S-1 1 ds1.htm REGISTRATION STATEMENT ON FORM S-1 Registration Statement on Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on June 10, 2011

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

Under

The Securities Act Of 1933

 

 

CafePress Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   5900   94-3342816

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

1850 Gateway Drive, Suite 300

San Mateo, California 94404

(650) 655-3000

(Address and telephone number of registrant’s principal executive offices)

 

 

Bob Marino

Chief Executive Officer

1850 Gateway Drive, Suite 300

San Mateo, California 94404

(650) 655-3000

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Jorge del Calvo, Esq.

Davina K. Kaile, Esq.

Stanley F. Pierson, Esq.

Pillsbury Winthrop Shaw Pittman LLP

2475 Hanover Street

Palo Alto, CA 94304

(650) 233-4500

(650) 233-4545 facsimile

 

Kirsten Mellor, Esq.

General Counsel

CafePress Inc.

1850 Gateway Drive,

Suite 300

San Mateo, CA 94404

(650) 655-3000

 

Bruce K. Dallas, Esq.

Martin A. Wellington, Esq.

Davis Polk & Wardwell LLP

1600 El Camino Real

Menlo Park, CA 94025

(650) 752-2000

(650) 752-2111 facsimile

 

 

Approximate date of commencement of proposed sale to the public:

As soon as practicable after this Registration Statement becomes effective.

 

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

¨ Large accelerated filer   ¨ Accelerated filer   x Non-accelerated filer   ¨ Smaller reporting  company

(Do not check if a smaller reporting company)

 

 

CALCULATION OF REGISTRATION FEE

 

 
Title of Each Class of
Securities to be Registered
  Proposed Maximum
Aggregate
Offering Price(1)(2)
  Amount of
Registration
Fee

Common Stock, $0.0001 par value per share

  $80,000,000   $9,288
 
 

 

(1)   Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933.
(2)   Includes shares that the underwriters have the option to purchase to cover overallotments, if any.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. Neither we nor the selling stockholders may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to completion, dated June 10, 2011

Prospectus

            shares

LOGO

Common stock

We are offering         shares of our common stock and the selling stockholders identified in this prospectus are offering         shares of our common stock. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders. This is our initial public offering and no public market currently exists for our common stock. We expect the initial public offering price to be between $        and $        per share.

We intend to apply to list our common stock on                      under the symbol “            .”

 

      Per share        Total  
   

Initial public offering price

   $                                  $                            

Underwriting discounts and commissions

   $           $     

Proceeds to CafePress Inc., before expenses

   $           $     

Proceeds to selling stockholders, before expenses

   $           $     
   

We and the selling stockholders have granted the underwriters an option for a period of 30 days to purchase up to an additional         shares of our common stock solely to cover overallotments.

Investing in our common stock involves a high degree of risk. Please read “Risk factors” beginning on page 12.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

Delivery of the shares is expected to be made on or about                     , 2011.

 

J.P. Morgan      Jefferies

Cowen and Company

                    , 2011


Table of Contents

LOGO


Table of Contents

LOGO


Table of Contents

LOGO


Table of Contents

Table of contents

 

     Page  

Prospectus summary

     1   

Risk factors

     12   

Special note regarding forward-looking statements

     36   

Use of proceeds

     38   

Dividend policy

     38   

Capitalization

     39   

Dilution

     41   

Selected consolidated financial data

     43   

Management’s discussion and analysis of financial condition and results of operations

     47   

Business

     72   

Management

     87   

Executive compensation

     94   

Related party transactions

     111   

Principal and selling stockholders

     112   

Description of capital stock

     115   

Shares eligible for future sale

     119   

Material United States federal income tax considerations to non-U.S. holders

     122   

Underwriting

     126   

Legal matters

     132   

Experts

     132   

Where you can find additional information

     132   

Index to consolidated financial statements

     F-1   

 

 

Neither we, nor the selling stockholders, nor the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We and the selling stockholders are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

Until                     , 2011 (25 days after the commencement of this offering), all dealers that buy, sell or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

For investors outside the United States: Neither we, nor the selling stockholders, nor the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside of the United States.


Table of Contents

Prospectus summary

This summary highlights information about CafePress Inc. and the offering contained elsewhere in this prospectus and is qualified in its entirety by the more detailed information and consolidated financial statements included elsewhere in this prospectus. Because it is a summary, it does not contain all the information you should consider before investing in our common stock. You should carefully read the entire prospectus before making an investment decision, including the information presented under the headings “Risk factors” and “Management’s discussion and analysis of financial condition and results of operations” and the consolidated financial statements and related notes included elsewhere in this prospectus. In this prospectus, except as otherwise indicated or as the context may otherwise require, all references to “CafePress”, “CafePress.com”, “we”, “us” and “our” refer to CafePress Inc. and its subsidiaries.

Company overview

We are a leading e-commerce platform enabling customers worldwide to create, buy and sell a wide variety of customized and personalized products. We serve our customers, including both consumers and content owners, through our portfolio of e-commerce websites, including our flagship website, CafePress.com. Our consumers include millions of individuals, groups, businesses and organizations who leverage our innovative and proprietary print-on-demand services to express personal and shared interests, beliefs and affiliations by customizing a wide variety of products. These products include clothing and accessories, art and posters, stickers, home accents and stationery. Our content owners include individual designers as well as artists and branded content licensors who leverage our platform to reach a mass consumer base and share and monetize their content. We have developed a strong brand with a growing community that, as of March 31, 2011, had more than 13 million members and more than two million shops, and we shipped six million products in 2010 from a growing catalog of over 325 million unique products.

We believe customers recognize us for our pioneering role in the industry, as well as our continued innovation advancing the breadth and quality of expressive customized products. Our mission is to offer an unrivaled platform that is the world’s premier source for self-expression through product customization and personalization.

We operate a portfolio of branded websites, including CafePress.com, and power customization for resellers and co-branded websites that individually target specific consumers, products and use cases, and collectively expand the reach of our platform. We benefit from the network effect created when millions of customers are attracted to our growing catalog of content and are often inspired to contribute and share their own content. By enabling communities to share their interests, beliefs and affiliations through customized and personalized merchandise, we believe we drive social commerce.

Our expansive content catalog covers topics our customers are deeply passionate about, as well as relevant current events. As a result, we believe our catalog serves as a cultural barometer reflecting the latest topics, ideas, trends, moods and opinions. For the quarter ended March 31, 2011, we had more than 160,000 new images uploaded to our retail e-commerce websites on average per week. We have accumulated over 325 million unique products, allowing us to market and provide almost any expressive idea across an increasingly diverse product assortment.

We have built a state-of-the-art facility in Louisville, Kentucky with innovative technology and manufacturing processes that enable us to provide high-quality customized products that are individually built to order at

 

 

1


Table of Contents

mass scale. Our proprietary, vertically integrated processes enable us to produce a broad range of merchandise efficiently and cost effectively, and to ship them often within 24 hours. As a result of our acquisition of Canvas On Demand, we also have a custom canvas production facility in Raleigh, North Carolina.

Since our founding in 1999, we have seen significant growth, and in 2010 we generated net revenues of $127.9 million. In the first quarter of 2011, net revenues were $32.0 million, an increase of 46% from the first quarter of 2010.

Industry overview

Customization of consumer products is undergoing an enormous transformation which is being driven by the following trends:

 

 

Consumer demand for long tail selection and customization.    Beginning with the emergence of the “big box” retailers, consumers have come to expect a constantly expanding array of choices. Consumers increasingly expect a broader selection of both design choices and content to create or customize products. We refer to the array of choices beyond what is typically in high demand or widely available as “long tail” selection.

 

 

E-commerce.    Online shopping and e-commerce have become mainstream. According to eMarketer, in 2011, approximately 179 million consumers ages 14 and older in the United States will research products online and 83% of them will make an online purchase. With the rise of e-commerce, the user experience has improved with easy-to-use interfaces, broad selection, enhanced search, rich media and streamlined payment options. Additionally, improved capabilities of inventory management systems, logistics infrastructure and ground and air transportation have provided fast and affordable delivery of consumer products.

 

 

Internet tools and do-it-yourself empowerment.    Historically, consumers have needed help from third-party vendors to customize apparel and other products, but with the widespread availability of easy-to-use digital tools, today people can design products themselves. The ability to use do-it-yourself design tools reduces the need to visit a local artisan, further disrupting the traditional way products have been customized.

 

 

Advances in mass customization technologies.    Historically, customizing products often required either large production runs with complex and expensive set-ups or allowed for only minimal customization through basic engraving or monogramming. With recent innovations in digital printing technology, the ability to digitally print in a cost effective, flexible volume and high-quality manner on a variety of mass market products has only recently emerged.

Market opportunity

Online tools, e-commerce and digital production technologies are disrupting the existing fragmented, offline product print and customization markets. Our services address multiple large adjacent markets which include, but are not limited to:

 

 

Screen printing and garment printing.    According to Freedonia, the U.S. screen printing and garment printing market is expected to grow from $7.2 billion in 2009 to $8.1 billion in 2014.

 

 

Creative photo merchandise.    IDC estimates that the market for creative photo merchandise will grow from $2.8 billion in 2010 to $6.6 billion in 2014. Creative photo merchandise encompasses all products that are customized with photos including, but not limited to, cards, calendars, posters, photobooks and scrapbook pages, wall art and home décor.

 

 

2


Table of Contents
 

Promotional products.    According to Promotional Products Association International, the promotional products industry grew 5.9% to $16.6 billion in 2010, up from $15.6 billion in 2009. This includes $2.7 billion in online sales of promotional products in 2010, up 11.1% from $2.4 billion in 2009.

 

 

Customization services for product manufacturers.    Providing mass-customization services for retailers and product manufacturers is an emerging opportunity. From tablet cases to water bottles and beyond, our product diversity suggests a large opportunity encompassing ever-expanding retail merchandise categories. Based on 2009 U.S. Census Bureau data, we estimate the U.S. market for customizable retail goods is approximately $1.0 trillion.

Traditional printing models are not optimized to satisfy individual consumers and smaller constituencies due to long lead times, costly set-up, limited printing capabilities and minimum quantities needed to achieve efficiency.

Our strengths

We believe we are well positioned in the market because we have more than a decade of experience meeting demand for customized single unit and small quantity orders that the traditional printing industry has generally not been able to serve efficiently and economically. We believe our business model provides us with the following competitive advantages:

 

 

Viral network effect.    We enjoy a network effect that attracts new users to our various services. We attract new customers when new sales channels are launched and when new designs are added to our content catalog, where they are socially shared and made discoverable online. These new customers then often add their own new designs to our content catalog.

 

 

Trusted premium brands.    We have built strong relationships with our customers who are passionate about the products they create. In addition to our flagship brand, CafePress.com, we operate a portfolio of vertically targeted brands that individually target specific consumers, products and use cases, and collectively expand the reach of the CafePress platform.

 

 

Broad product assortment.    We offer a wide variety of products across many different categories as diverse as t-shirts, hats, canvas art prints, banners, stickers, iPhone and iPad cases, mugs, water bottles, GPS units, cards and calendars. We believe this product assortment makes us a more compelling one-stop solution for our customers.

 

 

Innovative and efficient operations.    Our workflow automation enables us to schedule and produce items and efficiently merge them into a single shipment, often within 24 hours. Transforming blank materials into finished goods in real-time minimizes inventory and capital requirements.

 

 

Long tail marketing expertise.    Our expertise in data mining and analytics allows us to make effective marketing decisions across a continuously updated product catalog with sparse data.

 

 

Comprehensive online offering.    We believe our tools satisfy our users’ diverse needs, including finding the perfect unique gift, creating customized items or selling custom creations to their own communities or for profit through our online marketplace.

 

 

3


Table of Contents

The CafePress platform

We have developed compelling services and production capabilities that allow us to offer users the ability to find, make, buy and sell a wide variety of expressive customized products. This has evolved into a platform consisting of the following components:

Front-end design and sales channels:

 

 

CafePress.com.    CafePress.com is where consumers can find unique products that can also be customized and personalized. Users can choose from our catalog of over 325 million unique products or design their own.

 

 

CanvasOnDemand.com.    CanvasOnDemand.com takes photographs and transforms them into canvas artwork.

 

 

Imagekind.com.    Imagekind.com is where consumers can find artwork by independent artists that can be produced on posters, canvases and framed wall art.

 

 

GreatBigCanvas.com.    GreatBigCanvas.com is a premium provider of canvas wall art and panoramic canvas photographs.

 

 

CafePress content owners.    Over two million sellers, including small businesses, groups, clubs and organizations, use our shops platform to design their own products and sell them though their own hosted e-commerce “shop.” Our licensed properties include film properties such as The Hangover Part II and The Twilight Saga, television properties such as American Idol®, Dexter, The Big Bang Theory® and Grey’s Anatomy®, as well as entertainment brands such as Snoopy® and Garfield®. Such licensors can sell customized branded products through our portfolio of e-commerce websites or by distributing them through their own channels.

 

 

Branded product manufacturers.    By supplying custom design tools and manufacturing services, we extend the power of customization to other product manufacturers such as Sigg and TomTom®.

 

 

Other retailers.    We can power customization for the online experiences of other retailers and retail brands, such as Urban Outfitters, Inc. and philosophy brand cosmetics.

 

 

Distributed sales.    We supply distributors and resellers with short-run and quick-turn custom printed products.

Back-end services platform:

Our back-end services form a platform consisting of the following components that can be used to create unique front-end buyer and seller experiences:

 

 

User-generated content.    Over 16 million designs have been uploaded through our platform to create over 325 million unique products as of March 31, 2011, with an average of over 160,000 new images uploaded to our retail e-commerce websites per week for the quarter ended March 31, 2011. This constantly growing content library allows our users to find items that meet their exact, unique and expressive needs.

 

 

Licensed fan content.    We have developed relationships with major entertainment licensors that allow users to create designs using their logos and brands. This program extends our users ability to self express and interact with popular brands in ways previously not available and allows the brands to create viral social merchandising programs, which in turn enables them to engage with their fan base.

 

 

4


Table of Contents
 

Design tools.    Our “what you see is what you get” design tools allow users to easily customize hundreds of items with their own images, text and other advanced features. Our tools are readily adaptable to new products.

 

 

Shops.    Content owners can sell their own custom merchandise often within minutes of using our turn-key shops platform, which includes hosting, payment processing, marketing services, fulfillment and customer service.

 

 

Fulfillment.    Our fulfillment processes aggregate thousands of orders every day, automating the workflow though our plants in an efficient, cost-effective manner, whether orders contain one product or many products and product types.

 

 

Manufacturing.    We offer users high-quality printing on over 600 product SKUs, with shipment often within 24 hours after an order is received. Our proprietary quality assurance systems help ensure that high-quality products are delivered to our users.

Our strategy

Our goal is to be the world’s customization platform. Key elements of our strategy to achieve this goal include the following:

 

 

Expand customer base.    We intend to expand our customer base and continue to promote our portfolio of e-commerce websites through existing marketing channels, which include word of mouth referrals from existing customers, trade publications, catalogs, online advertising, search engine marketing and social media.

 

 

Expand content partners.    We intend to expand our licensed content partners to increase the range of content accessible on our site and attract new users.

 

 

Expand product partners.    We believe we can partner with branded product manufacturers to help them offer customized designs on their products.

 

 

Expand product and service offerings.    We intend to continue to innovate to enable us to expand our products and services. In the past four quarters, we have expanded our merchandise selection to include products such as iPhone and iPad cases, canvas artwork and new apparel products such as pajamas.

 

 

Increase sales to existing customers.    We seek to increase both our average order size and the lifetime value we receive from a customer by increasing retention rates, up-selling and cross-selling efforts and continuing to improve and streamline our design and ordering processes.

 

 

Offer customization through additional brands.    We intend to leverage our platform by developing new brands and seeking co-branding opportunities to provide rich customer experiences along a range of industries.

 

 

Seek acquisition and international expansion opportunities.    We intend to develop additional business opportunities through selected acquisition and international expansion, targeting customers in key geographies where Internet usage and e-commerce are widespread and targeting key verticals where we can leverage our technology and catalog of content. We currently have localized websites for the United States, Australia, Canada, Germany and the United Kingdom.

 

 

5


Table of Contents

Risks and challenges

Investing in our common stock involves substantial risks, including, but not limited to, the following:

 

 

fluctuations in our operating results may negatively impact the price of our common stock;

 

 

the seasonality of our business increases strain on our business and we may be unable to scale sufficiently to support our operations during periods of peak demand;

 

 

harm to our brands or failure to maintain and enhance our brand recognition may materially and adversely affect our business, financial condition and results of operations;

 

 

as our business model focuses on user-generated content, controversial political and social expressions may appear on our site with which current or potential customers or business partners may not wish to be associated;

 

 

any failure to maintain the satisfactory performance, security and integrity of our websites will materially and adversely affect our business, reputation, financial condition and results of operations;

 

 

if our fulfillment operations are interrupted for any significant period of time, our business and results of operations would be substantially harmed; and

 

 

we may become subject to liability for content that we publish through our service.

Corporate information

CafePress Inc., a Delaware corporation, was incorporated as CafePress.com, Inc. in California on October 15, 1999, and reincorporated in Delaware on January 19, 2005. Our corporate headquarters are located at 1850 Gateway Drive, Suite 300, San Mateo, California 94404 and our telephone number is (650) 655-3000. We maintain numerous e-commerce websites including those found at www.cafepress.com, www.canvasondemand.com and www.imagekind.com. The information contained in or connected to our websites is not a part of, and is not incorporated into, this prospectus and should not be relied on in determining whether to make an investment decision.

CAFEPRESS, CANVAS ON DEMAND and IMAGEKIND are among the trademarks or service marks owned by CafePress. Other trademarks, service marks and trade names appearing in this prospectus are the property of their respective owners.

 

 

6


Table of Contents

The offering

 

Common stock offered by CafePress Inc.

         shares

 

Common stock offered by the selling stockholders

         shares

 

Overallotment option

We and the selling stockholders have granted a 30-day option to the underwriters to purchase up to an aggregate of          additional shares to cover overallotments, if any.

 

Common stock to be outstanding immediately after this offering

         shares (         shares if the underwriters exercise their overallotment option in full)

 

Use of proceeds

We intend to use the net proceeds from this offering for general corporate purposes, including working capital and capital expenditures. In addition, we may use a portion of the net proceeds to acquire or invest in complementary businesses, products or technologies. We are not currently contemplating any significant acquisitions or investments. See “Use of proceeds.”

Proposed symbol

The number of shares of common stock to be outstanding immediately after this offering is based on 28,415,106 shares outstanding as of March 31, 2011 and excludes:

 

 

4,170,712 shares of common stock issuable upon the exercise of options outstanding as of March 31, 2011, at a weighted average exercise price of $4.51 per share;

 

 

        shares of common stock reserved for future issuance under our 2011 Stock Incentive Plan, as well as shares originally reserved for issuance under our 2004 Stock Plan and 1999 Stock Plan but which may become available for awards under our 2011 Stock Incentive Plan as described below, which plan will become effective in connection with this offering and contains provisions that will automatically increase its share reserve each year, as more fully described in “Executive compensation—Employee benefit plans”; and

 

 

        shares of common stock reserved for future issuance under our 2011 Employee Stock Purchase Plan, which will become effective in connection with this offering and contains provisions that will automatically increase its share reserve each year, as more fully described in “Executive compensation—Employee benefit plans.”

Unless otherwise stated, all information in this prospectus assumes:

 

 

the conversion of all of our outstanding shares of preferred stock into an aggregate of 11,069,962 shares of common stock effective upon the completion of this offering, assuming a one-to-one conversion ratio of our outstanding shares of preferred stock as of March 31, 2011 into common stock;

 

 

no exercise of options outstanding as of March 31, 2011;

 

 

7


Table of Contents
 

the filing of our amended and restated certificate of incorporation immediately prior to the completion of this offering; and

 

 

no exercise of the overallotment option granted to the underwriters.

As of March 31, 2011, no shares remained available for future issuance under our 1999 Stock Plan and 654,534 shares remained available for future issuance under our 2004 Stock Plan. In May 2011, the board of directors increased the number of shares authorized for the 2004 Stock Plan by 1,000,000 shares. Upon the completion of this offering, no shares of our common stock will remain available for future issuance under our 1999 Stock Plan or our 2004 Stock Plan. Upon the completion of this offering, shares originally reserved for issuance under our 1999 Stock Plan or our 2004 Stock Plan, but which are not issued or subject to outstanding grants on the effective date of our 2011 Stock Incentive Plan, shares subject to outstanding options under our 1999 Stock Plan and our 2004 Stock Plan on the effective date of our 2011 Stock Incentive Plan that are subsequently forfeited or terminated for any reason before being exercised, and shares subject to vesting restrictions under our 1999 Stock Plan and our 2004 Stock Plan on the effective date of our 2011 Stock Incentive Plan that are subsequently forfeited, up to a number of additional shares not to exceed             will become available for awards under our 2011 Stock Incentive Plan.

 

 

8


Table of Contents

Summary consolidated financial data

The information set forth below should be read together with “Capitalization”, “Selected consolidated financial data”, “Management’s discussion and analysis of financial condition and results of operations” and our consolidated financial statements and related notes included elsewhere in this prospectus. The summary consolidated statements of operations data for the years ended December 31, 2008, 2009 and 2010 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated statements of operations data for the three months ended March 31, 2010 and 2011 and the consolidated balance sheet data as of March 31, 2011 are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. Historical results are not necessarily indicative of the results to be expected in the future, and results of interim periods are not necessarily indicative of results for the entire year. In September 2010, we completed our acquisition of Canvas On Demand. The audited financial statements of Canvas On Demand for the year ended December 31, 2009, unaudited financial statements for the six months ended June 30, 2009 and 2010, and our unaudited pro forma combined consolidated statement of operations have been included elsewhere in this prospectus.

