Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
_____________________________________
Form 10-Q
_____________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
or 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number 001-35468 
_____________________________________
CafePress Inc.
(Exact name of registrant as specified in its charter) 
_____________________________________
Delaware
 
94-3342816
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
11909 Shelbyville Road, Louisville, KY 40243
(502) 995-2229
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
_____________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 or the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x  No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
¨
Accelerated filer
 
¨
 
 
 
 
 
 
Non-accelerated filer
 
¨   (Do not check if a smaller reporting company)
Smaller reporting company
 
x
 
 
 
Emerging growth company
 
¨


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No  x
The number of shares outstanding of the registrant’s common stock as of April 25, 2018 was 16,986,189 shares.
 


Table of Contents

CAFEPRESS INC.
TABLE OF CONTENTS
 
 
Page No.
 
 
 
PART I.
 
 
 
Item 1.
 
 
 
 
Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017
 
 
 
 
Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2018 and 2017
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II.
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 


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Table of Contents

PART I. FINANCIAL INFORMATION
Item 1.
Condensed Consolidated Financial Statements
CAFEPRESS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value amounts)
(Unaudited)
 
March 31,
2018
 
December 31,
2017
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
14,406

 
$
24,924

Short-term investments
8,011

 
6,007

Accounts receivable
818

 
1,496

Inventory, net
2,372

 
3,128

Deferred costs
550

 
781

Prepaid expenses and other current assets
2,122

 
2,412

Total current assets
28,279

 
38,748

Property and equipment, net
10,003

 
10,679

Restricted cash
1,513

 
1,513

Other assets
177

 
232

TOTAL ASSETS
$
39,972

 
$
51,172

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
1,097

 
$
2,351

Accrued royalties payable
1,643

 
2,872

Accrued liabilities
3,643

 
8,693

Deferred revenue
654

 
1,020

Total current liabilities
7,037

 
14,936

Other long-term liabilities
305

 
305

TOTAL LIABILITIES
7,342

 
15,241

Commitments and contingencies

 

Stockholders’ Equity:
 
 
 
Preferred stock, $0.0001 par value: 10,000 shares authorized as of March 31, 2018 and December 31, 2017; none issued and outstanding

 

Common stock, $0.0001 par value — 500,000 shares authorized and 16,978 and 16,932 shares issued and outstanding as of March 31, 2018 and December 31, 2017, respectively
2

 
2

Additional paid-in capital
101,994

 
101,697

              Accumulated other comprehensive income (loss)
1

 
(4
)
Accumulated deficit
(69,367
)
 
(65,764
)
TOTAL STOCKHOLDERS’ EQUITY
32,630

 
35,931

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
39,972

 
$
51,172

See the accompanying notes to the condensed consolidated financial statements.

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Table of Contents

CAFEPRESS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands, except per share amounts)
(Unaudited)
 
Three Months Ended
March 31,
 
2018
 
2017
Net revenue
$
14,550

 
$
18,289

Cost of net revenue
9,181

 
11,328

Gross profit
5,369

 
6,961

Operating expense:
 
 
 
Sales and marketing
3,580

 
4,410

Technology and development
2,478

 
2,976

General and administrative
2,402

 
2,957

Restructuring costs
605

 

Total operating expense
9,065

 
10,343

Loss from operations
(3,696
)
 
(3,382
)
Interest income
47

 
42

Interest expense

 
(6
)
Other income (expense), net
46

 
(26
)
Loss before income taxes
(3,603
)
 
(3,372
)
Provision for income taxes

 
1

Net loss
$
(3,603
)
 
$
(3,373
)
Net loss per share of common stock:
 
 
 
Basic
$
(0.21
)
 
$
(0.20
)
Diluted
$
(0.21
)
 
$
(0.20
)
Shares used in computing net loss per share of common stock:
 
 
 
Basic
16,946

 
16,639

Diluted
16,946

 
16,639

Other comprehensive income:
 
 
 
Unrealized holding gains on available-for-sale securities, net of tax
5

 

Other comprehensive income
5

 

Comprehensive loss
$
(3,598
)
 
$
(3,373
)
See the accompanying notes to the condensed consolidated financial statements.


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CAFEPRESS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Three Months Ended
March 31,
 
2018
 
2017
Cash Flows from Operating Activities:
 
 
 
Net loss
$
(3,603
)
 
$
(3,373
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
1,101

 
1,055

Loss on disposal of fixed assets
88

 
10

Stock-based compensation
297

 
419

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
678

 
649

Inventory
756

 
457

Prepaid expenses and other current assets
521

 
161

Other assets
55

 
(30
)
Accounts payable
(1,254
)
 
(447
)
Accrued royalties payables
(1,229
)
 
(1,627
)
Accrued and other liabilities
(5,050
)
 
(6,420
)
Deferred revenue
(366
)
 
33

Net cash used in operating activities
(8,006
)
 
(9,113
)
Cash Flows from Investing Activities:
 
 
 
Purchase of short-term investments
(1,999
)
 
(2,232
)
Proceeds from maturities of short-term investments

 
4,464

Purchase of property and equipment
(43
)
 
(454
)
Capitalization of software and website development costs
(553
)
 
(591
)
Proceeds from disposal of fixed assets
83

 
3

Net cash (used in) provided by investing activities
(2,512
)
 
1,190

Cash Flows from Financing Activities:
 
 
 
Principal payments on capital lease obligations

 
(147
)
Repurchases of common stock

 
(58
)
Net cash used in financing activities

 
(205
)
Net decrease in cash, cash equivalents and restricted cash
(10,518
)
 
(8,128
)
Cash, cash equivalents and restricted cash — beginning of period
26,437

 
19,980

Cash, cash equivalents and restricted cash— end of period
$
15,919

 
$
11,852

Supplemental Disclosures of Cash Flow Information:
 
 
 
Cash paid for interest
$
92

 
$
24

Income taxes paid during the period
4

 

Non-cash Investing and Financing Activities:
 
 
 
Accrued purchases of property and equipment
$

 
$
246

See the accompanying notes to the condensed consolidated financial statements.

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Table of Contents

CAFEPRESS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. Business and Summary of Significant Accounting Policies
Business
CafePress Inc. (the "Company," "we," "us," "our") is a provider of gifts and expressories. We take pride in helping to facilitate human connections by inspiring people to express themselves with the best assortment of engaging merchandise. We were founded in 1999 as a California corporation, we reincorporated in Delaware in 2005 and we completed our initial public offering in April 2012.
We are a leading provider of personalized products offering a wide variety of expressive gifts and accessories, including t-shirts and apparel, mugs and drinkware and home goods such as custom shower curtains and bed coverings. We conduct most of our business on our primary United States-based domain, CafePress.com and operate CafePress branded websites for the markets in the United Kingdom, Canada and Australia. We also sell CafePress branded products through other online retail partners such as Amazon and Walmart. Our products are customized with expressive designs contributed through a variety of means, including crowd-sourced user generated content, stock art licenses and licensed content relationships with large entertainment companies and brands. Our distinctive items bring our customers' passions to life and connect people to each other.
Our production facility and fulfillment center in Louisville, Kentucky has innovative technology and manufacturing processes that enable us to provide high-quality customized products that are individually built to order. Our proprietary processes enable us to produce a broad range of merchandise efficiently and profitably. We also maintain a diverse network of contract manufacturers that give us the ability to broaden our manufacturing capabilities and produce in certain international locales.
Most of our net revenue is generated from sales of customized products through our e-commerce websites (collectively referred to as "CafePress.com"), other third-party marketplaces (collectively referred to as "Retail Partner Channel") or through storefronts hosted by CafePress ("Shops"). In addition, we currently generate limited revenue from third-party printing and fulfillment services. Customized products include user-designed products as well as products designed by our content owners known as Shopkeepers.
An important revenue driver is customer acquisition, primarily through online marketing efforts, including paid and organic search, e-mail, social, affiliate and an array of other channels, as well as the acquisition efforts of our content owners. As a result, our sales and marketing expense is our largest operating expense.
Our consumers and content owner customers are increasingly accessing e-commerce sites from their mobile devices. This shift to mobile site access presents challenges for us as we cope with shifting traffic patterns, and we have experienced lower conversion rates on traffic from mobile devices. We expect that this shift to mobile site access will continue for the foreseeable future.
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 offering of custom gifts for the holidays combined with consumers’ continued shift to online purchasing drive this trend. As a result of seasonality, our revenue in each of the first three quarters of the year are generally substantially lower than our revenue in the fourth quarter of each year, and we expect this to continue for the foreseeable future.
Basis of presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") and follow the requirements of the Securities and Exchange Commission ("SEC") for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP can be condensed or omitted. These financial statements have been prepared on the same basis as our annual financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments that are necessary for a fair statement of our financial information. The results of operations for the three months ended March 31, 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018 or for any other interim period or for any other future year. The balance sheet as of December 31, 2017 has been derived from audited financial statements at that date but does not include all of the information required by U.S. GAAP for complete financial statements.

