49.1 million
of these NOLs were utilized to refund federal income taxes paid to Liberty in the prior two tax years. In accordance with the same tax sharing agreement, subject to finalizing our 2016 pre-Spin-Off federal tax return, the estimated remaining federal NOLs of
$25.6 million
were forfeited and recorded as an equity distribution to Liberty upon the Spin-Off in 2016. During the year ended December 31, 2017, upon finalizing our consolidated federal returns for the pre-spin period, we adjusted the amount of remaining gross federal NOLs we ultimately forfeited to Liberty. The adjustment totaled
$5.1 million
, which was recorded as an equity distribution to Liberty in 2017 and is included in the change in additional paid-in capital on our consolidated balances sheets for 2017.
As of
December 31, 2017
, we had unused federal NOLs that were acquired as part of the Mercent acquisition. Under IRC Section 382, if it is determined that, due to transactions involving CommerceHub's shares owned by its 5 percent or greater
COMMERCEHUB, INC.
Notes to Consolidated Financial Statements
shareholders, a change of ownership has occurred under the provisions of IRC Section 382, our federal NOLs could be subject to IRC Section 382 limitations.
Based on studies of the changes in ownership of Mercent at acquisition, we have determined that IRC Section 382 ownership changes did occur, which limit the amount of NOLs that can be used in future years. As of
December 31, 2017
, we had a total of
$7.9 million
in unused NOLs, of which approximately
$1.5 million
of NOLs are available to be utilized each year from 2018 to 2019, and approximately
$350 thousand
of NOLs are available to be utilized each year from 2020 to 2033.
Note 14 - 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
December 31, 2017
, we had
no
borrowings and
no
letters of credit outstanding under the facility, and our available borrowings under the facility were
$125.0 million
. The fair value of the debt under our credit facility, which holds a floating interest rate of a short duration and is based on Level 2 valuation inputs, approximates the carrying value when a balance is outstanding.
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%
. The revolving credit facility also carries a commitment fee on the unused portion that increases as our total leverage ratio increases, ranging from
0.25%
to
0.50%
per annum. In conjunction with entering into this credit facility, we incurred charges totaling
$1.1 million
. These charges are included in other long-term assets on the consolidated balance sheets and are 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
December 31, 2017
.
Note 15 - 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, prospects, financial condition, results of operations and/or cash flows.
Leases
The Company leases its corporate offices and primary operations facility under an operating lease arrangement which expires in March 2022, with renewal provisions that allow the Company to extend the lease through March 2028. We also lease office facilities in Seattle, Washington and shared office and executive office facilities in Hertford, England. During the first quarter of
2017
, we entered into a new lease for office space in Seattle, Washington and, at the same time, entered into a sub-lease of our existing space in Seattle. During the second quarter of 2017, we vacated our previous office and moved into the new office space and, as a result, recognized an impairment charge equal to the fair value of the unrecovered payments for the remainder of the lease, which was not material.
Total rent expense for the Company's office space for the years ended
December 31, 2017
,
2016
and
2015
was
$2.0 million
,
$1.9 million
and
$1.4 million
, respectively.
Future minimum lease payments due under operating lease arrangements contain rent increases over the term of the lease. Rent expense on these operating leases is recognized over the term of the lease on a straight-line basis. The excess of rent expense over future minimum lease payments due totaled
$2.5 million
and
$1.1 million
at
December 31, 2017
and
2016
, respectively, and is included in other long-term liabilities on the consolidated balance sheets.
COMMERCEHUB, INC.
Notes to Consolidated Financial Statements
At
December 31, 2017
, contractual minimum payments under operating leases were as follows (in thousands):
|
|
|
|
|
Year Ending December 31,
|
|
2018
|
$
|
2,652
|
|
2019
|
2,201
|
|
2020
|
2,183
|
|
2021
|
2,139
|
|
2022
|
362
|
|
Total minimum lease payments (1)
|
$
|
9,537
|
|
(1) Total minimum payments under our operating leases exclude
$2.4 million
in rental income from sub-tenants, consisting of
$0.6 million
due in each of the respective years ending December 31, 2018 through 2021.
Note 16 - Restructuring
In September 2017, we commenced a plan to consolidate our software development team and certain other corporate activities into our Albany, NY headquarters to more effectively support the ongoing growth of our business by streamlining and centralizing operations (the "2017 restructuring plan"). The 2017 restructuring plan included the immediate reduction of certain positions in our Seattle, WA office, the retention of certain Seattle-based engineers for a transition period, the gradual replacement of many of those positions in Albany, and the long-term presence of a Seattle-based account services team dedicated to brands and marketplace customers.
In connection with the 2017 restructuring plan, we recognized charges for termination benefits during the year ended
December 31, 2017
. The 2017 restructuring plan also includes retention benefits for employees who stay with the Company, which will be earned and paid out based on time-based milestones, with the last payments expected to occur in January 2019. As a result, the expenses related to these retention incentives will be recorded ratably over each employee’s applicable retention period.
As of
December 31, 2017
, we estimate that the total expenses associated with the 2017 restructuring plan will be approximately
$6.0 million
, of which
$2.3 million
was recognized in 2017, with the remaining expenses primarily being recognized throughout 2018. This estimate includes future expenses expected to be incurred from termination and retention benefits accrued over the retention period as well as payroll and related costs for redundant positions as we transition our software development team and certain other corporate activities into our Albany, NY headquarters, but which does not take into account actual and expected cost savings from reduced headcount associated with the 2017 restructuring plan.
