| SIGNIFICANT ACCOUNTING POLICIES | SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Reclassification Certain prior period amounts included in the consolidated statements of operations have been reclassified to conform to the current period’s presentation. Previously, depreciation and amortization expense was presented separately from cost of revenue and operating expenses in the consolidated statements of operations. Beginning with the first quarter of 2016, the Company now includes depreciation and amortization expense in cost of revenue and operating expenses in the consolidated statements of operations and separately discloses the amounts reflected in each financial statement line item in the notes to its consolidated financial statements. In addition, the Company has revised the classification of certain operating expenses to better align the income statement line items with how operations are managed. All reclassifications had no effect on the Company's reported gross profit and net loss for the years ended December 31, 2015 and 2014 . The tables below summarize these reclassifications (in thousands): Year Ended December 31, 2015 As Previously Reported Reclassification As Reclassified Cost of revenue $ 20,848 $ 4,986 $ 25,834 Depreciation - Cost of revenue 4,986 (4,986 ) — Sales and marketing 51,941 1,829 53,770 Research and development 16,060 506 16,566 General and administrative 24,136 1,472 25,608 Depreciation and amortization 3,807 (3,807 ) — Year Ended December 31, 2014 As Previously Reported Reclassification As Reclassified Cost of revenue $ 20,713 $ 3,507 $ 24,220 Depreciation - Cost of revenue 3,507 (3,507 ) — Sales and marketing 54,902 1,622 56,524 Research and development 16,215 370 16,585 General and administrative 20,815 765 21,580 Depreciation and amortization 2,757 (2,757 ) — Depreciation and amortization expense is included in the following line items in the accompanying consolidated statements of operations for the years ended December 31, 2016 , 2015 and 2014 (in thousands): 2016 2015 2014 Cost of revenue $ 4,632 $ 4,986 $ 3,507 Sales and marketing 1,136 1,264 927 Research and development 458 506 370 General and administrative 1,612 2,037 1,460 $ 7,838 $ 8,793 $ 6,264 Recent Accounting Pronouncements The following table provides a brief description of recently issued accounting standards: Standard Description Effective Date Effect on the Financial Statements or Other Significant Matters Standards that are not yet adopted Revenue Recognition: Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606) The standard will replace existing revenue recognition standards and provides that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires improved disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized. Entities have the option of using either a full retrospective or modified retrospective approach for the adoption of the standard. January 1, 2018 The Company has commenced a comprehensive project plan to direct the implementation of the new revenue recognition standards, including an analysis of its contract portfolio, evaluation of new revenue system requirements and IT updates, and assessment of the impact to business processes. The Company anticipates that the adoption of the new standards will impact the timing of revenue recognition of fixed fees for its contracts, as well as the accounting for costs to obtain and fulfill contracts. For managed-service contracts, the Company currently defers revenue until the completion of the implementation services, at which point the Company recognizes a cumulative catch-up adjustment equal to the revenue earned during the implementation period but previously deferred. The remaining balance of these fixed fees is recognized ratably over the remaining term of the contract. Under the new standard, the Company expects revenue recognition for the subscription and implementation fees to begin on the launch date and to be recognized ratably through the contract end date, with no cumulative catch-up adjustment on the launch date. Further, the Company currently expenses sales commissions and direct labor related to certain launch services as incurred. Under the new standard, the Company will be required to defer and amortize these contract costs. The Company intends to adopt the new standard using the modified retrospective transition method effective January 1, 2018. The Company continues to evaluate the provisions of ASU 2014-09 and the related amendments to identify further potential impacts to its consolidated financial statements. ASU 2016-08, Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net) The standard clarifies implementation guidance on principal versus agent considerations in ASU 2014-09. ASU 2016-10, Identifying Performance Obligations and Licensing The standard clarifies implementation guidance on the identification of performance obligations and the licensing implementation guidance in ASU 2014-09. ASU 2016-12, Narrow-Scope Improvements and Practical Expedients The standard clarifies the guidance on assessing collectability, presentation of sales taxes, noncash consideration and completed contracts and contract modifications at transition. ASU 2016-20, Technical Corrections and Improvements to Topic 606 The standard clarifies certain narrow aspects of ASU 2014-09. Leases: ASU 2016-02, Leases (Topic 842) The standard requires that lessees recognize assets and liabilities for leases with lease terms greater than twelve months in the statement of financial position. The standard also requires improved disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows arising from leases. January 1, 2019 The Company is currently evaluating the impact the adoption of the standard will have on its consolidated financial statements. Financial Instruments: ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) The standard replaces the incurred loss impairment methodology in current U.S. GAAP (defined below) with a methodology that reflects expected credit losses. The update is intended to provide financial statement users with more useful information about expected credit losses. January 1, 2020 The Company is currently evaluating the impact the adoption of the standard will have on its consolidated financial statements. Cash Flow: ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments (Topic 230) The standard 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 the statement of cash flows. January 1, 2018 The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements. ASU 2016-18, Restricted Cash The standard requires that entities show the changes in the 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. January 1, 2018 The Company is currently evaluating the impact the adoption of the standard will have on its consolidated financial statements. Goodwill: ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment The standard 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. January 1, 2020 The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements. Standards that were adopted Deferred Taxes: ASU 2015-17, Balance Sheet Classification of Deferred Taxes (Topic 740) The standard requires that all deferred tax assets and liabilities, including any related valuation allowance, be classified as noncurrent on the balance sheet. January 1, 2016 The Company elected to adopt this standard prospectively in the first quarter of 2016. As such, prior period results in the Company's consolidated financial statements have not been retrospectively adjusted. Stock-Based Compensation: ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718) The standard is intended to simplify several aspects of the accounting for share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. January 1, 2017 The Company adopted the standard effective January 1, 2017 and the adoption did not have a material impact on its consolidated financial statements. The Company has reviewed other new accounting pronouncements that were issued as of December 31, 2016 and does not believe that these pronouncements are applicable to the Company, or that they will have a material impact on its financial position or results of operations. Use of Estimates The preparation of financial statements in conformity with United States generally accepted accounting principles ("U.S. GAAP") requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. On an ongoing basis, the Company evaluates its estimates, including those related to the accounts receivable allowance, the useful lives of long-lived assets and other intangible assets, income taxes and assumptions used for purposes of determining stock-based compensation, among others. Estimates and assumptions are also required to value assets acquired and liabilities assumed as well as contingent consideration, where applicable, in conjunction with business combinations. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable, the results of which form the basis for making judgments about the carrying value of assets and liabilities. Cash and Cash Equivalents The Company considers all highly liquid investments maturing within ninety days or less at the time of purchase to be cash equivalents. Cash and cash equivalents are comprised of cash and money market funds. Due to the short-term nature and liquidity of these financial instruments, the carrying value of these assets approximates fair value. Revenue Recognition and Deferred Revenue The majority of the Company’s revenue is derived from subscription fees paid by customers for access to and usage of the Company’s cloud-based SaaS platform for a specified period of time, which is typically one year . A portion of the subscription fee is typically fixed and is based on a specified minimum amount of gross merchandise value ("GMV") or advertising spend that a customer expects to process through the Company’s platform over the contract term. The remaining portion of the subscription fee is variable and is based on a specified percentage of GMV or advertising spend processed through the Company’s platform in excess of the customer’s specified minimum amount. In addition, other sources of revenue consist primarily of implementation fees, which may include fees for providing launch assistance and training. Implementation services are provided at the customer's option and are not essential to the functionality of the Company's platform, nor is the customer required to purchase these services in order to access the Company's platform. The Company also generates revenue from its solutions that allow branded manufacturers to direct potential consumers from their websites and digital marketing campaigns to authorized resellers. These contracts are generally one year in duration. The Company recognizes revenue when there is persuasive evidence of an arrangement, the service has been provided to the customer, the collection of the fee is reasonably assured and the amount of the fee to be paid by the customer is fixed or determinable. The Company’s contractual arrangements include performance, termination and cancellation provisions, but do not provide for refunds. Customers do not have the contractual right to take possession of the Company’s software at