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The accompanying condensed consolidated financial statements and related financial information should be read in conjunction with the audited financial statements and the related notes thereto for the year ended December 31, 2017 included in the Company’s Annual Report on Form 10-K as filed on February 28, 2018 with the SEC. Our critical accounting policies are revenue recognition, property and equipment, inventory and income taxes. Our significant accounting policies are more fully described in Note 1 to the Consolidated Financial Statements included in Item 8. "Financial Statements and Supplementary Data of our Annual Report on Form 10-K.
Segments
Our Chief Executive Officer manages our operations on a consolidated basis for purposes of allocating resources. Thus, we have a single operating segment which is our single reportable segment. Our principal operations and decision-making functions are in the United States.
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, including but not limited to those related to revenue recognition, provisions for doubtful accounts, credit card chargebacks, sales returns, inventory write-downs, stock-based compensation, legal contingencies, depreciable lives and income taxes, including required valuation allowances. We base our estimates on historical experience, projections for future performance and other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from those estimates.
Revenue recognition
We derive our revenue primarily from our e-commerce websites (collectively referred to as “CafePress.com”) and other third-party marketplaces (collectively referred to as “Retail Partner Channel”). Revenue is recognized when control of the goods is transferred to our customers upon receipt, in an amount that reflects the consideration to which we expect to be entitled in exchange for delivering these goods. We recognize revenue when the following revenue recognition criteria are met: (1) identification of the contract with a customer; (2) identification of the performance obligation in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligation in the contract; and (5) recognition of revenue when we satisfy a performance obligation.
CafePress.com and Retail Partner Channel revenue primarily consist of the sale of customized products such as t-shirts and apparel, mugs and drinkware and home goods such as shower curtains and bed coverings. Each item included in orders from CafePress.com or our Retail Partner Channel is a separate performance obligation because our customers can benefit from each item individually on its own, and we sometimes fulfill an order in multiple shipments. As control transfers to the customer upon delivery, we account for shipping as a fulfillment cost, and, therefore, fees received for shipping are included in our transaction price.
Revenue is recognized at the point in time when the customer receives the goods and is recorded net of promotional discounts and return allowances. Revenue is also recorded net of sales and consumption taxes following the practical expedient in Accounting Standards Codification ("ASC") 606. 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 revenue. We maintain an allowance for estimated returns and credit card chargebacks under the expected value method based on current period revenue, judgement and historical experience. Because of the seasonality of our business, our allowance is further reviewed during the fourth quarter to determine whether the liability is sufficient for returns processed after the holiday season. Our net revenue is settled through credit cards and PayPal, and our accounts receivable primarily consists of credit card receivables that settle in less than 7 days. Sales settled through PayPal are collected within one business day of the customer order.
We evaluated principal vs. agent considerations to determine whether it is appropriate to record platform fees paid to our Retail Partner Channel as an expense or as a reduction of revenue. Platform fees are recorded as sales and marketing expense and are not recorded as a reduction of revenue because we control the goods before they are transferred to the customer. Specifically, we are responsible for fulfilling the order in the transaction, are subject to inventory and credit risk and have latitude in establishing prices and selecting suppliers.
Deferred revenue includes funds received in advance of product fulfillment and is deferred until the customer receives the shipped goods. Direct and incremental costs such as materials, shipping, labor and platform fees associated with deferred revenue are classified as deferred costs and recognized in the period revenue is recognized.




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Net revenue is summarized as follows (in thousands):
 
Three Months Ended
March 31,
 
2018
 
2017
CafePress.com revenue
$
9,776

 
$
13,651

Retail Partner Channel revenue
4,774

 
4,638

    Total revenue
$
14,550

 
$
18,289

We disaggregate our revenue between CafePress.com and our Retail Partner Channel as well as to customers located in the United States and to customers located outside of the United States. We determined that disaggregating revenue into these categories achieves the disclosure objectives for ASC 606 to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. As discussed in Note 1 - Business and Summary of Significant Accounting Policies - Segments, our business consists of one reportable segment. All disaggregated revenue is recorded within the one operating segment. Revenue by geography is based on the location to where the product was shipped and is summarized in Note 8- Geographic Information.
Cash, cash equivalents and restricted cash
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Condensed Consolidated Balance Sheets that sum to the total of the same such amounts shown in the statement of cash flows.

 
March 31,
2018
 
December 31,
2017
Cash and cash equivalents
$
14,406

 
$
24,924

Restricted cash
1,513

 
1,513

Total cash, cash equivalents and restricted cash shown in the statement of cash flows
$
15,919

 
$
26,437


Previously, we had an outstanding letter of credit of $1.5 million ("Letter of Credit"), secured by our existing operating cash, as required under the terms of our production facility and fulfillment center lease. As of March 31, 2018, as further disclosed in Note 4, amounts included in restricted cash represents funds set aside and required by the production facility and fulfillment center lease and corresponding escrow agreement negotiated with our landlord to replace the Letter of Credit.
Income taxes
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cut and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code that affected our 2017 deferred tax asset balances and establishes new tax laws that will affect 2018 and after, including a reduction in the U.S. federal corporate income tax rate from 35% to 21%.
There was no unrecognized tax benefit for any period presented.
We recognize interest and/or penalties related to all tax positions in income tax expense. To the extent that accrued interest and penalties do not ultimately become payable, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision in the period that such determination is made. No interest or penalties have been accrued for any period presented.
We have weighed both positive and negative evidence and have determined that there is a need for a valuation allowance due to the existence of three years of historical cumulative losses, which we considered significant verifiable negative evidence. As of March 31, 2018, we maintain a valuation allowance on substantially all of our deferred tax assets.
Recent accounting pronouncements

In February 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220). ASU 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects from the Tax Act. This guidance will become effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. The amendments in this ASU should be applied either in the period of adoption or retrospectively to each period (or periods) in which

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the effect of the change in the U.S. federal corporate income tax rate in the Tax Act is recognized. We are currently evaluating the impact of this updated standard, but we do not believe this update will have an impact on our consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718) Scope of Modification Accounting. ASU 2017-09 will clarify and reduce both (i) diversity in practice and (ii) cost and complexity when applying the guidance in Topic 718, to a change to the terms and conditions of a share-based payment award. We adopted ASU 2017-09 on January 1, 2018, and this standard did not have an impact on our consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 eliminates the diversity in practice related to the classification of certain cash receipts and payments for debt prepayment or extinguishment costs, the maturing of a zero-coupon bond, the settlement of contingent liabilities arising from a business combination, proceeds from insurance settlements, distributions from certain equity method investees and beneficial interests obtained in a financial asset securitization. ASU 2016-15 designates the appropriate cash flow classification, including requirements to allocate certain components of these cash receipts and payments among operating, investing and financing activities. The retrospective transition method, requiring adjustment to all comparative periods presented, is required unless it is impracticable for some of the amendments, in which case those amendments would be treated prospectively as of the earliest date practicable. We adopted ASU 2016-15 on January 1, 2018, and this standard did not have an impact on our consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires measurement and recognition of expected credit losses for financial assets held. ASU 2016-13 introduces a new forward-looking "expected loss" approach, to estimate credit losses on most financial assets and certain other instruments, including trade receivables and available-for-sale securities. The estimate of expected credit losses will incorporate the consideration of historical information, current information and reasonable and supportable forecasts. This ASU also expands the disclosure requirements to enable users of financial statements to understand the entity's assumptions, models and methods for estimating credit losses. ASU 2016-13 is effective for financial statements issued for annual periods beginning after December 15, 2019. Early adoption is permitted for fiscal years beginning after December 15, 2018. We are currently evaluating the impact of this updated standard on our consolidated financial statements.
    