 

      Year ended December 31,     Three months ended
March 31,
 
(in thousands, except per share data)    2008     2009     2010     2010     2011  
   

Consolidated statements of operations data:

  

Net revenues

   $ 120,407      $ 103,493      $ 127,930      $ 21,900      $ 32,036   

Cost of net revenues(1)

     74,403        57,688        72,447        12,135        18,757   
                                        

Gross profit

     46,004        45,805        55,483        9,765        13,279   

Operating expenses:

          

Sales and marketing(1)

     20,447        17,711        26,484        4,247        7,903   

Technology and development(1)

     12,590        13,152        14,305        3,388        3,447   

General and administrative(1)

     10,883        9,322        9,593        2,184        2,686   

Acquisition compensation

                   794               511   

Impairment charges

     3,746                               
        

Total operating expenses

     47,666        40,185        51,176        9,819        14,547   
                                        

Income (loss) from operations

     (1,662     5,620        4,307        (54     (1,268

Interest income

     527        220        116        34        17   

Interest expense

     (302     (253     (215     (58     (50

Other income (expense), net

     2        (3     239                 
        

Income (loss) before income taxes

     (1,435     5,584        4,447        (78     (1,301

Provision for (benefit from) income taxes

     808        2,255        1,724        (38     (470
        

Net income (loss)

   $ (2,243   $ 3,329      $ 2,723      $ (40   $ (831
        

Net income (loss) per share of common stock(2):

          

Basic

   $ (0.15   $ 0.08      $ 0.05      $ (0.00   $ (0.05
        

Diluted

   $ (0.15   $ 0.07      $ 0.05      $ (0.00   $ (0.05
        

Shares used in computing net income (loss) per share of common stock(2):

          

Basic

     15,347        16,132        16,617        16,244        17,275   
        

Diluted

     15,347        17,339        17,721        16,244        17,275   
        

Pro forma net income (loss) per share of common stock(2):

          

Basic (unaudited)

       $ 0.10        $ (0.03
                      

Diluted (unaudited)

       $ 0.09        $ (0.03
                      

Shares used in computing pro forma net income (loss) per share of common stock(2):

          

Basic (unaudited)

         27,687          28,345   
                      

Diluted (unaudited)

         28,791          28,345   
   

 

 

9


Table of Contents
      Year ended December 31,      Three months ended
March 31,
 
(in thousands, except key operating metrics)    2008      2009      2010      2010      2011  
   
     (unaudited)  

Other financial and non-GAAP financial data:

  

Adjusted EBITDA(3)

   $ 9,715       $ 14,136       $ 14,550       $ 2,076       $ 1,841   

Capital expenditures

   $ 7,393       $ 3,283       $ 5,836       $ 866       $ 471   

Key operating metrics:

              

Total customers(4)

     2,053,122         1,736,787         2,077,587         412,820         557,309   

Total number of orders(5)

     2,582,176         2,157,835         2,655,264         471,058         665,088   

Average order size(6)

   $ 47       $ 48       $ 47       $ 46       $ 48   
   

The table below presents a summary of our consolidated balance sheet data as of March 31, 2011:

 

 

on an actual basis;

 

 

on a pro forma basis to give effect to: (a) the issuance of 11,069,962 shares of common stock issuable upon the conversion of all of our outstanding shares of preferred stock upon completion of this offering and (b) the filing of our amended and restated certificate of incorporation upon the completion of this offering; and

 

 

on a pro forma as adjusted basis to give effect to: (a) the pro forma conversion described above and (b) the sale of          shares of common stock in this offering at an assumed initial public offering price of $         per share, the mid-point of the range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

March 31, 2011

(in thousands)

  

Actual

     Pro forma      Pro forma
as adjusted
 
   
     (unaudited)  

Consolidated balance sheet data:

  

Cash and cash equivalents

   $ 13,594       $ 13,594       $                

Short-term investments

     10,015         10,015      

Working capital

     16,988         16,988      

Total assets

     65,497         65,497      

Total indebtedness

     2,909         2,909      

Convertible preferred stock

     22,811              

Total stockholders’ equity

     17,277         40,088      
   

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share, the mid-point of the range set forth on the cover of this prospectus, would increase (decrease), on a pro forma as adjusted basis, each of cash and cash equivalents, working capital, total assets and total stockholders’ equity by approximately $         million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.

 

 

10


Table of Contents
(1)   Amounts include stock-based compensation expense as follows:

 

      Year ended December 31,      Three months ended
March 31,
 
     2008      2009      2010      2010      2011  
   

Cost of net revenues

   $ 174       $ 160       $ 152       $ 34       $ 38   
Sales and marketing    377      359      472      94      134  

Technology and development

     501         618         569         132         93   

General and administrative

     881         1,004         981         238         265   
        

Total stock-based compensation expense

   $ 1,933       $ 2,141       $ 2,174       $ 498       $ 530   
   

 

(2)   Please see notes 2 and 9 to our audited consolidated financial statements for an explanation of the calculations of our basic and diluted net income (loss) per share of common stock and unaudited pro forma net income (loss) per share of common stock.

 

(3)   Adjusted EBITDA is a non-GAAP financial measure that our management uses to assess our operating performance and it is a factor in the evaluation of the performance of our management in determining compensation. We define Adjusted EBITDA as net income (loss) less interest and other income (expense), provision for (benefit from) income taxes, depreciation and amortization, amortization of intangible assets, acquisition compensation, stock-based compensation and impairment charges.

We use Adjusted EBITDA as a key performance measure because we believe it facilitates operating performance comparisons from period to period by excluding potential differences caused by variations in capital structures (affecting net interest expense), tax positions (such as the impact on periods of changes in effective tax rates or fluctuations in permanent differences or discrete quarterly items), the impact of depreciation and amortization, amortization of intangible assets, acquisition compensation, stock-based compensation and impairment charges. Because Adjusted EBITDA facilitates internal comparisons of our historical operating performance on a more consistent basis, we also use Adjusted EBITDA for business planning purposes and to incentivize and compensate our management personnel.

Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider this measure in isolation or as a substitute for analysis of our results as reported under GAAP as the excluded items may have significant effects on our operating results and financial condition. When evaluating our performance, you should consider Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net income (loss) and our other GAAP results.

The following table presents a reconciliation of Adjusted EBITDA to net income (loss), the most comparable GAAP measure, for each of the periods indicated:

 

      Year ended December 31,     Three months  ended
March 31,
 
(in thousands)    2008     2009      2010     2010     2011  
   
    

(unaudited)

 

Net income (loss)

   $ (2,243   $ 3,329       $ 2,723      $ (40   $ (831

Non-GAAP adjustments:

           

Interest and other (income) expense

     (227     36         (140     24        33   

Provision for (benefit from) income taxes

     808        2,255         1,724        (38     (470

Depreciation and amortization

     5,387        6,013         6,364        1,555        1,526   

Amortization of intangible assets

     311        362         911        77        542   

Acquisition compensation

                    794               511   

Stock-based compensation

     1,933        2,141         2,174        498        530   

Impairment charges

     3,746                                
        

Adjusted EBITDA

   $ 9,715      $ 14,136       $ 14,550      $ 2,076      $ 1,841   
   

 

(4)   Total customers represents the number of transacting customers in a given period.

 

(5)   Total number of orders represents the number of individual transactions that are shipped during the period.

 

(6)   Average order size is calculated as billings for a given period divided by the total number of associated orders in the same period. Because we recognize revenue upon delivery, billings may not be recognized as revenues until the following period.

 

 

11


Table of Contents

Risk factors

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below before making a decision to buy our common stock. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of the following risks actually occurs, our business, financial condition, results of operations or growth prospects could be harmed. In that case, the trading price of our common stock could decline and you might lose all or part of your investment in our common stock. In assessing these risks, you should also refer to the other information set forth in this prospectus, including our consolidated financial statements and the related notes.

Risks related to our business

Our results of operations are subject to quarterly fluctuations due to a number of factors that could adversely affect our business and the trading price of our common stock.

Our revenues and operating results may fluctuate from period to period and are likely to continue to fluctuate due to a variety of factors, many of which are beyond our control. Factors relating to our business that may contribute to these fluctuations include the following factors, as well as other factors described elsewhere in this prospectus:

 

 

spikes in our sales from major social or political events or developments resulting in a short term demand for products with related content;

 

 

seasonality of our revenues, including shifts in the timing of holiday selling seasons;

 

 

macroeconomic cycles and consumer spending;

 

 

demand for our user-designed products and services;

 

 

market acceptance and competitiveness of our products and services;

 

 

the gain or loss of significant strategic relationships;

 

 

our ability to develop, introduce and market new products and services on a timely basis;

 

 

fluctuations in sales and marketing costs, including website traffic acquisition costs;

 

 

fluctuations in the cost of raw materials;

 

 

variations in the mix of products and services we sell;

 

 

new product and service announcements and introductions by us or our competitors; and

 

 

the growth rate of the e-commerce industry.

As a result of these factors, among others, the results of any prior quarterly or annual periods should not be relied upon as indications of our future revenues or operating performance.

We may not sustain profitability or avoid net losses in the future. Although we have experienced revenue growth in recent periods, these growth rates may not be sustainable and may decrease in the future. In addition, our ability to be profitable depends on our ability to control our costs and operating expenses, which we expect will increase as we expand our business and incur additional expense associated with being a public

 

12


Table of Contents

company. We have incurred in the past, and expect to continue to incur in future periods, stock-based compensation expense, which will reduce our net income and may result in future losses. If we fail to increase revenues at the rate we anticipate or if our costs and operating expenses increase without a commensurate increase in our revenues, our business, financial condition and results of operations will be negatively affected.

Due to the foregoing factors, our operating results in one or more future quarters may fall below the expectations of securities analysts and investors. In this event, the trading price of our common stock may be materially and adversely affected.

The seasonality of our business places increased strain on our operations and if we are unable to scale sufficiently to support our operations during periods of peak demand, our business could suffer.

A significant portion of our net revenues and operating cash flows have historically been realized during the period from November through December each year, primarily due to increased retail activity during the holiday seasons. Any disruption in our ability to process, produce and fulfill customer orders in the fourth quarter could have a negative effect on our quarterly and annual operating results. In anticipation of increased fourth quarter sales activity, we typically incur significant incremental expenses prior to and during peak selling seasons, particularly October through December, including the costs associated with hiring a substantial number of temporary employees to supplement our existing workforce. If we are unable to hire enough qualified employees to support our production and customer service operations or if there is a disruption in the labor we hire from our third-party providers, our business, financial condition and results of operations could be adversely affected. In addition, if too many customers access our websites within a short period of time due to increased holiday demand or other periods of peak demand, we may experience system delays or interruptions that make our websites unavailable or prevent us from efficiently fulfilling orders, which may reduce the volume of goods we sell and the attractiveness of our products and services. This in turn could harm our business, operating results and reputation. Because we continue to expect a significant portion of our net revenues and operating cash flows to be realized in the fourth quarter, the fourth quarter factors more significantly into our outlook for the fiscal year. Any disruption in our business operations or other factors that could lead to a material shortfall compared to our expectations for the fourth quarter could result in a material shortfall compared to our expectations for the full year, and could have a disproportionate effect on our stock price.

Our business depends heavily on the market recognition and reputation of our services, and any harm to our brands or failure to maintain and enhance our brand recognition may materially harm our business, financial condition and results of operations.

We believe that maintaining and enhancing the recognition and reputation of the level of services associated with our brands are critical to our success and ability to compete. Many factors, some of which are beyond our control, are important to maintaining and enhancing our services and may negatively impact our reputation if not properly managed, such as:

 

 

our ability to maintain a convenient and reliable user experience as consumer preferences evolve and as we expand into new product categories and new business lines;

 

 

our ability to increase brand awareness among existing and potential corporate partners and consumers through various means of marketing and promotional activities;

 

 

our ability to retain and expand our network of buyers and sellers;

 

 

the efficiency, reliability and service quality of our products and services;

 

 

our ability to protect personally identifiable information and credit card data;

 

13


Table of Contents
 

our ability to effectively control the product and service quality of content as we continue to develop the services provided by our retail websites, which we refer to as the marketplace; and

 

 

any negative media publicity about user-generated content or product quality problems of our or other e-commerce websites.

If we are unable to maintain our reputation, further enhance our brand recognition and increase positive awareness of our websites, our results of operations may suffer.

We depend heavily on the continued success of our core business of selling user-designed products online, and any event that adversely affects our sales of user-designed products could harm our business and results of operations.

Since inception, most of our revenues have been derived from the online sale of user-designed products through our marketplace. We expect that sales of user-designed products will continue to grow and comprise a majority of our revenues in the future. While we intend to continue to expand our product and service offerings, including the expansion of our Create & Buy services, revenues from these services may not increase to a level that would reduce our dependence on revenues from our marketplace. In addition, customers who purchase user-designed products on our websites may also purchase other products through our e-commerce services. If we cannot successfully attract or retain our customers for user-designed products, our operating results may suffer.

Our business model focuses on user-generated content and as a result, controversial political and social expressions appear on our site with which current or potential customers or business partners may not wish to be associated.

We have built our business by providing consumers an outlet for self-expression through customized goods that they can share with their friends, their communities and the world. Our service is often used for the expression of political and cause-related issues that may generate strong feelings on many sides of a given issue, including in other customers and potentially with the business partners who supply us with content or inventory and to those who choose to invest in our company. As a result, our websites frequently attract the attention of media outlets that may not understand the user-generated nature of our business model and attribute sentiments expressed by our users to our company. Additionally, because our service provides a platform for the expression of controversial ideas, our site could be the target of computer attacks or boycotts by well-organized special interest groups or filtered by foreign countries, which may adversely impact our growth and operations. For example, our websites are currently blocked in China. We believe we must maintain a balance between the encouragement of self-expression in our users that creates a content-rich experience, the needs and concerns of our business partners and our desire to protect our brands and company. If we fail to maintain this balance and lose customers or potential customers due to judgments made about the content on our websites, or conversely if we alienate corporate partners or businesses who wish to employ our customization services for their products, we risk damage to our brands and reputation and ultimately our business and results of operations.

If we are unable to attract customers in a cost-effective manner, our business and results of operations could be harmed.

Our success depends on our ability to attract customers in a cost-effective manner. We rely on a variety of methods to draw visitors to our websites and promote our products and services, such as search engine marketing, email, affiliate networks, social media outlets and flash deal promotions through group-buying

 

14


Table of Contents

websites. We pay providers of online services, search engines and other websites and e-commerce businesses to provide content, marketing links, advertising banners and other links that direct customers to our websites. If these providers modify or terminate their relationship with us or increase the price they charge us or if our competitors offer them greater fees for traffic, our expenses could rise and traffic to our websites could decrease, resulting in harm to our operations. We also devote substantial resources to optimizing our websites to increase the likelihood of our products and services appearing in unpaid search engine results; however there can be no assurance that these efforts will be successful. If our products and services receive low placement or do not appear within the listings of search engine results in response to relevant search queries, this could result in fewer customers clicking through to our websites, requiring us to resort to other more costly resources to replace this traffic. We also promote our products and special offers through emails targeted to potential customers and our site members. However, if our customers deem such emails and other promotions to be intrusive, we could be forced to discontinue or significantly curtail our email marketing activities. We have terminated a number of affiliate marketing partners in states that have imposed sales tax nexus for such marketing activities, and to the extent we shall have to continue to do so, we may be unable to achieve our strategic goals. If we are unable to develop or maintain an effective and cost efficient means of reaching content providers and consumers, the costs of attracting customers using these methods significantly increase, or we are unable to develop new cost-effective means to obtain customers, then our ability to attract new and repeat customers would be harmed, traffic to our websites would be reduced and our business and results of operations would be harmed.

Our strategy with respect to content acquisition may adversely affect our financial condition and future financial results.

We obtain content for our websites and our products from multiple sources, including our user designers, for whom we may pay royalties on subsequent sales of products created with such content. We also increasingly rely on entertainment, publishing and corporate content provider sources to generate content for our products and services. Due to designer relationship issues, including compensation provided by us compared to that provided by our competitors, users may decrease or cease providing content to our websites in the future. We face challenges in managing the payment infrastructure and taxation implications of these transactions and expect to continue to do so in the future as competitive pressures or new regulatory or other issues arise.

In connection with obtaining entertainment content, we sometimes enter into multi-year, royalty-based licenses with production studios for film and television and other media distributors. To date, we have been able to obtain those licenses without paying significant advance royalty payments but there is no guarantee that these licensors will renew their license agreements on the same or reasonable terms. Furthermore, we plan on increasing the level of committed content licensing in our efforts to grow our service and customer base both in the United States and globally. Finally, our competitors may be successful in obtaining exclusive licenses for content we wish to obtain for our site, making such content unavailable to us now or in the future. We may also, as we have in the past, enter into agreements with content providers that contain exclusivity provisions that may restrict our ability to sell certain products or in certain geographies or to partner with certain content providers. In order to compete effectively for these licenses, we could be forced to pay higher royalties or agree to significant advance payments. Our results of operations could be adversely affected as a result of these content licensing payment commitments in the event that sales or revenue growth do not meet our expectations. In addition, our flexibility in planning for, or reacting to, changes in our business and the market segments in which we operate could be limited.

In connection with the selection and popularity of specific content, we employ licensing and business development professionals and Internet traffic analysts who evaluate popular culture trends and potential properties to support the content on our site. To the extent they are unsuccessful in identifying or obtaining

 

15


Table of Contents

content sources that will be popular with consumers and that will generate sales of our products, our results could materially be harmed. To the extent the content we do choose to obtain proves unpopular or unsuccessful and we have agreed to contractual minimums, we may not achieve the planned return on royalty advances and may incur losses or impairment charges.

If any of the above circumstances increase the cost of obtaining content, our margins may suffer. We must continue to ensure that our content is sufficiently diversified to meet the needs of the markets we target. We believe that failure to secure content could result in lower sales and customer retention and materially reduce margins.

If we are unable to market and sell products and services beyond our existing target markets and develop new products and services to attract new customers, our results of operations may suffer.

We believe we will need to address additional markets and attract new business partners, content providers and consumers to further grow our business. To access new markets and consumers, we expect that we will need to develop, market and sell new products and services. We also intend to continue the geographic expansion of our marketing efforts and customer service operations and the introduction of localized language websites in different countries. There is no guarantee we will be successful in this expansion. In addition, we intend to develop new strategic relationships to expand our marketing and sales channels, such as co-branded or strategic partner-branded websites and retail in-store offerings. Any failure to develop new products and services, expand our business beyond our existing target markets or address additional market opportunities could harm our business, financial condition and results of operations.

If we are unable to manage our growth or execute our strategies effectively, our business and prospects may be materially and adversely affected.

We have experienced a period of rapid growth and expansion that has placed, and continues to place, significant strain on our management and resources. To accommodate our growth, we anticipate that we will need to implement a variety of new and upgraded operational and financial systems, procedures and controls, including the improvement of our accounting, legal and other internal management and control systems. We also intend to expand our production and logistics centers and distribution network to accommodate more customer orders and provide better coverage of our target markets. We cannot assure you that we will be able to lease suitable facilities at commercially acceptable terms in accordance with our expansion plan. In addition, the expansion of our production and logistics centers and distribution network will put pressure on our managerial, financial, operational and other resources. If we are unable to secure new facilities or effectively manage our expanded logistics operations and control increasing costs, our growth potential, results of operations and business could suffer. Additionally, we will need to continue to expand, recruit, train, manage and motivate our workforce and manage our relationships with existing and new business partners, suppliers, third-party service providers and content providers. Our strategies also include broadening our product and service offerings, which will require us to work with different groups of suppliers and address the needs of different kinds of consumers. We may incur significant costs in trying to expand our offerings into these new areas or fail to successfully execute the roll-out of these new offerings. All of these endeavors involve risks and will require substantial management effort and significant additional expenditures. We cannot assure you that we will be able to manage our growth or execute our strategies effectively, and any failure to do so may have a material adverse effect on our business and prospects.

 

16


Table of Contents

Given the relatively short history of some of our service offerings, it may be difficult to evaluate our business and prospects.

In recent years, we have gradually expanded the service offerings on our websites to include other services such as our Create & Buy services. For example, in 2010, we acquired Canvas On Demand, LLC, or Canvas On Demand, which provides an online service for creating personalized canvases from photographs. We cannot assure you that this service, or any other new services we may introduce or acquire, will be integrated or achieve market acceptance at a level sufficient to justify our investment or at all.

We have a limited history of operating these new services, which makes predicting our future results of operations more difficult than it otherwise would be. Therefore, our past results of operations should not be taken as indicative of our future performance. Our ability to achieve satisfactory financial results from these new services is unproven.

If we fail to successfully identify and respond to constantly changing consumer preferences, adopt new technologies or adapt our websites and systems to customer requirements or emerging industry standards, our business, prospects and financial results may be materially and adversely affected.

The e-commerce and retail industries as well as the content-provider industry are subject to ever changing trends and consumer preferences. Consequently, we must anticipate emerging consumer trends for customized retail merchandise that will appeal to existing and potential consumers. If our consumers cannot find their desired products on our websites, they may stop visiting our websites, visit less often or stop purchasing products on our websites or seek out our competitors’ websites. If we do not anticipate, identify and respond effectively to consumer preferences and changes in consumer trends at an early stage, we may not be able to generate the desired level of sales. Likewise, we must anticipate and capitalize on trends in user-generated content and popular culture that will continue to drive consumer interest in our websites.

The Internet and the online content and retail industries are characterized by rapid technological evolution, changes in user requirements and preferences, frequent introductions of new products and services embodying new technologies and the emergence of new industry standards and practices. To remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of our websites and systems. Our success will depend, in part, on our ability to identify, develop, acquire or license leading technologies useful in our business, enhance our existing services, develop new services and technologies that address the increasingly sophisticated and varied needs of our existing and prospective business partners and consumers, and respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. The development of our websites and other proprietary technology entails significant technical and business risks. We may be unable to use new technologies or systems to effectively adapt our websites, proprietary technologies and transaction-processing systems to customer requirements or emerging industry standards. If we are unable to adapt in a cost-effective and timely manner in response to changing market conditions or customer requirements, whether for technical, legal, financial or other reasons, our business, prospects, financial condition and results of operations would be materially adversely affected.

Competitive pricing pressures, particularly with respect to pricing and shipping, may harm our business and results of operations.

Demand for our products and services is sensitive to price, especially in times of recession, slow economic growth and consumer conservatism. Many external factors, including our production and personnel costs, the cost of raw materials, particularly the price of cotton, consumer sentiment and our competitors’ pricing and marketing strategies, can significantly impact our pricing strategies. If we fail to meet our consumers’ price expectations, we could lose customers, which would harm our business and results of operations.

 

17


Table of Contents

Changes in our pricing strategies have had, and may continue to have, a significant impact on our revenues and net income. We frequently make changes to our pricing structure in order to remain competitive but that may result in lower profit margins. Most of our products are also offered by our competitors. If in the future, due to competitor activities or other marketing strategies, we significantly reduce our prices on our products without a corresponding increase in volume or decrease in cost of goods sold, it would negatively impact our revenues and could adversely affect our gross margins and overall profitability.