any time. The Company’s arrangements generally contain multiple elements comprised of subscription and implementation services. The Company evaluates each element in an 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 the Company’s control. The Company’s implementation services are not sold separately from the subscription and there is no alternative use for them. As such, the Company has determined the implementation services do not have standalone value. Accordingly, subscription and implementation services are combined and recognized as a single unit of accounting. The Company generally recognizes the fixed portion of subscription fees and implementation fees ratably over the contract term. Recognition begins when the customer has access to the Company’s platform or to its solutions for branded manufacturers and transactions can be processed, provided all other revenue recognition criteria have been met. Some customers elect a managed-service solution and contract with the Company to manage some or all aspects of the Company’s SaaS solutions on the customer’s behalf for a specified period of time, which is typically one year . Under these managed-service arrangements, customer transactions cannot be processed through the Company’s platform until the completion of the implementation services. As such, revenue is contingent upon the Company’s completion of the implementation services and recognition commences when transactions can be processed on the Company’s platform, provided all other revenue recognition criteria have been satisfied. At that time, the Company recognizes a pro-rata portion of the fees earned since the inception of the arrangement. The balance of the fees is recognized ratably over the remaining contract term. The Company recognizes the variable portion of subscription fee revenue in the period in which the related GMV is processed, provided all other revenue recognition criteria have been met. Sales taxes collected from customers and remitted to government authorities are excluded from revenue. Deferred revenue represents the unearned portion of fixed subscription fees and implementation fees. Deferred amounts are generally recognized within one year. Those amounts that are expected to be recognized in greater than one year are recorded in other long-term liabilities in the accompanying condensed consolidated balance sheets. Sales Commissions Sales commissions are expensed when the related subscription agreement is executed by the customer. Cost of Revenue Cost of revenue primarily consists of personnel and related costs, including salaries, bonuses, payroll taxes and stock-based compensation, co-location facility costs for the Company’s data centers, depreciation expense for computer equipment directly associated with generating revenue, credit card transaction fees and infrastructure maintenance costs. In addition, the Company allocates a portion of overhead, such as rent, additional depreciation and amortization and employee benefits costs, to cost of revenue based on headcount. Fair Value of Financial Instruments The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires the Company to use observable inputs when available, and to minimize the use of unobservable inputs when determining fair value. The three tiers are defined as follows: • Level 1. Observable inputs based on unadjusted quoted prices in active markets for identical assets or liabilities; • Level 2. Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and • Level 3. Unobservable inputs for which there is little or no market data, which require the Company to develop its own assumptions. The carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate their respective fair values due to their short-term nature. In 2014, the Company, through its wholly owned subsidiary ChannelAdvisor UK Limited ("ChannelAdvisor UK"), acquired the issued and outstanding shares of E-Tale Holdings Limited ("E-Tale"), renamed ChannelAdvisor Brands UK Limited. Refer to Note 3, "Business Combination" for more information regarding the E-Tale acquisition. The acquisition of E-Tale includes a contingent consideration arrangement that allows for adjustment of payments based upon achievement of specified quarterly revenue targets through June 2017. Contingent consideration was measured at fair value at the acquisition date and is remeasured to fair value at each reporting date until the contingency is resolved. The fair value is reported within other current liabilities and other long-term liabilities on the consolidated balance sheets. Increases or decreases in any valuation inputs in isolation may result in a significantly lower or higher fair value measurement in the future. Subsequent changes in the fair value of contingent consideration are recognized within general and administrative expenses in the Company’s consolidated statements of operations. The fair value of contingent consideration related to the E-Tale acquisition is based on projected quarterly revenue targets for E-Tale through June 2017. The Company discounted the expected future earn-out payment to net present value using Level 3 inputs. A key assumption used in the measurement of fair value of contingent consideration includes a discount rate of 22% and 24% as of December 31, 2016 and 2015 , respectively. The Company believes the discount rate used to discount the earn-out payments reflects market participant assumptions. Projected revenue is based on the Company’s internal projections and analysis of the current customer base and expected customer growth, target market and sales potential. The following