In March 2016, the FASB issued ASU 2016-04, Recognition of Breakage for Certain Prepaid Stored-Value Products. The ASU exempts prepaid gift certificates from the guidance on extinguishing financial liabilities. The gift certificates will be subject to breakage accounting consistent with ASU 2014-09 Revenue from Contracts with Customers (Topic 606). Breakage should only be recognized to the extent that it is probable that a significant reversal of the recognized breakage amount will not subsequently occur. We adopted ASU 2016-04 on January 1, 2018, and this standard did not have an impact on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The new lease guidance also simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. ASU 2016-02 is effective for financial statements issued for annual periods beginning after December 15, 2018. Our preliminary analysis indicates that, for our one remaining operating lease that will be in effect, upon adoption of Topic 842, we will record an estimated lease right-of-use asset of $2.1 million and a corresponding lease liability of $2.1 million. We anticipate electing the practical expedient in ASC 842 and will not separate the nonlease components from the lease component. We are still evaluating the qualitative and quantitative disclosures that will be required when we adopt the standard.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. This ASU is based on the principle that revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. We adopted ASU 2014-09 on January 1, 2018 and used the full

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retrospective transition approach. The adoption of the new standard did not have any impact to our previously reported results as the impact to the timing and measurement of revenue recognized was not significant. Revenue related to our Retail Partner Channel will be recognized on a gross basis, as it was under ASC 605, as we control the goods before the goods are transferred to the customer.

2. Investments and Fair Value of Financial Instruments
Our investment policy is consistent with the definition of available-for-sale securities. We do not buy and hold securities principally for the purpose of selling them in the near future. Our policy is focused on the preservation of capital, liquidity and return. From time to time, we may sell certain securities but the objectives are generally not to generate profits on short-term differences in price. The following tables summarize, by major security type, our assets that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy and where they are classified on the Consolidated Balance Sheets (in thousands):
 
March 31, 2018
 
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Estimated Fair Value
 
Cash and cash equivalents
 
Short-term investments
 
Non-current assets (1)
Cash
$5,778
 
$—
 
$—
 
$5,778
 
$5,778
 
 
$1,513
Level 1 securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
8,628
 
 
 
8,628
 
8,628
 
 
Level 2 securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
2,607
 
 
(10)
 
2,597
 
 
2,597
 
 
Government securities
5,153
 
$13
 
(2)
 
5,164
 
 
5,164
 
 
Certificate of deposit
250
 
 
 
 
 
250
 
 
 
250
 
 
Total
$22,416
 
$13
 
$(12)
 
$22,417
 
$14,406
 
$8,011
 
$1,513

(1) Restricted cash represents funds set aside and required by the production facility and fulfillment center lease and corresponding escrow agreement negotiated with our landlord.

 
December 31, 2017
 
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Estimated Fair Value
 
Cash and cash equivalents
 
Short-term investments
 
Non-current assets (1)
Cash
$17,675
 
$—
 
$—
 
$17,675
 
$17,675
 
 
$1,513
Level 1 securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
7,249
 
 
 
7,249
 
7,249
 
 
Level 2 securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
2,212
 
 
(6)
 
2,206
 
 
2,206
 
 
Government securities
3,549
 
$3
 
(1)
 
3,551
 
 
3,551
 
 
Certificate of deposit
250
 
 
 
 
 
250
 
 
 
250
 
 
Total
$30,935
 
$3
 
$(7)
 
$30,931
 
$24,924
 
$6,007
 
$1,513

(1) Restricted cash represents funds set aside and required by the production facility and fulfillment center lease and corresponding escrow agreement negotiated with our landlord.

Fair value is a market-based measurement that should be determined based on the assumptions that market participants would use in pricing an asset or liability. The hierarchy level assigned to each security in our available-for-sale portfolio and cash equivalents is based on its assessment of the transparency and reliability of the inputs used in the valuation of such instrument at the measurement date. The fair value of available-for-sale securities and cash equivalents included in the Level 1 category is based on quoted prices that are readily and regularly available in an active market. The fair value of available-for-sale securities included in the Level 2 category is based on observable inputs, such as quoted prices for similar assets at the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly. These values were obtained from an independent pricing service and were evaluated using pricing models that vary by asset class and may incorporate available trade, bid and other market information and price quotes from well-established independent pricing vendors and broker-dealers.

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Because we do not intend to sell the investments that are in an unrealized loss position, and it is not likely that we will be required to sell any investments before recovery of their amortized cost basis, we do not consider those investments with an unrealized loss to be other-than-temporarily impaired at March 31, 2018 and December 31, 2017, respectively. There were no material other-than-temporary impairment or credit losses related to available-for-sale securities in the three months ended March 31, 2018 and 2017, respectively.

There were no material gross unrealized gains or losses from the sale of available-for-sale investments in the three months ended March 31, 2018 and 2017, respectively. Realized gains and losses and interest income are included in other income (expense) on the Consolidated Statements of Comprehensive Loss.

The following table summarize the short-term investment activity (in thousands):
 
Three Months Ended
March 31,
 
2018
 
2017
Proceeds from sale of short-term investments
$

 
$

Proceeds from maturities and calls of short-term investments

 
4,464

Purchases of short-term investments
1,999

 
2,232

Gross realized gains (losses) on sales of short-term investments

 


The estimated fair value of short-term investments by contractual maturity as of March 31, 2018 is as follows (in thousands):
Due within one year
$
6,278

Due after one year and through five years
1,733

Total short-term investments
$
8,011


3. Balance Sheet Items
Inventory, net, is comprised of the following (in thousands):
 
March 31,
2018
 
December 31,
2017
Raw materials
$
2,643

 
$
3,404

Finished goods

 

Less: reserve for obsolescence
(271
)
 
(276
)
Inventory, net
$
2,372

 
$
3,128

Property and equipment, net, is comprised of the following (in thousands):
 
March 31,
2018
 
December 31,
2017
Land and building
$
3,675

 
$
3,675

Computer equipment and office furniture
7,921

 
7,897

Computer software
1,943

 
1,925

Internal use software and website development
14,905

 
14,270

Internal use software and website development in progress
121

 
204

Production equipment
14,229

 
14,435

Leasehold improvements
3,061

 
3,061

Total property and equipment
45,855

 
45,467

Less: accumulated depreciation and amortization
(35,852
)
 
(34,788
)
Property and equipment, net
$
10,003

 
$
10,679

Depreciation and amortization expense was $1.1 million for both of the three months ended March 31, 2018 and 2017, respectively.

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Accrued liabilities consist of the following (in thousands):
 
March 31,
2018
 
December 31,
2017
Production costs
$
1,020

 
$
4,037

Payroll and employee related expense
755

 
1,382

Accrued sales and business taxes
391

 
919

Accrued advertising
380

 
1,323

Restructuring
253

 
20

Royalties-minimum guarantee
226

 
194

Unclaimed royalty payments
220

 
207

Professional services
190

 
226

Other accrued liabilities
153

 
204

Allowance for sales returns and chargebacks
55

 
181

Accrued liabilities
$
3,643

 
$
8,693

The following table presents the changes in the allowance for sales returns and chargebacks (in thousands):
 
Three Months Ended
March 31,
 
2018
 
2017
Balance, beginning of period
$
181

 
$
219

Add: provision
403

 
528

Less: deductions and other adjustments
(529
)
 
(675
)
Balance, end of period
$
55

 
$
72



4. Escrow Agreement
On September 15, 2017, the Letter of Credit provided to the landlord under our production facility and fulfillment center lease was replaced by a fully-negotiated escrow agreement. Pursuant to the terms of the escrow agreement, we deposited $1.5 million in a non-interest bearing account, representing the maximum amount owed to the landlord, only to be drawn on by the landlord should we exercise our right to terminate the production facility and fulfillment center lease prior to the expiration of the term.