We generate a portion of our revenues from the fees we collect from shipping our products. We frequently offer discounted or free shipping, with minimum purchase requirements during promotional periods to attract and retain customers. In addition, we occasionally offer free or discounted products and services to attract and retain customers. In the future, if we increase these offers to respond to actions taken by our competitors, our results of operations may be harmed.

We face intense competition and if we do not compete successfully against existing and new competitors, we may lose market share and customers.

The market for customized products and services is large, fragmented and intensely competitive and we expect competition to increase in the future. We face competition from a wide range of companies, including the following:

 

 

traditional offline printing businesses;

 

 

e-commerce companies, including large online retailers such as Amazon.com, Inc. and eBay Inc.;

 

 

physical and catalog retailers of personalized merchandise;

 

 

online providers of unique goods such as Etsy, Inc., as well as various other private companies offering customized products such as CustomInk, LLC, Spreadshirt, Inc., Threadless.com or Zazzle Inc.; and

 

 

online providers allowing users to customize goods in specific vertical markets, such as Vistaprint N.V. for small businesses and Shutterfly, Inc. for photographic products.

We may also indirectly compete with Internet portals and shopping search engines that are involved in e-commerce or sell products or services either directly or in collaboration with other retailers. If more companies move into the customized products space, we will face more direct and intense competition. Furthermore, to the extent that other companies are able to replicate our processes or that advances in print-on-demand technologies reduce any technological or other early mover leads we may have, our business, prospects, financial condition and results of operations could be harmed.

Some of our current and potential competitors have significantly greater financial, marketing and other resources than us, including significant brand recognition, sales volume and customer bases. In addition, other online retailers may be acquired by, receive investment from or enter into strategic relationships with, well-established and well-financed companies or investors which would help enhance their competitive positions. Some of our competitors may be able to secure goods and raw materials from suppliers on more favorable terms, devote greater resources to marketing activities and promotional campaigns, adopt more aggressive pricing policies and devote substantially more resources to website and system development than us. Increased competition may reduce our operating margins, market share and brand recognition, or force us to incur losses. We may not be able to compete successfully against current and future competitors. Competitive pressures may harm our business, prospects, financial condition and results of operations.

 

18


Table of Contents

The proper functioning of our websites is essential to our business and any failure to maintain the satisfactory performance, security and integrity of our websites will materially and adversely affect our business, reputation, financial condition and results of operations.

The satisfactory performance, reliability and availability of our websites, our sophisticated marketing activities, our transaction-processing systems and our network infrastructure are critical to our success. Our revenues depend on the number of visitors who shop on our websites and the volume of orders we fulfill. Any system delays, interruptions or disruptions to our servers caused by telecommunications failures, computer viruses, physical break-ins, domain attacks, hacking or other attempts to harm our systems or servers that result in the unavailability or slowdown of our websites, loss of data or reduced order fulfillment performance would reduce the volume of products sold and the attractiveness of product offerings on our websites. We may also experience interruptions caused by reasons beyond our control. For example, in the fourth quarter of 2006, our servers experienced a denial of service attack, which disrupted access to our websites for several days during the holiday buying season. These unexpected interruptions may occur in the future, and future occurrences could damage our reputation and harm our revenues and results of operations.

We use internally developed systems for all aspects of transaction processing, including order management, content review and purchasing and inventory management. We rely on third-party providers for debit card and credit card processing services, other payment services and shipping. We periodically upgrade and expand our systems, and in the future, we intend to further upgrade and expand our systems and to integrate newly developed or purchased software with our existing systems to support increased transaction volume. Any inability to add additional software and hardware or to develop and upgrade our existing technology, transaction-processing systems or network infrastructure to accommodate increased traffic on our websites or increased sales volume through our transaction-processing systems may cause unanticipated system disruptions, slower response time, degradation in levels of customer service and impaired quality and speed of order fulfillment, which would cause our business, reputation, financial condition and results of operations to suffer.

If our production and fulfillment operations are interrupted for any significant period of time or either facility where our computer and communications hardware is located fails, our business and results of operations would be substantially harmed.

Our success depends on our ability to successfully receive, produce and fulfill orders and to promptly and securely deliver our products to our customers, which in turn depends in part on the efficient and uninterrupted operation of our computer and communications systems. A significant portion of our production, inventory management, packaging, labeling and shipping processes are performed in a single production and fulfillment center located in Louisville, Kentucky and substantially all of the computer hardware necessary to operate our websites is located at one third-party hosting facility in Las Vegas, Nevada. These facilities are susceptible to damage or interruption from human error, fire, flood, ice storms, power loss, insufficient power availability, telecommunications failure, terrorist attacks, acts of war, break-ins, earthquakes and similar events. Louisville, Kentucky is particularly susceptible to flooding and extreme weather patterns. Our headquarters are located in Northern California, an area where the risk of an earthquake is significant due to the proximity of major earthquake fault lines. Any catastrophic loss to any of these facilities would likely disrupt our operations, delay production, shipments and revenues and result in significant expenses to repair or replace the facility. Our business interruption insurance may be insufficient to compensate us for losses that may occur, particularly from interruption due to an earthquake, which is not covered under our current policy. Any interruptions in our production, fulfillment center or systems operations, particularly if for any significant period of time, could damage our reputation and brands and substantially harm our business and results of operations.

 

19


Table of Contents

Shipment of merchandise sold in our marketplaces could be delayed or disrupted by factors beyond our control and we could lose buyers and sellers as a result.

We rely upon third-party carriers such as United Parcel Service, Inc., or UPS, in the United States for timely delivery of our merchandise shipments. As a result, we are subject to carrier disruptions and increased costs due to factors that are beyond our control, including labor difficulties, inclement weather, terrorist activity and increased fuel costs. We do not have a long-term agreement with any other third-party carriers, and we cannot be sure that our relationship with UPS will continue on terms favorable to us, if at all. If our relationship with UPS is terminated or impaired or if UPS is unable to deliver merchandise for us, we would be required to use alternative carriers for the shipment of products to our buyers. We may be unable to engage alternative carriers on a timely basis or on terms favorable to us, if at all. Potential adverse consequences include:

 

 

reduced visibility of order status and package tracking;

 

delays in merchandise receipt and delivery;

 

increased cost of shipment; and

 

reduced shipment quality, which may result in damaged merchandise.

Any failure to receive merchandise at our distribution centers or deliver products to our buyers in a timely and accurate manner could lead to client dissatisfaction and cause us to lose sellers and buyers.

Many of our suppliers are located in regions that are subject to weather instability, earthquakes and other natural disasters.

The facilities of our third-party suppliers are subject to risk of catastrophic loss due to fire, flood or other natural or man-made disasters. For example, the majority of our suppliers are located in the United States and China in areas with above-average catastrophic weather instability and seismic activity and which are subject to typhoons, tsunamis and other storms. Additionally, since a significant portion of our revenues are attributed to cotton apparel and because we do not currently engage in any cotton or other commodity-related hedging activities, we are particularly susceptible to issues affecting the cotton growing and production industry. Any catastrophic loss to any of these facilities or disruptions in the production of cotton would likely disrupt our operations, delay production, shipments and revenues and result in significant expenses to repair or replace the facility or to purchase critical inventory for creation of our products.

If we become subject to liability for content that we print and distribute through our service, our results of operations would be adversely affected.

As a service provider that prints content, we face allegations related to, and potential liability for, negligence, copyright or trademark infringement or other claims based on the nature and content of materials that we display and the goods created from user-generated uploads to our service. We also may face allegations related to, or potential liability for, content uploaded from our users in connection with claims of defamation, racism, hate speech, obscenity or pornography that may be embodied in user expression. As globally available websites, we also receive inquiries about content that may be illegal or insensitive to cultural norms not only in the United States but worldwide, and those sensitivities may differ widely. For example, content related to glorification of the current North Korean regime, while offensive to many, is not illegal in the United States. In South Korea, distribution of such speech is considered illegal and we therefore are subject to geographic-specific blocks on content on our websites. We are also exposed to risks associated with varying defamation laws in other jurisdictions in foreign countries, including heightened risk of secondary liability on defamation suits in the United Kingdom, despite our status as an e-commerce service provider and not a publisher. Further, we maintain relationships with law enforcement agencies to manage issues related to child pornography or other illegal uses of our service.

 

20


Table of Contents

As a distributor of content, we also face potential liability for negligence, copyright, patent or trademark infringement or other claims based on the nature and content of materials that we distribute. A number of our entertainment, publishing and corporate content providers impose limitations and conditions on our use of their licensed content, and our failure to implement and abide by these terms could result in our loss of these licenses, damages to our reputation and potential liability for breach of contract and copyright or trademark infringement. We also may face potential liability for content uploaded from our users in connection with our community-related content or movie reviews.

We maintain strict content usage policies that are frequently evaluated and updated and we maintain processes that review uploaded content for compliance with our terms. We maintain a content review process that includes evaluation and take-down of uploaded content on our site that fails to meet our policies. Nevertheless, we receive significant volumes of cease and desist demands on a regular basis with respect to claims of intellectual property infringement and infringement of the rights of third parties, such as rights of privacy and publicity, and expect this to grow with the volume of content made available through our service. Notwithstanding our efforts, these measures may not be effective in removing violative content nor sufficient to shield us from potential liability.

Our agreements with our content providers likewise contain indemnification clauses acknowledging that the user uploading content owns copyrights and trademarks in the work, is authorized to do so and to create products through our service. However, many of our content providers may lack the financial ability to fully indemnify us against any material liabilities or we may choose not to pursue such indemnification claims if we think that doing so may deter others from offering non-violative content on our services.

We maintain an intellectual property rights policy and dispute process, and we strive to promptly respond to all claims of infringement and to expeditiously remove infringing content from our websites where we believe valid claims may exist, as well as to comply with any applicable legal or contractual requirements. These processes require significant legal and operational resources and, given the volume of uploaded images to our websites, are challenging to implement. If our processes prove ineffective or we are unable to effectively scale these processes with the growth of our business, we may face significant liability and our business may suffer. Litigation to defend these claims could be costly and the expenses and damages arising from any liability could harm our results of operations. There can be no assurance that we are adequately insured or indemnified to cover claims of these types or liability that may be imposed on us.

Failure to protect confidential information of our customers and our network against security breaches or failure to comply with privacy and security laws and regulations could damage our reputation and brands and substantially harm our business and results of operations.

A significant challenge to e-commerce and communications is the secure transmission of confidential information over public networks. Our failure to prevent security breaches could damage our reputation and brands and substantially harm our business and results of operations. Currently, most of our product orders and payments for products we offer are made through our websites. A majority of our sales are billed to our customers’ credit card accounts directly, orders are shipped to a customer’s address, and customers log on using their email address. In addition, some online payments for our products are settled through third-party online payment services. In such transactions, maintaining complete security for the transmission of confidential information on our websites, such as customers’ credit card numbers and expiration dates, personal information and billing addresses, is essential to maintain consumer confidence. We have limited influence over the security measures of third-party online payment service providers. In addition, we hold certain private information about our customers, such as their names, addresses, phone numbers and browsing and purchasing records.

 

21


Table of Contents

We rely on encryption and authentication technology licensed from third parties to effect the secure transmission of confidential information, including credit card numbers. Advances in computer capabilities, new discoveries in the field of cryptography or other developments may result in a compromise or breach of the technology used by us to protect customer transaction data. In addition, any party who is able to illicitly obtain a user’s password could potentially access the user’s transaction data or personal information. We may not be able to prevent third parties, such as hackers or criminal organizations, from stealing information provided by our customers to us through our websites. In addition, our third-party merchants and delivery service providers may violate their confidentiality obligations and disclose information about our customers. Any compromise of our security could damage our reputation and brands and expose us to a risk of loss or litigation and possible liability, which would substantially harm our business and results of operations. In addition, anyone who is able to circumvent our security measures could misappropriate proprietary information or cause interruptions in our operations.

Significant capital and other resources may be required to protect against security breaches or to alleviate problems caused by such breaches. The methods used by hackers and others engaged in online criminal activity are increasingly sophisticated and constantly evolving. Even if we are successful in adapting to and preventing new security breaches, any perception by the public that e-commerce and other online transactions, or the privacy of user information, are becoming increasingly unsafe or vulnerable to attack could inhibit the growth of e-commerce and other online services generally, which in turn may reduce the number of orders we receive. Any failure, or perception of failure, to protect the confidential information of our customers or our network could damage our reputation and harm our business.

Any failure or perceived failure by us to comply with our privacy policies or privacy-related obligations to customers, sellers or other third parties may result in Federal or state governmental enforcement actions, litigation, or negative public statements against us by consumer advocacy groups or others and could cause our customers to lose trust in us, which could have an adverse effect on our reputation and business.

We are subject to customer payment-related risks.

We accept payments for our products and services on our websites by a variety of methods, including credit card, debit card and other payment services. In most geographic regions, we rely on one or two third-party companies to provide payment processing services, including the processing of credit cards, debit cards and other payment services. If any of these companies became unwilling or unable to provide these services to us, then we would need to find and engage replacement providers, which we may not be able to do on terms that are acceptable to us or at all, or to process the payments ourselves, which could be costly and time consuming, either of which scenarios could disrupt our business.

For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs and lower our profit margins or require that we charge our customers more for our products. We are also subject to payment card association and similar operating rules and requirements, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules and requirements, we may be subject to fines and higher transaction fees and lose our ability to accept credit and debit card payments from our customers or facilitate other types of online payments, and our business and operating results could be materially adversely affected.

If we fail to manage our relationships with our suppliers, our business and prospects may suffer.

We source our products from domestic and foreign manufacturers and distributors. Maintaining good relationships with suppliers that compete with each other can be difficult. For example, suppliers of similar products may compete for more prominent placement on our websites. Our current suppliers may not continue

 

22


Table of Contents

to sell merchandise to us on terms acceptable to us, and we may be unable to establish new or extend current supplier relationships to ensure a steady supply of blank inventory in a timely and cost-efficient manner. If we are unable to develop and maintain good relationships with suppliers, it may inhibit our ability to offer products demanded by our customers or to offer them in sufficient quantities and at prices acceptable to them. In addition, if our suppliers cease to provide us with favorable pricing or payment terms or return policies, our working capital requirements may increase and our operations may be materially and adversely affected. In addition, we subcontract certain activities to third-party vendors. Any deterioration in our supplier or subcontractor relationships, or a failure to resolve disputes with, or complaints from, our suppliers in a timely manner, could materially and adversely affect our business, prospects and results of operations.

We may suffer losses if we are unable to efficiently manage our inventory risks.

We must anticipate the popularity of products and purchase blank inventory and secure sufficient supplies before customizing and selling them to our customers. If we fail to adequately predict demand and experience an unexpected peak in production, our production times will suffer, which may result in damage to our reputation and business. For example, if we do not have an adequate supply of ink due to periods of unexpected peak demand, our ability to print and deliver products may be delayed. Conversely, any over purchase of ink or other supplies exposes us to risks of obsolete or excess inventory. Under some of our current supply agreements, we enjoy flexible policies for returning the unsold items to our suppliers. In order to secure more favorable business terms, we have entered into and plan to continue to enter into purchase arrangements with our suppliers with more restrictive return policies or with commitments to purchase larger quantities of inventory or supplies. For example, some of our contracts with suppliers contain restrictions on our ability to return products, such as caps on the amount of products that can be returned, and we may lose preferential pricing terms for such products if we exceed these caps, which could materially affect our profit margins. If we are unable to correctly predict demand for the products that we are committed to purchase, we will be responsible for covering the cost of the products that we are unable to sell, and our financial condition and results of operations may suffer.

We largely depend on overseas suppliers for blank inventory and if we do not appropriately manage the risks related to product safety and quality, we may face risk regulatory actions or recalls and our operating results will be harmed.

Like most retailers, manufacturers in China are the source of much of the blank inventory we utilize in the creation of customized products for sale on our websites, whether sourced from vendors directly by our supply managers or purchased through our business partners. Regulatory oversight of manufacturing in China is not subject to the same standards of product safety as may be expected in the United States. One or more of our vendors might not adhere to our quality standards, and we might not identify the deficiency before merchandise ships to our customers. In addition, our vendors may have difficulty adjusting to our changing demands and growing business. Our vendors’ failure to manufacture or import quality merchandise in a timely and effective manner could damage our reputation and brands, and could lead to an increase in customer litigation against us and an increase in our routine litigation costs. We rely on indemnities from our business partners with respect to the branded goods we customize and that protection may or may not be enough to shield us from liability for quality deficiencies. Further, any merchandise that we receive, even if it meets our quality standards, could become subject to a later recall, which could damage our reputation and brands and harm our business. While we have never been subject to a product recall, there can be no guarantee that we will not face one in the future. Recently enacted legislation has given the United States Consumer Product Safety Commission increased regulatory and enforcement power, particularly with regard to children’s safety, among other areas. As a result, companies like ours may be subject to more product recalls and incur higher recall-related expenses. Any recalls or other safety issues could harm our brands’ images.

 

23


Table of Contents

Increased product returns and the failure to accurately predict product returns could substantially harm our business and results of operations.

We generally offer our customers an unconditional 30-day return policy which allows our customers to return most products for a full refund if they are not satisfied for any reason. We make allowances for product returns and chargebacks in our financial statements based on historical return rates and current economic conditions. Actual merchandise returns are difficult to predict and may differ from our allowances. Any significant increase in merchandise returns or chargebacks above our allowances would substantially harm our business and results of operations.

Our business would be adversely affected by the departure of existing members of our senior management team and other key personnel.

Our success depends, in large part, on the continued contributions of our senior management team, in particular, the services of Bob Marino, our Chief Executive Officer, Fred Durham, our Chief Product Officer, and Monica Johnson, our Chief Financial Officer, as well as other key personnel. In addition, we have not entered into long-term employment agreements or non-compete agreements with some members of our senior management team. Our employees can terminate their employment with us upon little or no notice. The loss of any member of our senior management team or key personnel could harm our ability to implement our business strategy and respond to the rapidly changing market conditions in which we operate. In addition, we recently added several members to our senior management team. Integrating them into our management team could prove disruptive to our daily operations, require a disproportionate amount of resources and management attention and prove unsuccessful.

If we are unable to attract, train and retain qualified personnel with relevant industry and operational expertise, we may be unable to effectively execute our business plan or maintain or, in the future, expand our operations, which in turn would harm our business.

Our operations depend heavily on skilled personnel trained in our proprietary printing and production techniques and personnel knowledgeable about the online retail industry. Our future success depends, to a significant extent, on our ability to attract, train and retain qualified personnel with relevant experience and skill sets. Recruiting and retaining capable personnel, particularly those with expertise in the retail, e-commerce and printing industries, is vital to our success. There is substantial competition for qualified personnel and we cannot assure you that we will be able to attract or retain our personnel. If we are unable to attract and retain qualified personnel, our business may suffer.

Future strategic alliances or acquisitions may have a material and adverse effect on our business, reputation and results of operations.

We may in the future enter into strategic alliances with various third parties or acquire assets or companies with complementary businesses. Strategic alliances with third parties could subject us to a number of risks, including risks associated with sharing proprietary information, non-performance by the counter-party, and an increase in expenses incurred in establishing new strategic alliances, any of which may materially and adversely affect our business. We may have little ability to control or monitor the actions of these third parties. To the extent strategic third parties suffer negative publicity or harm to their reputation from events relating to their business, we may also suffer negative publicity or harm to our reputation by virtue of our association with such third parties.

 

24


Table of Contents

In addition, we often consider potential acquisitions and investments in the ordinary course of our business. If we are presented with appropriate opportunities, we may acquire additional assets, products, technologies or businesses that are complementary to our existing business. Future acquisitions and the successful integration of new assets and businesses into our own would require significant attention from our management and could result in a diversion of resources from our existing business, which in turn could have an adverse effect on our business operations. There can be no assurance that we will be successful in these efforts. Acquired assets or businesses may not achieve the anticipated benefits we expect due to a number of factors including: unanticipated costs or liabilities associated with the acquisition, incurrence of acquisition-related costs, harm to our relationships with existing customers as a result of the acquisition, harm to our brands and reputation, the potential loss of key employees, use of resources that are needed in other parts of our business, and use of substantial portions of our available cash to consummate the acquisition. In addition, acquisitions could result in the use of substantial amounts of cash, earn-outs, potentially dilutive issuances of equity securities, the occurrence of significant goodwill impairment charges, amortization expenses for other intangible assets and exposure to potential unknown liabilities of the acquired business. Moreover, the costs of identifying and consummating acquisitions may be significant and the efforts of doing so may be distracting to senior management. In addition to possible stockholders’ approval, we may also have to obtain approvals and licenses from the relevant government authorities for the acquisitions and to comply with any applicable laws and regulations, which could result in increased costs and delay.

Our failure to protect our intellectual property rights may undermine our competitive position, and litigation to protect our intellectual property rights or defend against third-party allegations of infringement may be costly.

Protection of our proprietary technology is critical to our business. Failure to protect and monitor the use of our existing intellectual property rights could result in the loss of valuable technologies and prevent us from maintaining a leading market position. We rely primarily on patents, trademarks, trade secrets, copyrights and other contractual restrictions to protect our intellectual property. As of March 31, 2011, we had three issued patents, 10 patents pending in the United States and two pending in foreign jurisdictions, which relate to our unique e-commerce services, our proprietary printing and decorating services and an online platform for designing and generating framed products. We may have on occasion disclosed inventions prior to making the relevant filings, which may make our patent applications and any resulting issued patents vulnerable to validity challenges. Our pending patent applications may not result in issued patents, or if patents are issued to us, such patents may not provide meaningful protection against competitors or against competitive technologies.

We also rely upon certain unpatented proprietary manufacturing expertise and modeling methods and designs, licensed third-party technologies, continuing technological innovation and other trade secrets to develop and maintain our competitive position. While we enter into confidentiality and invention assignment agreements with our employees and third parties to protect our intellectual property, certain confidentiality and invention assignment agreements may be limited in duration or deemed by a court to be unenforceable. Moreover, these confidentiality and invention assignment agreements could be breached, potentially in a way that we could not immediately detect, and thus may not provide meaningful protection for our trade secrets or proprietary manufacturing expertise. Adequate remedies may not be available in the event of unauthorized use or disclosure of our trade secrets and manufacturing expertise. In addition, others may obtain knowledge of our trade secrets through independent development or legal means. The failure of our patents or confidentiality agreements to protect our processes, equipment, technology, trade secrets and proprietary manufacturing expertise, methods of system design, other methods and materials could have a material adverse effect on our business. In addition, effective patent, trademark, copyright and trade secret protection may be unavailable or limited in some foreign countries. In some countries where we operate we have not applied for patent, trademark or copyright protection.