table presents changes to the Company's liability for acquisition-related contingent consideration for the year ended December 31, 2016 (in thousands): Balance, as of January 1, 2016 $ 697 Settlement of contingent consideration liability (338 ) Change in contingent consideration fair value (188 ) Balance, as of December 31, 2016 $ 171 Concentration of Credit Risk Financial instruments that subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. All of the Company’s cash and cash equivalents are held at financial institutions that management believes to be of high credit quality. The Company’s cash and cash equivalents accounts exceed federally insured limits. The Company has not experienced any losses on its cash and cash equivalents accounts to date. To manage accounts receivable risk, the Company maintains an allowance for doubtful accounts. The Company did not have any customers that individually comprised a significant concentration of its accounts receivable as of December 31, 2016 and 2015 , or a significant concentration of its revenue for the years ended December 31, 2016 , 2015 and 2014 . Accounts Receivable and Allowance for Doubtful Accounts The Company extends credit to customers without requiring collateral. Accounts receivable are stated at realizable value, net of an allowance for doubtful accounts. The Company utilizes the allowance method to provide for doubtful accounts based on management’s evaluation of the collectability of amounts due. The Company’s estimate is based on historical collection experience and a review of the current status of accounts receivable. Historically, actual write-offs for uncollectible accounts have not significantly differed from the Company’s estimates. The following table presents the changes in the Company’s allowance for doubtful accounts during the years ended December 31, 2016 , 2015 and 2014 (in thousands): Balance at Beginning of Period Additions Charged To Expense/ Against Revenue Deductions Balance at End of Period Allowance for doubtful accounts: Year ended December 31, 2016 $ 785 528 (719 ) $ 594 Year ended December 31, 2015 $ 673 1,236 (1,124 ) $ 785 Year ended December 31, 2014 $ 561 1,315 (1,203 ) $ 673 Other Receivables Under certain customer arrangements, the Company collects and remits monthly activity-based fees incurred on specific channels on the customers’ behalf. The Company records the amounts due from customers as a result of these arrangements as other receivables. Other receivables of $7.6 million and $4.7 million are included in prepaid expenses and other current assets on the consolidated balance sheets as of December 31, 2016 and 2015 , respectively. Property and Equipment Property and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized. Depreciation and amortization is provided over the estimated useful lives of the related assets using the straight-line method. The estimated useful lives for significant property and equipment categories are generally as follows: Purchased software, including internal-use software 3 years Computer hardware 3 years Furniture and office equipment 3 to 5 years Leasehold improvements Lesser of remaining lease term or useful life Repairs and maintenance costs are expensed as incurred. Identifiable Intangible Assets The Company acquired intangible assets in connection with its business acquisitions. These assets were recorded at their estimated fair values at the acquisition date and are being amortized over their respective estimated useful lives using the straight-line method. The estimated useful lives and amortization methodology used in computing amortization are as follows: Estimated Useful Lives Amortization Methodology Customer relationships 7 years Straight-line Acquired technology 7 years Straight-line Trade names 3 years Straight-line Impairment of Long-Lived Assets The Company reviews long-lived assets and definite-lived intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of the long-lived asset is measured by a comparison of the carrying amount of the asset or asset group to future undiscounted net cash flows expected to be generated by the asset or asset group. If such assets are not recoverable, the impairment to be recognized, if any, is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets or asset group. Assets held for sale are reported at the lower of the carrying amount or fair value, less costs to sell. As of December 31, 2016 and 2015 , management does no t believe any long-lived assets are impaired and has not identified any assets as being held for sale. Goodwill Goodwill represents the excess of the aggregate of the fair value of consideration transferred in a business combination over the fair value of assets acquired, net of liabilities assumed. The Company recorded goodwill in connection with its business acquisitions. See Note 5 below for information regarding goodwill recorded in connection with the acquisition of E-Tale. Goodwill is not amortized, but is subject to an annual impairment test, as described below. The Company has determined that it has a single, entity-wide reporting unit. The Company first assessed qualitative factors to determine whether it was more likely than not that the fair value of its single reporting unit was less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test under ASU No. 2011-08, Goodwill and Other (Topic 350): Testing Goodwill for Impairment. If the qualitative factors had indicated that it was more likely than not that the fair value of the reporting unit was less than its carrying amount, the Company would have tested goodwill for impairment at