5. Stock-Based Compensation

Stock option activity
The following table summarizes stock option activity related to shares of common stock (in thousands, except the weighted average exercise price):
 
Number of
Stock Options
Outstanding
 
Weighted-
Average Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Life (Years)
 
Aggregate
Intrinsic Value
Outstanding — December 31, 2017
2,270

 
$
3.99

 
6.81
 
$

Granted
195

 
1.40

 
 
 
 
Exercised

 

 
 
 
 
Forfeited
(408
)
 
2.99

 
 
 
 
Outstanding — March 31, 2018
2,057

 
$
3.94

 
6.08
 
$

Vested and expected to vest — March 31, 2018
2,057

 


 
6.08
 
$

Options exercisable — March 31, 2018
1,002

 


 
4.14
 
$


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Included in the stock options outstanding as of March 31, 2018 are 281,624 non-statutory stock options that have both three-year service criteria and vesting contingent on financial performance measures at the end of a three-year performance period ended December 31, 2018. The performance criteria for these awards consist of the following financial measures during the performance period: (i) revenue during each period, (ii) cumulative Adjusted EBITDA and (iii) cumulative free cash flow, which we define as cash flows from operations minus capital expenditures. Compensation cost associated with these performance-based stock options is recognized using an attribution model and ultimately based on whether satisfaction of the performance criteria is probable. The total compensation cost we recognize under these option awards will be based upon the results of the financial measures. As of March 31, 2018, we have estimated that it is not probable that the performance criteria will be met, and, accordingly, no stock compensation expense for the performance shares has been recorded. At March 31, 2018, we had $0.6 million of unrecognized compensation expense related to the performance awards.
Restricted stock unit activity
We may grant restricted stock units, ("RSUs") to our employees, consultants or outside directors under the provisions of our Amended and Restated 2012 Stock Incentive Plan. The cost of RSUs is determined using the fair value of our common stock on the date of grant. Compensation cost is amortized on a straight-line basis over the requisite service period.
Restricted stock unit activity is summarized as follows (unit numbers in thousands):
 
Number of Units
Outstanding
 
Weighted
Average Grant
Date Fair Value
Per Unit
Awarded and unvested at December 31, 2017
740

 
$
3.22

Granted
70

 
1.55

Vested
(45
)
 
3.40

Forfeited and canceled
(151
)
 
3.02

Awarded and unvested at March 31, 2018
614

 
$
3.07

Included in the restricted stock units outstanding as of March 31, 2018 are 129,651 performance-based restricted stock units ("PSUs") that have both three-year service criteria and vesting contingent on financial performance measures at the end of a three-year performance period ended December 31, 2019. The performance criteria for these awards consist of the following financial measures during the performance period: (i) cumulative Adjusted EBITDA and (ii) cumulative free cash flow, which we define as cash flows from operations minus capital expenditures. Compensation cost associated with these PSUs will be recognized based on whether satisfaction of the performance criteria is probable. The total compensation cost we recognize under these awards will be based upon the results of the financial measures. As of March 31, 2018, we have estimated that it is not probable that the performance criteria will be met, and, accordingly, no stock compensation expense for the PSUs has been recorded. At March 31, 2018, we had $0.4 million of unrecognized compensation expense related to the PSUs.
Stock-based compensation expense

We estimated the fair value of each option award on the date of grant using the Black-Scholes option-pricing model and the assumptions noted in the following table.  In the three months ended March 31, 2018 and 2017, we calculated volatility using our historical volatility as we had sufficient public trading history.  The expected term of options granted gave consideration to historical exercises, assumed forfeitures when they occur and the options’ contractual term.  For all periods presented, the risk-free rate is based on the rates in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to each grant’s expected life, and a dividend yield of zero is applied since we have not historically paid dividends and have no intention to pay dividends in the near future.
 
Three Months Ended
March 31,
 
2018
 
2017
Expected term (in years)
5.6

 
4.1

Risk-free interest rate
2.6
%
 
1.9
%
Expected volatility
54
%
 
55
%
Expected dividend rate
0.0
%
 
0.0
%

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The weighted average fair value of options granted was $0.72 and $1.37 for the three months ended March 31, 2018 and 2017 respectively.
Cost of net revenue and operating expense include stock-based compensation as follows (in thousands):
 
Three Months Ended
March 31,
 
2018
 
2017
Cost of net revenue
$
4

 
$
4

Sales and marketing
11

 
25

Technology and development
5

 
9

General and administrative
277

 
381

Total stock-based compensation expense
$
297

 
$
419


6. Restructuring
Restructuring costs were $0.6 million for the three months ended March 31, 2018 and are included in "Restructuring costs" in the accompanying Condensed Consolidated Statements of Comprehensive Loss. During the first quarter of 2018, in light of our revenue declines, which we believe are related to changes in search engine algorithms, we recorded severance costs and completed a plan to unify and simplify our organization in order to improve business performance, profitability, cash flow generation and productivity.
The change in the restructuring liability is summarized as follows (in thousands):
 
Three Months Ended
March 31,
 
2018
 
2017
Accrued restructuring balance, beginning of period
$
20

 
$
570

Employee severance
605

 

Cash payments
(372
)
 
(363
)
Accrued restructuring balance, end of period
$
253

 
$
207


7. Net Loss per Share of Common Stock
Basic net loss per share is computed by dividing the net loss attributable to common shares for the period by the weighted average number of common shares outstanding during the period.
Diluted net loss per share attributed to common shares is computed by dividing the net loss attributable to common shares for the period by the weighted average number of common and potential common shares outstanding during the period, if the effect of each class of potential common shares is dilutive. Potential common shares include restricted stock units and incremental shares of common stock issuable upon the exercise of stock options.

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The following table sets forth the computation of our basic and diluted net loss per share of common stock (in thousands, except for per share amounts).
 
Three Months Ended
March 31,
 
2018
 
2017
Numerator:
 
 
 
Net loss
$
(3,603
)
 
$
(3,373
)
Denominator used in computing net loss per share of common stock:
 
 
 
Basic
16,946

 
16,639

Diluted
16,946

 
16,639

Net loss per share of common stock:
 
 
 
Basic
$
(0.21
)
 
$
(0.20
)
Diluted
$
(0.21
)
 
$
(0.20
)
The following outstanding shares of potentially dilutive securities were excluded from the computation of diluted net loss per share of common stock for the periods in which we incurred a net loss because including them would have been antidilutive (in thousands):
 
Three Months Ended
March 31,
 
2018
 
2017
Stock options to purchase common stock and restricted stock units
84

 
87



8. Geographic Information
Our revenue by geographic region, based on the location to where the product was shipped, is summarized as follows (in thousands):
 
Three Months Ended
March 31,
 
2018
 
2017
United States
$
12,890

 
$
16,664

International
1,660

 
1,625

Total
$
14,550

 
$
18,289

All of our long-lived assets are located in the United States.


9. Related Party Transaction
On September 1, 2015, we sold our EZ Prints business, which provided a suite of enterprise class deployable software products and services focused on private label e-commerce customization services, pursuant to an asset purchase agreement with EZP Holdings. Vincent Sarrecchia, the chief executive officer of EZP Holdings, was previously serving as the interim chief executive officer of the EZ Prints business pursuant to a consulting agreement with the Company. Total consideration for the sale was $0.6 million, of which $0.1 million has been received by the Company, and $0.5 million is in the form of a non-interest bearing note receivable which is outstanding at March 31, 2018, and it is due on or before December 31, 2018.

Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
You should read the following discussion in conjunction with our condensed consolidated financial statements (unaudited) and related notes included elsewhere in this report. Except for the historical financial information contained herein, this quarterly report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Private Securities

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Litigation Reform Act of 1995, as amended and Section 21E of the Securities Exchange Act of 1934, as amended and are subject to the safe harbor created by the Securities Litigation Reform Act of 1995. 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. These forward-looking statements, include, but are not limited to, statements about: our restructuring initiatives and the impact thereof, including unifying and simplifying the organization, business performance, profitability, cash flow generation and productivity, seasonal fluctuations in our business and the impact thereof on our revenue; the impact of our adoption of new accounting standards; statements about our expectations achieving the performance criteria of our performance equity awards; anticipated trends and challenges in our business and the markets in which we operate; customer acquisition costs as a predictor of future growth and a key investment lever and our plans to invest in sales and marketing expense; the continued expansion of our catalogs; expectations with respect to the fluctuation of cash provided by operating activities; our anticipated cash needs and our estimates regarding capital requirements; our needs for additional financing and the potential dilutive effect thereof; benefit of non-GAAP financial measures; the impact of a change in market interest rates; our exposure to foreign currency exchange rate fluctuations; the impact of inflation and changes thereto; the impact of any legal proceedings to which we are or may become a party and the impact and timing of costs related thereto; and the impact of the Tax Act.
These statements involve known and unknown risks, uncertainties and other factors which 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. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, seasonality of our revenue, macroeconomic cycles and consumer discretionary spending, demand for our products and services, fluctuations in costs, particularly customer acquisition costs, changes in technology and other risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2017.
These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. You are advised, however, to consult any further disclosures we make on related subjects in our 10-Q and 8-K reports filed with the Securities and Exchange Commission.