 

25


Table of Contents

Third parties may infringe or misappropriate our proprietary technologies or other intellectual property rights, which could harm our business, financial condition or operating results. Policing unauthorized use of proprietary technology can be difficult and expensive and potentially subjects our intellectual property rights to validity and enforceability challenges. Also, litigation may be necessary to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of the proprietary rights of others. We cannot assure you that the outcome of such potential litigation will be in our favor. Such litigation may be costly and may divert management attention and other resources away from our business. An adverse determination in any such litigation will impair our intellectual property rights and may harm our business, prospects and reputation.

We may face infringement or misappropriation claims by third parties, which, if determined adversely to us, could cause us to pay significant damage awards or prohibit us from conducting our business.

Our success depends largely on our ability to use and develop our technology and know-how without infringing or misappropriating the intellectual property rights of third parties. The validity and scope of claims relating to business process patents involve complex scientific, legal and factual questions and analysis and, therefore, may be highly uncertain. We may be subject to litigation involving claims of patent infringement or violation of intellectual property rights of third parties, including allegations of patent infringement asserted by patent holding companies or other adverse patent owners who have no relevant product revenues and against whom our own patents may therefore provide little or no deterrence. The defense and prosecution of intellectual property suits, patent opposition proceedings and related legal and administrative proceedings can be both costly and time consuming and may significantly divert the efforts and resources of our technical and management personnel. An adverse determination in any such litigation or proceedings to which we may become a party could subject us to significant liability to third parties, require us to seek licenses from third parties, which may not be available on reasonable terms, or at all, pay ongoing royalties, or subject us to injunctions prohibiting the use of our technologies. Protracted litigation could also result in our customers or potential customers deferring or limiting their purchase or use of our website services until resolution of such litigation.

We may be subject to legal proceedings that could be time consuming, costly, require significant amounts of management time and result in the diversion of significant operational resources.

We are involved in lawsuits, claims and proceedings incident to the ordinary course of our business. Litigation is inherently unpredictable. Any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time and result in the diversion of significant operational resources. There have been a growing number of Internet-related patent infringement lawsuits in recent years. There has also been a rise in lawsuits against companies that gather information in order to market to consumers, either online or through the mail. In addition, there has generally been an increase in employment-related lawsuits. From time to time, we have been subject to these types of lawsuits. The cost of defending claims against us or the ultimate resolution of such claims may harm our business and operating results. In addition, the increasingly regulated business environment may result in a greater number of enforcement actions and private litigation. This could subject us to increased exposure to stockholder lawsuits. In addition, we are subject to various environmental, health and safety laws and regulations. We cannot assure you that we have been or will be at all times in complete compliance with such laws and regulations. If we fail to comply with these laws or regulations, we could incur costs to correct such violations and be fined or otherwise sanctioned by regulators.

 

26


Table of Contents

We will be subject to additional regulatory compliance requirements, including Section 404 of the Sarbanes-Oxley Act of 2002, as a result of becoming a public company and our management has limited experience managing a public company.

We have never operated as a public company and will incur significant legal, accounting and other expenses that we did not incur as a private company. The individuals who constitute our management team have limited experience managing a publicly traded company, and limited experience complying with the increasingly complex and changing laws pertaining to public companies. Our management team and other personnel will need to devote a substantial amount of time to new compliance initiatives and we may not successfully or efficiently manage our transition into a public company. We expect that requirements to comply with rules and regulations such as the Sarbanes-Oxley Act of 2002 will increase our legal and financial compliance costs and make some activities more time-consuming and costly. We will need to hire a number of additional employees with public accounting and disclosure experience in order to meet our ongoing obligations as a public company. For example, Section 404 of the Sarbanes-Oxley Act of 2002 requires that our management report on, and may require that our independent registered public accounting firm attest to, the effectiveness of our internal control over financial reporting in our annual report on Form 10-K for the year ending December 31, 2012. Section 404 compliance may divert internal resources and will take a significant amount of time and effort to complete. We may not be able to successfully complete the procedures and certification and attestation requirements of Section 404 by the time we will be required to do so. If we fail to do so, or if in the future our Chief Executive Officer, Chief Financial Officer, General Counsel or independent registered public accounting firm determines that our internal control over financial reporting is not effective as defined under Section 404, we could be subject to sanctions or investigations by The NASDAQ Global Market, or NASDAQ, or the New York Stock Exchange, or NYSE, the Securities and Exchange Commission, or the SEC, or other regulatory authorities. Furthermore, investor perceptions of our company may suffer and this could cause a decline in the market price of our common stock. Irrespective of compliance with Section 404, any failure of our internal controls could have a material adverse effect on our stated results of operations and harm our reputation. If we are unable to implement these changes effectively or efficiently, it could harm our operations, financial reporting or financial results and could result in an adverse opinion on internal controls from our independent auditors.

If we are unable to successfully improve internal controls, our ability to report our financial results on a timely and accurate basis may be adversely affected.

We are in the process of adopting and implementing several measures to improve our internal controls. If the procedures we have adopted and implemented are insufficient, we may fail to meet our future reporting obligations, our financial statements may contain material misstatements and our operating results may be harmed. We cannot assure you that significant deficiencies or material weaknesses in our internal control over financial reporting will not be identified in the future. Any failure to maintain or implement required new or improved controls, or difficulties we encounter in their implementation, could result in significant deficiencies or material weaknesses, cause us to fail to meet our future reporting obligations or cause our financial statements to contain material misstatements. Any such failure could also adversely affect the results of the periodic management evaluations and annual auditor attestation report regarding the effectiveness of our internal control over financial reporting that are, or may be, required under Section 404 of the Sarbanes-Oxley Act of 2002, and which will become applicable to us beginning with the required filing of our Annual Report on Form 10-K for the year ending December 31, 2012. Internal control deficiencies could also result in a restatement of our financial statements in the future or cause investors to lose confidence in our reported financial information, leading to a decline in our stock price.

 

27


Table of Contents

Risks related to our industry

Uncertainties regarding the growth and sustained profitability of business-to-consumer e-commerce could adversely affect our revenues and business prospects and the trading price of our common stock.

The long term viability and prospects of e-commerce remain relatively uncertain. Our future operating results will depend on numerous factors, including:

 

 

the growth of personal computer, Internet and broadband usage and penetration, and the rate of any such growth;

 

 

the trust and confidence level of consumers in online shopping, as well as changes in consumer demographics and consumers’ tastes and preferences;

 

 

concerns about buying customized and personalized products without face-to-face interaction with sales personnel;

 

 

our ability to provide high-quality customization capabilities;

 

 

the selection, price and popularity of products that we and our competitors offer on websites;

 

 

whether alternative retail channels or business models that better address the needs of consumers emerge;

 

 

the development of fulfillment, payment and other ancillary services associated with online purchases; and

 

 

general economic conditions, particularly economic conditions affecting discretionary consumer spending.

A decline in the popularity of shopping on the Internet in general, interest in customized goods as a retail trend or any failure by us to adapt our websites and improve the online shopping experience of our customers in response to consumer requirements and tastes, will harm our revenues and business prospects.

Our growth and profitability depend on the level of consumer confidence and spending in the United States and globally.

Our results of operations are sensitive to changes in overall economic and political conditions that impact consumer spending both in the United States and globally. The retail industry, in particular, is very sensitive to broad economic changes, and retail purchases tend to decline during recessionary periods. A substantial portion of our revenues are derived from retail sales in the United States, where sales are dependent on the availability of discretionary income. Many factors outside of our control, including interest rates, volatility of the world’s stock markets, inflation and deflation, tax rates and other government policies and unemployment rates can adversely affect consumer confidence and spending. The domestic and international political environments, including military conflicts and political turmoil or social instability, may also adversely affect consumer confidence and reduce spending, which could in turn materially and adversely affect our growth and profitability.

Our international sales and operations subject us to additional risks that may materially and adversely affect our business and operating results.

We plan to continue to target customers in countries outside the United States. We maintain websites localized to the United Kingdom, Australia and Canada and have recently launched our first localized language website in Germany. Additionally, we have operations in the Czech Republic. In connection with our international presence we are subject to a variety of risks including:

 

 

the need to develop new production, supplier and customer relationships;

 

28


Table of Contents
 

difficulties in enforcing contracts, collecting accounts receivables and longer payment cycles;

 

 

regulatory, political or contractual limitations on our ability to operate and sell in certain foreign markets, including trade barriers such as export requirements, tariffs, taxes and other restrictions and expenses;

 

 

varying data privacy and security laws and regulations in other countries;

 

 

challenges of international delivery and customs requirements;

 

 

varying product safety requirements and content restrictions in other countries;

 

 

difficulties of language translations, increased travel, infrastructure and legal compliance and enforcement costs associated with international locations;

 

 

currency translation and transaction risk, which may negatively affect our revenues, cost of net revenues and gross margins, and could result in exchange losses;

 

 

difficulty with staffing and managing widespread international operations;

 

 

reduced protection for intellectual property rights in some countries;

 

 

the need to defend against intellectual property infringement claims against us in unfamiliar foreign legal regimes and to comply with unfamiliar foreign regulatory schemes and laws;

 

 

lower per capita Internet usage and lack of appropriate infrastructure to support widespread Internet usage as well as broadband connections on which our content-rich services depend;

 

 

heightened exposure to political instability, war and terrorism; and

 

 

changes in the general economic and political conditions.

As we continue to expand our business globally, our success will depend on our ability to anticipate and effectively manage these and other risks associated with our international presence. Our failure to manage any of these risks successfully could harm our international reputation and reduce our international sales, adversely affecting our business, operating results and financial condition.

If we fail to comply with anti-bribery laws, including the United States Foreign Corrupt Practices Act, or FCPA, we could be subject to civil and criminal penalties.

As a result of our international operations, we are subject to anti-bribery laws including the FCPA, which prohibits companies from making improper payments to foreign officials for the purpose of obtaining or keeping business. If we, or any of our channel partners, fail to comply with these laws, the United States Department of Justice, the SEC or other United States or foreign governmental authorities could seek civil or criminal sanctions, including monetary fines and penalties against us or our employees, as well as additional changes to our business practices and compliance programs, which could have a material adverse effect on our business, operating results and reputation.

If use of the Internet, particularly with respect to e-commerce, does not continue to increase as we anticipate, our business and results of operations will be harmed.

Our future revenues are substantially dependent upon the continued growth in the use of the Internet as an effective medium of business and communication by our target customers. Internet use may not continue to develop at historical rates and consumers may not continue to use the Internet and other online services as a

 

29


Table of Contents

medium for commerce. Failures by some online retailers to meet consumer demands could result in consumer reluctance to adopt the Internet as a means for commerce, and thereby damage our reputation and brands and substantially harm our business and results of operations.

In addition, the Internet may not be accepted as a viable long-term commercial marketplace for a number of reasons, including:

 

 

actual or perceived lack of security of information or privacy protection;

 

 

attacks on or attempts to hijack our domain or website traffic or similar damage to our domains or servers;

 

 

possible disruptions, computer viruses, spyware, phishing, attacks or other damage to the Internet servers, service providers, network carriers and Internet companies or to users’ computers; and

 

 

excessive governmental regulation and taxation.

Our success will depend, in large part, upon third parties maintaining the Internet infrastructure to provide a reliable network backbone with the speed, data capacity, security and hardware necessary for reliable Internet access and services. Our business, which relies on contextually rich websites that require the transmission of substantial secure data, is also significantly dependent upon the availability and adoption of broadband Internet access and other high speed Internet connectivity technologies.

If we do not properly account for our unredeemed gift certificates, gift cards, merchandise credits and flash deal promotions through group-buying websites, our operating results will be harmed.

We account for unredeemed gift cards, gift certificates, flash deal promotions through group-buying websites and merchandise credits based on historical redemption data. In the event that our historical redemption patterns change in the future, our estimates for redemption would change, which would affect our financial position or operating results. Further, in the event that a state or states were to require that the unredeemed amounts be escheated to such state or states, our business and operating results would be harmed.

We also participate in flash deal promotions through group-buying websites such as Groupon. Due to the emerging development of this business model, the terms and conditions of these programs continue to evolve and the accounting, taxation, legal and other potential regulatory implications of these sales activities have yet to be fully settled. Based on the terms of the agreements that we have entered into to date, and based on our judgmental evaluation of the criteria in the authoritative accounting guidance, we have concluded that we are the primary obligor in these transactions and have recorded revenue on a gross basis and the fees retained by the group-buying website as sales and marketing expense. We will continue to evaluate changes in the terms and conditions of these programs, or changes in accounting guidance in determining our accounting for these programs. There can be no guarantee that the legal, accounting and customer service approaches we have taken to these programs will be appropriate in the future. Changes in the terms and conditions of these programs or our evaluation of our performance obligations and associated tax, escheatment and other obligations associated with these programs could have a material adverse effect on our business, operating results or financial position or otherwise harm our business.

Taxation risks could subject us to liability for past sales and cause our future sales to decrease.

United States Supreme Court precedents currently restrict the imposition of obligations to collect state and local sales and use taxes with respect to sales made over the Internet. However in recent years, a number of states have attempted or are considering adoption of initiatives that limit or supersede the Supreme Court’s position regarding sales and use taxes on Internet sales or with respect to marketing programs we employ to

 

30


Table of Contents

generate sales on our websites. If these initiatives are successful, we could be required to collect sales taxes in additional states or change our business practices and we may be exposed to retroactive liability on sales. The imposition by state and local governments of various taxes upon Internet commerce or affiliate programs could create administrative burdens for us in the future that may cause operational challenges. We currently collect sales tax in states in which we believe we have established sales tax nexus based on our operations and physical presence. Under some of our agreements, another company is the seller of record, but we are nevertheless obligated to collect sales tax on transactions. We may enter into additional agreements requiring similar tax collection obligations.

We also pay royalties to our designers where they upload content and license to us for the creation of online storefronts operated by us. We believe it is our content owners’ obligation to pay taxes on their royalty income and we issue appropriate tax forms disclaiming the withholding on taxes on such royalty income to them but there is no guarantee that such procedures will be appropriate to disclaim taxable nexus in every state and foreign country in the future.

We comply with tax liability obligations, including value added tax and provincial sales tax, in foreign jurisdictions as applicable but additional foreign countries may seek to impose sales or other tax collection obligations on us and as our international sales grow and we expand localized language sites our exposure to liability likewise grows.

A successful assertion of taxable nexus with respect to any of our sales, affiliate marketing or user royalty payment activity by one or more states or foreign countries that we should collect sales or other taxes on the sale of merchandise could result in substantial tax liabilities for past sales, decrease our ability to compete with traditional retailers or competitors, negatively impact our financial position or otherwise harm our business.

Risks related to this offering and our common stock

Our share price may be volatile and you may be unable to sell your shares at or above the offering price.

Prior to this offering, there has not been a public market for our common stock. We cannot predict the extent to which an active trading market will develop on the NASDAQ Global Market or the NYSE or how liquid that market might become. The initial public offering price for our shares will be determined by negotiations between us and representatives of the underwriters and may not be indicative of prices that will prevail in the trading market. The market price of shares of our common stock could be subject to wide fluctuations in response to many risk factors listed in this prospectus and others beyond our control, including:

 

 

actual or anticipated fluctuations, including seasonal variations, in our financial condition and operating results;

 

 

changes in the economic performance or market valuations of other e-commerce companies;

 

 

loss of a significant amount of existing business;

 

 

actual or anticipated changes in our growth rate relative to our competitors;

 

 

actual or anticipated fluctuations in our competitors’ operating results or changes in their growth rates;

 

 

issuance of new or updated research or reports by securities analysts;

 

 

our announcement of actual results for a fiscal period that are higher or lower than projected results or our announcement of revenues or earnings guidance that is higher or lower than expected;

 

31


Table of Contents
 

regulatory developments in our target markets affecting us, our customers or our competitors;

 

 

fluctuations in the valuation of companies perceived by investors to be comparable to us;

 

 

fluctuations in the supply and prices of materials used in our products, such as cotton;

 

 

share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;

 

 

sales or expected sales of additional common stock;

 

 

terrorist attacks or natural disasters or other such events impacting countries where we or our customers have operations; and

 

 

general economic and market conditions.

Furthermore, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may cause the market price of shares of our common stock to decline. If the market price of shares of our common stock after this offering does not exceed the initial public offering price, you may not realize any return on your investment in us and may lose some or all of your investment. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.

If securities or industry analysts do not publish research or reports about our business, or if they change their recommendations regarding our common stock adversely, our common stock price and trading volume could decline.

After this offering, we expect that the trading market for our common stock will be influenced by the research reports that industry analysts publish about us. However, we cannot assure you that any such analysts will publish reports about our company. Moreover, if analysts do cover our company and any such analysts downgrade our common stock or otherwise publish unfavorable reports about us or our industry, our common stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

Substantial future sales of our common stock in the public market could cause our stock price to fall.

Additional sales of our common stock in the public market after this offering, or the perception that these sales could occur, could cause the market price of our common stock to decline. Upon the completion of this offering, we will have         shares of common stock outstanding. All shares sold in this offering will be freely transferable without restriction or additional registration under the Securities Act of 1933, or the Securities Act, except for any shares held by our affiliates as defined in Rule 144 under the Securities Act. The remaining         shares of common stock outstanding after this offering will be eligible for sale at various times beginning 180 days after the date of this prospectus upon the expiration of lock-up agreements as described below and subject to vesting requirements and the requirements of Rule 144 or Rule 701.

 

32


Table of Contents

Our directors, executive officers and holders of approximately     % of our outstanding common stock (on a fully-diluted basis as of March 31, 2011 without giving effect to this offering) have agreed with limited exceptions that they will not sell any shares of common stock owned by them without the prior written consent of J.P. Morgan Securities LLC and Jefferies & Company, Inc., on behalf of the underwriters, for a period of 180 days from the date of this prospectus. However, subject to certain exceptions, in the event that either:

 

 

during the last 17 days of the 180-day restricted period, we issue an earnings release or material news or a material event relating to us occurs, or

 

 

prior to the expiration of the 180-day restricted period, we announce that we will release earnings results during the 16-day period beginning on the last day of the 180-day restricted period,

then in either case the expiration of the 180-day restricted period will be extended until the expiration of the 18-day period beginning on the date of the issuance of an earnings release or the occurrence of the material news or event, as applicable, unless J.P. Morgan Securities LLC and Jefferies & Company, Inc. waive, in writing, such an extension. At any time and without public notice, J.P. Morgan Securities LLC and Jefferies & Company, Inc. may in their sole discretion release some or all of the securities from these lock-up agreements prior to the expiration of the lock-up period. As resale restrictions end, the market price of our common stock could decline if the holders of those shares sell them or are perceived by the market as intending to sell them. In addition, after this offering, the holders of         shares of common stock will be entitled to contractual rights by which they may require us to register those shares under the Securities Act. All of these shares are subject to a lock-up period for 180 days. Registration of these shares under the Securities Act would result in these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration statement. We also intend to file a registration statement on Form S-8 under the Securities Act to register approximately         shares under our 1999 Stock Plan, 2004 Stock Plan and 2011 Equity Incentive Plan, as well as         shares reserved for issuance under our 2011 Employee Stock Purchase Plan. For more information, see “Shares eligible for future sale.”

Our insiders who are significant stockholders may control the election of our board of directors and may have interests that conflict with those of other stockholders.

Our directors, executive officers and holders of 5% of more of our common stock, together with their affiliates, beneficially owned, in the aggregate, more than 70% of our outstanding common stock as of March 31, 2011, and will beneficially own, in the aggregate, more than     % of our outstanding common stock immediately after this offering. As a result, acting together, this group has the ability to exercise significant control over most matters requiring our stockholders’ approval, including the election and removal of directors and significant corporate transactions. This concentration of ownership could have the effect of delaying or preventing a change in control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which in turn could have a material adverse effect on our stock price and may prevent attempts by our stockholders to replace or remove our board of directors or management.

As a new investor, you will experience immediate and substantial dilution.

Purchasers in this offering will immediately experience substantial dilution in the net tangible book value of their shares. Because our common stock has in the past been sold at prices substantially lower than the initial public offering price that you will pay, you will suffer immediate dilution of $        per share in net tangible book value, based on an assumed initial offering price of $        per share of common stock, the mid-point of the range set forth on the cover page of this prospectus. As of March 31, 2011, we also had outstanding stock options to purchase approximately 4,170,712 shares of our common stock with exercise prices that are below the assumed initial public offering price of the common stock. To the extent that these options are exercised, purchasers in this offering will experience further dilution.

 

33


Table of Contents

Management may apply the net proceeds from this offering to uses that do not increase our market value or improve our operating results.

We intend to use the net proceeds from this offering for general corporate purposes, including as yet undetermined amounts related to working capital and capital expenditures. However, our management will have considerable discretion in applying the net proceeds and you will not have the opportunity, as part of your investment decision, to assess whether we are using the net proceeds appropriately. Until the net proceeds we receive are used, they may be placed in investments that do not produce income or that lose value. We may use the net proceeds for purposes that do not result in any increase in our results of operations, which could cause the price of our common stock to decline.

We may not be able to obtain additional capital when desired on favorable terms, if at all, or without dilution to our stockholders and our failure to raise additional capital when needed could prevent us from executing our growth strategy.

In the absence of this offering, we believe that our existing cash, cash equivalents, short-term investments and cash flows from our operating activities will be sufficient to meet our anticipated cash needs for at least the next 12 to 18 months. However, we operate in an industry that makes our prospects difficult to evaluate. It is possible that we may not generate sufficient cash flow from operations or otherwise have the capital resources to meet our future capital needs. If this occurs, we may need additional financing to execute on our current or future business strategies, including to:

 

 

invest in our research and development efforts by hiring additional technical and other personnel;

 

expand our operating infrastructure;

 

acquire complementary businesses, products, services or technologies; or

 

otherwise pursue our strategic plans and respond to competitive pressures.