the reporting unit level using a two-step approach. The first step is to compare the fair value of the reporting unit to the carrying value of the net assets assigned to the reporting unit. If the fair value of the reporting unit is greater than the carrying value of the net assets assigned to the reporting unit, the assigned goodwill is not considered impaired. If the fair value is less than the reporting unit’s carrying value, step two is performed to measure the amount of the impairment, if any. In the second step, the fair value of goodwill is determined by deducting the fair value of the reporting unit’s identifiable assets and liabilities from the fair value of the reporting unit as a whole, as if the reporting unit had just been acquired and the fair value was being initially allocated. If the carrying value of goodwill exceeds the implied fair value, an impairment charge would be recorded in the period the determination is made. During the fourth quarter of 2016, the Company voluntarily changed the date of its annual goodwill impairment testing from December 31, the last day of the fiscal year, to October 1, the first day of the fourth quarter. This change provides the Company with additional time to complete its annual goodwill impairment testing in advance of its year-end reporting and results in better alignment with the Company’s strategic planning and forecasting process. The voluntary change in accounting principle related to the annual testing date will not delay, accelerate or avoid an impairment charge. This change is not being applied retrospectively, as it would require application of significant estimates and assumptions with the use of hindsight. Accordingly, the change will be applied prospectively. As a result of the Company’s annual impairment tests as of October 1, 2016 and December 31, 2015 , goodwill was not considered impaired and, as such, no impairment charges were recorded. Advertising Costs The Company expenses advertising costs as incurred. The amount expensed during the years ended December 31, 2016 , 2015 and 2014 was $4.1 million , $4.3 million and $6.3 million , respectively. Income Taxes Income taxes are accounted for under the asset and liability method of accounting. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as for operating loss and tax credit carryforwards. 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 results of operations in the period that includes the enactment date. The measurement of a deferred tax asset is reduced, if necessary, by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. The Company applies the accounting guidance for uncertainties in income taxes, which prescribes a recognition threshold and measurement process for recording uncertain tax positions taken, or expected to be taken, in a tax return in the financial statements. Additionally, the guidance also prescribes the treatment for the derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. The Company accrues for the estimated amount of taxes for uncertain tax positions if it is more likely than not that the Company would be required to pay such additional taxes. An uncertain tax position will be recognized if it is more likely than not to be sustained. The Company did no t have any accrued interest or penalties associated with unrecognized tax positions as of December 31, 2016 and 2015 . Foreign Currency Translation The functional currency of the Company’s non-U.S. operations is the local currency. Monetary assets and liabilities denominated in foreign currencies are translated into U.S. dollars at exchange rates prevailing at the balance sheet dates. Non-monetary assets and liabilities are translated at the historical rates in effect when the assets were acquired or obligations incurred. Revenue and expenses are translated into U.S. dollars using the average rates of exchange prevailing during the period. Translation gains or losses are included as a component of accumulated other comprehensive loss in stockholders’ equity. Gains and losses resulting from foreign currency transactions are recognized as other (expense) income. Stock-Based Compensation The Company accounts for stock-based compensation awards, which include stock options and restricted stock units ("RSUs"), based on the fair value of the award as of the grant date. The Company recognizes stock-based compensation expense using the accelerated attribution method, net of estimated forfeitures, in which compensation cost for each vesting tranche in an award is recognized ratably from the service inception date to the vesting date for that tranche. The Company uses the Black-Scholes option pricing model for estimating the fair value of stock options. The use of the option valuation model requires the input of the Company's stock price, as well as highly subjective assumptions, including the expected life of the option and the expected stock price volatility based on peer companies. Additionally, the recognition of expense requires the estimation of the number of awards that will ultimately vest and the number of awards that will ultimately be forfeited. The fair value of the Company's common stock, for purposes of determining the grant date fair value of option and RSU awards, has been determined by using the closing market price per share of common stock as quoted on the New York Stock Exchange on the date of grant. Basic and Diluted Loss per Common Share Diluted loss per share is the same as basic loss per share for all periods presented because the effects of potentially dilutive items were anti-dilutive given the Company’s net loss. |