Our Business

We are a leading provider of personalized products offering a wide variety of expressive gifts and accessories, including t-shirts and apparel, mugs and drinkware and home goods such as custom shower curtains and bed coverings. We conduct most of our business on our primary, United States-based domain, CafePress.com and operate CafePress branded websites for the markets in the United Kingdom, Canada and Australia. We also sell CafePress branded products through other online retail partners such as Amazon and Walmart. Our products are customized with expressive designs contributed through a variety of means, including crowd-sourced user generated content, stock art licenses and licensed content relationships with large entertainment companies and brands. Our distinctive items bring our customers' passions to life and connect people to each other.
Our production facility and fulfillment center in Louisville, Kentucky has innovative technology and manufacturing processes that enable us to provide high-quality customized products that are individually built to order. Our proprietary processes enable us to produce a broad range of merchandise efficiently and profitably. We also maintain a diverse network of contract manufacturers that give us the ability to broaden our manufacturing capabilities and produce in certain international locales.
Most of our net revenue is generated from sales of customized products through our e-commerce websites (collectively referred to as "CafePress.com"), other third-party marketplaces (collectively referred to as "Retail Partner Channel") or through storefronts hosted by CafePress ("Shops"). In addition, we currently generate limited revenue from third-party printing and fulfillment services. Customized products include user-designed products as well as products designed by our content owners known as Shopkeepers.
An important revenue driver is customer acquisition, primarily through online marketing efforts, including paid and organic search, e-mail, social, affiliate and an array of other channels, as well as the acquisition efforts of our content owners. As a result, our sales and marketing expense is our largest operating expense.

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Our consumers and content owner customers are increasingly accessing e-commerce sites from their mobile devices. This shift to mobile site access presents challenges for us as we cope with shifting traffic patterns, and we have experienced lower conversion rates on traffic from mobile devices. We expect that this shift to mobile site access will continue for the foreseeable future.
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 offering of custom gifts for the holidays combined with consumers’ continued shift to online purchasing drive this trend. As a result of seasonality, our revenue in each of the first three quarters of the year are generally substantially lower than our revenue in the fourth quarter of each year, and we expect this to continue for the foreseeable future.

Basis of presentation
Net revenue
We derive our revenue primarily from CafePress.com and our Retail Partner Channel. Revenue is recognized when control of the goods is transferred to our customers upon receipt, in an amount that reflects the consideration to which we expect to be entitled in exchange for delivering these goods. We recognize revenue when the following revenue recognition criteria are met: (1) identification of the contract with a customer; (2) identification of the performance obligation in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligation in the contract; and (5) recognition of revenue when we satisfy a performance obligation.
CafePress.com and Retail Partner Channel revenue primarily consist of the sale of customized products such as t-shirts and apparel, mugs and drinkware and home goods such as shower curtains and bed coverings. Each item included in orders from CafePress.com or our Retail Partner Channel is a separate performance obligation because our customers can benefit from each item individually on its own, and we sometimes fulfill an order in multiple shipments. As control transfer to the customer upon delivery, we account for shipping as a fulfillment cost, and, therefore, fees received for shipping are included in our transaction price.
Revenue is recognized at the point in time when the customer receives the goods and is recorded net of promotional discounts and return allowances. Revenue is also recorded net of sales and consumption taxes following the practical expedient in Accounting Standards Codification ("ASC") 606. 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 revenue. We maintain an allowance for estimated returns and credit card chargebacks under the expected value method based on current period revenue, judgement and historical experience. Because of the seasonality of our business, our allowance is further reviewed during the fourth quarter to determine whether the liability is sufficient for returns processed after the holiday season. Our net revenue is settled through credit cards and PayPal, and our accounts receivable primarily consists of credit card receivables that settle in less than 7 days. Sales settled through PayPal are collected within one business day of the customer order.
We evaluated principal vs. agent considerations to determine whether it is appropriate to record platform fees paid to our Retail Partner Channel as an expense or as a reduction of revenue. Platform fees are recorded as sales and marketing expense and are not recorded as a reduction of revenue because we control the goods before they are transferred to the customer. Specifically, we are responsible for fulfilling the order in the transaction, are subject to inventory and credit risk and have latitude in establishing prices and selecting suppliers.
Deferred revenue includes funds received in advance of product fulfillment and is deferred until the customer receives the shipped goods. Direct and incremental costs such as materials, shipping, labor and platform fees associated with deferred revenue are classified as deferred costs and recognized in the period revenue is recognized.
Cost of net revenue
Cost of net revenue includes materials, labor, royalties, depreciation and other fixed overhead costs related to our manufacturing facilities, as well as outbound shipping and handling costs. The cost of materials may vary based on revenue as well as the price we are able to negotiate. Shipping fluctuates with volume as well as the method of shipping and fuel surcharges. Labor varies primarily by volume and product mix, and to a lesser extent, based on whether the employee is an hourly or a salary employee. We rely on temporary employees to augment our permanent staff particularly during periods of peak demand. Our royalty expense is comprised of fees we pay to our content owners for the use of their content on our products. Additionally, we pay commissions to shopkeepers for the use of their content on our products. Such fees vary based primarily on sales channel and volume. Royalty-based obligations and commissions are expensed to cost of net revenue at the contractual rate for the relevant product sales.
Operating expense
Operating expense consists of sales and marketing, technology and development, general and administrative expense and restructuring costs.
Sales and marketing

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Sales and marketing expense consists primarily of customer acquisition costs, personnel costs and costs related to customer support, order processing, third-party platform fees and other marketing activities. Customer acquisition, customer support, third-party platform fees and third-party payment processor and credit card fees are variable and historically have represented the majority of our overall sales and marketing expense.
Our customer acquisition costs consist of various online media programs, such as paid search engine marketing, email, display advertising and affiliate channels. We believe this expense is a key lever that we can use within our business as we adjust volumes to our target return on investment. We expect to continue to invest in sales and marketing expense in the foreseeable future to fund new customer acquisition, increase focus on driving repeat customer purchases and build our brand.
Technology and development
Technology and development expense consists of costs incurred for engineering, network operations and information technology, including personnel expense, 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 their estimated useful lives of two years.
General and administrative
General and administrative expense consists 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 expense also include headcount and related costs for operations related to our content usage and fraudulent review personnel.

Results of Operations
The following table presents the components of our statement of operations as a percentage of net revenue:
 
Three Months Ended
March 31,
 
2018
 
2017
Net revenue
100.0
 %
 
100.0
 %
Cost of net revenue
63.1

 
61.9

Gross profit
36.9

 
38.1

Operating expense:
 
 
 
Sales and marketing
24.6

 
24.1

Technology and development
17.0

 
16.3

General and administrative
16.5

 
16.2

Restructuring costs
4.2

 

Total operating expense
62.3


56.6

Loss from operations
(25.4
)
 
(18.5
)
Interest income
0.3

 
0.2

Other income (expense), net
0.3

 
(0.1
)
Net loss
(24.8
)%
 
(18.4
)%

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Comparison of the three months ended March 31, 2018 and 2017
We monitor several key operating metrics including (in thousands, except for percentages and average order size data):
 
Three Months Ended
March 31,
 
 
 
 
 
2018
 
2017
 
Variance
 
% Variance
CafePress.com orders
238

 
353

 
(115
)
 
(33)%
Retail Partner Channel orders
223

 
228

 
(5
)
 
(2)%
    Total orders
461

 
581

 
$
(120
)
 
(21)%
 
 
 
 
 
 
 
 
CafePress.com average order size
$
40.04

 
$
38.78

 
$
1.26

 
3%
Retail Partner Channel average order size
$
20.91

 
$
20.43

 
$
0.48

 
2%
    Total average order size
$
30.79

 
$
31.59

 
$
(0.80
)
 
(3)%
 
 
 
 
 
 
 
 
CafePress.com revenue
$
9,776

 
$
13,651

 
$
(3,875
)
 
(28)%
Retail Partner Channel revenue
4,774

 
4,638

 
136

 
3%
    Total revenue
$
14,550

 
$
18,289

 
$
(3,739
)
 
(20)%
The following table presents our statements of operations for the periods indicated (in thousands, except for percentages):
 
Three Months Ended
March 31,
 
 
 
 
 
2018
 
2017
 
$ Change
 
% Change
Net revenue
$
14,550

 
$
18,289

 
$
(3,739
)
 
(20)%
Cost of net revenue
9,181

 
11,328

 
(2,147
)
 
(19)
Gross profit
5,369

 
6,961

 
(1,592
)
 
(23)
Operating expense:
 