If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders could be significantly diluted, and these newly-issued securities may have rights, preferences or privileges senior to those of existing stockholders, including those acquiring shares in this offering. If we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our operational flexibility, and would also require us to incur interest expense. We have not made arrangements to obtain additional financing and there is no assurance that additional financing will be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, if and when needed, our ability to fund our operations, take advantage of unanticipated opportunities, develop or enhance our technology and systems, or otherwise respond to competitive pressures could be significantly limited.

Delaware law and our corporate charter and bylaws will contain anti-takeover provisions that could delay or discourage takeover attempts that stockholders may consider favorable.

Provisions in our certificate of incorporation and bylaws, that we intend to adopt before the completion of this offering, may have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following:

 

 

the right of our board of directors to elect a director to fill a vacancy created by the expansion of our board of directors;

 

 

the classification of our board of directors so that only a portion of our directors are elected each year, with each director serving a three-year term;

 

34


Table of Contents
 

the requirement for advance notice for nominations for election to our board of directors or for proposing matters that can be acted upon at a stockholders’ meeting;

 

 

the ability of our board of directors to alter our bylaws without obtaining stockholder approval;

 

 

the ability of our board of directors to issue, without stockholder approval, up to 10,000,000 shares of preferred stock with rights set by our board of directors, which rights could be senior to those of common stock;

 

 

the required approval of holders of at least two-thirds of the shares entitled to vote at an election of directors to adopt, amend or repeal our bylaws or amend or repeal the provisions of our certificate of incorporation regarding the election and removal of directors and the ability of stockholders to take action by written consent; and

 

 

the elimination of the right of stockholders to call a special meeting of stockholders and to take action by written consent.

In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law. These provisions may prohibit or restrict large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us. These provisions will be in our certificate of incorporation and bylaws and under Delaware law could discourage potential takeover attempts and could reduce the price that investors might be willing to pay for shares of our common stock in the future and result in our market price being lower than it would without these provisions.

We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.

We have never declared or paid any cash dividends on our common stock and do not currently intend to do so for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future and the success of an investment in shares of our common stock will depend upon any future appreciation in their value. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares.

 

35


Table of Contents

Special note regarding forward-looking statements

This prospectus contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are contained principally in the sections entitled “Prospectus summary”, “Risk factors”, “Management’s discussion and analysis of financial condition and results of operations” and “Business.” In some cases, you can identify forward-looking statements by terms such as “may”, “might”, “will”, “objective”, “intend”, “should”, “could”, “can”, “would”, “expect”, “believe”, “estimate”, “predict”, “potential”, “plan”, or the negative of these terms, and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Forward-looking statements include, but are not limited to, statements regarding:

 

 

our mission is to offer an unrivaled platform that is the world’s premier source for self-expression through product customization and personalization and our goal to be the world’s customization platform;

 

 

trends and challenges in our business and the market for customization of consumer products, including trends in consumer demand for customization and e-commerce;

 

 

our market opportunity and market data;

 

 

our expectations regarding the seasonality and cyclicality of our business;

 

 

the effectiveness of our content usage policies;

 

 

our competitive position and our expectation regarding key competitive factors;

 

 

our ability to expand our production and fulfillment capabilities in a timely and cost-effective manner;

 

 

our intellectual property and our investment in sales and marketing and technology and development;

 

 

our expectations regarding fluctuations in our operating results;

 

 

our expectations regarding our expenses and revenues, including net revenues, and the uses of the proceeds of this offering;

 

 

our anticipated cash needs and our estimates regarding our capital requirements and our needs for additional financing;

 

 

our anticipated growth strategies;

 

 

our ability to retain and attract customers and the anticipated benefits of our sales and marketing and customer acquisition efforts; and

 

 

the regulatory environment in which we do business.

These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. We discuss many of these risks in this prospectus in greater detail under the heading “Risk factors.” Also, these forward-looking statements represent our estimates and assumptions only as of the date of this prospectus. Unless required by law, we do not intend to update any of these forward-looking statements to reflect circumstances or events that occur after the statement is made.

 

36


Table of Contents

You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

The market data and certain other statistical information used throughout this prospectus are based on independent industry publications, governmental publications, reports by market research firms or other independent sources. Some data are also based on our good faith estimates.

 

37


Table of Contents

Use of proceeds

We estimate that we will receive net proceeds from this offering of approximately $        million, based on an assumed initial public offering price of $        per share, the mid-point of the range set forth on the cover of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase (decrease) in the assumed initial public offering price would increase (decrease) the net proceeds to us from this offering by approximately $        million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares by any selling stockholder.

The principal purposes for this offering are to increase our working capital, create a public market for our common stock and facilitate our access to the public capital markets.

We currently intend to use our proceeds from this offering for general corporate purposes, including working capital and capital expenditures. The amount and timing of these expenditures will vary depending on a number of factors, including competitive and technological developments and the rate of growth, if any, of our business. In addition, we may use a portion of the net proceeds to acquire or invest in complementary businesses, products or technologies; however, we are not currently contemplating any significant acquisitions or investments.

As of the date of this prospectus, we have not determined all of the anticipated uses for the proceeds of this offering or the amounts that we will actually spend on the uses set forth above. The amount and timing of actual expenditures may vary significantly depending upon a number of factors, including the amount of cash generated from our operations, competitive and technological developments and the rate of growth, if any, of our business. Accordingly, our management will have significant flexibility in applying the net proceeds of this offering. Pending use of the net proceeds as described above, we intend to invest the net proceeds of this offering in short-term, interest-bearing, investment-grade securities.

Dividend policy

We have never declared or paid any cash dividends on shares of our capital stock. We currently expect to retain all of our earnings, if any, to finance the expansion and development of our business, and we do not currently intend to pay any cash dividends on our capital stock in the foreseeable future. Our board of directors will determine whether to declare any future dividends, if any, in its discretion subject to applicable laws. Any such determination will depend on our financial condition, results of operations, capital requirements, general business conditions and any other factors our board of directors may deem relevant.

 

38


Table of Contents

Capitalization

The following table describes our capitalization as of March 31, 2011:

 

 

on an actual basis;

 

 

on a pro forma basis to give effect to the issuance of 11,069,962 shares of common stock issuable upon the conversion of all of our outstanding shares of preferred stock upon completion of this offering and the filing of our amended and restated certificate of incorporation upon the completion of this offering; and

 

 

on a pro forma as adjusted basis to give effect to the pro forma matters described above and to the sale of         shares of common stock in this offering at an assumed initial public offering price of $        per share, the mid-point of the range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

You should read this table together with “Management’s discussion and analysis of financial condition and results of operations” and our consolidated financial statements and the related notes appearing elsewhere in this prospectus.

 

March 31, 2011

(in thousands, except share and per share data)

  

Actual

    Pro forma      Pro forma
as adjusted
 
   
     (unaudited)  

Convertible preferred stock, $0.0001 par value per share; 12,344,521 shares authorized; 11,069,962 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

   $ 22,811        

Stockholders’ equity:

       

Preferred stock, $0.0001 par value per share; no shares authorized, issued or outstanding actual; 10,000,000 shares authorized, no shares issued or outstanding, pro forma and pro forma as adjusted

       

Common stock, $0.0001 par value per share; 33,815,000 shares authorized; 17,345,144 shares issued and outstanding, actual; 500,000,000 shares authorized, 28,415,106 shares issued and outstanding, pro forma; and         shares issued and outstanding, pro forma as adjusted

     2        

Additional paid-in capital

     22,213        

Accumulated deficit

     (4,938     
        

Total stockholders’ equity

     17,277        
        

Total capitalization

   $ 40,088        
   

The actual, pro forma and pro forma as adjusted information set forth in the table:

 

 

excludes 4,170,712 shares of common stock issuable upon the exercise of options outstanding as of March 31, 2011, at a weighted average exercise price of $4.51 per share;

 

 

excludes         shares of common stock reserved for future issuance under our 2011 Stock Incentive Plan, as well as shares originally reserved for issuance under our 1999 Stock Plan and 2004 Stock Plan but which may become available for awards under our 2011 Stock Incentive Plan as described below, which plan will become

 

39


Table of Contents
 

effective in connection with this offering and contains provisions that will automatically increase its share reserve each year, as more fully described in “Executive Compensation—Employee Benefit Plans”;

 

 

excludes         shares of common stock reserved for future issuance under our 2011 Employee Stock Purchase Plan, which will become effective in connection with this offering and contains provisions that will automatically increase its share reserve each year, as more fully described in “Executive Compensation—Employee benefit plans”; and

 

 

assumes no exercise of the overallotment option granted to the underwriters.

As of March 31, 2011, no shares remained available for future issuance under our 1999 Stock Plan and 654,534 shares remained available for issuance under our 2004 Stock Plan. In May 2011 the board of directors increased the number of shares authorized for the 2004 Stock Plan by 1,000,000 shares. Upon the completion of this offering, no shares of our common stock will remain available for future issuance under our 1999 Stock Plan or our 2004 Stock Plan. Upon completion of this offering, shares originally reserved for issuance under our 1999 Stock Plan or our 2004 Stock Plan but which are not issued or subject to outstanding grants on the effective date of our 2011 Stock Incentive Plan, shares subject to outstanding options under our 1999 Stock Plan and our 2004 Stock Plan on the effective date of our 2011 Stock Incentive Plan that are subsequently forfeited or terminated for any reason before being exercised, and shares subject to vesting restrictions under our 1999 Stock Plan and our 2004 Stock Plan on the effective date of our 2011 Stock Plan that are subsequently forfeited, up to a number of additional shares not to exceed                     , will become available for awards under our 2011 Stock Incentive Plan upon the completion of this offering.

A $1.00 increase (decrease) in the assumed initial public offering price of $        per share, the mid-point of the range set forth on the cover of this prospectus, would increase (decrease) the pro forma as adjusted amount of each of cash and cash equivalents, additional paid-in capital, total stockholder’s equity and total capitalization by $        million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

40


Table of Contents

Dilution

Our pro forma net tangible book value as of March 31, 2011 was $        , or $        per share of common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the pro forma number of shares of common stock outstanding, assuming the issuance of 11,069,962 shares of common stock upon the conversion of all of our outstanding shares of Series A preferred stock, Series B preferred stock and Series I preferred stock. Net tangible book value dilution per share represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the pro forma net tangible book value per share of common stock immediately after completion of this offering on a pro forma as adjusted basis. After giving effect to the sale of the shares of common stock by us at an assumed initial public offering price of $        per share, which is the mid-point of the price range set forth on the cover of this prospectus, and the application of our estimated net proceeds from the offering, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our net tangible book value as of March 31, 2011 would have been $        , or $        per share of common stock. This represents an immediate increase in net tangible book value of $        per share of common stock to existing common stockholders and an immediate dilution in net tangible book value of $        per share to new investors purchasing shares of common stock in this offering.

The following table illustrates this per share dilution:

 

    

Assumed initial public offering price

      $                

Pro forma net tangible book value as of March 31, 2011

   $                   

Increase attributable to new investors

     
           

Pro forma net tangible book value after this offering

     
           

Net tangible book value dilution to new investors

      $     
   

A $1.00 increase (decrease) in the assumed initial public offering price of $        , the mid-point of the range set forth on the cover of the prospectus, would increase (decrease) our pro forma as adjusted net tangible book value per share by $        , assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters exercise their overallotment option in full, the pro forma net tangible book value per share of our common stock after giving effect to this offering would be approximately $        per share, and the dilution in pro forma net tangible book value per share to investors in this offering would be approximately $        per share of common stock.

The following table summarizes as of March 31, 2011, on the pro forma as adjusted basis described above, the number of shares of common stock purchased from us, the total consideration paid and the average price per share paid by existing and new investors purchasing shares of common stock in this offering, before deducting the estimated underwriting discounts and commissions and estimated offering expenses.

 

      Shares purchased      Total consideration      Average price
per share
 
     Number      Percent      Amount      Percent     
   

Existing stockholders

     28,415,106         %       $ 29,946,143         %       $ 1.05   

New stockholders

              
        

Total

        100.0%       $           100.0%       $     
   

A $1.00 increase (decrease) in the assumed initial public offering price of $        , the mid-point of the range set forth on the cover of the prospectus, would increase (decrease) the total consideration paid by new investors by

 

41


Table of Contents

$        , assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Sales by selling stockholders in this offering will reduce the number of shares of common stock held by existing stockholders to         or approximately     % of the total number of shares of common stock outstanding after this offering and will increase the number of shares of common stock held by new investors by         to approximately     % of the total number of shares of common stock outstanding after this offering.

The table above:

 

 

excludes 4,170,712 shares of common stock issuable upon the exercise of options outstanding as of March 31, 2011, at a weighted average exercise price of $4.51 per share;

 

 

excludes         shares of common stock reserved for future issuance under our 2011 Stock Incentive Plan, as well as shares originally reserved for issuance under our 2004 Stock Plan but which may become available for awards under our 2011 Stock Incentive Plan as described below, which plan will become effective in connection with this offering and contains provisions that will automatically increase its share reserve each year, as more fully described in “Executive compensation—Employee benefit plans”;

 

 

excludes         shares of common stock reserved for future issuance under our 2011 Employee Stock Purchase Plan, which will become effective in connection with this offering and contains provisions that will automatically increase its share reserve each year, as more fully described in “Executive Compensation—Employee benefit plans”;

 

 

assumes no exercise of the overallotment option granted to the underwriters; and

 

 

excludes amounts paid by us in connection with the repurchase, forfeiture or cancellation of shares of our common stock.

As of March 31, 2011, no shares remained available for future issuance under our 1999 Stock Plan and 654,534 shares remained available for future issuance under our 2004 Stock Plan. In May 2011 the board of directors increased the number of shares authorized for the 2004 Stock Plan by 1,000,000 shares. Upon the completion of this offering, no shares of our common stock will remain available for future issuance under our 1999 Stock Plan or our 2004 Stock Plan. Upon the completion of this offering, shares originally reserved for issuance under our 1999 Stock Plan or our 2004 Stock Plan but which are not issued or subject to outstanding grants on the effective date of our 2011 Stock Incentive Plan, shares subject to outstanding options under our 1999 Stock Plan and our 2004 Stock Plan on the effective date of our 2011 Stock Incentive Plan that are subsequently forfeited or terminated for any reason before being exercised, and shares subject to vesting restrictions under our 1999 Stock Plan and our 2004 Stock Plan on the effective date of our 2011 Stock Plan that are subsequently forfeited, up to a number of additional shares not to exceed                     , will become available for awards under our 2011 Stock Incentive Plan upon the completion of this offering.

To the extent that any outstanding options are exercised, there will be further dilution to new investors.

 

42


Table of Contents

Selected consolidated financial data

The selected consolidated statement of operations data for the years ended December 31, 2008, 2009 and 2010 and the consolidated balance sheet data as of December 31, 2009 and 2010 are derived from our consolidated audited financial statements included elsewhere in this prospectus. The selected consolidated statement of operations data for the three months ended March 31, 2010 and 2011, and the consolidated balance sheet data as of March 31, 2011 are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The selected consolidated statement of operations data for the years ended December 31, 2006 and 2007 and the consolidated balance sheet data as of December 31, 2006, 2007 and 2008 are derived from our audited consolidated financial statements not included in this prospectus. The unaudited consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments necessary for the fair statement of the financial information set forth in those statements. Our historical results are not necessarily indicative of the results that may be expected in the future. You should read the following selected historical financial data below in conjunction with “Management’s discussion and analysis of financial condition and results of operations” and our consolidated financial statements, related notes and other financial information included elsewhere in this prospectus.

In September 2010, we completed our acquisition of Canvas On Demand. The audited financial statements of Canvas On Demand for the year ended December 31, 2009, unaudited financial statements for the six months ended June 30, 2009 and 2010, and our unaudited pro forma combined consolidated statement of operations have been included elsewhere in this prospectus.

 

 

43


Table of Contents
     Year ended December 31,     Three months
ended March 31,
 
(in thousands, except per share data)   2006     2007     2008     2009     2010     2010     2011  
   

Consolidated statements of operations data:

             

Net revenues

  $ 64,097      $ 96,844      $ 120,407      $ 103,493      $ 127,930      $ 21,900      $ 32,036   

Cost of net revenues(1)

    40,719        59,764        74,403        57,688        72,447        12,135        18,757   
       

Gross profit

    23,378        37,080        46,004        45,805        55,483        9,765        13,279   

Operating expenses:

             

Sales and marketing(1)

    11,999        16,344        20,447        17,711        26,484        4,247        7,903   

Technology and development(1)

    5,020        8,174        12,590        13,152        14,305        3,388        3,447   

General and administrative(1)

    4,494        6,563        10,883        9,322        9,593        2,184        2,686   

Acquisition compensation

                                794               511   

Impairment charges

    565               3,746                               
       

Total operating expenses

    22,078        31,081        47,666        40,185        51,176        9,819        14,547   
                                                       

Income (loss) from operations

    1,300        5,999        (1,662     5,620        4,307        (54     (1,268

Interest income

    396        750        527        220        116        34        17   

Interest expense

    (501     (467     (302     (253     (215     (58     (50

Other income (expense), net

    (22     (33     2        (3     239                 
       

Income (loss) before income taxes

    1,173        6,249        (1,435     5,584        4,447        (78     (1,301

Provision for (benefit from) income taxes

    148        1,661        808        2,255        1,724        (38     (470
       

Net income (loss)

  $ 1,025      $ 4,588      $ (2,243   $ 3,329      $ 2,723      $ (40   $ (831
       

Net income (loss) per share of common stock(2):

             

Basic

  $ 0.00      $ 0.13      $ (0.15   $ 0.08      $ 0.05      $ (0.00   $ (0.05
       

Diluted

  $ 0.00      $ 0.12      $ (0.15   $ 0.07      $ 0.05      $ (0.00   $ (0.05
       

Shares used in computing net income (loss) per share of common stock(2):

             

Basic

    13,952        14,667        15,347        16,132        16,617        16,244        17,275   
       

Diluted

    13,952        16,730        15,347        17,339        17,721        16,244        17,275   
       

Pro forma net income (loss) per share of common stock(2):

             

Basic (unaudited)

            $0.10          $(0.03
                         

Diluted (unaudited)

            $0.09          $(0.03
                         

Shares used in computing pro forma net income (loss) per share of common stock(2):

             

Basic (unaudited)

            27,687          28,345   
                         

Diluted (unaudited)

            28,791          28,345   
   

 

44


Table of Contents
      Year ended December 31,      Three months
ended March 31,
 
(in thousands, except key
operating metrics)
   2006      2007      2008      2009      2010      2010      2011  
   
    

(unaudited)

 
Other financial and non-GAAP financial data:                     

Adjusted EBITDA(3)

   $ 5,254       $ 11,133       $ 9,715       $ 14,136       $ 14,550       $ 2,076       $ 1,841   

Capital expenditures

     2,992         6,426         7,393         3,283         5,836         866         471   

Key operating metrics:

                    

Total customers(4)

     1,209,992         1,737,658         2,053,122         1,736,787         2,077,587         412,820         557,309   

Total number of orders(5)

     1,538,687         2,188,811         2,582,176         2,157,835         2,655,264         471,058         665,088   

Average order size(6)

   $ 42       $ 45       $ 47       $ 48       $ 47       $ 46       $ 48   
   

 

      As of December 31,      As of
March 31,
 
(in thousands)    2006     2007     2008      2009      2010      2011  
   
            (unaudited)  

Consolidated balance sheet data:

               

Cash and cash equivalents

   $ 9,370      $ 4,102      $ 8,808       $ 13,255       $ 19,276       $ 13,594   

Short-term investments

     4,993        13,980        9,998         12,974         10,033         10,015   

Working capital

     4,135        4,791        7,993         15,502         15,873         16,988   

Total assets

     27,764        38,329        46,798         52,388         72,056         65,497   

Total indebtedness

     7,886        5,641        3,670         3,326         3,020         2,909   

Convertible preferred stock

     20,318        20,318        22,811         22,811         22,811         22,811   

Total stockholder’s equity (deficit)

     (11,478     (4,821     1,840         7,709         17,419         17,277   
   

 

(1)   Amounts include stock-based compensation expense as follows:

 

      Year ended December 31,      Three months
ended March 31,
 
(in thousands)    2006      2007      2008      2009      2010          2010          2011  
   
        

Cost of net revenues

   $ 29       $ 82       $ 174       $ 160       $ 152       $ 34       $ 38   

Sales and marketing

     65         265         377         359         472         94         134   

Technology and development

     54         242         501         618         569         132         93   

General and administrative

     141         591         881         1,004         981         238         265   
        

Total stock-based compensation expense

   $ 289       $ 1,180       $ 1,933       $ 2,141       $ 2,174       $ 498       $ 530   
   

 

(2)   Please see notes 2 and 9 to our audited consolidated financial statements for an explanation of the calculations of our basic and diluted net income (loss) per share of common stock and unaudited pro forma net income (loss) per share of common stock.

 

(3)   Adjusted EBITDA is a non-GAAP financial measure that our management uses to assess our operating performance and it is a factor in the evaluation of the performance of our management in determining compensation. We define Adjusted EBITDA as net income (loss) less interest and other income (expense), provision for (benefit from) income taxes, depreciation and amortization, amortization of intangible assets, acquisition compensation, stock-based compensation and impairment charges.

We use Adjusted EBITDA as a key performance measure because we believe it facilitates operating performance comparisons from period to period by excluding potential differences caused by variations in capital structures (affecting net interest expense), tax positions (such as the impact on periods of changes in effective tax rates or fluctuations in permanent differences or discrete quarterly items), the impact of depreciation and amortization, amortization of intangible assets, acquisition compensation, stock-based compensation and impairment charges. Because Adjusted EBITDA facilitates internal comparisons of our historical operating performance on a more consistent basis, we also use Adjusted EBITDA for business planning purposes and to incentivize and compensate our management personnel.

Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider this measure in isolation or as a substitute for analysis of our results as reported under GAAP as the excluded items may have significant effects on our operating results and financial condition. When evaluating our performance, you should consider Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net income (loss) and our other GAAP results.