During the year ended
December 31, 2017
, we incurred
$2.3 million
in restructuring charges within the consolidated statements of comprehensive income (loss) as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenue
|
|
Research and Development
|
|
Sales and Marketing
|
|
General and Administrative
|
|
Total Restructuring Expenses
|
Termination & retention benefits
|
$
|
295
|
|
|
$
|
1,345
|
|
|
$
|
384
|
|
|
$
|
64
|
|
|
$
|
2,088
|
|
Impairment of capitalized software
|
191
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
191
|
|
Total restructuring expenses
|
$
|
486
|
|
|
$
|
1,345
|
|
|
$
|
384
|
|
|
$
|
64
|
|
|
$
|
2,279
|
|
The table below sets forth our restructuring liability during the year ended
December 31, 2017
(in thousands):
|
|
|
|
|
|
Total Restructuring Liability
|
Balance at January 1, 2017
|
$
|
—
|
|
Restructuring charges
|
2,088
|
|
Non-cash adjustments
|
—
|
|
Cash payouts
|
(812
|
)
|
Balance at December 31, 2017
|
$
|
1,276
|
|
COMMERCEHUB, INC.
Notes to Consolidated Financial Statements
Our total restructuring liability of
$1.3 million
consists of accruals for termination and retention benefits. We expect
$0.5 million
of these benefits will be paid within the next 12 months, and this portion is included in accounts payable and accrued expenses within the consolidated balance sheets. The remaining
$0.8 million
of these benefits, which we expect to fully pay by the first quarter of 2019, is included in other long-term liabilities within the consolidated balance sheets.
Note 17 - Selected Quarterly Information (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended,
|
|
March 31, 2017
|
|
June 30, 2017
|
|
September 30, 2017
|
|
December 31, 2017
|
|
(in thousands, except per share amounts)
|
Revenue
|
$
|
24,568
|
|
|
$
|
25,208
|
|
|
$
|
24,614
|
|
|
$
|
36,731
|
|
Gross profit
|
19,052
|
|
|
19,569
|
|
|
19,586
|
|
|
31,314
|
|
Income from operations
|
4,267
|
|
|
3,841
|
|
|
3,318
|
|
|
15,040
|
|
Net income
|
$
|
2,459
|
|
|
$
|
2,245
|
|
|
$
|
1,988
|
|
|
$
|
3,166
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.06
|
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
|
$
|
0.07
|
|
Diluted
|
$
|
0.06
|
|
|
$
|
0.05
|
|
|
$
|
0.04
|
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended,
|
|
March 31, 2016
|
|
June 30, 2016
|
|
September 30, 2016
|
|
December 31, 2016
|
|
(in thousands, except per share amounts)
|
Revenue
|
$
|
22,090
|
|
|
$
|
23,103
|
|
|
$
|
22,478
|
|
|
$
|
32,881
|
|
Gross profit
|
15,985
|
|
|
17,783
|
|
|
16,741
|
|
|
26,986
|
|
Income (loss) from operations
|
(3,026
|
)
|
|
7,280
|
|
|
633
|
|
|
11,805
|
|
Net income (loss)
|
$
|
(1,990
|
)
|
|
$
|
4,424
|
|
|
$
|
710
|
|
|
$
|
5,952
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:*
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.04
|
)
|
|
$
|
0.10
|
|
|
$
|
0.02
|
|
|
$
|
0.14
|
|
Diluted
|
$
|
(0.04
|
)
|
|
$
|
0.10
|
|
|
$
|
0.02
|
|
|
$
|
0.13
|
|
*
Share count for pre-Spin-Off periods represent the shares issued at Spin-Off on July 22, 2016.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 and 15d-15 under the Exchange Act, as of the end of the period covered by this Annual Report on Form 10-K.
Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2017, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act. Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework set forth in "Internal Control—Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework).
Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2017. Management reviewed the results of its assessment with our Audit Committee.
The effectiveness of our internal control over financial reporting as of December 31, 2017 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in its report, which is included in Item 8 of this Annual Report on Form 10-K.
Limitations on Effectiveness of Controls and Procedures and Internal Control over Financial Reporting
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures and internal control over financial reporting, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and preventing and detecting misstatements.
Remediation of Prior Material Weakness in Internal Control over Financial Reporting
We identified a material weakness in our internal control over financial reporting that existed as of December 31, 2015 and 2016, relating to the processes and controls to properly identify and account for transactions of a complex and non-routine nature. We hired a new Chief Accounting Officer and a new Chief Financial Officer in May and June 2016, respectively. Together, these officers developed and executed a plan to remediate the material weakness, which included hiring additional personnel with SEC reporting and technical accounting experience and creating tax and internal audit functions. In addition to these organizational changes, we implemented new policies and processes, including formalizing our delegation of authority, defining processes to document the accounting for non-routine or complex transactions, enhancing account reconciliation controls, and expanding the use of our financial systems used for accounting and financial reporting. We also have completed our process to review, document and test our internal control over financial reporting.
Based upon the successful execution of the remediation plan above and the testing and evaluation of the effectiveness of our internal control over financial reporting, we have concluded that the material weakness referred to above no longer existed as of December 31, 2017.
Changes in Internal Control over Financial Reporting
In December 2017, our former Chief Financial Officer resigned from the Company, at which time our Chief Commercial Officer and former Chief Accounting Officer was appointed as Chief Financial Officer, also assuming the role of principal financial and accounting officer, while continuing to serve as our Chief Commercial Officer.
Other than the changes 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 Exchange Act) during the quarter ended
December 31, 2017
that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.