 
 
 
 
 
 
Sales and marketing
3,580

 
4,410

 
(830
)
 
(19)
Technology and development
2,478

 
2,976

 
(498
)
 
(17)
General and administrative
2,402

 
2,957

 
(555
)
 
(19)
Restructuring costs
605

 

 
605

 
U
Total operating expense
9,065

 
10,343

 
(1,278
)
 
(12)
Loss from operations
(3,696
)
 
(3,382
)
 
(314
)
 
(9)
Interest income
47

 
42

 
5

 
12
Interest expense

 
(6
)
 
6

 
100
Other income (expense), net
46

 
(26
)
 
72

 
F
Loss before income taxes
(3,603
)
 
(3,372
)
 
(231
)
 
(7)
Provision (benefit) for income taxes

 
1

 
(1
)
 
100
Net loss
$
(3,603
)
 
$
(3,373
)
 
$
(230
)
 
(7)%
U:> 100% unfavorable        F:> 100% favorable
Total number of orders
Total number of orders represents the number of individual transactions that are made during the period. We monitor the total number of orders as a leading indicator of revenue trends. During the three months ended March 31, 2018, the decrease in orders of 21% as compared to the prior year was primarily the result of lower visitation to CafePress.com across all traffic sources that we believe is related to changes in search engine algorithms. The decrease in Retail Partner Channel orders of 2% was primarily driven by the temporary loss of a portion of content sold through one partner during all of the first quarter of 2018 which was partially offset by an increase in international orders.



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Average order size
Average order size is calculated as billings for a given period based on order date divided by the total number of associated orders in the same period. We recognize revenue when delivery has occurred or the service has been provided. Due to timing of meeting revenue recognition criteria, billings may not be recognized as revenue until the following period. We closely monitor the average order size as it relates to changes in order volume, product pricing and product mix. For the three months ended March 31, 2018, the increase in CafePress.com average order size of 3% as compared to the prior year was primarily due to a shift toward higher-priced, new products. The 2% increase in Retail Partner Channel average order size was primarily due to the result of improved pricing.
Net revenue
Net revenue decreased $3.7 million, or 20%, for the three months ended March 31, 2018 compared to the same period in 2017. The change in revenue was driven by lower revenue from our CafePress.com domains, which more than offset growth from our Retail Partner Channel. The decline in revenue from CafePress.com of $3.9 million, or 28%, was primarily driven by declines in visits and conversions from most traffic sources. We believe the reduction in traffic was driven by changes in search engine algorithms. Within our Retail Partner Channel, revenue increased $0.1 million, or 3%. Although revenue was adversely impacted from the temporary loss of a portion of content sold through one partner during all of the first quarter of 2018, expansion into international domains contributed to higher revenue levels. Additionally, we benefited to a lesser extent from the contribution of the Walmart marketplace.
Cost of net revenue
Cost of net revenue decreased $2.1 million, or 19%, for the three months ended March 31, 2018 compared to the same period in 2017. Cost of net revenue was 63.1%, as a percentage of net revenue, for the three months ended March 31, 2018, compared to 61.9% in the same period in 2017. The percentage change was primarily driven by increases in depreciation and overhead and material costs. Depreciation and overhead costs increased as a percentage of net revenue by approximately 0.8 percentage points. The reduction in revenue compared to the prior year resulted in less absorption of these fixed costs and a lower gross margin.
Sales and marketing
Sales and marketing expense decreased $0.8 million, or 19%, for the three months ended March 31, 2018 compared to the same period in 2017. Sales and marketing expense was 24.6% of net revenue for the three months ended March 31, 2018 compared to 24.1% for the same period in 2017. Sales and marketing expense consisted of $0.5 million of lower fixed costs and $0.3 million of lower variable costs. Lower fixed costs were primarily driven by reductions in personnel-related costs associated with our restructuring initiative completed during the first quarter of 2018. CafePress.com variable costs decreased $0.4 million from lower paid search advertising costs and decreases in credit card fees and customer service expenses. Retail Partner Channel variable expenses increased $0.1 million from higher platform fees and advertising.
Technology and development
Technology and development expense decreased $0.5 million or 17% for the three months ended March 31, 2018 as compared to the same period in 2017. Technology and development expense was 17.0% of net revenue in the three months ended March 31, 2018 compared to 16.3% in the same period in 2017. Personnel-related, consulting, recruiting and other technology infrastructure costs declined by $0.5 million primarily from our restructuring initiative completed during the first quarter of 2018.
General and administrative
General and administrative expense decreased $0.6 million, or 19%, for the three months ended March 31, 2018 compared to the same period in 2017. General and administrative expense was 16.5% of net revenue in the three months ended March 31, 2018 compared to 16.2% for the same period of 2017. Personnel-related and stock compensation costs decreased $0.5 million driven by our restructuring initiative completed during the first quarter of 2018. In addition, insurance expense decreased $0.1 million primarily due to a reduction in our premiums.
Restructuring costs
Restructuring costs increased $0.6 million for the three months ended March 31, 2018 as compared to the same period in 2017. During the first quarter of 2018, in light of our revenue declines which we believe are related to changes in search engine algorithms, we recorded severance costs and completed a plan to unify and simplify our organization in order to improve business performance, profitability, cash flow generation and productivity.


Consolidated Balance Sheet

The following table is a summary of our overall financial position (in thousands):

20

Table of Contents


 
March 31, 2018
 
December 31, 2017
 
$ Change
Total assets
$
39,972

 
$
51,172

 
$
(11,200
)
Total liabilities
7,342

 
15,241

 
(7,899
)
Total stockholders' equity
32,630

 
35,931

 
(3,301
)

Total assets decreased $11.2 million driven primarily by a reduction in current assets due to the utilization of cash and short-term investments for the 2018 payment of production, advertising, royalty and commission liabilities related to retail holiday activity during the fourth quarter of 2017 and reductions in accounts receivable and inventory related to the seasonality of our business. In addition, cash balances were adversely affected by declines in our business levels.

Total liabilities decreased $7.9 million driven by the payment of the liabilities as discussed above related to retail holiday activity during the fourth quarter of 2017.

Total stockholders' equity decreased by $3.3 million primarily driven by $3.6 million of net loss partially offset by $0.3 million in stock-based compensation expense.

Liquidity and Capital Resources
As of March 31, 2018, we had cash, cash equivalents, short-term investments and restricted cash totaling $23.9 million.

The following table summarizes our cash flows for the three months ended March 31, 2018 and 2017 (in thousands):
 
Three Months Ended
March 31,
 
Change
 
2018
 
2017
 
$
Cash flows from:
 
 
 
 
 
    Operating activities
$
(8,006
)
 
$
(9,113
)
 
$
1,107

    Investing activities
$
(2,512
)
 
$
1,190

 
$
(3,702
)
    Financing activities
$

 
$
(205
)
 
$
205

Cash flows from operating activities
Our primary source of cash from operating activities is cash collections from our customers and partners. The substantial majority of our net revenue is generated from credit card transactions and credit card accounts receivable and are typically settled within one to 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 three to nine months have generally been negative due to the timing of settlements of accounts payable and accrued liabilities related to our fourth quarter holiday business, and to a lesser extent, operating losses. We expect that cash provided by operating activities may fluctuate in future periods due to several factors, including volatility in our operating results, seasonality, accounts receivable collections performance, inventory and supply chain management, and the timing and amount of personnel-related payments.
Cash used in operating activities decreased $1.1 million primarily due to improved management of our inventory levels, lower annual software license renewals and the timing of health insurance benefit payments.
Cash flows from investing activities
Cash used in investing activities increased $3.7 million primarily driven by an increase in the net purchase of short-term investments of $4.2 million offset by a decrease in capital expenditures of $0.5 million as the quarter ended March 31, 2017 included an investment in plant equipment that did not recur during the quarter ended March 31, 2018.
Cash flows from financing activities
Cash used in financing activities decreased $0.2 million as the prior year included stock repurchased under our repurchase program that ended in 2017 and principal payments related to a capital lease that expired in 2017.


21

Table of Contents

Credit Facility and Indebtedness
On September 15, 2017, the Letter of Credit provided to the landlord under our production facility and fulfillment center lease was replaced by a fully-negotiated escrow agreement. Pursuant to the terms of the escrow agreement, we deposited $1.5 million in a non-interest bearing account, representing the maximum amount owed to the landlord, only to be drawn on by the landlord should we exercise our right to terminate the production facility and fulfillment center lease prior to the expiration of the term.
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.
We anticipate that our current cash and cash equivalent balances and cash generated from operations will be sufficient to meet our strategic and working capital requirements for at least the next twelve months.