 

45


Table of Contents

The following table presents a reconciliation of Adjusted EBITDA to net income (loss), the most comparable GAAP measure, for each of the periods indicated:

 

      Year ended December 31,     Three months
ended March 31,
 
(in thousands)    2006      2007     2008     2009      2010     2010     2011  
   

Net income (loss)

   $ 1,025       $ 4,588      $ (2,243   $ 3,329       $ 2,723      $ (40   $ (831

Non-GAAP adjustments:

                

Interest and other (income) expense

     127         (250     (227     36         (140     24        33   

Provision for (benefit from) income taxes

     148         1,661        808        2,255         1,724        (38     (470

Depreciation and amortization

     3,100         3,954        5,387        6,013         6,364        1,555        1,526   

Amortization of intangible assets

                    311        362         911        77        542   

Acquisition compensation

                                   794               511   

Stock-based compensation

     289         1,180        1,933        2,141         2,174        498        530   

Impairment and restructuring charges

     565                3,746                                
        

Adjusted EBITDA

   $ 5,254       $ 11,133      $ 9,715      $ 14,136       $ 14,550      $ 2,076      $ 1,841   
   

 

(4)   Total customers represents the number of transacting customers in a given period.

 

(5)   Total number of orders represents the number of individual transactions that are shipped during the period.

 

(6)   Average order size is calculated as billings for a given period divided by the total number of associated orders in the same period. Because we recognize revenue upon delivery, billings may not be recognized as revenues until the following period.

 

46


Table of Contents

Management’s discussion and analysis of financial condition and results of operations

The following management’s discussion and analysis of financial condition and results of operations should be read together with our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements, which involve risk and uncertainties. Our actual results could differ materially from those anticipated in the forward looking statements as a result of certain factors, including but not limited to those discussed in “Risk factors” and elsewhere in this prospectus. See “Risk factors” and “Special note regarding forward-looking statements” at the beginning of this prospectus.

Overview

We are a leading e-commerce platform enabling customers worldwide to create, buy and sell a wide variety of customized and personalized products. We serve our customers, including both consumers and content owners, through our portfolio of e-commerce websites, including our flagship website, CafePress.com. Our consumers include millions of individuals, groups, businesses and organizations who leverage our innovative and proprietary print-on-demand services to express interests, beliefs, and affiliations by customizing a wide variety of products. These products include clothing and accessories, art and posters, stickers, home accents, and stationery. Our content owners include individual designers as well as artists and branded content licensors who leverage our platform to reach a mass consumer base and monetize their content. We have developed a strong brand with a growing community that, as of March 31, 2011, had more than 13 million members and more than two million shops, and we shipped six million products in 2010 from a growing catalog of over 325 million unique products.

We define members as visitors to our website who register with us and provide their email address. Members often become customers through purchases on our websites, content owners by opening a shop or purchasing through our Create & Buy function, or both. Content owners include individuals or groups who upload or design images for their own purchase or for sale to others, or corporate clients who provide content to support the sale of branded merchandise. These products can be sold through storefronts hosted by CafePress, which we refer to as shops. Content owners may also sell products through the retail marketplace found on our portfolio of e-commerce websites.

CafePress was founded in 1999, initially providing an e-commerce platform for individuals to offer their unique content on products with no upfront investment. We became profitable within two years after proving out the economics of small volume print-on-demand manufacturing with direct-to-consumer custom product pricing. As our content catalog grew, and we reached a critical mass of buyers and sellers, we added our retail marketplace in 2004.

In 2005, we raised venture capital to finance expansion of our production and fulfillment capabilities in response to increasing demand. We chose Louisville, Kentucky as the site for our flagship manufacturing plant to take advantage of logistical efficiencies, and this facility was completed in 2006. Building on increasing awareness of our brand, along with sales of politically oriented merchandise in connection with the U.S. general election, our net revenues increased to $120.4 million in 2008.

In 2009, our net revenues declined to $103.5 million as a result of macro-economic conditions in our primary markets that reduced discretionary spending by our customers coupled with the absence of election year sales. In mid-2009, we adopted a differentiated royalty and pricing structure, which positively impacted our gross margin. Driven by these margin improvements, our Adjusted EBITDA in 2009 increased by 46%, despite the 14% decline in net revenues.

 

47


Table of Contents

In 2010, we aggressively focused on order and customer growth. This included increasing sales and marketing expenses to drive brand awareness and customer acquisition, as well as the acquisition of Canvas On Demand, LLC in September 2010. As a result of these investments, our net revenues grew by 24% in 2010 compared to 2009, and by 46% in the three months ended March 31, 2011 compared to the prior year period. Our relatively flat to declining Adjusted EBITDA during these periods reflect this investment in our growth. Because we believe the market for print on demand customized and personalized products is at an early stage, we plan to continue to invest aggressively in customer acquisition to achieve revenue and market share growth for the foreseeable future.

An important driver for our growth is customer acquisition, primarily through online marketing efforts including paid and natural search, email, affiliate and an array of other channels, as well as the acquisition efforts of our content owners. We are investing aggressively in customer acquisition and as a result, our sales and marketing expenses are our largest operating expense. Increases in our content library of user-generated and branded content also drive our growth. The expansion of product categories, as well as branded products, contributed to increases in our sales volume as consumers continue to desire custom products, individualized to their unique interests and affiliations. To further expand our customer base outside the United States, we maintain localized websites in Australia, Canada, Germany and the United Kingdom.

A key differentiator of our business model is our ability to profitably produce customized merchandise in small quantities on a when-ordered basis. We generally process and ship orders within three business days after a customer places an order, and often can process and ship an order within 24 hours from when the order is placed. We have invested substantial time and resources in establishing our production and fulfillment operations in Louisville, Kentucky and Raleigh, North Carolina. We combine our state-of-the-art print-on-demand infrastructure and technology with variable staffing and efficient distribution to deliver small production run orders profitably at scale.

Seasonal and cyclical influences impact our business volume. A significant portion of our sales are realized in conjunction with traditional retail holidays, with the largest sales volume in the fourth quarter of each calendar year. Our unique offering of custom gifts for the holidays combined with consumers’ continued shift to online purchasing drive this trend. In addition, political merchandise represents one of our largest content categories, creating a cyclical impact on our volume during key election periods.

Although our principal growth has been organic, we have also grown through acquisitions. In July 2008, we acquired Imagekind, Inc., an online art marketplace, for cash and stock consideration valued at $8.4 million. In September 2010, we acquired Canvas On Demand, an online service for creating personalized canvases from photographs, for cash and stock consideration valued at $10.1 million. We also agreed to make up to $9.0 million in earn-out payments to the former owners of Canvas On Demand, contingent upon the achievement of performance targets in each 12-month period from October 1 through September 30 through 2014, and, subject to certain exceptions, the continued employment of the two former owners. We record these earn-out payments as acquisition compensation in our consolidated statements of operations.

 

48


Table of Contents

Key operating metrics

 

Three months ended  

Mar. 31,
2009

    June 30,
2009
    Sept. 30,
2009
    Dec. 31,
2009
    Mar. 31,
2010
    June 30,
2010
    Sept. 30,
2010
    Dec. 31,
2010
    Mar. 31,
2011
 
   

Key operating metrics:

                 

Total customers

    412,184        388,830        370,989        714,490        412,820        466,224        465,498        899,614        557,309   

Total number of orders

    468,839        444,858        418,185        825,953        471,058        546,441        537,153        1,100,612        665,088   

Average order size

  $ 47      $ 47      $ 47      $ 48      $ 46      $ 47      $ 47      $ 49      $ 48   
   

Total customers

Total customers represents the number of transacting customers in a given period based on shipment date. We track the total number of customers by unique member number or email address. As a result, an individual who creates multiple accounts using different email addresses will be counted as multiple unique customers. The total number of customers represents those that are unique to the period specified. Therefore, the total number of unique customers for individual quarters within a year will not necessarily equal the total number of unique customers for the entire year.

We monitor total customers as a key indicator of demand. We seek to expand our customer base through our marketing efforts, expansion of product merchandise, user-generated and licensed content, acquisitions and through increasing opportunities for customers to create and buy customized and personalized products. We believe the number of customers, both new and repeat, is a key indicator of the growth of our current business.

Total number of orders

Total number of orders represents the number of individual transactions that are shipped during the period. We monitor the total number of orders as a leading indicator of revenue trends. We generally process and ship orders within three business days after a customer places an order. During periods of peak demand, such as the fourth quarter, we optimize our fulfillment operations and resource allocations on a daily basis to maintain process efficiency and high levels of customer satisfaction.

Average order size

Average order size is calculated as billings for a given period based on shipment date divided by the total number of associated orders in the same period. Because we recognize revenue upon delivery, billings may not be recognized as revenues until the following period. We closely monitor the average order size as it relates to changes in order volume, product pricing and product mix.

Basis of presentation

Net revenues

We generate revenues from online transactions through our portfolio of e-commerce websites. We sell a wide range of customized products such as t-shirts, hats, canvas art prints, banners, stickers and mugs, as well as products containing content supplied by the content owner and offered through our e-commerce websites or, in some cases, through feeds to independent third party websites.

We recognize revenues associated with an order when the products have been delivered and all other revenue recognition criteria have been met. Revenues are recorded at the gross amount when we are the primary

 

49


Table of Contents

obligor in a transaction, are subject to inventory and credit risk, have latitude in establishing prices and selecting suppliers, or have most of these indicators. For transactions where we act as principal and record revenues on a gross basis, applicable royalty payments to our content owners are recorded in cost of net revenues.

We have entered into arrangements with certain customers to provide fulfillment services under which we are not the primary obligor. These arrangements have historically constituted a smaller component of our business. We consider that we are acting as an agent in such transactions. The net fees received on such transactions are recorded as revenues.

Cost of net revenues

Cost of net revenues includes materials, shipping, labor, royalties and fixed overhead costs related to our manufacturing facilities. The cost of materials may vary based on revenues as well as the price we are able to negotiate when purchasing cotton or other such commodities. Shipping fluctuates with volume as well as the method of shipping chosen by the consumer and fuel surcharges. Labor varies primarily by volume and product mix, and to a lesser extent, based on whether the employee is a permanent or a temporary employee. We rely on temporary employees to augment our permanent staff particularly during periods of peak demand. Our royalty expenses comprise fees we pay to our content owners for the use of their content on our products. Certain sales transactions under our Create & Buy program do not incur royalties. For other product sales, royalties vary with volume as well as whether the transaction occurred in a shop or the marketplace. Royalty-based obligations are expensed to cost of net revenues at the contractual rate for the relevant product sales.

Operating expenses

Operating expenses consist of sales and marketing, technology and development, and general and administrative expenses. In addition, we have incurred costs related to acquisition compensation and impairment of goodwill and other intangible assets. Personnel-related expenses comprise a significant component of our operating expenses and consist of wages and related benefits, bonuses and stock-based compensation.

Sales and marketing

Sales and marketing expenses consist primarily of customer acquisition costs, personnel costs and costs related to customer support, order processing and other marketing activities. Customer acquisition, customer support and order processing expenses are variable and historically have represented more than half of our overall sales and marketing expenses. In 2010, these expense categories accounted for 66% of our total sales and marketing expense.

Our customer acquisition costs consist of various online media programs, such as paid search engine marketing, email, flash deal promotions through group-buying websites, display advertising and affiliate channels. We believe this expense is a key lever that we can use to drive growth and volume within our business as we adjust volumes to our target return on investment. We expect sales and marketing expense to increase in absolute dollars in the foreseeable future as we continue to invest in new customer acquisition.

 

50


Table of Contents

Technology and development

Technology and development expenses consist of costs incurred for engineering, network operations, and information technology, including personnel expenses, as well as the costs incurred to operate our websites. Technology and development costs are expensed as incurred, except for certain costs related to the development of internal use software and website development, which are capitalized and amortized over the estimated useful lives ranging from two to three years. We expect technology and development expenses will increase in absolute dollars as we continue to expand our network operations and personnel to support our anticipated future growth.

General and administrative

General and administrative expenses consist of personnel, professional services and facilities costs related to our executive, finance, human resources and legal functions. Professional services consist primarily of outside legal and accounting services. General and administrative expenses also include headcount and related costs for our fraudulent review organization as well as our content usage review organization. After this offering, we expect general and administrative expenses to increase in absolute dollars due to the anticipated growth of our business and infrastructure and the costs associated with becoming a public company, such as costs associated with SEC reporting and compliance, including compliance with the Sarbanes-Oxley Act of 2002, insurance, investor relations fees and similar expenses.

Acquisition compensation

Acquisition compensation expense consists of earn-out payments of up to $9.0 million in connection with our acquisition of Canvas on Demand that are payable in installments through 2014 based on a 12-month period from October 1 through September 30. The amounts payable in each 12-month period are contingent upon achievement of performance targets and are subject to maximum amounts of $2.1 million, $2.6 million and $4.3 million in each of the 12-month periods ending September 30, 2011, 2012 and 2013, respectively, and, subject to certain exceptions, the continued employment of the two former owners. In addition, if maximum amounts are not earned in each 12-month period ending September 30, 2011 or 2012, but are met in 2013, a maximum of $4.2 million in 2014 may be earned based on the achievement of specific performance targets, with the total amounts paid across the four years not to exceed $9.0 million. In each period, we accrue for acquisition compensation based on our current estimates of performance relative to the stated targets. The accrual could be adjusted if the achievement of goals results in an amount paid that is different from our accrual estimate.

Critical accounting policies

Our financial statements are prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, operating expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. In many instances, we could have reasonably used different accounting estimates, and in other instances changes in the accounting estimates are reasonably likely to occur from period-to-period. Accordingly, actual results could differ significantly from the estimates made by our management. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

 

51


Table of Contents

Revenue recognition

We recognize revenues from product sales, net of estimated returns based on historical experience, when the following revenue recognition criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or the service has been provided; (3) the selling price or fee revenues earned are fixed or determinable; and (4) collection of the resulting receivable is reasonably assured.

Revenues related to merchandise sales are recognized upon delivery to our customers. We evaluate whether it is appropriate for us to record the gross amount of product sales and related costs as product revenues or the net amount earned as fulfillment revenues. When we are the primary obligor in a transaction, are subject to inventory risk, have latitude in establishing prices and selecting suppliers, or have several but not all of these indicators, revenues are recorded gross. For transactions where we act as principal and record revenues on a gross basis, applicable royalty payments to our content owners are recorded in cost of net revenues. For certain transactions, we have concluded we are not the primary obligor and we record the net amount received by us as fulfillment revenues. Fulfillment revenues during the years ended December 31, 2008, 2009 and 2010 were less than 1%, 2% and 2% of net revenues, respectively, and less than 2% during each of the three months ended March 31, 2010 and 2011, respectively.

Product sales and shipping revenues are recognized net of promotional discounts, rebates, and return and credit card chargeback allowances. We periodically provide incentive offers to customers to encourage purchases. Such offers include current discount offers, such as percentage discounts off current purchases, and other similar offers. Current discount offers, when used by customers, are treated as a reduction of revenues. We maintain an allowance for estimated future returns and credit card chargebacks based on current period revenues and historical experience. During the years ended December 31, 2008, 2009 and 2010 and three months ended March 31, 2011, returns and credit card chargebacks were less than 2% of net revenues for each of these periods, and have been within management’s expectations.

We account for flash deal promotions through group-buying websites as gift certificates. We record deferred revenues at the time of the promotion based on the gross fee payable by the end customer, as we are the primary obligor in the transaction. We record deferred costs for the fees retained by the group-buying websites. Revenues and costs are recognized on redemption of the offer and delivery of the product to our customers. We recognize estimated gift certificate breakage from gift certificate sales and flash deal promotions as a component of net revenues in proportion to the actual gift certificate redemptions based on an analysis of historical breakage experience. Changes in customers’ behavior could impact the amounts that are ultimately redeemed and could affect the breakage recognized as a component of net revenues.

Deferred revenues include funds received in advance of product fulfillment, deferred revenues for flash deal promotions and gift card sales and amounts deferred until applicable revenue recognition criteria are met. Direct and incremental costs associated with deferred revenues are deferred, classified as deferred costs and recognized in the period revenues are recognized.

Internal use software and website development costs

We incur costs associated with website development and for software developed or obtained for internal use. We expense all costs that relate to the planning associated with website development and for the post-implementation phases of development as product development expense. Costs incurred in the development phase are capitalized and amortized over the product’s estimated useful life of two to three years. Costs associated with repair or maintenance are expensed as incurred.

 

52


Table of Contents

Goodwill and intangible assets

Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed related to a business combination. Goodwill is presumed to have an indefinite life and is not subject to amortization. We conduct a test for the impairment of goodwill at least annually, which we conduct in the third quarter of each year, and also whenever events or changes in circumstances indicate that the carrying value of the goodwill may not be fully recoverable. The impairment test is a two-step process. The first step is a comparison of the fair value of the reporting unit with its carrying amount, including goodwill. If this step indicates impairment, then the loss is measured as the excess of recorded goodwill over its implied fair value, or the excess of the fair value of the reporting unit over the fair value of all identified assets and liabilities.

The application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. Significant judgments required to estimate the fair value of reporting units include estimating future cash flows, and determining the appropriate discount and growth rates and other assumptions and evaluation of market comparable multiples. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit which could trigger impairment. We determined we had two reporting units for all periods presented. In 2009 and 2010, we determined there was no indication of impairment. In 2008, we performed an event-driven assessment and recorded an impairment charge of $3.1 million within our art reporting unit.

We evaluate our finite-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset is impaired or the estimated useful lives are no longer appropriate. Intangible assets resulting from the acquisition of entities accounted for using the purchase method of accounting are estimated by management based on the fair value of assets received. Our intangible assets have an economic useful life and/or expire after a specified period of time and thus are classified as finite-lived intangible assets on our balance sheets. Amortization of finite-lived intangible assets is computed using the straight-line method over the estimated economic life of the assets which range from three years to eight years. If indicators of impairment exist and the undiscounted projected cash flows associated with such assets are less than the carrying amount of the asset, an impairment loss is recorded to write the asset down to their estimated fair values. Fair value is estimated based on discounted future cash flows. Factors that could result in an impairment review include, but are not limited to, significant underperformance relative to projected future operating results, significant negative industry or economic trends and changes in the planned use of assets.

Income taxes

We use the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized by applying the statutory tax rates in effect in the years in which the differences between the financial reporting and tax filings basis of existing assets and liabilities are expected to reverse. We have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance against our deferred tax assets. We believe that the net deferred tax assets shown on our balance sheet are more likely than not to be realized in the future. In the event that actual results differ from those estimates in future periods, we may need to record an increase to our valuation allowance, which will impact deferred tax assets and the results of operations in the period the change is made.

 

53


Table of Contents

Stock-based compensation

We recognize compensation costs related to stock options granted to employees based on the estimated fair value of the awards on the date of grant, net of estimated forfeitures. We estimate the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. The grant date fair value of the stock-based awards is generally recognized on a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards.

The fair value of the option awards was calculated using the Black-Scholes option valuation model with the following assumptions:

 

      Year ended December 31,      Three months
ended March 31,
 
     2008      2009      2010          2010          2011  
   
                          (unaudited)  

Expected term (in years)

     4.6         4.6         4.6         4.6         4.6   

Risk-free interest rate

     2.8%         2.1%         1.8%         2.1%         2.2%   

Expected volatility

     55%         62%         59%         59%         58%   

Expected dividend rate

     0%         0%         0%         0%         0%   
   

The Black-Scholes model requires the use of highly subjective and complex assumptions which determine the fair value of stock-based awards, including the option’s expected term and the price volatility of the underlying stock. These assumptions include:

 

 

Expected term.    The expected term represents the period that our stock-based awards are expected to be outstanding and was primarily determined using the simplified method in accordance with guidance provided by the SEC. For option grants considered to be “plain vanilla”, the simplified method calculates the expected term as the average of the time-to-vesting and the contractual life of the awards. For awards not considered “plain vanilla”, the expected term is based on the historical option exercise behavior of our employees and posting-vesting cancellations.

 

 

Risk-free interest rate.    The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to each award’s expected term.

 

 

Expected volatility.    The expected volatility is derived from historical volatilities of several unrelated public companies within the online retail industries that are deemed to be comparable to our business because we have no trading history. When making the selections of our industry peer companies to be used in the volatility calculation, we considered the size, operational and economic similarities to our principle business operations.

 

 

Expected dividend.    The expected dividend was assumed to be zero as we have never paid dividends and have no current plans to do so.

In addition to assumptions used in the Black-Scholes option-pricing model, we must also estimate a forfeiture rate to calculate the stock-based compensation for our awards. Our forfeiture rate is based on an analysis of our actual forfeitures. We will continue to evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover and other factors. Quarterly changes in the estimated forfeiture rate can have a significant impact on our stock-based compensation expense as the cumulative effect of adjusting the rate is recognized in the period the forfeiture estimate is changed. If a revised forfeiture rate is higher than the previously estimated forfeiture rate, an adjustment is made that will result in a decrease to the stock-based compensation expense recognized in the financial statements. If a revised forfeiture rate is lower

 

54


Table of Contents

than the previously estimated forfeiture rate, an adjustment is made that will result in an increase to the stock-based compensation expense recognized in the financial statements.

We will continue to use judgment in evaluating the expected term, expected volatility and forfeiture rate related to our own stock-based compensation on a prospective basis. As we continue to accumulate additional data related to our common stock, we may have refinements to the estimates of our expected volatility, expected terms and forfeiture rates, which could materially impact our future stock-based compensation expense.

We are also required to estimate the fair value of the common stock underlying our stock-based awards when performing the fair value calculations with the Black-Scholes option-pricing model. The fair values of the common stock underlying our stock-based awards were estimated on each grant date by our board of directors, with input from management. We believe that our board of directors has the relevant experience and expertise to determine a fair value of our common stock on each respective grant date. Given the absence of a public trading market of our common stock, and in accordance with the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, our board of directors exercised reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of the fair value of our common stock including:

 

 

independent contemporaneous valuations;

 

 

rights, preferences and privileges of our convertible preferred stock relative to those of our common stock;

 

 

actual operating and financial performance;

 

 

current business conditions and projections;

 

 

hiring of key personnel and the experience of our management;

 

 

secondary sales of shares of our capital stock in arm’s-length transactions;

 

 

likelihood of achieving a liquidity event, such as an initial public offering or a merger or acquisition of our company given prevailing market conditions and the nature and history of our business;

 

 

illiquidity of stock-based awards involving securities in a private company;

 

 

industry information such as market size and growth; and

 

 

the U.S. and global capital market conditions.