Non-GAAP Financial Measures
Regulation G, conditions for use of non-generally accepted accounting principles, or Non-GAAP, financial measures and other SEC regulations define and prescribe the conditions for use of certain Non-GAAP financial information. In addition, to disclosing financial results that are determined in accordance with GAAP, we also disclose certain non-GAAP financial information, including Adjusted EBITDA and Cash Contribution Margin, as further explained below. Analysis of results on a non-GAAP basis should be used as a compliment to, and in conjunction with, data presented in accordance with GAAP. Additionally, because our non-GAAP measures are not calculated in accordance with GAAP, the measures may not necessarily be comparable to similarly titled measures employed by other companies.
Adjusted EBITDA
We closely monitor Adjusted EBITDA which meets the definition of a Non-GAAP financial measure. We define Adjusted EBITDA as net income (loss) from continuing operations less interest and other (income) expense, provision for (benefit from) income taxes, depreciation and amortization, stock-based compensation, acquisition-related costs, restructuring costs 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, stock-based compensation, acquisition-related costs, restructuring costs 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.

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Table of Contents

The following table presents a reconciliation of Adjusted EBITDA to net loss, the most comparable GAAP measure, for each of the periods indicated (in thousands):
 
Three Months Ended
March 31,
 
2018
 
2017
Net loss
$
(3,603
)
 
$
(3,373
)
Non-GAAP adjustments:
 
 
 
Interest and other (income) expense
(93
)
 
(10
)
Provision (benefit) for income taxes

 
1

Depreciation and amortization
1,101

 
1,055

Stock-based compensation
297

 
419

Restructuring costs
605

 

Adjusted EBITDA
$
(1,693
)
 
$
(1,908
)
The following shows Adjusted EBITDA as a percentage of net revenue, for each of the periods indicated (in thousands, except for percentages):
 
Three Months Ended
March 31,
 
2018
 
2017
Net Revenue
$
14,550

 
$
18,289

Non-GAAP Adjusted EBITDA
$
(1,693
)
 
$
(1,908
)
% of net revenue
(11.6
)%
 
(10.4
)%
Cash Contribution Margin
Cash contribution margin (a non-GAAP financial measure that we reconcile to “Gross profit” in our consolidated statements of operations) consists of gross profit plus stock-based compensation and depreciation and amortization included in cost of net revenue less variable sales and marketing expense.
When viewed together with our GAAP results, we believe cash contribution margin provides management and users of the financial statements information about our ability to cover our operating costs, such as Technology and Development and General and Administrative expense. Cash contribution margin is used in addition to and in conjunction with results presented in accordance with GAAP and should not be relied upon to the exclusion of GAAP financial measures. You should review our financial statements and publicly-filed reports in their entirety and not rely on any single financial measure. One material limitation associated with the use of cash contribution margin is that it is an incomplete measure of profitability as it does not include all operating expense or non-operating income and expense. Management compensates for these limitations when using this measure by looking at other GAAP measures such as operating income (loss) and net income (loss).
The following table presents the calculation of cash contribution margin for the periods indicated (in thousands, except for percentages):

23

Table of Contents


 
Three Months Ended
March 31,
 
2018
 
2017
Net revenue
$
14,550

 
100.0
 %
 
$
18,289

 
100.0
 %
Cost of net revenue
9,181

 
63.1

 
11,328

 
61.9

Gross profit
5,369

 
36.9

 
6,961

 
38.1

Non-GAAP adjustments:
 
 
 
 
 
 
 
Add: Stock-based compensation
4

 

 
4

 

Add: Depreciation and amortization
407

 
2.8

 
422

 
2.3

Less: Variable sales and marketing costs
(2,780
)
 
(19.1
)
 
(3,084
)
 
(16.9
)
Cash contribution margin
$
3,000

 
20.6
 %
 
$
4,303

 
23.5
 %



24

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. In addition, we do not have any undisclosed borrowings or debt and we have not entered into any synthetic leases. Therefore, we are not currently exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.



25

Table of Contents

ITEM 3.
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, foreign currency exchange rate sensitivities and inflation.
Interest rate sensitivity
We had cash and cash equivalents and short-term investments of $23.9 million and $32.4 million as of March 31, 2018 and December 31, 2017, respectively. These amounts were held primarily in cash deposits, money market funds, corporate debt securities, government securities 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 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 primarily 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.
Inflation Risk
We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.


ITEM 4. CONTROLS AND PROCEDURES
We maintain “disclosure controls and procedures” as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act of 1934, as amended, or the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving their objectives. Our disclosure controls and procedures have been designed to meet reasonable assurance standards. Additionally, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. The design of any disclosure controls and procedures is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Evaluation of Disclosure Controls and Procedures
As of March 31, 2018, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that evaluation, our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal financial officer) have concluded that, as of March 31, 2018, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


26

Table of Contents

PART II. OTHER INFORMATION

ITEM 1.
LEGAL PROCEEDINGS
We may be subject to lawsuits, claims and proceedings incident to the ordinary course of business, particularly with respect to content that appears on our website. Any claims against us, whether material, meritorious or not, could be time consuming, result in costly litigation, require significant amounts of legal resources, management time and result in the diversion of significant operational resources. The results of these lawsuits, claims and proceedings cannot be predicted with certainty.


ITEM 1A.    RISK FACTORS
There have been no material changes from the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017.



27

Table of Contents

ITEM 5.
Other Information

Our Board of Directors approved a revised Form of Change in Control (“CIC”) Agreement (“CIC Agreement”) for the following executive officers of the Company: Fred E. Durham, III, Phillip L. Milliner, and Ekumene M. Lysonge. The new Form CIC Agreement is substantially similar to existing CIC Agreements for these officers. These revised agreements amend and replace the existing agreements and became effective on May 1, 2018. Generally, CIC benefits will be provided in the event of a termination without Cause or a Constructive Termination (“CT”) (as both are defined in the CIC agreement) within the 12 months following a CIC of the Company. However, the changes to the CIC Agreement provides for cash bonus payments as follows:

*
 
An initial cash bonus payment will be paid out, simultaneously with the closing of a CIC, on a pro-rata basis based upon the Company’s performance through the most recently completed quarter
 
 
 
*
 
Termination within 12 months of a CIC, shall trigger a severance payment to the executive equal to 12 months of the executive’s then-current base salary.
 
 
 
*
 
The other material terms of the CIC Agreements for these executives remain the same as our previously filed forms.

The description in this Item 5 is qualified in its entirety by the Form of Change in Control Agreement, which is included as Exhibit 10.3.



28

Table of Contents

ITEM 6.
EXHIBITS
(A) Exhibits:
Exhibit
number
 
Description
 
 
 
3(i)(1)
 
 
 
 
3(ii)(2)
 
 
 
 
10.1(3)+
 


 
 
 
10.2(4)+
 

 
 
 
10.3 + *
 
 
 
 
31.1
 
 
 
 
31.2
 
 
 
 
32.1(5)
 
 
 
 
32.2(5)
 
 
 
 
101.INS
 
XBRL Instance Document.
 
 
 
101.SCH
 
XBRL Schema Document.
 
 
 
101.CAL
 
XBRL Calculation Linkbase Document.
 
 
 
101.DEF
 
XBRL Taxonomy Definition Linkbase Document.
 
 
 
101.LAB
 
XBRL Label Linkbase Document.
 
 
 
101.PRE
 
XBRL Presentation Linkbase Document.
 
+    Management contract, compensatory plan or arrangement
*    Filed herewith
(1)
Previously filed as Exhibit 3(i) to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-35468), filed with the Securities and Exchange Commission on May 15, 2012, and incorporated by reference herein.
(2)
Previously filed as Exhibit 3(ii) to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-35468), filed with the Securities and Exchange Commission on May 15, 2012, and incorporated by reference herein.
(3)
Previously filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K (File No. 001-35468), filed with the Securities and Exchange Commission on March 5, 2018, and incorporated by reference herein.
(4)
Previously filed as Exhibit 10.1 to the Registrant's Current Report on Form 8-K (File No. 001-35468), filed with the Securities and Exchange Commission on March 9, 2018, and incorporated by reference herein.
(5)
The material contained in Exhibit 32.1 and Exhibit 32.2 is not deemed “filed” with the SEC and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language contained in such filing, except to the extent that the registrant specifically incorporates it by reference.


29

Table of Contents

SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Date: May 2, 2018
CAFEPRESS INC.
 
 
 
 
 
By:
 
/s/ Fred E. Durham III
 
 
 
Fred E. Durham III
 
 
 
 
 
 
 
Chief Executive Officer
 
 
 
(Duly Authorized Officer, Principal Executive Officer) and Director
 
 
 
 
 
By:
 
/s/ Phillip L. Milliner, Jr.
 
 
 
Phillip L. Milliner, Jr.
 
 
 
 
 
 
 
Chief Financial Officer
 
 
 
(Duly Authorized Officer, Principal Financial and Accounting Officer)


30
Exhibit


Exhibit 10.3
Amended and Restated
Form of Change in Control Agreement
for Senior Management

May 1, 2018

[INSERT EXECUTIVE NAME]
CafePress Inc.
11909 Shelbyville Road
Louisville, KY 40243

Dear [INSERT EXECUTIVE NAME]:

I am pleased to provide you with this letter to confirm a supplemental term of your employment with CafePress Inc., a Delaware corporation (“CafePress” or the “Company”), approved by the Compensation Committee of the Board of Directors as of May 1, 2018.

Change in Control Bonus Payment. The Company shall simultaneously with the closing of a transaction that triggers a Change in Control (as such term is defined below), determine the bonus earned (ranging from 50% - 200% of target) based on the Company’s financial performance achieved through the most recently completed quarter. Following the Company’s determination, it shall issue a pro-rata payout of the bonus earned equal to the number of quarters that have lapsed in the current year (e.g. 50% if a Change in Control occurred on July 15) (“Bonus Payment”). You will receive the Bonus Payment in a cash lump-sum in accordance with the Company’s standard payroll procedures, which payment will be made no later than the first regular payroll date occurring after the event triggering the Change in Control.

Termination following a Change in Control. In the event you are terminated without Cause or are Constructively Terminated within twelve (12) months following a Change in Control (as such terms are defined below), then you shall receive a lump sum payment equal to twelve (12) months of your then-current base salary (“Severance Payment”). Receipt of the Severance Payment shall be conditioned upon your execution and non-revocation of a general release in a form reasonably acceptable to the Company. This provision for a Severance Payment shall be in addition to any provision in your stock option, restricted stock unit, or performance stock unit or option agreement(s) with the Company that provide for accelerated vesting in the event of a termination of employment following a Change in Control.

Definitions:
 
Cause” means (i) conviction of any felony, or any misdemeanor where imprisonment is imposed; (ii) the commission of any act of fraud, embezzlement or dishonesty with respect to the Company; (iii) any unauthorized use or disclosure of confidential information or trade secrets of the Company; (iv) willful misconduct or gross negligence in performance of your duties, including your refusal to comply in any material respect with the legal directives of the Company’s Board of Directors so long as such directives are not inconsistent with your position and duties, and such refusal to comply is not remedied within thirty (30) days after written notice from the Board of Directors, which notice shall state that failure to remedy such conduct may result in termination for Cause; or (v) repeated unexcused absence from the Company.
Constructively Terminated” means your voluntary resignation within sixty (60) days following (i) a change in your position which materially reduces your duties or level of responsibility, provided that for this purpose your duties and level of responsibility will not be deemed to be materially diminished if following a Change in Control you retain the same duties and level of responsibility with respect to the Company business or the business with which such business is operationally merged or subsumed; (ii) a material reduction in your base salary, other than in connection with a general decrease in compensation affecting officers of the Company or an acquiring corporation; or (iii) a change in your place of employment which is more than 50 miles from your place of employment, provided that in each case such change or reduction is effected without your written concurrence, and provided further that such change is not remedied within thirty (30) working days after written notice thereof from the you to the Company, which notice shall specifically reference a “Constructive Termination“ pursuant to this provision. Notwithstanding the foregoing, you will not be deemed to be Constructively Terminated on account of a change in your title, change in the person or persons to whom you report or the occurrence of a mere Change in Control or other change in corporate status of the Company (such as pursuant to a “going private” transaction) absent additional action on the part of the Company or a successor company that would result in an event described in (i), (ii) or (iii) of the preceding sentence.





Change in Control” means the occurrence of any of the following events:
(a) The consummation of a merger or consolidation of the Company with or into another entity or any other corporate reorganization, if persons who were not shareholders of the Company immediately prior to such merger, consolidation or other reorganization own immediately after such merger, consolidation or other reorganization fifty percent (50%) or more of the voting power of the outstanding securities of each of (A) the continuing or surviving entity and (B) any direct or indirect parent corporation of such continuing or surviving entity;
(b) The consummation of the sale, transfer or other disposition of all or substantially all of the Company’s assets or the shareholders of the Company approve a plan of complete liquidation of the Company; or
(c) Any “person” (as defined below) who, by the acquisition or aggregation of securities, is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company’s then outstanding securities ordinarily (and apart from rights accruing under special circumstances) having the right to vote at elections of directors (the “Base Capital Stock”); except that any change in the relative beneficial ownership of the Company’s securities by any person resulting solely from a reduction in the aggregate number of outstanding shares of Base Capital Stock, and any decrease thereafter in such person’s ownership of securities, shall be disregarded until such person increases in any manner, directly or indirectly, such person’s beneficial ownership of any securities of the Company.
For purposes of clause(c) above, the term “person” shall have the same meaning as when used in sections 13(d) and 14(d) of the Exchange Act but shall exclude (1) a trustee or other fiduciary holding securities under an employee benefit plan maintained by the Company or a Parent or Subsidiary and (2) a corporation owned directly or indirectly by the shareholders of the Company in substantially the same proportions as their ownership of the Stock.
Notwithstanding the foregoing, the term “Change in Control” shall not include a transaction the sole purpose of which is (a) to change the state of the Company’s incorporation or (b) to form a holding company that will be owned in substantially the same proportions by the persons who held the Company’s securities immediately before such transaction, or (c) to affect an initial or secondary public offering of securities or debt of the Company.
Governing Law. This agreement will be governed in accordance with the laws of the State of California, without reference to principles of conflicts of law.
Acceptance. To indicate your acceptance of this agreement, please sign and date this letter in the space provided below and return it to me. A duplicate original is enclosed for your records. To the extent that any agreement between you and the Company currently provides for any severance payment following a Change in Control, the terms of this agreement shall supersede and replace any such prior agreement, whether written or oral, with respect to the payment of severance. This letter may not be modified or amended except by a written agreement, signed by the Company and by you.

If you have any questions, please contact me. If you find the terms of this letter acceptable, please sign a copy of this letter agreement and return it to me.
Sincerely,
I agree to and accept the terms of this letter,



________________________________      ________________________________
[COMPANY REPRESENTATIVE]            [INSERT EXECUTIVE NAME]



Exhibit


Exhibit 31.1
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
PURSUANT TO
SECURITIES EXCHANGE ACT RULES 13A-14(A) AND 15D-14(A)
I, Fred E. Durham III, certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of CafePress Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: May 2, 2018
 
 
 
By:
 
/s/    Fred E. Durham III        
 
 
Fred E. Durham III
 
 
Chief Executive Officer


Exhibit


Exhibit 31.2
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
PURSUANT TO
SECURITIES EXCHANGE ACT RULES 13A-14(A) AND 15D-14(A)
I, Phillip L. Milliner, Jr., certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of CafePress Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: May 2, 2018
 
 
 
By:
 
/s/    Phillip L. Milliner, Jr.        
 
 
Phillip L. Milliner, Jr.
 
 
Chief Financial Officer


Exhibit


Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Fred E. Durham III, Chief Executive Officer of CafePress Inc., do hereby certify to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of CafePress Inc. on Form 10-Q for the three months ended March 31, 2018 to which this certification is attached fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of CafePress Inc.
Date: May 2, 2018

 
 
 
By:
 
/s/    Fred E. Durham III        
 
 
Fred E. Durham III
 
 
Chief Executive Officer


Exhibit


Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Phillip L. Milliner, Jr., Chief Financial Officer of CafePress Inc., do hereby certify to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of CafePress Inc. on Form 10-Q for the three months ended March 31, 2018 to which this certification is attached fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of CafePress Inc.
Date: May 2, 2018

 
 
 
By:
 
/s/    Phillip L. Milliner, Jr.        
 
 
Phillip L. Milliner, Jr
 
 
Chief Financial Officer