In valuing our common stock, our board of directors determined the equity value of our business using the income approach valuation method. The income approach estimates value based on the expectation of future cash flows that a company will generate, such as cash earnings, cost savings, tax deductions and the proceeds from disposition. These future cash flows are discounted to their present values using a discount rate derived from an analysis of the cost of capital of comparable publicly traded companies in our industry or similar lines of business as of each valuation date and is adjusted to reflect the risks inherent in our cash flows. The market approach was used as a reasonableness check, as it takes the fair value of a company by applying market multiples of comparable publicly traded companies in our industry or similar lines of business which are based on key metrics implied by the enterprise values or acquisition values of our comparable publicly traded companies. In addition, we also considered the appropriate adjustment to recognize the lack of marketability due to being a closely held entity.

 

55


Table of Contents

We granted stock options with the following exercise prices since May 7, 2010:

 

Grant date    Number of
options
granted
    

Exercise
price

($)

    

Fair value
per share of
common stock

($)

 
   

May 7, 2010

     591,475         5.70         5.70   

August 6, 2010

     147,900         5.70         5.70   

November 5, 2010

     90,350         5.95         5.95   

February 10, 2011

     149,750         6.35         6.35   

May 4, 2011

     1,257,375         7.05         7.05   
   

The intrinsic value of all outstanding options as March 31, 2011 was $        million based on the estimated fair value for our common stock of $        per share, the mid-point of the price range set forth on the cover of this prospectus.

No single event caused the valuation of our common stock to increase or decrease through May 4, 2011. Instead, a combination of the factors described below in each period led to the changes in the fair value of the underlying common stock.

Significant factors considered by our board of directors in determining the fair value of our common stock at these grant dates include:

May 2010

In May 2010, the U.S. economy and the financial stock markets were in recovery following a challenging sales environment in 2009, and consumer spending was slowly increasing. We experienced revenue growth, generating $21.9 million for the quarter ended March 31, 2010 compared to $21.1 million for the same quarter in 2009. As our business continued to grow, and developing multi-year forecasts became possible, we began estimating our enterprise value with a discounted cash flow approach. Under the discounted cash flow approach, we analyzed the forecast of our expected future financial performance, and discounted those to a present value using an appropriate discount rate which reflected our then current cost of capital. We applied a marketability discount to reflect the fact that our common stockholders were unable to liquidate their holdings at will, or possibly at all. An independent contemporaneous valuation of our common stock as of March 31, 2010 determined the fair value of our common stock to be $5.75 per share under the discounted flow approach. The discount rate applied to our cash flows was 15.0% and our enterprise value reflected a non-marketability discount of 20.0% based on a liquidity event expected to occur within two years. This value was weighted 75% in the valuation of our common stock. We also considered a sale of stock by stockholders who agreed to sell shares of our common stock at $5.50 per share to a third-party investor for approximately $1.2 million in February 2010. The transaction was negotiated by unrelated third parties and represents an arm’s length transaction of the common stock. Given the facts and circumstances surrounding the transactions, we assigned a 25% weight to the value indicator. The independent contemporaneous valuation took into consideration this transaction and concluded that the common stock value was $5.69 per share at March 31, 2010. There was no change in our financial forecasts between March 31, 2010 and May 7, 2010. Based on the contemporaneous valuation and the common stock sale transaction, on May 7, 2010, our board of directors granted stock options with an exercise price of $5.70 per share, which was equal to the fair value per share of our common stock as determined by our board of directors as of such date.

 

56


Table of Contents

August 2010

Between May 2010 and August 2010, the U.S. economy and the financial stock markets continued their recovery. We experienced revenue growth, generating $25.7 million for the quarter ended June 30, 2010 compared to $21.5 million for the same quarter in 2009, and $21.9 million for the quarter ended March 31, 2010. In June 2010, an independent investor purchased an aggregate of 1.4 million shares of our common stock and Series A convertible preferred stock from existing stockholders. All shares were tendered for $5.70 per share and the transaction was completed on June 30, 2010. We did not have a full contemporaneous valuation of our common stock prepared as of June 30, 2010 but rather we reviewed the market to determine if there was any significant changes in market multiples that had occurred within our peer group that could affect our valuation. Our board of directors, with assistance from management, determined that the fair value of our common stock at June 30, 2010 was $5.70, based on the significance of the stock sales transaction with a sale price of $5.70 per share, that we met our second quarter financial plan and did not revise our financial forecast, and there was no material change in our peer group market multiples in the second quarter. On August 6, 2010, our board of directors granted stock options with an exercise price of $5.70 per share, which was equal to the fair value per share of our common stock as determined by our board of directors as of such date, as there was no material change in our business or in our industry between July 1 and August 6, 2010 that would alter the valuation as of June 30, 2010.

November 2010

Between August 2010 and November 2010, the U.S. economy and the financial stock markets continued their recovery. We experienced revenue growth, generating $25.4 million for the quarter ended September 30, 2010 compared to $20.1 million for the same quarter in 2009. An independent contemporaneous valuation of our common stock as of September 30, 2010 determined the fair value of our common stock to be $5.94 per share under the discounted cash flow approach. The discount rate applied to our cash flows was 16.0% and our enterprise value reflected a non-marketability discount of 17.5% based on a liquidity event expected to occur within 18 months. Based on the independent contemporaneous valuation and that there was no change in our financial forecast, on November 5, 2010, our board of directors granted stock options with an exercise price of $5.95 per share, which was equal to the fair value per share of our common stock as determined by our board of directors as of such date.

February 2011

Between December 2010 and February 2011, the U.S. economy and the financial stock markets continued their recovery. We experienced revenue growth, generating $54.9 million for the quarter ended December 31, 2010 compared to the $40.7 million for the same quarter in 2009. An independent contemporaneous valuation of our common stock as of December 31, 2010 determined the fair value of our common stock to be $6.35 per share under the discounted cash flow approach. The discount rate applied to our cash flows was 16.0% and our enterprise value reflected a non-marketability discount of 17.5% based on a liquidity event expected to occur within 15 months. Based on the independent contemporaneous valuation and that there was no change in our financial forecast, on February 10, 2011, our board of directors granted stock options with an exercise price of $6.35 per share, which was equal to the fair value per share of our common stock as determined by our board of directors as of such date.

May 2011

Between February 2011 and May 2011, the U.S. economy and the financial stock markets continued their recovery. We experienced revenue growth, generating $32.0 million for the quarter ended March 31, 2011 compared to $21.9 million for the same quarter in 2010. An independent contemporaneous valuation of our

 

57


Table of Contents

common stock as of March 31, 2011 determined the fair value of our common stock to be $7.05 per share under the discounted cash flow approach. The discount rate applied to our cash flows was 16.0% and our enterprise value reflected a non-marketability discount of 10% based on a liquidity event expected to occur within six months. There was no change in financial forecasts, and based on the independent contemporaneous valuation, and consideration of our progress towards being ready for a liquidity event, on May 4, 2011, our board of directors granted stock options with an exercise price of $7.05 per share, which was equal to the fair value per share of our common stock as determined by our board of directors as of such date.

Our stock-based compensation expense for awards granted is as follows:

 

      Year ended December 31,      Three months
ended March 31,
 
(in thousands)    2008      2009      2010          2010          2011  
   
                          (unaudited)  

Cost of net revenues

   $ 174       $ 160       $ 152       $ 34       $ 38   

Sales and marketing

     377         359         472         94         134   

Technology and development

     501         618         569         132         93   

General and administrative

     881         1,004         981         238         265   
        

Total stock-based compensation expense

   $ 1,933       $ 2,141       $ 2,174       $ 498       $ 530   
   

As of December 31, 2010, we had $3.2 million of unrecognized stock-based compensation expense, net of estimated forfeitures, that is expected to be recognized over a weighted average period of 2.75 years. In future periods, our stock-based compensation expense is expected to increase as a result of our existing unrecognized stock-based compensation to be recognized as these awards vest and as we issue additional stock-based awards to attract and retain employees.

 

58


Table of Contents

Results of operations

The following table presents the components of our statement of operations as a percentage of net revenues:

 

      Year ended
December 31,
    Three
months
ended
March 31,
 
     2008     2009     2010     2010     2011  
   
                       (unaudited)  

Net revenues

     100  %      100     100     100  %      100  % 

Cost of net revenues

     62        56        57        55        59   
        

Gross profit

     38        44        43        45        41   
        

Operating expenses:

          

Sales and marketing

     17        17        21        19        25   

Technology and development

     10        13        11        15        11   

General and administrative

     9        9        7        10        8   

Acquisition compensation

                   1        0        2   

Impairment charge

     3                               
        

Total operating expenses

     40        39        40        45        45   
        

Income (loss) from operations

     (1     5        3        0        (4

Interest income

     0        0        0        0        0   

Interest expense

     0        0        0        0        0   

Other income (expense), net

     0        0        0        0        0   
        

Income (loss) before income taxes

     (1     5        3        0        (4

Provision for (benefit from) income taxes

     1        2        1        (0     (1
        

Net income (loss)

     (2 )%      3     2     0  %      (3 )% 
        

Effective tax rate

     56.3  %      40.4     38.8     48.7  %      36.1  % 
   

 

59


Table of Contents

Comparison of the three months ended March 31, 2010 and March 31, 2011

The following table presents our statements of operations for the periods indicated:

 

      Three months
ended March 31,
    $ Change     % Change  
(in thousands, except for percentages)    2010     2011      
   
     (unaudited)              

Net revenues

   $ 21,900      $ 32,036      $ 10,136        46  % 

Cost of net revenues

     12,135        18,757        6,622        55   
        

Gross profit

     9,765        13,279        3,514        36   
        

Operating expenses:

        

Sales and marketing

     4,247        7,903        3,656        86   

Technology and development

     3,388        3,447        59        2   

General and administrative

     2,184        2,686        502        23   

Acquisition compensation

            511        511        *   
        

Total operating expenses

     9,819        14,547        4,728        48   
        

Loss from operations

     (54     (1,268     (1,214     *   

Interest income

     34        17        (17     (50

Interest expense

     (58     (50     8        14   
        

Loss before income taxes

     (78     (1,301     (1,223     *   

Benefit from income taxes

     (38     (470     (432     *   
        

Net loss

   $ (40   $ (831   $ (791     *   
   

 

*   Not meaningful

Net revenues

Net revenues increased $10.1 million, or 46%, in the three months ended March 31, 2011 compared to the same period in 2010. The increase in net revenues is primarily due to an increase in orders, which was attributable to new customer acquisitions and expansion of our product categories, particularly in the art, posters and signs category, as well as growth in our international sales.

Cost of net revenues

Cost of net revenues increased $6.6 million, or 55%, in the three months ended March 31, 2011 compared to the same period in 2010. As a percentage of net revenues, cost of net revenues increased to 59% in 2011 from 55% in 2010. Within cost of net revenues, materials, shipping, labor and fixed overhead costs all increased as a percentage of net revenues due to changes in the product mix and increased promotional offerings designed to attract new customers. These increases were partially offset by a one percentage point decline in royalty payments as a percentage of net revenues due to an increase in sales of products with lower royalty rates.

Sales and marketing

Sales and marketing expenses increased $3.7 million, or 86%, in the three months ended March 31, 2011 compared to the same period in 2010. Sales and marketing expenses were 25% of net revenues in the three months ended March 31, 2011 compared to 19% in the same period in 2010. The increase in sales and marketing expenses was primarily due to higher variable expenses, including increases of $2.3 million in customer acquisition costs, $0.2 million in order processing expenses and $0.1 million in customer support costs. In addition, payroll and related costs increased $0.6 million to support the growth in our net revenues.

 

60


Table of Contents

Technology and development

Technology and development expenses were relatively flat in the three months ended March 31, 2011 compared to the same period in 2010. As a percentage of net revenues, technology and development expenses declined to 11% in the three months ended March 31, 2011 from 15% in the same period in 2010.

General and administrative

General and administrative expenses increased $0.5 million, or 23%, in the three months ended March 31, 2011 compared to the same period in 2010. General and administrative expenses were 8% of net revenues in the three months ended March 31, 2011 compared to 10% in the same period in 2010. The increase in absolute dollars is primarily due to an increase in personnel-related costs.

Acquisition compensation

Acquisition compensation expense was $0.5 million in the three months ended March 31, 2011. This expense relates to our acquisition of Canvas On Demand in September 2010, and represents the accrual of earn-out payments for the acquisition for the three months ended March 31, 2011.

Benefit from income taxes

The benefit from income tax was $0.5 million in the three months ended March 31, 2011 compared to $38,000 in the same period in 2010. Our effective tax rate was 36.1% in 2011 compared to 48.7% in 2010. This decrease in our effective tax rate is primarily due to the impact of disqualifying dispositions of incentive stock options in the three months ended March 31, 2010.

 

61


Table of Contents

Comparison of the years ended December 31, 2009 and 2010

The following table presents our statements of operations for the periods indicated:

 

      Year ended
December 31,
   

$ Change

    % Change  
(in thousands, except for percentages)    2009     2010      
   

Net revenues

   $ 103,493      $ 127,930      $ 24,437        24  % 

Cost of net revenues

     57,688        72,447        14,759        26   
        

Gross profit

     45,805        55,483        9,678        21   
        

Operating expenses:

        

Sales and marketing

     17,711        26,484        8,773        50   

Technology and development

     13,152        14,305        1,153        9   

General and administrative

     9,322        9,593        271        3   

Acquisition compensation

            794        794        *   
        

Total operating expenses

     40,185        51,176        10,991        27   
        

Income from operations

     5,620        4,307        (1,313     (23

Interest income

     220        116        (104     (47

Interest expense

     (253     (215     38        15   

Other income (expense), net

     (3     239        242        *   
        

Income before income taxes

     5,584        4,447        (1,137     (20

Provision for income taxes

     2,255        1,724        (531     (24
        

Net income

   $ 3,329      $ 2,723      $ (606     (18 )% 
   

 

*   Not meaningful

Net revenues

Net revenues increased $24.4 million, or 24%, in 2010 compared to 2009. Net revenues increased due to an increase in the number of customers and overall orders. In addition, we experienced growth in revenues across our product categories, particularly in art, posters and signs.

Cost of net revenues

Cost of net revenues increased $14.8 million, or 26%, in 2010 compared to 2009. As a percentage of net revenues, cost of net revenues increased to 57% in 2010 from 56% in 2009. Within our cost of net revenues, materials, shipping, labor and fixed overhead costs all increased as a percentage of net revenues due to changes in the product mix and promotional offerings designed to attract new customers, partially offset by declines in royalty payments as a percentage of net revenues.

Sales and marketing

Sales and marketing expenses increased $8.8 million, or 50%, in 2010 compared to 2009. As a percentage of net revenues, sales and marketing expenses increased to 21% in 2010 from 17% in 2009. The increase in sales and marketing expenses was primarily due to increases of $4.8 million in customer acquisition costs, $0.5 million in customer support costs and $0.4 million in order processing expenses. In addition, payroll and related costs increased $2.2 million to support the growth in our net revenues. General marketing expenses for public relations and events also increased by $0.3 million.

 

62


Table of Contents

Technology and development

Technology and development expenses increased $1.2 million, or 9%, in 2010 compared to 2009. As a percentage of net revenues, technology and development decreased to 11% in 2010 from 13% in 2009. The increase in absolute dollars is primarily due to an increase of $0.6 million in third-party contractor services and a $0.4 million increase in depreciation and amortization.

General and administrative

General and administrative expenses increased $0.3 million, or 3%, in 2010 compared to 2009. As a percentage of net revenues, general and administrative decreased to 7% in 2010 from 9% in 2009. The increase in absolute dollars is primarily due to increases in personnel related costs of $0.2 million and a $0.3 million increase in facilities costs, partially offset by lower legal expenses.

Acquisition compensation

Acquisition compensation expense was $0.8 million in 2010 and represents the amount of the earn-out payment accrued for the acquisition of Canvas On Demand.

Other income (expense), net

Other income, net was $0.2 million in 2010 and was comprised of non-operating income from the sale of a domain name.

Provision for income taxes

The provision for income tax was $1.7 million in 2010 compared to $2.3 million in 2009. Our effective tax rate was 38.8% in 2010 compared to 40.4% in 2009. This decrease in our effective tax rate is primarily due to the impact of higher tax credits in 2010 and lower incentive stock option expense.

 

63


Table of Contents

Comparison of the years ended December 31, 2008 and 2009

The following table presents our statements of operations for the periods indicated:

 

      Year ended
December 31,
   

$ Change

    % Change  
(in thousands, except for percentages)    2008     2009      
   

Net revenues

   $ 120,407      $ 103,493      $ (16,914     (14 )% 

Cost of net revenues

     74,403        57,688        (16,715     (22
        

Gross profit

     46,004        45,805        (199     (0
        

Operating expenses:

        

Sales and marketing

     20,447        17,711        (2,736     (13

Technology and development

     12,590        13,152        562        4   

General and administrative

     10,883        9,322        (1,561     (14

Impairment charges

     3,746               (3,746     (100
        

Total operating expenses

     47,666        40,185        (7,481     (16
        

Income (loss) from operations

     (1,662     5,620        7,282        438   

Interest income

     527        220        (307     (58

Interest expense

     (302     (253     49        16   

Other income (expense), net

     2        (3     (5     (250
        

Income (loss) before income taxes

     (1,435     5,584        7,019        489   

Provision for income taxes

     808        2,255        1,447        179   
        

Net income (loss)

   $ (2,243   $ 3,329      $ 5,572        248  % 
   

Net revenues

Net revenues decreased $16.9 million, or 14%, in 2009 compared to 2008. The decrease in net revenues is primarily due to a reduction in election-related merchandise sold, and a slowdown in consumer spending that continued into most of 2009.

Cost of net revenues

Cost of net revenues decreased $16.7 million, or 22%, in 2009 compared to 2008. As a percentage of net revenues, cost of net revenues decreased to 56% in 2009 from 62% in 2008. As a percentage of net revenues, royalties declined seven percentage points due to the change in mix of products sold and the adoption of a differentiated royalty and pricing structure.

Sales and marketing

Sales and marketing expenses decreased $2.7 million, or 13%, in 2009 compared to 2008. As a percentage of net revenues, sales and marketing expenses were consistent at 17% in 2009 and 2008. The decrease in absolute dollars in sales and marketing expenses was due to declines in variable costs, including decreases of $1.2 million in customer acquisition costs, $0.4 million in credit card fees, $0.4 million in customer service costs. In addition, there was a $0.2 million decline in personnel-related costs, as well as decreases in general marketing costs of $0.5 million related to public relations events and marketing research.

 

64


Table of Contents

Technology and development

Technology and development expenses increased $0.6 million, or 4%, in 2009 compared to 2008. As a percentage of net revenues, technology and development increased to 13% in 2009 from 10% in 2008. The increase in absolute dollars is primarily due to an increase in depreciation and amortization expense of $0.8 million. This increase was partially offset by a decrease in personnel-related costs of $0.2 million.

General and administrative

General and administrative expenses decreased $1.6 million, or 14%, in 2009 compared to 2008. As a percentage of net revenues, general and administrative were consistent at 9% in 2009 and 2008. The decrease in absolute dollars is primarily due to decreases in personnel-related costs of $0.3 million, facility expenses of $0.4 million and legal expenses of $0.2 million. In addition, we incurred a charge of $0.6 million for terminating a facility lease in 2008, and there was no such charge in 2009.

Impairment charge

In 2008, we performed an event-driven assessment of our goodwill and acquired intangible assets and recorded an impairment charge within our Imagekind reporting unit for $3.1 million related to goodwill and $0.7 million related to the acquired intangible assets. There was no such charge in 2009.

Provision for income taxes

The provision for income tax was $2.3 million in 2009 compared to $0.8 million in 2008. Our effective tax rate was 40.4% in 2009 compared to 56.3% in 2008. This decrease in our effective tax rate is primarily due to the impact of the non-deductible goodwill impairment charge in 2008.

 

65


Table of Contents

Quarterly results of operations

The following table sets forth our unaudited quarterly statement of operations data for each of the nine quarters in the period ended March 31, 2011. In management’s opinion, the data below has been prepared on the same basis as the audited financial statements included elsewhere in this prospectus, and reflects all necessary adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of this data. The results of historical periods are not necessarily indicative of the results of operations for a full year or any future period.

 

Three months ended

(in thousands)

  Mar. 31,
2009
    June 30,
2009
    Sept. 30,
2009
    Dec. 31,
2009
    Mar. 31,
2010
    June 30,
2010
    Sept. 30,
2010
   

Dec. 31,

2010

   

Mar. 31,

2011

 
   
    (unaudited)  

Net revenues

  $ 21,115      $ 21,502      $ 20,131      $ 40,745      $ 21,900      $ 25,710      $ 25,421      $ 54,899      $ 32,036   

Cost of net revenues

    12,608        12,156        10,999        21,925        12,135        13,946        14,715        31,651        18,757   
       

Gross profit

    8,507        9,346        9,132        18,820        9,765        11,764        10,706        23,248        13,279   

Operating expenses:

                 

Sales and marketing

    3,685        3,777        3,910        6,339        4,247        5,210        5,846        11,181        7,903   

Technology and development

    3,196        3,285        3,356        3,315        3,388        3,745        3,527        3,645        3,447   

General and administrative

    2,387        2,136        2,112        2,687        2,184        2,533        2,283        2,593        2,686   

Acquisition compensation

                                              28        766        511   
       

Total operating expenses

    9,268        9,198        9,378        12,341        9,819        11,488        11,684        18,185        14,547   
       

Income (loss) from operations

    (761     148        (246     6,479        (54     276        (978     5,063        (1,268

Interest income

    76        51        55        38        34        35        28        19        17   

Interest expense

    (66     (63     (63     (61     (58     (54     (52     (51     (50

Other income (expense), net

    (3     (4     4                                    239          
       

Income (loss) before income taxes

    (754     132        (250     6,456        (78     257        (1,002     5,270        (1,301

Provision for (benefit from) income taxes

    (234     44        (101     2,546        (38     77        (380     2,065        (470
       

Net income (loss)

  $ (520   $ 88      $ (149   $ 3,910      $ (40   $ 180      $ (622   $ 3,205      $ (831
       

Other Financial and Non-GAAP Financial Data:

                 

Adjusted EBITDA(1)

  $ 1,274      $ 2,360      $ 1,907      $ 8,595      $ 2,076      $ 2,509      $ 1,443      $ 8,522      $ 1,841   

Capital expenditures

  $ 814      $ 627      $ 535      $ 1,307      $ 866      $ 1,614      $ 2,395      $ 961      $ 471   
   

 

(1)   Adjusted EBITDA is a non-GAAP financial measure that our management uses to assess our operating performance and it is a factor in the evaluation of the performance of our management in determining compensation. We define Adjusted EBITDA as net income (loss) less interest and other income (expense), provision for (benefit from) income taxes, depreciation and amortization, amortization of intangible assets, acquisition compensation, stock-based compensation and impairment charges.

We use Adjusted EBITDA as a key performance measure because we believe it facilitates operating performance comparisons from period to period by excluding potential differences caused by variations in capital structures (affecting net interest expense), tax positions (such as the impact on periods of changes in effective tax rates or fluctuations in permanent differences or discrete quarterly items), the impact of depreciation and amortization, amortization of intangible assets, acquisition compensation, stock-based compensation and impairment charges. Because Adjusted EBITDA facilitates internal comparisons of our historical operating performance on a more consistent basis, we also use Adjusted EBITDA for business planning purposes and to incentivize and compensate our management personnel.

Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider this measure in isolation or as a substitute for analysis of our results as reported under GAAP as the excluded items may have significant effects on our operating results and financial condition. When evaluating our performance, you should consider Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net income (loss) and our other GAAP results.

 

66


Table of Contents

The following table presents a reconciliation of Adjusted EBITDA to net income (loss), the most comparable GAAP measure, for each of the periods indicated:

 

Three months ended

(in thousands)

  Mar. 31,
2009
    June 30,
2009
    Sept. 30,
2009
    Dec. 31,
2009
    Mar. 31,
2010
    June 30,
2010
    Sept. 30,
2010
    Dec. 31,
2010
    Mar. 31,
2011
 
   
    (unaudited)        

Net income (loss)

  $ (520   $ 88      $ (149   $ 3,910      $ (40   $ 180      $ (622   $ 3,205      $ (831

Non-GAAP adjustments:

                 

Interest and other (income) expense

    (7     16        4        23        24        19        24        (207     33   

Provision for (benefit from) income taxes

    (234     44        (101     2,546        (38     77        (380     2,065        (470

Depreciation and amortization

    1,435        1,482        1,571        1,525        1,555        1,605        1,627        1,577        1,526   

Amortization of intangible assets

    91        90        91        90        77        78        215        541        542   

Acquisition compensation

                                              28        766        511   

Stock-based compensation

    509        640        491        501        498        550        551        575        530   
          

Adjusted EBITDA

  $ 1,274      $ 2,360      $ 1,907      $ 8,595      $ 2,076      $ 2,509      $ 1,443      $ 8,522      $ 1,841   
   

The following table presents the unaudited quarterly results of operations as a percentage of net revenues:

 

Three months ended

(in thousands)

 

Mar. 31,

2009

   

June 30,

2009

   

Sept. 30,

2009

   

Dec. 31,

2009

   

Mar.31,

2010

   

June 30,

2010

   

Sept. 30,

2010

   

Dec. 31,

2010

   

Mar. 31,

2011

 
   
    (Unaudited)  

Net revenues

    100  %      100     100  %      100     100  %      100     100  %      100     100  % 

Cost of net revenues

    60        57        55        54        55        54        58        58        59   
       

Gross margin

    40        43        45        46        45        46        42        42        41   

Operating expenses:

                 

Sales and marketing

    17        18        19        16        19        20        23        20        25   

Technology and development

    15        15        17        8        15        15        14        7        11   

General and administrative

    11        10        10        7        10        10        9        5        8   

Acquisition compensation

                                              0        1        2   
       

Total operating expenses

    44        43        47        30        45        45        46        33        45   
       

Income (loss) from operations

    (4     1        (1     16        (0     1        (4     9        (4

Interest income

    0        0        0        0        0        0        0        0        0   

Interest expense

    (0     (0     (0     (0     (0     (0     (0     (0     (0

Other income (expense), net

    (0     (0     0               (0                   0        0   
       

Income (loss) before income taxes

    (4     1        (1     16        (0     1        (4     10        (4

Provision for (benefit from) income taxes

    (1     0        (1     6        (0     0        (1     4        (1
       

Net income (loss)

    (2 )%      0     (1 )%      10     (0 )%      1     (2 )%      6     (3 )% 
   

Quarterly trends

Our business is subject to seasonal fluctuations. In particular, we generate a significant portion of our revenues during the fourth quarter, primarily due to increased retail activity during the holiday seasons. During the fourth quarter, we typically see our largest increases in orders and customers along with an increase in average order size. We also typically experience increases in revenues during shopping-related seasonal events, such as Mother’s Day, Father’s Day and other retail holidays.

In mid-2009, we adopted a differentiated royalty and pricing structure, which positively impacted our gross margin beginning in the third quarter of 2009.

Within operating expenses, since a significant portion of sales and marketing is variable, our sales and marketing expenses fluctuate with volume. In 2010 and continuing into the first quarter of 2011, we increased our sales and marketing expenses to drive new customer acquisition.

 

67


Table of Contents

In September 2010, we acquired Canvas On Demand, which resulted in acquisition compensation expense in the fourth quarter of 2010 and the first quarter of 2011, representing the amount of the earn-out payment accrued in connection with the acquisition, as well as increases in operating expenses directly related to the Canvas On Demand personnel and facilities in Raleigh, North Carolina.

Liquidity and capital resources

Since inception, we have funded our operations primarily with cash flows from operations and, to a lesser extent, issuances of convertible preferred stock and debt financing, including capital leases. Based on our current operating plan, and in the absence of this offering, we believe our existing cash, cash equivalents and short-term investments combined with cash generated from operations will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 to 18 months. Our future capital requirements may vary materially from those currently planned and will depend on many factors, including, among other things, market acceptance of our products, our growth, and our operating results. If we require additional capital resources to grow our business or to acquire complementary technologies and businesses at any time in the future, we may seek to sell additional equity or raise funds through debt financing or other sources. The sale of additional equity could result in additional dilution to our stockholders. If we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our operating flexibility, and would also require us to incur interest expense. We can provide no assurance that additional financing will be available at all or, if available, that we would be able to obtain financing on terms favorable to us.

Cash flows

The following summary of our cash flows for the periods indicated has been derived from our financial statements included elsewhere in this prospectus:

 

      Year ended December 31,     Three months
ended March 31,
 
(in thousands)    2008     2009     2010     2010     2011  
   
                       (unaudited)  

Net cash provided by (used in) operating activities

   $ 9,136      $ 10,701      $ 13,553      $ (4,035   $ (5,379

Net cash used in investing activities

   $ (4,320   $ (6,256   $ (7,932   $ (3,760   $ (413

Net cash provided by (used in) financing activities

   $ (109   $ 1      $ 400      $ 76      $ 110   
   

Cash flows from operating activities

Our primary source of cash from operating activities is cash collections from our customers. The substantial majority of our net revenues are generated from credit card transactions and credit card accounts receivable are typically settled between one and five business days. Our primary uses of cash for operating activities are for settlement of accounts payable to vendors and personnel-related expenditures. Our quarterly cash flows from operations are impacted by the seasonality of our business. We generate a significant portion of our cash flow from operations in the fourth quarter and cash flows in the first quarter have historically been negative due to the timing of settlements of accounts payable and accrued liabilities related to our fourth quarter holiday business. We expect that cash provided by operating activities may fluctuate in future periods as a result of a number of factors, including fluctuations in our operating results, seasonality, accounts receivable collections performance, inventory and supply chain management, and the timing and amount of personnel-related and other payments.

 

68


Table of Contents

For the three months ended March 31, 2011, net cash used in operations was $5.4 million, primarily due to the use of cash of $6.9 million for the net change in operating assets and liabilities, partially offset by non-cash items including $2.1 million for depreciation and amortization, including amortization of intangible assets, and $0.5 million for stock-based compensation. The net change in operating assets and liabilities is primarily due to the seasonal decrease in accounts payable and accrued liabilities that we experience in the first quarter of the calendar year.

For the three months ended March 31, 2010, net cash used in operations was $4.0 million, primarily due to the use of cash of $6.1 million for the net change in operating assets and liabilities, partially offset by non-cash items including $1.6 million for depreciation and amortization, including amortization of intangible assets, and $0.5 million for stock-based compensation. The net change in operating assets and liabilities is primarily due to the seasonal decrease in accounts payable and accrued liabilities.

In 2010, net cash provided by operations was $13.6 million, primarily due to our net income of $2.7 million, adjusted for non-cash items including $7.3 million for depreciation and amortization, including amortization of intangible assets, and $2.2 million for stock-based compensation. In addition, the growth in our business resulted in net cash from the change in our operating assets and liabilities of $2.3 million as our accounts payable, deferred revenue and accrued liabilities increased more than our accounts receivable, inventory and other current assets.

In 2009, net cash provided by operations was $10.7 million, primarily due to our net income of $3.3 million adjusted for non-cash items of $6.4 million for depreciation and amortization expense for property and equipment and intangible assets and $2.1 million for stock-based compensation expense.

In 2008, net cash provided by operations was $9.1 million, primarily due to our net loss of $2.2 million adjusted for non-cash items including $5.7 million for depreciation and amortization expense for property and equipment and intangible assets, $3.7 million impairment charge related to the goodwill and intangible assets of our art reporting unit and $1.9 million for stock-based compensation expense.

Cash flows from investing activities

Our investing activities have consisted primarily of capital expenditures to purchase property and equipment, cash used in the acquisition of businesses in 2008 and 2010 and purchases of, and proceeds from, the sale of short-term investments.

For the three months ended March 31, 2010 and 2011, net cash used in investing activities was $3.8 million and $0.4 million, respectively. For the three months ended March 31, 2010, net purchases of short-term investments was $2.9 million compared to $18,000 of net proceeds in the same period in 2011. For the three months ended March 31, 2010, capital expenditures and the capitalization of software and website development costs was $0.9 million compared to $0.5 million for the same period in 2011.

In 2010, net cash used in investing activities was $8.0 million. Net cash used for the acquisition of Canvas on Demand was $5.4 million. In addition, $5.8 million was used for capital expenditures and the capitalization of software and website development costs, partially offset by net proceeds from the sale of short-term investments of $2.9 million.

In 2009, net cash used in investing activities was $6.3 million including capital expenditures and the capitalization of software and website development costs of $3.3 million and net purchases of short-term investments of $3.0 million.

In 2008, net cash used in investing activities was $4.3 million, primarily due to $7.4 million in capital expenditures and capitalization of software and website development costs, which was partially offset by net

 

69


Table of Contents

proceeds from the purchase of short-term investments of $4.0 million. In addition in 2008, we utilized net cash of $0.9 million for the acquisition of Imagekind.

Cash flows from financing activities

For the three months ended March 31, 2010 and 2011, net cash provided by financing activities was $76,000 and $110,000, primarily as a result of the receipt of funds from the exercise of stock options and the resulting excess tax benefits, offset by payments on our capital lease obligations.

In 2010, net cash provided by financing activities was $0.4 million, primarily due to $0.4 million received from the exercise of stock options, $0.4 million in excess tax benefits, offset by payments on our capital lease obligations of $0.4 million.

In 2009, net cash provided by financing activities consisted of $0.2 million of proceeds from the exercise of stock options and $0.2 million in excess tax benefits, which were offset by payments on our capital lease obligations of $0.3 million.

In 2008, net cash used in financing activities was $0.1 million, primarily due to $2.2 million of payments on our equipment loan and capital lease obligations, offset by proceeds from the exercise of stock options of $1.0 million and excess tax benefits of $1.1 million.

Contractual obligations

The following summarizes our contractual obligations as of December 31, 2010:

 

      Payments due by period  

(in thousands)

   Less than
1 year
     1 to 3
years
     4 to 5
years
     More than
5 years
     Total  
   

Capital lease obligations

   $ 602       $ 1,596       $ 570       $ 963       $ 3,731   

Operating lease obligations

     2,102         2,500                         4,602   

Purchase obligations

     1,784                                 1,784   
        

Total

   $ 4,488       $ 4,096       $ 570       $ 963       $ 10,117   
   

In September 2010, we acquired Canvas On Demand. In connection with the acquisition, we agreed to make up to $9.0 million in earn-out payments to the former owners of Canvas On Demand, payable in installments through 2014 based on a 12-month period from October 1 through September 30. The amounts payable in each 12-month period are contingent upon achievement of performance targets and are subject to maximum amounts of $2.1 million, $2.6 million and $4.3 million in each of the 12-month periods ending September 30, 2011, 2012 and 2013, respectively. In addition, if maximum amounts are not earned in each of the 12-month periods ending September 30, 2011 or 2012, but are met in 2013, a maximum of $4.2 million in 2014 may be earned based on achieving specific performance targets, with the total amounts paid across the four years not to exceed $9.0 million. Earn-out payments are, subject to certain exceptions, also contingent on the continued employment of the two former owners. Accordingly, earn-out payments are being recorded as acquisition compensation and are accrued over the service period. In each period, we accrue for acquisition compensation based on the service provided and our current estimates of performance relative to the stated targets. The accrual could be adjusted if the actual performance differs from our current estimates. As of December 31, 2010, $0.8 million of acquisition compensation expense was recorded, and $0.7 million and $0.1 million were classified as accrued liabilities and other long-term liabilities, respectively. As of March 31, 2011, $1.3 million of aggregate acquisition compensation was recorded as accrued liabilities.

 

70


Table of Contents

Off-balance sheet arrangements

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Quantitative and qualitative disclosures about market risk

We are exposed to market risks in the ordinary course of our business. These risks primarily include risk related to interest rate and foreign currency exchange rate sensitivities.

Interest rate sensitivity

We have cash and cash equivalents and short-term investments of $29.3 million and $23.6 million as of December 31, 2010 and March 31, 2011, respectively. These amounts were held primarily in cash deposits, money market funds and certificates of deposit. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of the interest rates in the United States. Due to the short-term nature of these instruments, a change in market interest rates would not be expected to have a material impact on our financial condition or our results of operations.

Foreign currency exchange rate sensitivity

Our sales to international customers are denominated in multiple currencies, including the United States dollar, the British Pound, the Euro, the Canadian dollar and the Australian dollar. As the substantial majority of our sales are charged to credit cards, accounts receivables are generally settled in a short time duration and accordingly, we have limited exposure to foreign currency exchange rates on our accounts receivable. To date, our operating costs have been denominated almost exclusively in United States dollars. As a result of our limited exposure to foreign currency exchange rates, we do not currently enter into foreign currency hedging transactions. If our international operations increase, our exposure to foreign currency exchange rate fluctuations may increase.

Recent accounting pronouncements

Effective January 1, 2010, we adopted new authoritative guidance on fair value measurements and disclosures. The new guidance requires additional disclosures regarding fair value measurements, amends disclosures about postretirement benefit plan assets, and provides clarification regarding the level of disaggregation of fair value disclosures by investment class. This guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for certain Level 3 activity disclosure requirements that will be effective for reporting periods beginning after December 15, 2010. Accordingly, we adopted this new guidance beginning January 1, 2010, except for the additional Level 3 requirements, which we adopted on January 1, 2011. Level 3 assets and liabilities are those whose fair value inputs are unobservable and reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The adoption of this guidance did not have a material impact on our financial statements.

In December 2010, new authoritative guidance was issued with respect to when to perform Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts. According to the new guidance, entities must consider whether it is more likely than not that goodwill impairment exists by assessing if there are any adverse qualitative factors indicating impairment. The qualitative factors are consistent with the existing guidance. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. The adoption of this guidance did not have a material impact on our consolidated financial statements.

 

71


Table of Contents

Business

Overview

We are a leading e-commerce platform enabling customers worldwide to create, buy and sell a wide variety of customized and personalized products. We serve our customers, including both consumers and content owners, through our portfolio of e-commerce websites, including our flagship website, CafePress.com. Our consumers include millions of individuals, groups, businesses and organizations who leverage our innovative and proprietary print-on-demand services to express personal and shared interests, beliefs and affiliations by customizing a wide variety of products. These products include clothing and accessories, art and posters, stickers, home accents and stationery. Our content owners include individual designers as well as artists and branded content licensors who leverage our platform to reach a mass consumer base and share and monetize their content. We have developed a strong brand with a growing community that, as of March 31, 2011, had more than 13 million members and more than two million shops, and we shipped six million products in 2010 from a growing catalog of over 325 million unique products.

We believe customers recognize us for our pioneering role in the industry, as well as our continued innovation advancing the breadth and quality of expressive customized products. Our mission is to offer an unrivaled platform that is the world’s premier source for self-expression through product customization and personalization.

We operate a portfolio of branded websites, including CafePress.com, and power customization for resellers and co-branded websites that individually target specific consumers, products and use cases, and collectively expand the reach of our platform. We benefit from the network effect created when millions of customers are attracted to our growing catalog of content and are often inspired to contribute and share their own content. By enabling communities to share their interests, beliefs and affiliations through customized and personalized merchandise, we believe we drive social commerce.

Our expansive content catalog covers topics our customers are deeply passionate about, as well as relevant current events. As a result, we believe our catalog serves as a cultural barometer reflecting the latest topics, ideas, trends, moods and opinions. For the quarter ended March 31, 2011, we had more than 160,000 new images uploaded to our retail e-commerce websites on average per week. We have accumulated over 325 million unique products, allowing us to market and provide almost any expressive idea across an increasingly diverse product assortment.

We have built a state-of-the-art facility in Louisville, Kentucky with innovative technology and manufacturing processes that enable us to provide high-quality customized products that are individually built to order at mass scale. Our proprietary, vertically integrated processes enable us to produce a broad range of merchandise efficiently and cost effectively, and to ship them often within 24 hours. As a result of our acquisition of Canvas On Demand, we also have a custom canvas production facility in Raleigh, North Carolina.

Since our founding in 1999, we have seen significant growth and in 2010 we generated net revenues of $127.9 million. In the first quarter of 2011, net revenues were $32.0 million, an increase of 46% from the first quarter of 2010.

Vision and mission

Our vision is to empower expression by making products extraordinary and personal. Our mission is to offer an unrivaled platform that is the world’s premier source for self-expression through product customization and personalization.

 

72


Table of Contents

We believe that people possess an innate desire to express who they are, where they belong and what they love. Personalizing products is a common way to express what is most meaningful in our lives. We strive to build the best platform for truly mass-customized, one-of-a-kind personalization, and become the leading source for customized products, whether selling directly to consumers and businesses or helping other brands and product manufacturers make their products more expressive for their customers.

Industry overview

Customization of consumer products is undergoing an enormous transformation, driven by advances in Internet technology that enable consumers to shop for products in new ways and advances in manufacturing technology that enable high-quality printing on a broad range of merchandise that can be efficiently and cost effectively processed in small and single unit batches.

 

 

Consumer demand for long tail selection and customization.    Consumer tastes and interests are diverse. Beginning with the emergence of the “big box” retailers, consumers have come to expect a constantly expanding array of choices for products. E-commerce companies such as Amazon.com and eBay are offering more items than ever before, creating growing expectations for a broader and expanding range of products and services. The Internet has further fueled demand for a broader selection of merchandise and has provided a forum for self-expression. Social media services such as Facebook and Twitter have given voice to consumers and enabled the sharing of ideas. Consumers increasingly expect a broader selection of both design choices and content to create or customize products. We refer to the array of choices beyond what is typically in high demand or widely available as “long tail” selection.

 

 

E-commerce.    Online shopping and e-commerce have become mainstream. According to eMarketer, in 2011, approximately 179 million consumers ages 14 and older in the United States will research products online and 83% of them will make an online purchase. Shopping has become a fundamentally different experience as search and discovery have improved and as the unit economics of fulfillment have made e-commerce channels a viable alternative to traditional retail. With the rise of e-commerce, the user experience has improved with easy-to-use interfaces, broad selection, enhanced search, rich media and streamlined payment options. Additionally, improved capabilities of inventory management systems, logistics infrastructure and ground and air transportation have provided fast and affordable delivery of consumer products.

 

 

Internet tools and do-it-yourself empowerment.    Historically, consumers have needed help from third-party vendors to customize apparel and other products, but with the widespread availability of easy-to-use digital tools, today people can design products themselves. Customers are significantly less intimidated by designing online as evidenced by the widespread use of online photo slideshows and online product design software. The ability to use do-it-yourself design tools reduces the need to visit a local artisan, further disrupting the traditional way products have been customized.

 

 

Advances in mass customization technologies.    Historically, customizing products often required either large production runs with complex and expensive set-ups or allowed for only minimal customization through basic engraving or monogramming. Recent innovations in digital printing technology are driving the ability to digitally print in a high-quality manner on a variety of surfaces and on mass market products. In addition, manufacturing process and workflow innovation enables cost-effective and fast production of small and single unit batches at scale.

 

73


Table of Contents

Market opportunity

Online tools, e-commerce and digital production technologies are disrupting the existing fragmented, offline product print and customization markets. Our services address multiple large adjacent markets which include, but are not limited to:

 

 

Screen printing and garment printing.    According to Freedonia, the U.S. screen printing and garment printing market is expected to grow from $7.2 billion in 2009 to $8.1 billion in 2014.

 

 

Creative photo merchandise.    IDC estimates that the market for creative photo merchandise will grow from $2.8 billion in 2010 to $6.6 billion in 2014. Creative photo merchandise encompasses all products that are customized with photos including, but not limited to, cards, calendars, posters, photobooks and scrapbook pages, wall art and home décor.

 

 

Promotional products.    According to Promotional Products Association International, the promotional products industry grew 5.9% to $16.6 billion in 2010, up from $15.6 billion in 2009. This includes $2.7 billion in online sales of promotional products in 2010, up 11.1% from $2.4 billion in 2009.

 

 

Customization services for product manufacturers.    Providing mass-customization services for retailers and product manufacturers is an emerging opportunity. From tablet cases to water bottles and beyond, our product diversity suggests a large opportunity encompassing ever-expanding retail merchandise categories. Based on 2009 U.S. Census Bureau data, we estimate the U.S. market for customizable retail goods is approximately $1.0 trillion.

Traditional printing models are not optimized to satisfy individual consumers and smaller constituencies due to long lead times, costly set-up, limited printing capabilities and minimum quantities needed to achieve efficiency. Moreover, the traditional businesses addressing these opportunities are fragmented and generally lack the tools and competencies to aggregate and serve consumers as they move online to make purchases.

Our strengths

We believe we are well positioned in the market because we have more than a decade of experience meeting demand for customized single unit and small quantity orders that the traditional printing industry has generally not been able to serve efficiently and economically. We believe our business model provides us with the following competitive advantages: