zulily, inc. - FORM 10-Q - November 6, 2014

Attached files

file	filename
EX-31.2 - EXHIBIT 31.2 - zulily, inc.	q32014exhibit312.htm
EX-32.1 - EXHIBIT 32.1 - zulily, inc.	q32014exhibit321.htm
EX-31.1 - EXHIBIT 31.1 - zulily, inc.	q32014exhibit311.htm
EX-10.1 - EXHIBIT 10.1 - zulily, inc.	bethlehempa-leaseagreement.htm
EXCEL - IDEA: XBRL DOCUMENT - zulily, inc.	Financial_Report.xls

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 28, 2014



¨	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 001-36188

zulily, inc.

(Exact name of registrant as specified in its charter)



Delaware		27-1202150
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)



2601 Elliott Avenue, Suite 200, Seattle, Washington		98121
(Address of principal executive offices)		(Zip Code)

(877) 779-5614

(Registrant's telephone number,

including area code)

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 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 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, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer ¨		Accelerated filer ¨
Non-accelerated filer x (Do not check if a smaller reporting company)		Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x

As of November 4, 2014, there were 58,512,210 shares of the registrant’s Class A Common Stock, par value $0.0001 per share, and 66,824,168 shares of the registrant's Class B Common Stock, par value $0.0001 per share, issued and outstanding.

ZULILY, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 28, 2014

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		Page
	Part I. Financial Information
Item 1.	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets as of September 28, 2014 and December 29, 2013	3
	Condensed Consolidated Statements of Operations for the three and nine months ended September 28, 2014 and September 29, 2013	4
	Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 28, 2014 and September 29, 2013	5
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 28, 2014 and September 29, 2013	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	30
Item 4.	Controls and Procedures	31
	Part II. Other Information
Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	55
Item 3.	Defaults Upon Senior Securities	56
Item 4.	Mine Safety Disclosures	56
Item 5.	Other Information	56
Item 6.	Exhibits	56
Signatures		57
Exhibit Index		58

Unless the context suggests otherwise, references in this Quarterly Report on Form 10-Q, or Quarterly Report, to "zulily," the "Company," "we," "us," and "our" refer to zulily, inc. and, where appropriate, its subsidiary, Zulily UK Ltd.

zulily, zulily, inc., the zulily logo and other trade names, trademarks or service marks of zulily appearing in this Quarterly Report are the property of zulily. Any trade names, trademarks and service marks of other companies appearing in this Quarterly Report are the property of their respective holders.

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ZULILY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

(Unaudited)



	September 28, 2014			December 29, 2013

ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	291,039		$	290,089
Short-term investments	53,006			18,014
Accounts receivable	12,693			5,176
Inventories	22,731			12,979
Prepaid expenses and other current assets	6,306			4,192
Deferred income taxes — Net	1,676			—
Total current assets	387,451			330,450
PROPERTY AND EQUIPMENT — Net	77,460			24,613
OTHER NON-CURRENT ASSETS	1,032			1,024
Total assets	$	465,943		$	356,087
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	83,134		$	55,607
Accrued expenses	36,190			30,773
Deferred revenue	68,098			23,250
Total current liabilities	187,422			109,630
DEFERRED INCOME TAXES — Net	1,264			—
OTHER NON-CURRENT LIABILITIES	16,690			4,254
Total liabilities	205,376			113,884
COMMITMENTS AND CONTINGENCIES (Note 3 and Note 4)
STOCKHOLDERS’ EQUITY
Preferred stock, $0.0001 par value—2,000,000 shares authorized as of September 28, 2014 and December 29, 2013; zero shares issued and outstanding as of September 28, 2014 and December 29, 2013	—			—
Class A common stock, $0.0001 par value—500,000,000 shares authorized as of September 28, 2014 and December 29, 2013; 58,365,856 and 13,225,000 shares issued and outstanding as of September 28, 2014 and December 29, 2013, respectively	6			1
Class B common stock, $0.0001 par value—275,000,000 shares authorized as of September 28, 2014 and December 29, 2013; 66,888,268 and 110,159,235 shares issued and outstanding as of September 28, 2014 and December 29, 2013, respectively, including 5,209 and 82,682 shares subject to repurchase as of September 28, 2014 and December 29, 2013, respectively	7			11
Additional paid-in capital	301,712			287,385
Accumulated other comprehensive loss	(33		)	(58		)
Accumulated deficit	(41,125		)	(45,136		)
Total stockholders’ equity	260,567			242,203
Total liabilities and stockholders' equity	$	465,943		$	356,087

See notes to condensed consolidated financial statements.

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ZULILY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

(Unaudited)



	Three Months Ended						Nine Months Ended
	September 28, 2014			September 29, 2013			September 28, 2014		September 29, 2013

NET SALES	$	285,836		$	166,655		$	808,730	$	438,676
COST OF SALES	207,147			122,154			585,350		313,660
GROSS PROFIT	78,689			44,501			223,380		125,016
OPERATING EXPENSES:
Marketing	24,878			14,651			72,245		42,707
Selling, general, and administrative	54,474			32,133			147,073		82,202
TOTAL OPERATING EXPENSES	79,352			46,784			219,318		124,909
INCOME (LOSS) FROM OPERATIONS	(663		)	(2,283		)	4,062		107
INTEREST INCOME (EXPENSE)—Net	92			22			237		86
OTHER INCOME (EXPENSE)—Net	76			10			12		(38		)
NET INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES	(495		)	(2,251		)	4,311		155
PROVISION FOR INCOME TAXES	300			—			300		—
NET INCOME (LOSS)	$	(795	)	$	(2,251	)	$	4,011	$	155
Net income (loss) attributable to Class A and Class B common stockholders	$	(795	)	$	(4,819	)	$	4,011	$	(7,475	)
Net income (loss) per share attributable to Class A and Class B common stockholders:
Basic	$	(0.01	)	$	(0.09	)	$	0.03	$	(0.15	)
Diluted	$	(0.01	)	$	(0.09	)	$	0.03	$	(0.15	)
Weighted average shares outstanding used to compute net income (loss) attributable to Class A and Class B common stockholders:
Basic	124,984,564			53,495,263			124,446,242		49,936,220
Diluted	124,984,564			53,495,263			132,796,014		49,936,220

See notes to condensed consolidated financial statements.

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ZULILY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS

(in thousands)

(Unaudited)



	Three Months Ended						Nine Months Ended
	September 28, 2014			September 29, 2013			September 28, 2014			September 29, 2013

NET INCOME (LOSS)	$	(795	)	$	(2,251	)	$	4,011		$	155
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized holding gains on available-for-sale securities	12			5			44			4
Foreign currency translation adjustment	18			45			(19		)	70
OTHER COMPREHENSIVE INCOME, NET	30			50			25			74
TOTAL COMPREHENSIVE INCOME (LOSS)	$	(765	)	$	(2,201	)	$	4,036		$	229

See notes to condensed consolidated financial statements.

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ZULILY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)



	Nine Months Ended
	September 28, 2014			September 29, 2013

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	4,011		$	155
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	8,878			4,257
Stock-based compensation	10,525			4,896
Excess tax benefit from stock-based compensation	(645		)	—
Deferred income taxes	233			—
Loss on disposal of assets	149			18
Changes in operating assets and liabilities:
Accounts receivable	(7,520		)	(2,448		)
Inventories	(9,762		)	(7,151		)
Prepaid expenses and other assets	(2,022		)	(1,798		)
Accounts payable	24,744			12,192
Accrued expenses and other liabilities	17,864			6,336
Deferred revenue	44,857			12,787
Net cash provided by operating activities	91,312			29,244
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures	(58,365		)	(12,720		)
Purchases of short-term and other investments	(112,948		)	(18,000		)
Proceeds from maturity and sale of short-term and other investments	78,000			8,000
Purchases of restricted cash	—			(5,400		)
Proceeds from maturity of restricted cash	—			5,481
Net cash used in investing activities	(93,313		)	(22,639		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options	3,136			520
Excess tax benefit from stock-based compensation	645			—
Payments of deferred offering costs	(385		)	—
Debt issuance costs	(412		)	—
Deferred initial public offering costs	—			(1,563		)
Net cash provided by (used in) financing activities	2,984			(1,043		)
Effect of exchange rate changes on cash and cash equivalents	(33		)	64
NET INCREASE IN CASH AND CASH EQUIVALENTS	950			5,626
CASH AND CASH EQUIVALENTS—Beginning of period	290,089			96,998
CASH AND CASH EQUIVALENTS—End of period	$	291,039		$	102,624
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Payable for capital purchases	$	3,576		$	564
Stock-based compensation capitalized	16			15
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Vesting of early exercised shares	4			8
Deferred initial public offering cost accruals	—			326
Accretion of redeemable convertible preferred stock	—			7,630

See notes to condensed consolidated financial statements

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ZULILY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1. Description of Business

zulily, inc. (the “Company”, “we”, “us” or “our” ) is an online retailer offering customers a fun and entertaining shopping experience with a fresh selection of new product styles launched each day. Through the Company’s desktop sites, mobile sites and mobile applications, the Company helps its customers discover new and unique products at great values that they would likely not find elsewhere. The Company, a Delaware corporation formed in 2009, primarily conducts its buying, marketing and administrative functions in Seattle, Washington. The Company also operates a buying and studio office in Columbus, Ohio, a customer service office in Gahanna, Ohio and fulfillment centers in McCarran, Nevada and Lockbourne, Ohio.

Zulily UK Ltd. was incorporated in the United Kingdom in October 2011 and is a wholly owned subsidiary of zulily, inc. The principal corporate offices are located in London, England.

NOTE 2. Summary of Significant Accounting Policies

Basis of Presentation—The consolidated balance sheet data as of December 29, 2013 was derived from audited financial statements. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP") for unaudited condensed consolidated financial information. The financial information as of December 29, 2013 is derived from the Company's audited consolidated financial statements and notes included in Item 8 in the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 2013 (the "2013 Form 10-K"), filed with the U.S. Securities and Exchange Commission on February 28, 2014. The financial information included in this Quarterly Report should be read in conjunction with management's discussion and analysis of financial condition and results of operations and the consolidated financial statements and notes included in the 2013 Form 10-K. Accordingly, we have omitted certain footnotes and other disclosures that are disclosed in the 2013 Form 10-K. The accompanying unaudited condensed consolidated financial statements reflect all adjustments consisting of normal recurring adjustments which, in the opinion of management, are necessary for a fair presentation of the Company's financial position and results of its operations, as of and for the periods presented. Operating results for the three and nine months ended September 28, 2014 are not necessarily indicative of the results that may be expected for the fiscal year ending December 28, 2014, or for any other period.

Principles of Consolidation—The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Zulily UK Ltd. All intercompany transactions and balances are eliminated in consolidation.

Reclassifications—Certain reclassifications have been made to the condensed consolidated financial statements in the prior period to conform to the current period presentation. Specifically, merchandise deposits are included in prepaid expenses and other current assets as of September 28, 2014 and December 29, 2013. As of December 29, 2013, we reclassified $0.5 million related to merchandise deposits to prepaid expenses and other current assets.

Out-of-Period Correction—In the three months ended September 28, 2014, we made an out-of-period error correction to our accrual for non-expiring customer merchandise credits. Specifically, the accrual was reduced to reflect the appropriate amount owed to customers as of September 28, 2014. The net impact of the adjustment was an increase to net sales of $2.8 million and a decrease to deferred revenue of the same amount. The prior period financial statements have not been recast because the Company does not view the error as material to any previously issued financial statements.

Fiscal Year—In 2011, the Company adopted a retail calendar whereby the fiscal year ends on the Sunday closest to December 31. Each fiscal year consists of four 13-week quarters, with one extra week added in the fourth quarter every five to six years.

Accounting Estimates—The preparation of unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts

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of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the result of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ materially from those estimates.

Certain Risks and Concentrations—The Company maintains the majority of its cash and cash equivalents in accounts with major financial institutions within the United States, generally in the form of demand and money market accounts. Deposits in these institutions may exceed federally insured limits. The Company has not experienced any losses on its deposits of cash and cash equivalents.

The Company is subject to certain risks and concentrations, including dependence on third-party technology providers and hosting services, exposure to risks associated with online commerce security, consumer credit risk, and credit card fraud, as well as the interpretation of state and local laws and regulations in regards to the collection and remittance of sales and use taxes and occupancy taxes. The Company also depends upon third-party service providers for processing customer orders.

Recent Accounting Pronouncements—In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar tax Loss, or a Tax Credit Carryforward Exists ("ASU 2013-11"). The amendments in this update require an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows: To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. The amendments in this update do not require new recurring disclosures. For public entities, ASU 2013-11 is effective for annual and interim periods beginning after December 15, 2013. The Company adopted ASU 2013-11 in the first quarter of 2014 and it did not have a material impact on the Company's consolidated financial statements or related disclosures.

In May 2014, the FASB issued an Accounting Standard Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”) amending revenue recognition guidance and requiring more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The guidance is effective for annual and interim reporting periods beginning after December 15, 2016, with early adoption prohibited. We are currently evaluating the impact ASU 2014-09 will have on the Company's consolidated financial statements.

NOTE 3. COMMITMENTS

Fulfillment Center Leases

In January 2014, the Company entered into a lease agreement for a fulfillment center located in McCarran, Nevada. The initial, 12-year term of the lease expires in August 2026. The Company commenced operations in the new Nevada fulfillment center in the three months ended September 28, 2014. The Company is obligated to pay approximately $1.3 million in annual base rent in the first year, which includes a free rent period of six months. Beginning in the second year, the annual base rent will be approximately $2.6 million and will increase by 1.75% each year thereafter. The Company is also obligated to pay certain operating expenses, including property management fees. As part of the agreement, the Company issued a security deposit in the form of an irrevocable standby letter of credit totaling $3.0 million which expires in 2026. The standby letter of credit may be drawn if certain conditions occur, including default on payments, losses incurred due to breach or termination of the agreement.

In September 2014, the Company entered into a lease agreement for a fulfillment center located in Bethlehem, Pennsylvania. The initial term of the lease expires 86 months from the commencement of the lease,

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which will occur on the earlier of December 31, 2014 or the date the Company takes possession of the leased premises. After two (2) months of free rent, the Company will be obligated to pay approximately $3.7 million in annual base rent, which shall increase by 2% each year thereafter. The Company will also be obligated to pay certain operating expenses, including property management fees. The Company expects to begin operating the new Pennsylvania fulfillment center in mid-2015.

Credit Facility

In January 2014, the Company entered into a $50.0 million revolving credit facility pursuant to a Credit Agreement with certain lenders (the "Credit Agreement"). Any borrowings under the Credit Agreement mature in January 2016. The Credit Agreement includes a letter of credit sub-limit of up to $15.0 million.

Borrowings under the Credit Agreement bear annual interest, at the Company's option, in an amount equal to (i) in the case of base rate loans, 1.50% plus the highest of (a) the Federal Funds Rate plus one-half of one percent (0.50%), (b) the prime rate, and (c) the eurodollar rate plus two percent (2.00%), or (ii) in the case of eurodollar loans, for any interest period, LIBOR plus 2.50%. An undrawn commitment fee shall be payable to the lenders in an amount equal to 0.175% times the actual daily amount by which the aggregate commitments exceed the sum of the outstanding amount of loans and the outstanding amount of letter of credit obligations, calculated on a quarterly basis in arrears.

The Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants, in each case applicable to us and our subsidiaries. The negative covenants include restrictions on, among other things, indebtedness, liens, investments, mergers, dispositions, dividends and other distributions. The Credit Agreement contains certain financial covenants that require us and our subsidiaries to, among other things, maintain a specified fixed charge coverage ratio, quick ratio and a senior leverage ratio.

The Credit Agreement includes customary events of default, including a change of control and a cross-default on our or any subsidiary’s material indebtedness. Our obligations under the Credit Agreement are secured by substantially all of our and our subsidiaries’ assets, and the Company’s obligations under the Credit Agreement will be guaranteed by certain of our subsequently acquired or organized direct and indirect domestic subsidiaries.

During the nine months ended September 28, 2014, the Company made no borrowings under the revolving credit facility.

NOTE 4. CONTINGENCIES

Legal Proceedings—In the ordinary course of business, the Company may be involved in various legal proceedings, lawsuits, disputes or claims related to, among other things, alleged infringement of third-party patents and other intellectual property rights, commercial and consumer matters, product compliance and employment matters. We have been, and may in the future be, put on notice and/or sued by third parties for alleged infringement of their proprietary rights, including patent, trademark, and copyright infringement. The outcome of any such claim or litigation is inherently uncertain. Any claims against us, whether meritorious or not, could be time-consuming, result in costly litigation, damage our reputation, require significant amounts of management time and divert significant resources. Although the Company cannot predict the outcome of any such claims or litigation, it does not believe there are currently any such claims or litigation that, if resolved unfavorably, would have a material impact on the Company's financial condition, results of operations or cash flows.

Sales Taxes—The Company believes that the likelihood of incurring a liability as a result of sales tax nexus being asserted by certain states where it does not currently collect sales tax reaches the threshold for reasonably possible; however, the Company is unable to estimate the potential exposure.

NOTE 5. INCOME TAXES

Income Taxes—The Company's income tax expense or benefit for interim periods is determined using an estimate of the Company's annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter the Company updates its estimate of the annual effective tax rate, and if its estimated tax rate changes, the Company makes a cumulative adjustment. The Company's 2014 annual effective

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tax rate is lower than the federal rate primarily due to the expected use of prior period net operating losses and R&D tax credits.

The Company's effective tax rate was 7.0% and 0.0% for the nine months ended September 28, 2014 and September 29, 2013, respectively. The effective tax rate for the nine months ended September 28, 2014 is different from the Company's estimated annual effective tax rate primarily as a result of discrete benefits for the release of the valuation allowance and for incentive stock option disqualifying dispositions.

In order to release the valuation allowance, the Company considered all available evidence, both positive and negative, including:


•	the nature, frequency, and severity of cumulative financial reporting losses in recent years;


•	the projected sustainability of recent operating profitability;


•	the predictability of future operating profitability of the character necessary to realize the net deferred tax asset; and


•	the carryforward periods for the net operating loss, capital loss and research and development tax credit carryforwards, including the effect of reversing taxable temporary differences.

The Company has emerged from cumulative losses in the quarter ended September 28, 2014 and has projections of sufficient future taxable income. These two items represent significant positive evidence and as of September 28, 2014, the cumulative positive evidence outweighed the historical negative evidence regarding the likelihood that the deferred tax asset for the Company's U.S. operations will be realized. This assessment was evidenced by the Company meeting all of the above criteria, resulting in its conclusion that $3.9 million of the deferred tax asset valuation allowance for the Company's U.S. operations should be released.

NOTE 6. STOCKHOLDERS’ EQUITY

Preferred Stock

The Company has 2,000,000 shares of undesignated preferred stock authorized for future issuance. Shares of preferred stock may be issued from time to time in one or more series with rights, preferences and privileges established by the Company's board of directors.

Common Stock

The Company's certificate of incorporation provides for two classes of common stock: Class A common stock and Class B common stock. Each holder of Class A common stock is entitled to one vote per share and each holder of Class B common stock is entitled to ten votes per share. Each share of Class B common stock may be converted into one share of Class A common stock at the option of its holder and are automatically converted upon transfer to Class A common stock, subject to certain limited exceptions. The Company's authorized Class A and Class B common stock consists of 775,000,000 shares, all with a par value of $0.0001 per share. In November 2013, the Company completed its initial public offering ("IPO") in which it issued and sold 7,334,125 shares of Class A common stock at a public offering price of $22.00 per share and the selling stockholders sold 5,890,875 shares of Class A common stock. The Company did not receive any proceeds from the sale of shares by the selling stockholders.

Restricted Common Stock

As of September 28, 2014, all 52,812,500 Class B common shares under restricted stock purchase agreements entered into with the Company's founders have fully vested. No amount of compensation expense has been recognized in connection with these shares, as they were deemed to have nominal value at the date of issuance.

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Stock-Based Compensation Expense

A summary of option activity under the Company's equity compensation plans during the nine months ended September 28, 2014 is presented below:



					Weighted
					Average
	Number of		Weighted		Remaining
	Shares		Average		Contractual	Total
	Underlying		Exercise		Term	Intrinsic
	Options		Price		(in Years)	Value

	(in thousands, except price, shares and years)
Outstanding at December 29, 2013	13,938,487		$	7.40	8.56	$	462,558
Granted	638,650		41.21
Exercised	(1,869,215	)	1.68
Canceled	(4,605	)	6.94
Forfeited	(388,691	)	14.51
Outstanding at September 28, 2014	12,314,626		$	9.80	8.10	$	368,111
Vested and expected to vest at September 28, 2014	12,065,195		$	9.63	8.09	$	362,690
Exercisable at September 28, 2014	9,010,542		$	7.60	7.93	$	287,943

During the fiscal year ended January 1, 2012, the Company issued 1,439,627 Class B common shares for the exercise of stock options. Of this amount, 473,958 Class B common shares were early exercised and are subject to repurchase in accordance with the provision of the Company's 2009 Equity Incentive Plan. The unvested portion of the early exercised shares as of September 28, 2014 and December 29, 2013, was 5,209 and 63,151, respectively. No repurchases of the early exercised Class B common shares have been made by the Company.

As of September 28, 2014, total unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested stock options was approximately $52.7 million and the weighted-average remaining vesting period was 4.92 years.

The Company also grants restricted stock unit ("RSU") awards to its employees and non-employee consultants under the provisions of its 2013 Equity Plan. The fair value of an RSU is generally based on the number of awards granted and the closing price of the Company's Class A common stock on the NASDAQ Global Select Market on the date of grant or measurement. An RSU award entitles the holder to receive shares of the Company's Class A common stock as the award vests, which is generally based on length of service. The Company's unvested RSUs do not have nonforfeitable rights to dividends or dividend equivalents.

A summary of RSU activity under the Company's 2013 Equity Plan during the nine months ended September 28, 2014 is presented below:



	Number of		Weighted
	Shares		Average
	Underlying		Grant Date
	RSUs		Fair Value

Outstanding at December 29, 2013	—		$	—
Granted	205,811		35.59
Vested	(675	)	34.36
Forfeited	(3,085	)	36.27
Outstanding at September 28, 2014	202,051		$	35.58

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As of September 28, 2014, total unrecognized compensation cost, adjusted for estimated forfeitures, related to unvested RSUs was approximately $5.8 million and the weighted-average remaining vesting period was 4.75 years.

The following table presents the effects of stock-based compensation on the condensed consolidated statements of operations during the periods presented:



	Three Months Ended				Nine Months Ended
	September 28, 2014		September 29, 2013		September 28, 2014		September 29, 2013

	(in thousands)
Cost of sales	$	67	$	21	$	140	$	48
Marketing expenses	242		76		550		208
Selling, general and administrative expenses	3,385		2,199		9,835		4,640
Total stock-based compensation expense	$	3,694	$	2,296	$	10,525	$	4,896

NOTE 7. NET INCOME (LOSS) PER SHARE

Net income (loss) per common share is presented using the two-class method required for participating securities. Concurrent with the closing of the IPO in November 2013, all shares of outstanding preferred stock automatically converted into 60,621,233 shares of the Company's Class B common stock. Prior to the IPO, the Company considered preferred stock to be participating securities as the holders were entitled to receive non-cumulative dividends. Additionally, the Company considers unvested restricted common stock to be participating securities because of the holders' non-forfeitable rights to dividends, in the event dividends are declared and paid. During the three and nine months ended September 28, 2014, the Company did not consider the remaining unvested restricted common stock to be participating securities because there would be no change to the reported net income (loss) per share.

Following the completion of the Company's IPO in November 2013, Class A and Class B common stock are the only outstanding equity in the Company. The rights of the holders of Class A and Class B common stock are identical, except with respect to voting and conversion. Each share of Class A common stock is entitled to one vote per share and each share of Class B common stock is entitled to ten votes per share, on all matters that are subject to stockholder vote. Shares of Class B common stock may be converted into Class A common stock at any time at the option of the stockholder, and are automatically converted upon transfer to Class A common stock, subject to certain limited exceptions.

Undistributed earnings allocated to participating securities are subtracted from net income in determining net income attributable to Class A and Class B common stockholders. Net losses are not allocated to the participating securities as holders of preferred stock and unvested restricted common stock do not have a contractual obligation to share in the losses of the Company. Undistributed earnings are calculated as net income (loss) less distributed earnings, accretion of convertible preferred stock, and current period convertible preferred stock non-cumulative dividends, whether or not declared. Basic net income (loss) per share is computed by dividing net income attributable to Class A and Class B common stockholders by the weighted-average number of shares of Class A and Class B common stock outstanding during the period.

For the calculation of diluted net income (loss), net income attributable to Class A and Class B common stockholders for basic net income (loss) is adjusted by the effect of dilutive securities, including awards under our equity compensation plans. Diluted net income (loss) per share attributable to Class A and Class B common stockholders is computed by dividing the resulting net income (loss) attributable to Class A and Class B common stockholders by the weighted-average number of fully diluted Class A and Class B common shares outstanding.

For the three and nine months ended September 28, 2014 and September 29, 2013, the computation of basic and diluted net income (loss) per share is presented on a combined basis for Class A and Class B common stock because the results are identical.

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The following table presents the calculation of basic and diluted net income (loss) per common share:



	Three Months Ended						Nine Months Ended
	September 28, 2014			September 29, 2013			September 28, 2014		September 29, 2013

	(in thousands, except share and per share amounts)
Numerator
Net income (loss)	$	(795	)	$	(2,251	)	$	4,011	$	155
Less: Accretion of convertible redeemable preferred stock	—			(2,568		)	—		(7,630		)
Less: Undistributed earnings attributable to participating securities	—			—			—		—
Net income (loss) attributable to Class A and Class B common stockholders	$	(795	)	$	(4,819	)	$	4,011	$	(7,475	)
Denominator
Weighted average shares used to compute basic net income (loss) per Class A and Class B common share	124,984,564			53,495,263			124,446,242		49,936,220
Effect of potentially dilutive securities:
Stock options	—			—			8,317,778		—
Restricted stock unit awards	—			—			31,994		—
Weighted average shares used to compute diluted net income (loss) per Class A and Class B common share	124,984,564			53,495,263			132,796,014		49,936,220
Net income (loss) per share attributable to Class A and Class B common stockholders—basic	$	(0.01	)	$	(0.09	)	$	0.03	$	(0.15	)
Net income (loss) per share attributable to Class A and Class B common stockholders—diluted	$	(0.01	)	$	(0.09	)	$	0.03	$	(0.15	)

The following have been excluded from the computation of diluted net income (loss) per share attributable to Class A and Class B common stockholders as their effect would have been antidilutive:



	Three Months Ended		Nine Months Ended
	September 28, 2014	September 29, 2013	September 28, 2014	September 29, 2013

Convertible preferred shares	—	60,497,884	—	60,497,884
Unvested restricted common shares	—	1,471,290	—	4,804,926
Stock options	12,314,626	13,825,873	427,701	13,825,873
Restricted stock unit awards	202,051	—	20,938	—
Total	12,516,677	75,795,047	448,639	79,128,683

NOTE 8. SEGMENT INFORMATION

The Company has two reportable segments: North America and United Kingdom ("U.K."). The Company’s reportable segments have been identified based on how the Company’s chief operating decision maker manages the Company’s businesses, makes operating decisions, and evaluates operating performance. The Company’s chief operating decision maker is its chief executive officer. The Company evaluates the performance of its reportable segments based on net sales and income (loss) from operations. Income (loss) from operations represents net income (loss) before interest income (expense), net, other income (expense), net and provision for income taxes. Management does not evaluate the performance of its reportable segments using asset measures.

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North America—The North America segment consists of amounts earned from retail and services sales through the Company’s U.S.-operated sites, including sales from the sites to customers in the United States, Canada, Australia and other foreign countries.

U.K.—The U.K. segment consists of amounts earned from retail and services sales through the Company’s U.K.-operated sites, including sales from the sites to customers in the United Kingdom and other countries in Europe.

Certain corporate-level activities are not allocated to the U.K. segment, including costs of marketing, human resources, legal, finance and technology.

The Company accounts for intersegment sales in accordance with the underlying transfer pricing agreement between zulily, inc. and Zulily UK Ltd.

Information on reportable segments and reconciliation to consolidated net income before provision for income taxes is as follows:



	Three Months Ended						Nine Months Ended
	September 28, 2014			September 29, 2013			September 28, 2014			September 29, 2013

	(in thousands)
North America
Net sales	$	281,722		$	163,726		$	796,358		$	429,891
Operating income (loss)	916			(1,077		)	8,596			3,735
Intersegment expense	(1,518		)	(1,205		)	(4,583		)	(3,708		)
Total segment operating income (loss)	(602		)	(2,282		)	4,013			27
United Kingdom
Net sales	4,114			2,929			12,372			8,785
Intersegment sales	1,518			1,205			4,583			3,708
Total net sales	5,632			4,134			16,955			12,493
Segment operating income (loss)	$	(61	)	$	(1	)	$	49		$	80
Consolidated
Net sales
Total sales for reportable segments	$	287,354		$	167,860		$	813,313		$	442,384
Elimination of intersegment sales	(1,518		)	(1,205		)	(4,583		)	(3,708		)
Total consolidated net sales	$	285,836		$	166,655		$	808,730		$	438,676
Net income (loss) before provision for income taxes
Total operating income (loss) for reportable segments	$	(663	)	$	(2,283	)	$	4,062		$	107
Interest income (expense)—net	92			22			237			86
Other income (expense)—net	76			10			12			(38		)
Net income (loss) before provision for income taxes	$	(495	)	$	(2,251	)	$	4,311		$	155

The Company’s assets are primarily located in the United States. We sell similar products and services in each of our segments, and revenue from external customers for each group of similar products and services are not reported to the Company’s chief operating decision maker.

NOTE 9. FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair

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value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:

Level 1—Quoted prices for identical assets and liabilities in active markets. The Company classifies cash equivalents as Level 1 in the fair value hierarchy. Cash equivalents are comprised of highly-liquid investments, including money market funds with original maturities of less than six months. The fair value measurement of these assets is based on quoted market prices in active markets and, therefore, these assets are recorded at fair value on a recurring basis.

Level 2—Assets and liabilities valued based on observable market data for similar instruments, such as quoted prices for similar assets or liabilities or other inputs that are observable or can be corroborated by observable market data. The Company classifies restricted cash and short-term investments as Level 2 in the fair value hierarchy. Restricted cash is comprised of certificates of deposit funds with original maturities of less than three months. Short-term investments consist of commercial paper. The fair value measurement of these assets is based on observable market-based inputs or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3—Unobservable inputs reflecting the Company’s assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment. The Company does not have assets classified as Level 3 in the fair value hierarchy.

The following tables summarize the Company's assets that are measured at fair value on a recurring basis, by level, within the fair value hierarchy as of September 28, 2014 and December 29, 2013:



	September 28, 2014
	Total		Level 1		Level 2		Level 3

	(in thousands)
Cash equivalents:
Money market funds	$	18,020	$	18,020	$	—	$	—
Short-term investments:
Commercial paper	53,006		—		53,006		—
Total	$	71,026	$	18,020	$	53,006	$	—



	December 29, 2013
	Total		Level 1		Level 2		Level 3

	(in thousands)
Cash equivalents:
Money market funds	$	18,019	$	18,019	$	—	$	—
Short-term investments:
Commercial paper	18,014		—		18,014		—
Total	$	36,033	$	18,019	$	18,014	$	—

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our results of operation and financial condition. You should read this analysis in conjunction with the attached condensed consolidated financial statements and related notes thereto, and with our audited consolidated financial statements and the notes thereto, included in our Annual Report on Form 10-K for the year ended December 29, 2013, as filed with the Securities and Exchange Commission (the "SEC") on February 28, 2014.

Special Note Regarding Forward-Looking Statements

This Quarterly Report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Section 27A of the Securities Act of 1933, as amended (the "Securities Act"). All statements contained in this Quarterly Report other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "expect," "seek," and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the "Risk Factors" section of this Quarterly Report. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the future events and trends discussed in this Quarterly Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. We are under no duty to update any of these forward-looking statements after the date of this Quarterly Report or to conform these statements to actual results or revised expectations.

Overview

We launched the zulily website in January 2010 with the goal of revolutionizing the way moms shop. Today, we are one of the largest standalone e-commerce companies in the United States. Through our mobile and desktop websites and mobile applications, which we refer to as our “sites”, we help our customers discover new and unique products at great values that they would likely not find elsewhere. We provide our customers with a fun and entertaining shopping experience with a fresh selection of flash sales events with thousands of product styles offered on a typical day. We source these products from thousands of vendors, including emerging brands and smaller boutique vendors, as well as larger national brands. By bringing together millions of customers and a daily selection of products chosen from our vendor base, we have built a large-scale and uniquely curated marketplace.

We sell our products through a flash sales model, with offerings typically only available for 72 hours and in a limited quantity, creating an urgency to browse and purchase. We sell children’s, women’s and men's apparel and other categories such as toys, infant gear, kitchen accessories and home décor. Historically, children’s apparel has been our largest merchandise category; however, we have expanded our categories over time such that all non-children’s apparel categories combined accounted for 63% of our North America units ordered in the three months ended September 28, 2014, up from 55% for the three months ended September 29, 2013. We focus on providing significant value to consumers across all of our categories; the average item on our sites is offered for approximately 50% off the manufacturer’s suggested retail price.

We plan to further grow our customer base by cost-effectively acquiring new email subscribers and users of our mobile applications through targeted marketing campaigns and then converting them into active customers. In addition, we regularly introduce new categories, brands and products to our customers and work to maximize the

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relevance of the items we display, thereby improving customer satisfaction, increasing customer loyalty and driving repeat purchasing.

Mobile is a large and growing part of our business. We have invested heavily in our mobile platform to optimize our sites for use on iPhones, iPads and Android-based devices. In the quarter ended September 28, 2014, approximately 50% of our North America orders were placed from a mobile device, up from approximately 49% in the second quarter of 2014, and approximately 45% in the third quarter of 2013.

We have built a merchandising organization specifically designed to source, cultivate and manage relationships with thousands of vendors, including emerging brands and smaller boutique vendors as well as larger national brands. To identify and support our vendors and effectively tell their stories to our customers, we have built a merchandising team and in-house photography studios, supported by a substantial and talented photo editing, copywriting and editorial team. By sourcing products from a large number of vendors and providing them with strong support, we are able to offer our customers a broad and unique selection of curated products that is refreshed on a daily basis.

We typically take customer orders before we purchase inventory from our vendors, which greatly reduces our inventory risk. The result of this dynamic is that we are able to offer a much larger range of products to our customers and to generate greater sales for our vendors, who are able to match a broader range of their product supply to actual customer demand. To best serve our customers and vendors, we have in place a custom, fully integrated fulfillment infrastructure. Our proprietary supply chain system enables us to efficiently handle the unique features of our flash sales model, including small to medium lot sizes and high inventory turnover. This allows us to sell lower price point products cost-effectively, without needing to pre-stock substantial inventory. Our business model together with our fulfillment infrastructure has enabled us to conduct successful events of all sizes, including smaller ones. In the three months ended September 28, 2014, 87% of our events each generated less than $50,000 of North America product sales, and these smaller events accounted for approximately 42% of our North America product sales.

As of September 28, 2014, we occupy 1.8 million square feet of leased fulfillment space, as compared to 1.1 million square feet in the second quarter of 2014, at facilities in Nevada and Ohio. The increase is due to the overlap of two lease terms in Nevada, one of which will terminate during the fourth quarter of 2014. Our fulfillment operations regularly handle thousands of items a day from product styles that change each day and require different handling processes. Because we have deliberately established an intermediary model in which we do not typically pre-purchase substantial inventory, our shipping times are generally slower than e-commerce retailers that hold inventory. Our average order-to-ship time from our U.S. fulfillment centers was 11.6 days in the third quarter of 2014, down from 12.6 days in the second quarter of 2014 and 13.2 days in the first quarter of 2014. We are continually investing in our U.S. fulfillment systems and infrastructure, which includes automating the shipping process, increasing capacity, reducing shipping costs and improving order-to-ship times.

To date, we have primarily focused on expanding our North America business, which includes all sales made through our U.S.-operated sites, including sales made to customers in Canada, Australia and other foreign countries. In April 2012, we launched our first international-operated site, with a small team based in the United Kingdom. For the nine months ended September 28, 2014 and September 29, 2013, we generated $12.4 million and $8.8 million in net sales, respectively, from our U.K.-operated sites, representing growth of 41%.

We are gradually increasing our level of investment in international expansion and plan to continue to invest in and develop international markets. During the third quarter of 2014, we began marketing our U.S.-operated sites to Australian subscribers. Our international strategy is focused primarily on marketing U.S. vendors to subscribers globally. We also occasionally market international boutique vendors on our U.S.-operated sites. Customers in foreign countries that purchase on our U.S.-operated sites are included in our North America net sales. During the three months ended September 28, 2014, our products were shipped to 75 countries.

A summary of activity for the three and nine months ended September 28, 2014, compared to the three and nine months ended September 29, 2013, is as follows:


•	For the three months ended September 28, 2014 and September 29, 2013, we reported $285.8 million and $166.7 million in net sales, respectively, representing growth of 72%.


•	For the nine months ended September 28, 2014 and September 29, 2013, we reported $808.7 million and $438.7 million in net sales, respectively, representing growth of 84%.

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•	As of September 28, 2014, we had 4.5 million active customers, or customers who had purchased at least once in the last year, an increase of 72% from the 2.6 million active customers we had as of September 29, 2013.

•

For the three and nine months ended September 28, 2014, there were total orders placed of 5.9 million and 16.8 million, respectively, representing an increase in total orders of 2.3 million and 7.5 million, respectively, or 63% and 80%, respectively, from the three and nine months ended September 29, 2013. For the trailing 12 months ended September 28, 2014, 84% of our North America orders were placed by customers who had previously purchased from us.

Components of Our Results of Operations

Net Sales

Net sales consist primarily of sales of children’s, women’s and men's apparel and other product categories, such as toys, infant gear, kitchen accessories and home décor. We recognize product sales at the time title transfers to the customer, which is generally at delivery. Net sales represent the sales of these items plus shipping and handling charges to customers, net of estimated returns and promotional discounts. Net sales are primarily driven by growth in our active customers, the frequency with which customers purchase and average order value. Net sales also include sales generated from the sale of services events, which are primarily electronic vouchers or access codes for our customers to redeem directly with the vendor. Net sales of services events have not been material to date.

Cost of Sales

Cost of sales consists of our purchase price for merchandise sold to customers, inbound and outbound shipping and handling costs, shipping supplies and fulfillment costs. Fulfillment costs represent those costs incurred in operating and staffing the fulfillment centers, including costs attributed to receiving, inspecting, picking, packaging and preparing customer orders for shipment. Cost of sales also includes direct and indirect labor costs for fulfillment center oversight, including payroll and related benefit costs and stock-based compensation expense. Cost of sales are primarily driven by growth in orders placed by customers, the mix of the product available for sale on our sites and transportation costs related to delivering orders to our customers.

Marketing Expenses

Marketing expenses consist primarily of targeted online marketing costs, such as display advertising, key word search campaigns, search engine optimization and social media, and offline marketing costs, such as print, radio and television advertising. Marketing expenses also include payroll and related benefit costs and stock-based compensation expense for our employees involved in marketing activities. Marketing expenses are primarily driven by investments to grow and retain our customer base. In the longer term, we expect marketing expenses to continue to increase in amount but decline as a percentage of net sales.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist primarily of payroll and related benefit costs and stock-based compensation expense for our employees involved in general corporate functions including customer service, merchandising, studio and technology, as well as costs associated with the use by these functions of facilities and equipment, including depreciation and rent. Selling, general and administrative expenses are primarily driven by increases in headcount required to support business growth. In the longer term, we expect selling, general and administrative expenses to continue to increase in amount but decline as a percentage of net sales.

Interest Income (Expense)—Net

Interest income (expense)—net consists primarily of interest earned on cash, cash equivalents and short-term investments held by us.

Other Income (Expense)—Net

Other income (expense)—net consists primarily of income earned from our corporate purchasing card and realized foreign currency gains (losses).

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Provision for Income Taxes

Provision for income taxes is calculated as the amount of our taxable income multiplied by enacted federal, state and foreign tax rates, as adjusted for allowable credits and deductions. Further, the provision for income taxes includes deferred income taxes and changes in related valuation allowance reflecting the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

RESULTS OF OPERATIONS

We have organized our operations into two principal segments: North America and the U.K. We present our segment information along the same lines that our Chief Executive Officer, who is our chief operating decision maker, reviews our operating results in assessing performance and allocating resources.

Comparison of the Three Months Ended September 28, 2014 and September 29, 2013

Net Sales



	Three Months Ended
	September 28, 2014		September 29, 2013		$ Change		% Change

	(dollars in thousands)
Net sales:
North America	$	281,722	$	163,726	$	117,996	72	%
U.K.	4,114		2,929		1,185		40	%
Consolidated	$	285,836	$	166,655	$	119,181	72	%

The increase in North America net sales for the three months ended September 28, 2014 compared to the three months ended September 29, 2013 was primarily driven by an increase of 1.9 million active customers, or a 72% increase, and an increase in total orders placed of 2.3 million, or a 63% increase. As discussed in Note 2 to our attached condensed consolidated financial statements, during the three months ended September 28, 2014, we also made an out-of-period correction of an error to our accrual for non-expiring customer merchandise credits. The net impact of the correction was an increase to net sales of $2.8 million and a decrease to deferred revenue of the same amount. We believe our growth was partially constrained by email deliverability issues with some of our email subscribers during the three months ended September 28, 2014.

The increase in U.K. net sales for the three months ended September 28, 2014 compared to the three months ended September 29, 2013 was primarily driven by an overall increase in orders and active customers.

Cost of Sales



	Three Months Ended
	September 28, 2014			September 29, 2013			$ Change		% Change

	(dollars in thousands)
Cost of sales	$	207,147		$	122,154		$	84,993	70	%
Percentage of net sales	72		%	73		%

Of the increase in cost of sales, $60.0 million was due to the increase in products sold to our larger customer base. In addition, shipping and fulfillment costs increased $25.0 million as a result of the increase in order growth.

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Marketing Expenses



	Three Months Ended
	September 28, 2014			September 29, 2013			$ Change		% Change

	(dollars in thousands)
Marketing expenses	$	24,878		$	14,651		$	10,227	70	%
Percentage of net sales	9		%	9		%

The increase in marketing expenses for the three months ended September 28, 2014 compared to the three months ended September 29, 2013 was primarily due to increased spending on paid online marketing channels, including display advertising, keyword search campaigns, search engine optimization and social media. Additionally, we experienced an increase in subscriber acquisition costs as compared to the quarter ended September 29, 2013. As a result of the increased spend, we grew our active customer base by 1.9 million, or 72%, as of September 28, 2014, as compared to September 29, 2013.

Selling, General and Administrative Expenses



	Three Months Ended
	September 28, 2014			September 29, 2013			$ Change		% Change

	(dollars in thousands)
Selling, general and administrative expenses	$	54,474		$	32,133		$	22,341	70	%
Percentage of net sales	19		%	19		%

Of the increase in selling, general and administrative expenses of $22.3 million for the three months ended September 28, 2014 compared to the three months ended September 29, 2013, $11.3 million was due to the increase in salaries and related benefits and stock-based compensation expense as we continued to increase our headcount across functions to support business growth. Additionally, this increase was attributable to a $3.9 million increase in our rent, depreciation and other facilities expense as a result of our business and headcount growth and a $3.1 million increase in our merchant processing fees driven by sales volume increases, which increase in total dollars as sales increase. To a lesser extent, this increase was attributable to a $1.5 million increase in our professional services costs and a $1.4 million increase in technology related costs as a result of business growth and a related increase in business complexity due to being a public company.

Interest Income (Expense), Net

Interest income (expense), net is primarily derived from interest income related to the investment of our cash and cash equivalents and short-term investments. Interest income (expense), net for the three months ended September 28, 2014 and September 29, 2013, totaled $92,000 and $22,000, respectively.

Other Income (Expense), Net

Other income (expense), net consists of income earned from our corporate purchasing card and foreign realized currency gains (losses). Other income (expense), net for the three months ended September 28, 2014 and September 29, 2013 totaled $76,000 and $10,000, respectively.

Income Taxes

Historically, when we considered past operating results, our limited operating history and feasible tax planning strategies, we determined that a full valuation allowance against our deferred tax assets was necessary. As a result, we recorded a full valuation allowance based on the amount of net tax assets and loss carry-forwards that we believed were more likely than not to go unused. We have emerged from cumulative losses and project sufficient future taxable income. This significant positive evidence caused us to conclude in the third quarter of 2014 that the $3.9 million deferred tax asset valuation allowance for the Company's U.S. operations should be released.

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As we released the valuation allowance, we have determined our provision for income taxes in the third quarter of 2014 using an estimated annual effective tax rate, adjusted for any discrete items. The result was an effective tax rate of 60.5% for the three months ended September 28, 2014 as compared to an effective rate of 0.0% for the three months ended September 28, 2013.

Comparison of the Nine Months Ended September 28, 2014 and September 29, 2013

Net Sales



	Nine Months Ended
	September 28, 2014		September 29, 2013		$ Change		% Change

	(dollars in thousands)
Net sales:
North America	$	796,358	$	429,891	$	366,467	85	%
U.K.	12,372		8,785		3,587		41	%
Consolidated	$	808,730	$	438,676	$	370,054	84	%

The increase in North America net sales for the nine months ended September 28, 2014 compared to the nine months ended September 29, 2013 was primarily driven by an increase of 1.9 million active customers, or a 72% increase, an increase in total orders placed of 7.5 million, or a 80% increase, and a 7% increase in revenue per active customer.

The increase in U.K. net sales for the nine months ended September 28, 2014 compared to the nine months ended September 29, 2013 was primarily driven by an overall increase in orders and active customers.

Cost of Sales



	Nine Months Ended
	September 28, 2014			September 29, 2013			$ Change		% Change

	(dollars in thousands)
Cost of sales	$	585,350		$	313,660		$	271,690	87	%
Percentage of net sales	72		%	72		%

Of the increase in cost of sales, $192.3 million was due to the increase in products sold to our larger customer base. In addition, shipping and fulfillment costs increased $79.4 million as a result of the increase in order growth.

Marketing Expenses



	Nine Months Ended
	September 28, 2014			September 29, 2013			$ Change		% Change

	(dollars in thousands)
Marketing expenses	$	72,245		$	42,707		$	29,538	69	%
Percentage of net sales	9		%	10		%

The increase in marketing expenses for the nine months ended September 28, 2014 compared to the nine months ended September 29, 2013 was primarily due to increased spending on paid online marketing channels, including display advertising, keyword search campaigns, search engine optimization and social media. As a result of the increased spend, we grew our active customer base by 1.9 million, or 72%, as of September 28, 2014, as compared to September 29, 2013.

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Selling, General and Administrative Expenses



	Nine Months Ended
	September 28, 2014			September 29, 2013			$ Change		% Change

	(dollars in thousands)
Selling, general and administrative expenses	$	147,073		$	82,202		$	64,871	79	%
Percentage of net sales	18		%	19		%

Of the increase in selling, general and administrative expenses of $64.9 million for the nine months ended September 28, 2014 compared to the nine months ended September 29, 2013, $34.7 million was due to the increase in salaries and related benefits and stock-based compensation expense as we continued to increase our headcount across functions to support business growth. Additionally, this increase was attributable to a $10.2 million increase in our rent, depreciation and other facilities expense as a result of our business and headcount growth and a $8.9 million increase in our merchant processing fees driven by sales volume increases, which increase in total dollars as sales increase. To a lesser extent, this increase was attributable to a $5.2 million increase in our professional services costs and a $3.1 million increase in technology related costs as a result of business growth and a related increase in business complexity due to being a public company.

Interest Income (Expense), Net

Interest income (expense), net is primarily derived from interest income related to the investment of our cash and cash equivalents and short-term investments. Interest income (expense), net for the nine months ended September 28, 2014 and September 29, 2013, totaled $237,000 and $86,000, respectively.

Other Income (Expense), Net

Other income (expense), net consists of income earned from our corporate purchasing card and realized foreign currency gains (losses). Other income (expense), net for the nine months ended September 28, 2014 and September 29, 2013 totaled $12,000 and $(38,000) respectively.

Income Taxes

As we released the valuation allowance, we have determined our provision for income taxes in the third quarter of 2014 using an estimated annual effective tax rate, adjusted for any discrete items. The result was an effective tax rate of 7.0% for the nine months ended September 28, 2014 as compared to an effective rate of 0.0% for the nine months ended September 28, 2013.

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KEY FINANCIAL AND OPERATING MEASURES

We measure our business using both financial and operating metrics. We use these metrics to assess the progress of our business, make decisions on where to allocate capital, time and technology investments and assess the near-term and longer-term performance of our business.

The key financial and operating metrics for the three and nine months ended September 28, 2014 and September 29, 2013 are:



	Three Months Ended								Nine Months Ended
	September 28, 2014		September 29, 2013		Change		% Change		September 28, 2014		September 29, 2013		Change		% Change

	(in thousands, except revenue per active customer, average order value and per share amounts)
Adjusted EBITDA	$	6,391	$	1,791	$	4,600	257	%	$	23,465	$	9,260	$	14,205	153	%
Free cash flow	$	31,213	$	20,764	$	10,449	50	%	$	32,947	$	16,524	$	16,423	99	%
Active customers	4,531		2,632		1,899		72	%	4,531		2,632		1,899		72	%
Revenue per active customer	$	63	$	63	$	—	—	%	$	178	$	167	$	11	7	%
Total orders placed	5,937		3,652		2,285		63	%	16,825		9,348		7,477		80	%
Average order value	$	56.33	$	55.16	$	1.17	2	%	$	55.21	$	53.99	$	1.22	2	%
Non-GAAP diluted net income per share	$	0.02	$	—	$	0.02	100	%	$	0.11	$	0.04	$	0.07	175	%

Adjusted EBITDA

To provide investors with additional information regarding our financial results, we have disclosed in the table above Adjusted EBITDA, a non-GAAP financial measure that we calculate as earnings before interest and other income and expense, taxes, depreciation, amortization and stock-based compensation expense. We have provided a reconciliation below of Adjusted EBITDA to net income, the most directly comparable GAAP financial measure.

We have included Adjusted EBITDA in this Quarterly Report because it is a key measure used by our management and board of directors to evaluate our operating performance, generate future operating plans and make strategic decisions regarding the allocation of capital. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA facilitates operating performance comparisons on a period-to-period basis and, in the case of exclusion of the impact of stock-based compensation, excludes an item that we do not consider to be indicative of our core operating performance. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:


•	although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;


•	Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;


•	Adjusted EBITDA does not consider the potentially dilutive impact of equity-based compensation;


•	Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and


•	other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure.

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Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net income (loss) and our other GAAP results.

The following table reflects the reconciliation of net income (loss) to Adjusted EBITDA for each of the periods indicated:



	Three Months Ended						Nine Months Ended
	September 28, 2014			September 29, 2013			September 28, 2014			September 29, 2013

	(in thousands)
Net income (loss)	$	(795	)	$	(2,251	)	$	4,011		$	155
Excluding:
Interest (income) expense—net	(92		)	(22		)	(237		)	(86		)
Other (income) expense—net	(76		)	(10		)	(12		)	38
Taxes	300			—			300			—
Depreciation and amortization	3,360			1,778			8,878			4,257
Stock-based compensation expense	3,694			2,296			10,525			4,896
Adjusted EBITDA	$	6,391		$	1,791		$	23,465		$	9,260

Free Cash Flow

To provide investors with additional information regarding our financial results, we have also disclosed in the table above free cash flow, a non-GAAP financial measure that we calculate as net cash provided by operating activities less net cash used in capital expenditures. We have provided a reconciliation below of free cash flow to net cash provided by operating activities, the most directly comparable GAAP financial measure.

We have included free cash flow in this Quarterly Report because it is a key measure used by our management and board of directors. We believe free cash flow is an important indicator of our business performance because it measures the amount of cash we generate. Free cash flow also reflects changes in working capital. Accordingly, we believe that free cash flow provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

Free cash flow has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. There are limitations to using free cash flow, including that other companies, including companies in our industry, may calculate free cash flow differently. Because of these limitations, you should consider free cash flow alongside other financial performance measures, including net cash provided by operating activities, capital expenditures and our other GAAP results.

The following table presents a reconciliation of free cash flow to net cash provided by operating activities for each of the periods indicated:



	Three Months Ended						Nine Months Ended
	September 28, 2014			September 29, 2013			September 28, 2014			September 29, 2013

	(in thousands)
Net cash provided by operating activities	$	52,041		$	25,241		$	91,312		$	29,244
Capital expenditures	(20,828		)	(4,477		)	(58,365		)	(12,720		)
Free cash flow	$	31,213		$	20,764		$	32,947		$	16,524
Net cash used in investing activities	$	(20,780	)	$	(4,477	)	$	(93,313	)	$	(22,639	)
Net cash provided by (used in) financing activities	$	2,252		$	(1,201	)	$	2,984		$	(1,043	)

Active Customers

We define an active customer as an individual customer who has purchased from us at least once in the last year. In any particular period, we determine our number of active customers by counting the total number of

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customers who have made at least one purchase in the preceding 12 month period, measured from the last date of such period. We view the number of active customers as a key indicator of our growth, the reach of our sites, the value proposition and consumer awareness of our brand, the continued use of our sites by our customers and their desire to purchase our products. Our number of active customers drives both net sales and our appeal to vendors.

Revenue Per Active Customer

We define revenue per active customer as our total net sales divided by our total number of active customers in any particular period. We view revenue per active customer as a key indicator of our customers’ pattern of use of our sites to purchase our products and a measure of our customers’ demand.

Total Orders Placed

We define total orders placed as the total number of customer orders placed by our customers in any period. We view total orders placed as a key indicator of the velocity of our business and an indication of the desirability of our products and sites to our customers.

Average Order Value

We define average order value as the sum of the total order values (including shipping and handling charges) in a given period divided by the total orders placed in that period. We view average order value as a key indicator of the desirability of our products and sites to our customers.

Non-GAAP Diluted Net Income (Loss) Per Share

To provide investors with additional information regarding our financial results, we have also disclosed in the table above, a non-GAAP diluted net income (loss) per share financial measure which assumes the conversion of all outstanding shares of preferred stock at the beginning of the reporting period for periods prior to our IPO in November 2013. Our non-GAAP diluted net income (loss) per share financial measure also assumes that all vesting of restricted stock occurred at the beginning of the applicable reporting periods. In reports filed with the SEC for the periods preceding the period ended June 29, 2014, we did not add back stock-based compensation expense when calculating our non-GAAP diluted net income (loss) per share financial measure. Beginning in our quarterly report for the period ended June 29, 2014 and continued in this Quarterly Report, we have modified our non-GAAP diluted net income (loss) per share financial measure to add back stock-based compensation expense for all periods presented. We do not add back tax adjustments related to stock-based compensation, as we have a limited history of taxable income and applicable effective tax rates, which makes inclusion of such adjustments less useful to investors and others.

We have included non-GAAP diluted net income (loss) per share, inclusive of the change noted above, in this Quarterly Report because it is a key measure used by our management and board of directors. We believe non-GAAP diluted net income (loss) per share is an important indicator of our business performance as this measure facilitates comparisons on a period-to-period basis, which provides useful information to our management and board of directors in understanding our past financial performance and future results. We believe that adding back stock-based compensation expense to our non-GAAP diluted net income (loss) per share financial measure for all periods presented provides a more meaningful comparison between our operating results from period to period because of varying available valuation methodologies, subjective assumptions, the variety of equity instruments that can impact a company's non-cash expenses and the inability of the expense to directly relate to performance in any particular period. Accordingly, we believe that non-GAAP diluted net income (loss) per share provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

A reconciliation of non-GAAP net income (loss) attributable to common stockholders to GAAP net income (loss) attributable to common stockholders, the most directly comparable GAAP financial measure, and non-GAAP dilutive shares to GAAP dilutive shares, the most directly comparable GAAP financial measure, in order to calculate non-GAAP dilutive net income (loss) per share, is as follows:

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	Three Months Ended						Nine Months Ended
	September 28, 2014			September 29, 2013			September 28, 2014		September 29, 2013

	(in thousands, except share and per share amounts)

GAAP net income (loss) attributable to common stockholders	$	(795	)	$	(4,819	)	$	4,011	$	(7,475	)
Add: Accretion of convertible redeemable preferred stock	—			2,568			—		7,630
Add: Distributed earnings attributable to participating securities	—			—			—		—
Add: Stock-based compensation expense	3,694			2,296			10,525		4,896
Non-GAAP net income attributable to common stockholders	2,899			45			14,536		5,051

GAAP Weighted average shares used to compute diluted net income (loss) per Class A and Class B common share	124,984,564			53,495,263			132,796,014		49,936,220
Add: Convertible preferred stock	—			60,621,233			—		60,621,233
Add: Unvested restricted stock	—			1,471,290			—		4,804,926
Add: Additional dilutive effect of stock options	6,097,063			4,910,835			—		4,614,859
Add: Additional dilutive effect of restricted stock unit awards	7,744			—			—		—
Non-GAAP Weighted average shares used to compute diluted net income per Class A and Class B common share	131,089,371			120,498,621			132,796,014		119,977,238
Non-GAAP diluted net income per share attributable to Class A and Class B common stockholders	$	0.02		$	—		$	0.11	$	0.04

LIQUIDITY AND CAPITAL RESOURCES

We believe that our existing cash and cash equivalents, together with cash generated from operations and the revolving credit facility entered into during January 2014, will provide sufficient liquidity to meet our operational needs for the foreseeable future. However, our liquidity assumptions may prove to be incorrect, and we could exhaust our available financial resources sooner than we currently expect. In addition, we may elect to raise additional funds at any time through equity, equity-linked or debt financing arrangements. Our future capital requirements and the adequacy of available funds will depend on many factors, including those described in the section of this Quarterly Report captioned “Risk Factors.” We may not be able to secure additional financing to meet our operating requirements on acceptable terms, or at all.

At September 28, 2014, our cash and cash equivalents balance was $291.0 million, with an additional $53.0 million held in short-term investments. Cash and cash equivalents primarily consist of cash deposits and money market funds. Cash held internationally as of September 28, 2014 was not material.

Prior to our IPO, we financed our operations and capital expenditures through private sales of preferred stock and cash flows from our operations. On November 20, 2013, we closed our IPO, in which 13,225,000 shares of common stock were sold to the public (including 7,334,125 shares of common stock sold by us). The public offering price of the shares sold in the IPO was $22.00 per share. We did not receive any proceeds from the sale of shares by the selling stockholders. The total net proceeds from the offering to us were $147.5 million after deducting the underwriting discount with respect to the shares offered by us of approximately $10.5 million and offering expenses totaling $3.3 million.

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Cash flow information is as follows:



	Nine Months Ended
	September 28, 2014			September 29, 2013

	(in thousands)
Cash provided by (used in):
Operating activities	$	91,312		$	29,244
Investing activities	(93,313		)	(22,639		)
Financing activities	2,984			(1,043		)

Operating Activities

Our cash flow provided by operating activities is significantly impacted by volume of customer orders from an increased active customer base as compared to prior periods. The impact of the increase in active customers and higher volume of orders resulted in net sales growth of 84% in the nine months ended September 28, 2014 as compared to the nine months ended September 29, 2013. The increased order volumes drive increased inventory purchases, increased fulfillment activities and a greater investment in infrastructure including human capital. The below noted timing differences are a result of the significant increase in order volumes and net sales experienced in the nine months ended September 28, 2014 as compared to the nine months ended September 29, 2013.

The increase in deferred revenue was primarily due to an increase in customer orders during the period which had not been delivered as of the end of the period and a change in payment collection processing during the current year. The changes in inventory were primarily due to changes in the number of items sold, which were either in the fulfillment centers awaiting shipment to customers or in-transit to customers. The increase in accounts payable and accrued expenses and other liabilities was primarily due to the growth in the business during the period, which primarily relate to amounts owed to vendors for products sold on our sites, transportation expenses for products being shipped into and out of our fulfillment centers, member and customer acquisition marketing expenses and deferred rent increases.

Net cash provided by operating activities was $91.3 million in the nine months ended September 28, 2014, as a result of net income of $4.0 million, adding back non-cash charges of $19.1 million and changes in our operating assets and liabilities that provided $68.2 million in positive cash flow. Non-cash charges primarily consisted of stock-based compensation expense of $10.5 million and depreciation and amortization of $8.9 million. The net changes in our operating assets and liabilities was a result of increased deferred revenue of $44.9 million, accounts payable of $24.7 million and accrued expenses and other liabilities of $17.9 million offset by increases in inventories of $9.8 million, accounts receivable of $7.5 million and prepaid expenses and other assets of $2.0 million. The increases in accounts receivable, inventory, deferred revenue, accounts payable, and accrued expenses and other liabilities were primarily due to growth in events, orders and net sales during the period and an increase to our deferred rent liability.

Net cash provided by operating activities was $29.2 million in the nine months ended September 29, 2013, as a result of net income of $0.2 million, adding back stock-based compensation expense and other non-cash charges of $9.2 million and changes in our operating assets and liabilities that provided $19.9 million in cash. Inventory increased $7.2 million, accounts receivable increased $2.4 million and prepaid expenses increased $1.8 million offset by increases in deferred revenue of $12.8 million, accounts payable of $12.2 million and accrued expenses of $6.3 million. The increases in accounts receivable, inventory, deferred revenue, accounts payable and accrued expenses were primarily due to growth in events, orders and net sales during the period.

Investing Activities

Our investing activities have consisted of purchases of property and equipment to support our fulfillment centers and our overall business growth as well as short-term investments of our excess cash. Purchases of property and equipment may vary from period-to-period due to timing of our expansion of our operations. Additionally, we have invested some of our excess cash balances in money market funds and commercial paper.

Net cash used in investing activities was $93.3 million in the nine months ended September 28, 2014. This was primarily attributable to purchases of short-term investments related to excess cash of $112.9 million and $58.4

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million in capital expenditures offset by proceeds from the maturity of available-for-sale securities of $53.0 million and proceeds from the sale of available-for-sale securities of $25.0 million. The capital expenditures primarily related to additional equipment in our fulfillment centers and leasehold improvements at our new corporate office space in Seattle to support our growth.

Net cash used in investing activities was $22.6 million in the nine months ended September 29, 2013. This was primarily attributable to purchases of short-term investments related to excess cash of $18.0 million and $12.7 million in capital expenditures, which related to additional equipment for our fulfillment centers as well as software purchases and internally developed software offset by proceeds from maturities of securities of $8.0 million, which were transferred to cash.

Financing Activities

Net cash provided by financing activities was $3.0 million in the nine months ended September 28, 2014. This was primarily attributable to the receipt of $3.1 million in proceeds from the exercise of stock options and $0.6 million in excess tax benefit from stock-based compensation offset by stock and debt issuance costs of $0.4 million and $0.4 million, respectively.

Net cash used in financing activities was $1.0 million in the nine months ended September 29, 2013. This was primarily attributable to costs incurred for our IPO of $1.6 million partially offset by $0.5 million in proceeds from the exercise of stock options.

Credit Facility

On January 23, 2014, we entered into a $50 million revolving credit facility pursuant to a Credit Agreement with certain lenders. Borrowings under the Credit Agreement will mature on January 23, 2016. The Credit Agreement includes a letter of credit sub-limit of up to $15.0 million.

Borrowings under the Credit Agreement bear annual interest, at our option, in an amount equal to (i) in the case of base rate loans, 1.50% plus the highest of (a) the Federal Funds Rate plus one-half of one percent (0.50%), (b) the prime rate, and (c) the eurodollar rate plus two percent (2.00%), or (ii) in the case of eurodollar loans, for any interest period, LIBOR plus 2.50%. An undrawn commitment fee shall be payable to the lenders in an amount equal to 0.175% times the actual daily amount by which the aggregate commitments exceed the sum of the outstanding amount of loans and the outstanding amount of letter of credit obligations, calculated on a quarterly basis in arrears.

We are permitted to make voluntary prepayments at any time without payment of a premium, provided that we will be subject to a breakage indemnity in the case of prepayments of LIBOR loans.

The Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants, in each case applicable to us and our subsidiaries. The negative covenants include restrictions on, among other things, indebtedness, liens, investments, mergers, dispositions, dividends and other distributions. The Credit Agreement contains certain financial covenants that require us and our subsidiaries to, among other things, maintain a minimum fixed charge coverage ratio of 1.35 to 1.0 and minimum quick ratio of 1.1 to 1.0, and requires us to maintain a senior leverage ratio not in excess of 2.0 to 1.0.

As of the filing date of this Quarterly Report, no amounts have been drawn down under the revolving credit facility.

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Off Balance Sheet Arrangements

We did not have any off balance sheet arrangements as of September 28, 2014, except for operating leases as discussed below.

Contractual Obligations

Our contractual obligations consist of non-cancelable operating leases for equipment, office facilities, fulfillment centers and corporate headquarters. There have been no material changes to our contractual obligations disclosed in tabular format in our Annual Report on Form 10-K for the fiscal year ended December 29, 2013 other than the following:

McCarran, Nevada Fulfillment Center

On January 24, 2014, we entered into a lease agreement for a new Nevada fulfillment center. The 12-year lease is for approximately 48 acres of land, including a fulfillment center containing approximately 707,010 square feet of ground floor, which was constructed by the landlord. The property is located in McCarran, Nevada.

We commenced operations in the new Nevada fulfillment center in the third quarter of 2014.

We are obligated to pay approximately $1.3 million in annual base rent in the first year, which includes a free rent period of six months. Beginning in the second year, the annual base rent will be approximately $2.6 million and will increase by 1.75% each year thereafter. We are also obligated to pay certain operating expenses, including property management fees. Additionally, a letter of credit in the amount of $3.0 million was delivered during the first quarter of 2014.

Pursuant to this lease, if we provide at least six months' notice prior to the expiration of the then-current term, we have the option to extend this lease for three additional five-year terms, with certain increases in base rent.

Bethlehem, Pennsylvania Fulfillment Center

On September 8, 2014, we entered into a lease agreement for a new fulfillment center located in Bethlehem, Pennsylvania. The 86-month lease is for approximately 800,250 square feet of ground floor. We expect to begin operating the new fulfillment center in mid-2015.

The initial term of this lease will commence on the earlier of December 31, 2014 or the date we take possession of the leased premises. After two months of free rent, we will be obligated to pay approximately $3.7 million in annual base rent, which shall increase by 2% each year thereafter. We will also be obligated to pay certain operating expenses, including property management fees.

Pursuant to this lease, if we provide at least ten months' notice prior to the expiration of then-current term, we have the option to extend this lease for four additional five-year terms, with certain increases in base rent.

Critical Accounting Policies and Estimates

Our management's discussion and analysis of our financial condition and results of operations is based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, net sales, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.

We believe that the assumptions and estimates associated with revenue recognition, income taxes and stock-based compensation have the greatest potential impact on our unaudited condensed consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.

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For a summary of all of our significant accounting policies, see Note 2, Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended December 29, 2013. In our Annual Report on Form 10-K, we provide additional analysis of our significant accounting policies in Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Management believes there have been no material changes to our quantitative and qualitative disclosures about market risks during the nine months ended September 28, 2014, compared to those discussed in our Annual Report on Form 10-K for the fiscal year ended December 29, 2013.

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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation required by the Exchange Act, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act, as of September 28, 2014. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of September 28, 2014, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms and to provide reasonable assurance that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) or 15d-15(d) of the Exchange Act during the third quarter of 2014 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Controls

Our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Item 1 of Part I, "Financial Statements - Note 4 - Contingencies - Legal Proceedings."

ITEM 1A. RISK FACTORS

Our operations and financial results are subject to various risks and uncertainties, including those described below. Before making an investment decision, you should carefully consider the risks described below and all other information contained in this Quarterly Report, including our consolidated financial statements and related notes, which could materially and adversely affect our business, results of operations or financial condition. Our business faces significant risks and the risks described below may not be the only risks we face. Additional risks not presently known to us or that we currently believe are immaterial may materially affect our business, results of operations, or financial condition. If any of these risks occur, the trading price of our Class A common stock could decline and you may lose all or part of your investment.

Risks Related to Our Business and Industry

Because we have a short operating history in an evolving industry, our past results may not be indicative of future performance, and our future performance may fluctuate materially and increase your investment risk.

We have a short operating history in a rapidly evolving industry that may not develop as expected, if at all. Our relatively short operating history makes it difficult to assess our future prospects. You should consider our business and prospects in light of the risks and difficulties we may encounter.

Our future success will depend in large part upon our ability to, among other things:


•	cost effectively acquire new customers who purchase products from us at the same rate and of the same type as existing customers;


•	retain our existing customers and have them continue to purchase products from us at rates and methods consistent with their prior purchasing behavior;


•	encourage customers to expand the categories of products they purchase from us;


•	attract new vendors and retain our existing vendors to supply quality products that we can offer to our customers at attractive prices;


•	increase the awareness of our brand;


•	provide our customers and vendors with a superior experience;


•	fulfill and deliver orders in a timely way and in accordance with customer expectations, which may change over time;


•	respond to changes in consumer access to and use of the Internet and mobile devices;


•	deliver email and mobile alerts to our subscribers successfully;


•	react to challenges from existing and new competitors;


•	expand our business in new and existing markets, both domestic and international;


•	avoid interruptions or disruptions in our business;


•	develop a scalable, high-performance technology and fulfillment infrastructure that can efficiently and reliably handle increased usage globally, as well as the deployment of new features and the sale of new products and services;


•	respond to macroeconomic trends; and


•	hire, integrate and retain talented merchandise buyers and other personnel.

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We experience seasonal trends in our business, and our mix of product offerings, which change with each 72 hour event, is highly variable from day-to-day and quarter-to-quarter. This variability makes it difficult to predict sales and can result in significant fluctuations in our net sales from period-to-period. We base our expense levels and investment plans on our estimates of net sales and gross margins. A significant portion of our expenses and investments is fixed, and we may be unable to adjust our spending quickly if our net sales or our gross margins are worse than expected.

The cumulative effects of these factors or our inability to manage any of the risks and difficulties identified above and elsewhere in this section could result in large fluctuations and unpredictability in our quarterly and annual operating results. As a result, comparing our operating results on a period-to-period basis may not be meaningful. You should not rely on our past results as an indication of our future performance. This variability and unpredictability could also result in our failing to meet the expectations of industry or financial analysts or investors for any period. If our net sales or operating results fall below the expectations of analysts or investors or below any forecasts we may provide to the market, or if the forecasts we provide to the market are below the expectations of analysts or investors, the price of our Class A common stock could decline substantially. Such a stock price decline could occur even when we have met any previously publicly stated net sales or earnings forecasts that we may provide.

If we fail to effectively manage our growth, our business, financial condition and operating results could be harmed.

To effectively manage our growth, we must continue to implement our operational plans and strategies, improve and expand our infrastructure of people and information systems and expand, train and manage our employee and contractor base. We have rapidly increased employee and contractor headcount since our inception to support the growth in our business, and we intend for this growth to continue for the foreseeable future. The number of our employees increased from 329 as of January 1, 2012 to 2,287 as of September 28, 2014, and we expect to add a significant number of employees during the remainder of 2014. To support continued growth, we must effectively integrate, develop and motivate a large number of new employees, while maintaining our corporate culture. In particular, we intend to continue to make substantial investments to expand our merchandising and technology personnel. We face significant competition for personnel, particularly in the Seattle area where our headquarters is located. To attract top talent, we have had to offer, and believe we will need to continue to offer, competitive compensation and benefits packages before we can validate the productivity of those employees. The risks associated with a rapidly growing workforce will be particularly acute internationally. Additionally, we may not be able to hire new employees quickly enough to meet our needs. If we fail to effectively manage our hiring needs or successfully integrate our new hires, our efficiency and ability to meet our forecasts and our employee morale, productivity and retention could suffer, which may have a material adverse effect on our business, financial condition and operating results.

Additionally, the growth and expansion of our business and our product offerings place significant demands on our management and mid-level management in particular. We produce new versions of our sites and emails and mobile alerts to our customers on a daily basis, which generally requires new products, photos and text every day. The growth of our business may require significant additional resources to meet these daily requirements, which may not scale in a cost-effective manner or may negatively affect the quality of our sites and customer experience. We are also required to manage multiple relationships with various vendors, customers and other third parties. If we fail to manage these third-party relationships or any business developments effectively, our business, financial condition and operating results may be materially and adversely affected. Further growth of our operations, our vendor base, our fulfillment centers, information technology systems or our internal controls and procedures may not be adequate to support our operations. If we are unable to manage the growth of our organization effectively, our business, financial condition and operating results may be materially and adversely affected.

We have incurred significant operating losses in the past, and we may not be able to generate sufficient net sales to achieve or maintain profitability. Our recent net sales growth may not be sustainable, and a failure to maintain an adequate growth rate will materially and adversely affect our business, financial condition and operating results.

While we achieved profitability on an annual basis for the first time for the fiscal year ended December 29, 2013, we incurred net losses of $10.3 million and $11.3 million in the fiscal year ended December 30, 2012 and the fiscal year ended January 1, 2012, respectively, and had an accumulated deficit of $41.1 million as of September 28, 2014. In the three months ended September 28, 2014, we had a net loss of $0.8 million. We anticipate that our operating expenses will increase substantially in the foreseeable future as we continue to invest

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to increase our customer base, increase the number and variety of products we offer, expand our marketing channels, expand our operations, hire additional employees and managers, incur the costs of being a public company and develop our technology platform and fulfillment infrastructure. These efforts may prove more expensive than we currently anticipate. Although our net sales have grown rapidly, increasing from $438.7 million in the nine months ended September 29, 2013 to $808.7 million in the nine months ended September 28, 2014, we may not be able to sustain this rate of net sales growth or to increase our net sales sufficiently to offset higher expenses. Some of our efforts to generate net sales from our business are new and unproven, and any failure to increase our net sales or improve our gross margins could prevent us from maintaining or increasing profitability. In addition, we expect to invest to fund longer term initiatives, which will likely impact profitability or other operating results. We cannot be certain that we will be able to maintain or increase profitability on a quarterly or annual basis. If we are unable to effectively manage these risks and difficulties as we encounter them, our business, financial condition and operating results may be materially and adversely affected.

We may be unable to accurately forecast net sales and appropriately plan our expenses in the future.

We may base our current and future expense levels on our operating forecasts and estimates of future net sales and gross margins. Net sales and operating results are difficult to forecast because they generally depend on the volume, timing and type of the orders we receive, all of which are uncertain. Additionally, our business is affected by general economic and business conditions in the United States, Canada, the United Kingdom, Australia and other international markets. A significant portion of our expenses is fixed, and as a result, we may be unable to adjust our spending in a timely manner to compensate for any unexpected shortfall in net sales. Any failure to accurately predict net sales or gross margins could cause our operating results in any given quarter, or a series of quarters, to be lower than expected, which could cause the price of our Class A common stock to decline substantially.

Our business is highly competitive. Competition presents an ongoing threat to the success of our business.

We expect competition in e-commerce generally, and with companies employing a flash sales model in particular, to continue to increase because there are no significant barriers to entry. We currently compete with and expect to increasingly compete with e-commerce businesses, such as Amazon.com, Inc. and Alibaba Group, the e-commerce platforms of traditional retailers, such as Target Corporation, Toys“R”Us, Inc. and Wal-Mart Stores, Inc., and online marketplaces such as eBay Inc., particularly as some of these companies adopt flash sales business practices. A substantial number of flash sales sites have similar business models in related and unrelated market segments, including Gilt Groupe Holdings, Inc., HauteLook (which is owned by Nordstrom, Inc.), MyHabit (which is operated by Amazon.com), One Kings Lane, Inc., Groupon, Inc., Wayfair LLC and RueLaLa.com (which is operated by Retail Convergence.com LP). We also compete with the traditional offline retail industry, including discount and mass merchandisers, such as Target, Toys“R”Us and Walmart, as well as boutique sellers of children’s, women’s and men's apparel and other product categories, such as toys, infant gear, kitchen accessories and home décor.

We believe that our ability to compete depends upon many factors both within and beyond our control, including:


•	the size of the online retail market;


•	the size and composition of our customer base and vendor base;


•	the number of vendors and products we feature on our sites;


•	selling and marketing efforts;


•	the quality, price and reliability of products offered either by us or our competitors;


•	the convenience and entertainment of the shopping experience that we provide;


•	our ability to cost-effectively source, market and distribute our products and manage our operations; and


•	our reputation and brand strength relative to our competitors.

Many of our current competitors have, and potential competitors may have, longer operating histories, larger fulfillment infrastructures, greater technical capabilities, significantly faster shipping times as well as free or low-cost shipping, significantly greater financial, marketing and other resources and larger customer bases than we do. These factors may allow our competitors to derive greater net sales and profits from their existing customer base,

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acquire customers at lower costs, use incentive programs to acquire our customers, or respond more quickly than we can to new or emerging technologies and changes in consumer habits. These competitors may engage in more extensive research and development efforts, undertake more far-reaching marketing campaigns and adopt more aggressive pricing policies, which may allow them to build larger customer bases or generate net sales from their customer bases more effectively than we do.

We depend on the continued growth of e-commerce in general and the flash sales model in particular.

The business of selling products over the Internet, particularly on the flash sales model, is dynamic and relatively new. The market segment for the flash sales model has grown significantly, and this growth may not be sustainable. If customers cease to find the flash sales model shopping experience fun, entertaining and a good value, or otherwise lose interest in shopping in this manner, we may not acquire new customers at rates consistent with historical or projected periods, and existing customers’ buying patterns and levels may be less than historical or projected rates. If the market segment for the flash sales model were to become saturated or decline overall, we may not be able to acquire new customers or engage existing customers, and our business, financial condition and operating results may suffer.

If we fail to acquire new customers, we may not be able to increase net sales or maintain profitability.

We have made significant investments related to customer acquisition and expect to continue to spend significant amounts to acquire additional customers. We must continue to acquire customers in order to increase net sales and maintain profitability. In order to expand our customer base, we must appeal to and acquire customers who have historically used other means of commerce to purchase products and may prefer alternatives to our offerings, such as in-store, the retailer’s own website or the websites of our competitors. In the United States, where we have achieved some level of market penetration, acquiring new customers may become more difficult and costly than it has been in the past. We cannot assure you that the net sales from new customers we acquire will ultimately exceed the cost of acquiring those customers. If we fail to deliver an entertaining shopping experience, or if consumers do not perceive the products we offer to be of high value and quality or deliverable within a reasonable period of time, we may not be able to acquire new customers. If we are unable to acquire new customers who purchase products in numbers sufficient to grow our business, the net sales we generate may decrease, and our business, financial condition and operating results may be materially and adversely affected.

We believe that many of our new customers originate from word-of-mouth and other non-paid referrals from existing customers, and therefore we must ensure that our existing customers remain loyal to us in order to continue receiving those referrals. If our efforts to satisfy our existing customers are not successful, we may not be able to acquire new customers in sufficient numbers to continue to grow our business, or we may be required to incur significantly higher marketing expenses in order to acquire new customers. If the level of usage by our customer base declines or does not grow as expected, we may suffer a decline in customer growth or net sales. A significant decrease in the level of usage or customer growth would have a material adverse effect on our business, financial condition and operating results.

We have relationships with social networking sites, such as Facebook, Pinterest, Twitter and Tumblr, online services, search engines, affiliate marketing websites, directories and other websites and e-commerce businesses to provide advertising and other links that direct customers to our sites. As e-commerce and social networking continue to rapidly evolve, we must continue to establish relationships with the channels that are used by our current and prospective customers and cost-effectively drive traffic to our sites. We rely on these relationships as significant sources of traffic to our sites and to generate new customers. If we are unable to develop or maintain these relationships on acceptable terms, our ability to attract new customers and our financial condition would suffer.

We also conduct national U.S. television branding and advertising campaigns. Such campaigns are expensive and may not result in the cost-effective acquisition of customers.

We base our decisions regarding expenditures in customer acquisition primarily on our analysis of the net sales generated from customers that we acquired in prior periods. Our estimates and assumptions may not accurately reflect our future results, and we may not be able to recover our customer acquisition costs.

Our success depends on our ability to attract customers in a cost-effective manner. Our decisions regarding investments in customer acquisition substantially depend upon our analysis of the net sales generated from customers we acquired in earlier periods. Our analysis regarding customer acquisition investment and net sales includes several assumptions, such as:

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•

Many customers sign-up as subscribers to our sites for varying periods of time before they make their first purchase and become active customers. We make various assumptions with respect to the level of additional marketing or other expenses necessary to activate these subscribers and how these expenses vary from those required to generate subscriptions. If our assumptions regarding such expenses are incorrect, our net sales relative to customer acquisition cost could be less favorable than we believe.


•	We make various assumptions based on our historical data with respect to the repurchase rates of active customers. If our assumptions regarding such repurchase rates are incorrect, our net sales relative to customer acquisition cost could be less favorable than we believe.

If our assumptions regarding our customer acquisition investment and resulting net sales from these customers, including those relating to the effectiveness of our marketing expenditures, prove incorrect, our ability to generate net sales from our investments in new customer acquisitions may be less than we have assumed and than we have experienced in the past. In such case, we may need to increase expenses or otherwise alter our strategy, and our business, financial condition and operating results may be materially and adversely affected.

Our sales may be adversely affected if we fail to respond to changes in consumer preferences in a timely manner or are not successful in expanding our product offerings.

Our financial performance depends on our ability to identify, originate and define retail product trends, as well as to anticipate, gauge and react to changing consumer preferences in a timely manner. Our products must appeal to a broad range of moms and other consumers whose preferences cannot be predicted with certainty and are subject to change. Our business fluctuates according to changes in consumer preferences dictated in part by retail product trends, perceived product value and seasonal variations.

We have broadened our product offering beyond children's apparel, to include women’s apparel, toys, infant gear, men's apparel, kitchen accessories, home décor and other categories. We continue to explore additional categories which may be accepted by our target customers. If we offer new products or categories that are not accepted by our customers, our sales may fall short of expectations, our brand and reputation could be adversely affected and we may incur expenses that are not offset by sales. If we expand into new categories, consumer demands may be different, and there is no assurance that the flash sales model will be successful in these new categories. We may make substantial investments in such new categories in anticipation of future net sales. If the launch of a new category requires investments greater than we expect, if we are unable to attract vendors that produce sufficient high quality, value-oriented products or if the sales generated from a new category grow more slowly or produce lower gross margins than we expect, our results of operations could be adversely impacted. Expansion of our product lines may also strain our management and operational resources, specifically the need to hire and manage additional merchandise buyers to source and curate these new products. We may also face greater competition in specific categories from Internet sites that are more focused on such categories. It may be difficult to differentiate our offering from other competitors as we offer additional product categories, and our customers may have additional considerations in deciding whether or not to purchase these additional product categories. In addition, the relative profitability, if any, of new product lines may be lower than what we have experienced historically, and we may not generate sufficient net sales from new product initiatives to recoup our investments in them. If any of these were to occur, it could damage our reputation, limit our growth and have a material adverse effect on our business, financial condition and operating results.

Our business relies heavily on email and mobile "push" notifications, and any restrictions on the sending of emails or mobile alerts or an inability to timely deliver such communications could adversely affect our net sales and business.

Our business is highly dependent upon email and mobile "push" notifications for promoting our sites and products. We provide daily emails and mobile alerts to subscribers informing them of what is available for purchase on our sites that day, and we believe these emails and mobile alerts are an important part of our customer experience and help generate a substantial portion of our net sales. If we are unable to successfully deliver emails or mobile alerts to our subscribers, or if subscribers decline to open our emails or mobile alerts, our net sales and profitability would be adversely affected. Changes in how webmail application providers such as Google Inc., Yahoo! Inc., Microsoft Corporation, AOL Inc. and Comcast Corporation organize, prioritize, filter and deliver email may reduce the number of subscribers opening our emails. For example, Google Inc.’s Gmail service contains features that organize incoming emails into categories (such as primary, social, promotions, updates and spam). Such categorization or similar inbox organizational features or filtering by Google Inc. and other webmail application

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providers may result in our emails being delivered in a less prominent location in a subscriber’s inbox or viewed as “spam” by our subscribers and may reduce the likelihood of that subscriber opening our emails. Actions by third parties such as platform providers Apple App Store or Google Play Store to block, impose restrictions on or charge for the delivery of emails or mobile alerts could also materially and adversely impact our business. From time to time, Internet service providers, webmail applications or other third parties may block bulk email transmissions or otherwise experience technical difficulties that result in our inability to successfully deliver emails or mobile alerts to third parties or our subscribers. Changes in laws, regulations or third-party provider policies that limit our ability to send such communications or impose additional requirements upon us or our subscribers in connection with sending such communications would also materially and adversely impact our business. Our use of email and mobile alerts to send communications about our sites or other matters may also result in legal claims against us, which may cause us increased expenses, and if successful might result in fines and orders with costly reporting and compliance obligations or might limit or prohibit our ability to send emails or mobile alerts. We also rely on social networking messaging services to send communications and to encourage customers to send communications. Changes to the terms of these social networking services to limit promotional communications, any restrictions that would limit our ability or our customers’ ability to send communications through their services, disruptions or downtime experienced by these social networking services or decline in the use of or engagement with social networking services by customers and potential customers could materially and adversely affect our business, financial condition and operating results.

We rely on a third-party service for the delivery of all our daily emails, and delay or errors in the delivery of such emails or other messaging we send may occur and are beyond our control. For example, the delivery of our daily emails to subscribers has previously been delayed by two hours as a result of a third-party service error. We have also experienced technical issues that have resulted in shorter delivery delays of our daily emails to subscribers. Such delays could occur again in the future or be more severe, which could result in damage to our reputation or harm our business, financial condition and operating results. If we were unable to use our current email service or other messaging services, alternate services are available; however, we believe our sales could be impacted for some period as we transition to a new provider. Any disruption or restriction on the distribution of our emails or other messages, termination or disruption of our relationship with our messaging service providers, including our third-party service that delivers our daily emails, or any increase in our costs associated with our email and other messaging activities could materially and adversely affect our business, financial condition and operating results.

Customer growth and activity on mobile devices depends upon effective use of mobile operating systems, networks and standards that we do not control.

Purchases using mobile devices by consumers generally, and by our customers specifically, have increased significantly, and we expect this trend to continue. To optimize the mobile shopping experience, we are somewhat dependent on our customers downloading our specific mobile applications for their particular device as opposed to accessing our sites from an Internet browser on their mobile device. As new mobile devices and platforms are released, it is difficult to predict the problems we may encounter in developing applications for these alternative devices and platforms, and we may need to devote significant resources to the creation, support and maintenance of such applications. In addition, our future growth and our results of operations could suffer if we experience difficulties in the future in integrating our mobile applications into mobile devices or if problems arise with our relationships with providers of mobile operating systems or mobile application download stores, such as those of Apple Inc. or Google Inc., if our applications receive unfavorable treatment compared to competing applications, such as the order of our products in the Apple App Store, or if we face increased costs to distribute or have customers use our mobile app. We are further dependent on the interoperability of our sites with popular mobile operating systems that we do not control, such as iOS and Android, and any changes in such systems that degrade the functionality of our sites, block or impose restrictions on our delivery of mobile alerts or give preferential treatment to competitive products could adversely affect the usage of our sites on mobile devices. In the event that it is more difficult for our customers to access and use our sites on their mobile devices, or if our customers choose not to access or to use our sites on their mobile devices or to use mobile products that do not offer access to our sites, our customer growth could be harmed and our business, financial condition and operating results may be materially and adversely affected.

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Our failure or the failure of third-party service providers to protect our sites, networks and systems against security breaches, or otherwise to protect our confidential information or the confidential information of our customers, could damage our reputation and brand and substantially harm our business and operating results.

Our business employs sites, networks and systems through which we collect, maintain, transmit and store data about our customers, vendors and others, including credit card information and personally identifiable information, as well as other confidential and proprietary information. We also employ third-party service providers that store, process and transmit proprietary, personal and confidential information on our behalf. We rely on encryption and authentication technology licensed from third parties in an effort to securely transmit confidential and sensitive information, including credit card numbers. Advances in computer capabilities, new technological discoveries or other developments may result in the whole or partial failure of this technology to protect transaction data or other confidential and sensitive information from being breached or compromised. More generally, we take steps to protect the security, integrity and confidentiality of the information we collect, store or transmit, but there is no guarantee that inadvertent or unauthorized use or disclosure will not occur or that third parties will not gain unauthorized access to this information despite our efforts. Our security measures, and those of our third-party service providers, may not detect or prevent all attempts to hack our systems, denial-of-service attacks, viruses, malicious software, break-ins, phishing attacks, social engineering, security breaches or other attacks and similar disruptions that may jeopardize the security of information stored in or transmitted by our sites, networks and systems or that we or our third-party service providers otherwise maintain. We and our service providers may not have the resources or technical sophistication to anticipate or prevent all types of attacks, and techniques used to obtain unauthorized access to or sabotage systems change frequently and may not be known until launched against us or our third-party service providers. In addition, security breaches can also occur as a result of non-technical issues, including intentional or inadvertent breaches by our employees or by persons with whom we have commercial relationships.

Breaches of our security measures or those of our third-party service providers or cyber security incidents could result in unauthorized access to our sites, networks and systems; unauthorized access to and misappropriation of consumer information, including consumers’ personally identifiable information, or other confidential or proprietary information of ourselves or third parties; viruses, worms, spyware or other malware being served from our sites, networks or systems; deletion or modification of content or the display of unauthorized content on our sites; interruption, disruption or malfunction of operations; costs relating to breach remediation, deployment of additional personnel and protection technologies, response to governmental investigations and media inquiries and coverage; engagement of third party experts and consultants; and litigation, regulatory action and other potential liabilities. If any of these breaches of security occur, our reputation and brand could be damaged, our business may suffer, we could be required to expend significant capital and other resources to alleviate problems caused by such breaches and we could be exposed to a risk of loss, litigation or regulatory action and possible liability. Actual or anticipated attacks may cause us to incur increasing costs, including costs to deploy additional personnel and protection technologies, train employees and engage third-party experts and consultants. In addition, any party who is able to illicitly obtain a subscriber’s password could access the subscriber’s transaction data or personal information. Any compromise or breach of our security measures, or those of our third-party service providers, could violate applicable privacy, data security and other laws, and cause significant legal and financial exposure, adverse publicity and a loss of confidence in our security measures, which could have an adverse and material effect on our business, financial condition and operating results. Although we maintain privacy, data breach and network security liability insurance, we cannot be certain that our coverage will be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms, or at all. We may need to devote significant resources to protect against security breaches or to address problems caused by breaches, diverting resources from the growth and expansion of our business.

Our business depends on a strong brand. We may not be able to maintain and enhance our brand, or we may receive unfavorable customer complaints or negative publicity, which could adversely affect our brand.

We believe that the brand we have built with our customers has significantly contributed to the success of our business. We also believe that maintaining and enhancing the “zulily” brand is critical to expanding our base of customers and vendors. Maintaining and enhancing our brand may require us to make substantial investments, and these investments may not be successful. If we fail to promote and maintain the “zulily” brand or if we incur excessive expenses in this effort, our business, operating results and financial condition may be materially and adversely affected. We anticipate that, as our market becomes increasingly competitive, maintaining and enhancing

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our brand may become increasingly difficult and expensive. Maintaining and enhancing our brand will depend largely on our ability to continue to provide reliable, trustworthy and high quality products to our customers and a reliable, trustworthy and profitable market to our vendors, which we may not do successfully.

Our brand depends on effective customer support, which requires significant personnel expense. If not managed properly, this expense could impact our profitability. Failure to manage or train our own or outsourced customer support representatives properly could compromise our ability to handle customer complaints effectively.

Customer complaints or negative publicity about our sites, products, product delivery times, customer data handling and security practices or customer support, especially on social media platforms such as blogs and social media websites, could rapidly and severely diminish consumer use of our sites and consumer and vendor confidence in us and cause our reputation to suffer.

If we do not successfully optimize and operate our fulfillment centers, our business, financial condition and operating results could be harmed.

If we do not optimize and operate our fulfillment centers successfully and efficiently, it could result in excess or insufficient fulfillment capacity, an increase in costs or impairment charges or harm our business in other ways. If we do not have sufficient fulfillment capacity or experience a problem fulfilling orders in a timely manner, our customers may experience delays in receiving their purchases, which could harm our reputation and our relationship with our customers.

We have designed and built our own fulfillment center infrastructure, including customizing third-party inventory and package handling software systems, which is tailored to meet the specific needs of our business. As we continue to add fulfillment and warehouse volumes and capabilities, add new businesses or categories with different fulfillment requirements or change the mix in products that we sell, our fulfillment network will become increasingly complex and operating it will become more challenging. For example, in our prior outsourced third-party fulfillment center, operational difficulties were encountered as our shipping volumes increased dramatically, which resulted in shipping delays and customer dissatisfaction. Failure to successfully address such challenges in a cost-effective and timely manner could impair our ability to timely deliver our customers’ purchases and could harm our reputation and ultimately, our business, financial condition and operating results.

We may not successfully expand our fulfillment center capacity in a timely and cost-effective manner to address future growth, which could delay our shipping times and our business, reputation and operating results could be harmed.

Our current fulfillment center network has the capability to handle limited growth with the current mix of product offerings before additional capacity will be required. Although we recently commenced operations in a new fulfillment center in Nevada, we need to add additional fulfillment center capacity in 2015. To address this need, we entered into a lease agreement for a new fulfillment center located in Bethlehem, Pennsylvania, which we expect to begin operating in mid-2015. The expansion of our fulfillment center capacity will put pressure on our managerial, financial, operational, technology and other resources. We cannot assure you that we will effectively expand into the new Pennsylvania fulfillment center, that our customized inventory and package handling software systems meet our business needs, or that we will be able to execute on our expansion plans, or recruit qualified managerial and operational personnel necessary to support our expansion plans. If we are unable to expand our fulfillment operations and increase fulfillment center capacity or to effectively control expansion-related expenses, our business, prospects, financial condition and operating results could be materially and adversely affected. If we grow faster than we anticipate, we may exceed our fulfillment center capacity sooner than we anticipate, we may experience problems fulfilling orders in a timely manner or our customers may experience delays in receiving their purchases, which could harm our reputation and our relationship with our customers, and we would need to increase our capital expenditures more than anticipated. Many of the expenses and investments with respect to our fulfillment centers are fixed, and any expansion of such fulfillment centers will require additional investment of capital. We expect to incur higher capital expenditures in the future for our fulfillment center operations. We may incur such expenses or make such investments in advance of expected sales, and such expected sales may not occur.

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Our failure to adequately and effectively staff our fulfillment centers, through third-parties or with our own employees, or to integrate employees as we are transitioning from our third-party staffing organizations, could adversely affect our shipping times, business and results of operations.

We depend, in part, on a third party to provide staffing for our U.S. fulfillment centers. As of September 28, 2014, there were over 1,600 third party associates in our U.S. fulfillment centers. By using a third-party staffing organization, we face additional risks that are outside of our control, such as employment claims, issues arising from failure to comply with labor or other laws, union organizing activities and any deterioration in the finance and operations of such organization. If our third-party staffing organization is unable to adequately staff our fulfillment centers or if the cost of such staffing is higher than historical or projected costs due to mandated wage increases or other factors, our operations could be harmed. We depend on a third party to provide fulfillment services for some of our sales outside the United States, and we face similar risks with that third party.

In the second quarter of 2014, we began staffing our U.S. fulfillment centers, in part, with our employees, many of whom we hired from our third-party staffing organization. If we do not effectively integrate these employees into our U.S. fulfillment centers or transition staffing from the third-party staffing organization, or if the cost of such employees is higher than historical or projected costs due to mandated wage increases or other factors, our operations could be harmed. In addition, we will face potential risks that were previously addressed by our third-party staffing organization, such as employment claims, issues arising from failure to comply with labor or other laws or union organizing activities. Any such issues may result in delays in shipping times and our reputation, business and results of operations may be harmed.

We generally do not hold inventory until products have been ordered by customers, which results in slower delivery time than other e-commerce retailers.

We generally do not order inventory from our vendors to be held in our fulfillment centers until after the products have been ordered by our customers. As a result, the time from when an order is placed on our sites to when the product is delivered to our customers is longer than for many other e-commerce retailers who generally carry significant inventory that enables them to expedite delivery. Our average order-to-ship time from our U.S. fulfillment centers in the third quarter of 2014 was 11.6 days. Our relatively slower delivery times may place us at a competitive disadvantage to other e-commerce retailers. If we are required to decrease our delivery times to address this competition or to meet customer demands, we may be required to incur additional shipping costs, which we may or may not be able to pass on to our customers, or to change our operations to carry additional inventory and face additional inventory risk, either of which could adversely affect our business, financial condition and operating results.

Uncertainties in global economic conditions and their impact on consumer spending patterns, particularly in the apparel, toys, infant gear, kitchen accessories and home décor categories, could adversely impact our operating results.

Our performance is subject to global economic conditions and their impact on levels of consumer spending worldwide, particularly spending on children's, women’s and men's apparel, toys, infant gear, kitchen accessories and home décor. Some of the factors adversely affecting consumer spending include levels of unemployment, consumer debt levels, changes in net worth based on market changes and uncertainty, home foreclosures and changes in home values, fluctuating interest rates, credit availability, government actions, fluctuating fuel and other energy costs, fluctuating commodity prices and general uncertainty regarding the overall future economic environment. Consumer purchases of discretionary items, including our merchandise, generally decline during periods when disposable income is adversely affected or there is economic uncertainty. Adverse economic changes in any of the regions in which we sell our products could reduce consumer confidence and could negatively affect net sales and have a material adverse effect on our operating results.

Our business is subject to seasonal sales fluctuations which could result in volatility or have an adverse effect on the market price of our Class A common stock.

We believe our results are impacted by a pattern of increased sales during the back-to-school shopping season in the third quarter and holiday shopping season in the fourth quarter which has resulted in increased sales during a portion of the third quarter and the fourth quarter each fiscal year, which then results in lower sequential growth in the first quarter. For example, net sales in the first quarter of 2014 decreased when compared with net sales in the fourth quarter of 2013. We also believe that we have experienced slower growth in orders placed during

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the late spring and early summer months. Shifts in product mix, when combined with seasonality, could further affect our overall operating results or growth rates. Our historical growth rates and limited operating history make it difficult to discern the impact of any seasonality in our business. To the extent the growth of our business slows, or our product mix changes, these seasonal fluctuations may become more evident. Seasonality may cause our working capital cash flow requirements to vary from quarter-to-quarter depending on the variability in the volume and timing of sales. These factors, among other things, make forecasting more difficult and may adversely affect our ability to manage working capital and to predict financial results accurately, which could result in volatility or adversely affect the market price of our Class A common stock.

Failure to continue to provide our customers with differentiated merchandise from vendors will harm our business.

Our net sales growth depends, in part, on our ability to continue to source unique merchandise in sufficient quantities at competitive prices from vendors. Offering a variety of brands, styles, categories and products at affordable price points is important to our ability to acquire new customers and to keep our existing customers engaged and purchasing products. Typically, our events feature thousands of product styles from different vendors and last for 72 hours, and we believe our business requires us to continue this rapid pace of product introduction. Growth in the number of our customers, as well as increased competition, may make it difficult to source additional brands and styles in sufficient quantities and on acceptable terms to meet the demand of our customers. Since launching our sites, we have purchased our merchandise from thousands of brands, with a particular focus on emerging brands and smaller boutique vendors. We believe our ability to offer our customers a high volume of merchandise from emerging brands and smaller boutique vendors is particularly important to our long-term success.

We have few contractual assurances of continued supply, pricing or access to new products, and vendors could change the terms upon which they sell to us or discontinue selling to us for future sales at any time. As we grow, continuing to identify a sufficient number of new emerging brands and smaller boutique vendors may become more and more of a challenge. If we are not able to identify and effectively promote these new brands, we may lose customers to our competitors. Even if we identify new vendors, we may not be able to purchase desired merchandise in sufficient quantities on terms acceptable to us in the future, and products from alternative sources, if any, may be of a lesser quality or more expensive than those from existing vendors. In addition, larger national brands may offer products that are less unique, and it may be easier for our competitors to offer such products at prices or upon terms that may be compelling to consumers. An inability to purchase suitable merchandise on acceptable terms or to source new vendors could have a material adverse effect on our business, financial condition and operating results.

Our merchandise approach and the flash sales model is challenging and, if not managed effectively, could adversely affect our operating results.

To support our large and diverse base of vendors and our flash sales model which requires constantly changing products, we must incur significant costs, including costs related to our merchandising team, photography studios and creative personnel. As our business grows, we may not be able to continue to expand our product offerings in a cost-effective manner. Expanding personnel in our merchandising and studio departments is challenging due to competition for such personnel, and expansion of our studio spaces may require fixed expenses and investments that will impact profitability and may not be recouped if sufficient additional net sales are not generated.

In addition, the variety in size and sophistication of our vendors presents different challenges to our infrastructure and operations. Our emerging brands and smaller boutique vendors may be less experienced in manufacturing and shipping, which in the past has led to inconsistencies in quality, delays in the delivery of merchandise or additional fulfillment cost. Our larger national brands may impose additional requirements on us or offer less favorable terms than our smaller vendors related to margins and inventory ownership and risk. If we are unable to maintain and effectively manage our relationships with our emerging brands and smaller boutique vendors or our larger national brands, our business, financial condition and operating results could be materially and adversely affected.

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Failure of our vendors to supply high quality and compliant merchandise in a timely manner may damage our reputation and brand and harm our business.

We depend on our vendors to supply high quality merchandise in a timely manner. The failure of these vendors to supply merchandise which meets our quality standards or the quality standards of our customers could damage our reputation and harm our business, financial condition and operating results.

Our vendors are subject to various risks, including raw material costs, inflation, labor disputes, union organizing activities, boycotts, financial liquidity, product merchantability, safety issues, inclement weather, natural disasters, disruptions in exports, trade restrictions, trade disruptions, currency fluctuations and general economic and political conditions that could limit the ability of our vendors to provide us with high quality merchandise on a timely basis and at prices and payment terms that are commercially acceptable. For these or other reasons, one or more of our vendors might not adhere to our vendor terms and conditions or their applicable contract or might stop providing us with high quality merchandise. If there are any deficiencies in the products our vendors have provided to us, we might not identify such deficiencies before products ship to our customers.

In addition, our vendors may have difficulty adjusting to our changing demands and growing business. Failure of our vendors to provide us with quality merchandise that complies with all applicable laws, including but not limited to product safety regulations and legislation, in a timely and effective manner could damage our reputation and brand and could lead to an increase in customer litigation against us and an increase in our routine and non-routine litigation costs. Further, any merchandise could become subject to a recall, regulatory action or legal claim, which could result in increased legal expenses as well as damage to our reputation and brand and harm to our business. We cannot predict whether any of the countries in which our merchandise currently is manufactured or may be manufactured in the future will be subject to additional trade restrictions imposed by the United States and other foreign governments, including the likelihood, type or effect of any such restrictions. Such developments could have a material adverse effect on our business, financial condition and operating results.

Any failure by our vendors to comply with product safety, labor or other laws, or our standard vendor terms and conditions or to provide safe factory conditions for their workers, may damage our reputation and brand and harm our business.

Many of the products we sell on our sites are subject to regulation by the U.S. Consumer Product Safety Commission, the U.S. Food and Drug Administration and similar state and international regulatory authorities. As a result, such products have been and could be in the future subject to recalls and other remedial actions. Many of the products we sell are for children, and these products are often subject to enhanced safety concerns and additional scrutiny and regulation. Product safety concerns may require us to voluntarily remove selected products from our sites. Such recalls and voluntary removal of products can result in, among other things, lost sales, diverted resources, potential harm to our reputation and increased customer service costs and legal expenses, which could have a material adverse effect on our business, financial condition and operating results.

Some of the products we sell may expose us to product liability claims and litigation or regulatory action relating to personal injury, death or environmental or property damage. Although we maintain liability insurance, we cannot be certain that our coverage will be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms, or at all. In addition, some of our agreements with our vendors may not indemnify us from product liability for a particular vendor’s products, or our vendors may not have sufficient resources or insurance to satisfy their indemnity and defense obligations.

We purchase our merchandise from numerous vendors, including domestic and international manufacturers, resellers, wholesalers and consolidators. Our standard vendor terms and conditions require vendors to comply with applicable laws, as well as the intellectual property and proprietary rights of third parties. Failure of our vendors to comply with applicable laws, regulations and contractual requirements could lead to litigation against us, resulting in increased legal expenses and costs. In addition, the failure of any such vendors to provide safe and humane factory conditions and oversight at their facilities could damage our reputation with consumers or result in legal claims against us.

We may choose to expand or alter our operations by developing new sites or applications or by promoting new or complementary products, sales formats or services, which may increase our costs and may not be successful.

There can be no assurance that we will be able to expand or alter our operations in a cost-effective or timely manner or that any such efforts would be accepted by the market. Furthermore, any new business, website,

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application, product, promotion, sales format or service launched by us that is not favorably received by consumers could damage our reputation and brand. Any such expansion or alteration of our operations could also require significant additional expenses, management time and operations personnel that could impact our operating results. Any failure to generate satisfactory net sales from such expansion or alteration of our operations to offset their cost could have a material adverse effect on our business, financial condition and operating results.

We are subject to payment-related risks.

We accept payments using a variety of methods, including credit card, debit card, PayPal and gift cards. As we offer new payment options to consumers, we may be subject to additional regulations, compliance requirements and fraud. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs and lower profitability. We are also subject to payment card association operating rules and certification requirements, including the Payment Card Industry Data Security Standard and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with the rules or requirements of any provider of a payment method we accept, among other things, we may be subject to fines or higher transaction fees and may lose, or face restrictions placed upon, our ability to accept credit and debit card payments from consumers or facilitate other types of online payments. If any of these events were to occur, our business, financial condition and operating results could be materially and adversely affected.

We also may incur significant losses from fraud. We may incur losses from claims that the consumer did not authorize the purchase, from merchant fraud, from erroneous transmissions and from consumers who have closed bank accounts or have insufficient funds in them to satisfy payments. In addition to the direct costs of such losses, if they are related to credit card transactions and become excessive, they could potentially result in our losing the right to accept credit cards for payment. In addition, under current credit card practices, we are liable for fraudulent credit card transactions because we do not obtain a cardholder’s signature. We do not currently carry insurance against this risk. To date, we have experienced minimal losses from credit card fraud, but we continue to face the risk of significant losses from this and other types of fraud. Our failure to adequately control fraudulent transactions could damage our reputation and brand and result in litigation or regulatory action, causing an increase in legal expenses and fees and substantially harm our business, financial condition and operating results.

Government regulation of the Internet and e-commerce is evolving, and unfavorable changes or failure by us to comply with these regulations could substantially harm our business and results of operations.

We are subject to general business regulations and laws as well as regulations and laws specifically governing the Internet and e-commerce. Existing and future regulations and laws could impede the growth of the Internet, e-commerce or mobile commerce. These regulations and laws may involve taxes, tariffs, privacy and data security, anti-spam, content protection, electronic contracts and communications, consumer protection and gift cards. For example, the Federal Trade Commission’s Mail or Telephone Order Merchandise Rule requires compliance with certain rules of conduct relating to shipping dates, shipping delays, customer notifications, cancellations and refunds. It is not clear how existing laws governing issues such as property ownership, sales and other taxes and consumer privacy apply to the Internet as the vast majority of these laws were adopted prior to the advent of the Internet and do not contemplate or address the unique issues raised by the Internet or e-commerce. It is possible that general business regulations and laws, or those specifically governing the Internet or e-commerce, may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices.

We cannot guarantee that our practices have complied, comply or will comply fully with all such laws and regulations. Any failure, or perceived failure, by us to comply with any of these laws or regulations could result in damage to our reputation, a loss in business and proceedings or actions against us by governmental entities or others. Any such proceeding or action could hurt our reputation, force us to spend significant amounts in defense of these proceedings, distract our management, increase our costs of doing business, decrease the use of our sites by consumers and vendors and may result in the imposition of monetary liability. We may also be contractually liable to indemnify and hold harmless third parties from the costs or consequences of non-compliance with any such laws or regulations. In addition, it is possible that governments of one or more countries may seek to censor content available on our sites or may even attempt to completely block access to our sites. Adverse legal or regulatory developments could substantially harm our business. In particular, in the event that we are restricted, in whole or in part, from operating in one or more countries, our ability to retain or increase our customer base may be adversely affected, and we may not be able to maintain or grow our net sales and expand our business as anticipated.

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Failure to comply with federal, state and international laws and regulations relating to privacy, data protection and consumer protection, or the expansion of current or the enactment of new laws or regulations relating to privacy, data protection and consumer protection, could adversely affect our business and our financial condition.

A variety of federal, state and international laws and regulations govern the collection, use, retention, sharing and security of consumer data. Laws and regulations relating to privacy, data protection and consumer protection are evolving and subject to potentially differing interpretations. We strive to comply with all applicable laws, regulations and other legal obligations relating to privacy, data protection and consumer protection, including those relating to the use of data for marketing purposes. It is possible, however, that these requirements may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another or may conflict with other rules or our practices. We cannot guarantee that our practices have complied, comply or will comply fully with all such laws, regulations, requirements and obligations. Any failure, or perceived failure, by us to comply with our posted privacy practices or with any federal, state or international privacy or consumer protection-related laws, regulations, industry self-regulatory principles, industry standards or codes of conduct, regulatory guidance, orders to which we may be subject or other legal obligations relating to privacy or consumer protection could adversely affect our reputations, brand and business, and may result in claims, proceedings or actions against us by governmental entities or others or other liabilities. Any such claim, proceeding or action could hurt our reputation, brand and business, force us to incur significant expenses in defense of such proceedings, distract our management, increase our costs of doing business, result in a loss of customers and vendors and may result in the imposition of monetary liability. We may also be contractually liable to indemnify and hold harmless third parties from the costs or consequences of non-compliance with any laws, regulations or other legal obligations relating to privacy or consumer protection or any inadvertent or unauthorized use or disclosure of data that we store or handle as part of operating our business.

Federal, state and international governmental authorities continue to evaluate the privacy implications inherent in the use of third-party “cookies”, "web beacons", and other methods of online tracking for behavioral advertising and other purposes. U.S. and foreign governments have enacted, considered or are considering legislation or regulations that could significantly restrict the ability of companies and individuals to engage in these activities, such as by regulating the level of consumer notice and consent required before a company can employ cookies or other electronic tracking tools. Additionally, some providers of consumer devices and web browsers have implemented, or announced plans to implement, means to make it easier for Internet users to prevent the placement of cookies, web beacons, or to block other tracking technologies, which could if widely adopted result in the use of third-party cookies, web beacons, and other methods of online tracking becoming significantly less effective. The regulation of the use of these cookies, web beacons, and other current online tracking and advertising practices or a loss in our ability to make effective use of services that employ such practices could increase our costs of operations and limit our ability to acquire new customers on cost-effective terms and consequently, materially and adversely affect our business, financial condition and operating results.

Foreign data protection, privacy and other laws and regulations are often more restrictive than those in the United States. The European Union, for example, traditionally has imposed stricter obligations under its laws and regulations relating to privacy, data protection and consumer protection than the United States. Individual EU member countries have had discretion with respect to their interpretation and implementation of these laws, resulting in variation of privacy standards from country to country. Legislation and regulation in the European Union and some EU member states require companies to obtain specific types of notice and consent from consumers before using cookies or other tracking technologies. International expansion of our operations may require changes in the way we use consumer information in operating our business. Compliance with such laws and regulations will result in additional costs and may necessitate changes to our business practices, which may adversely affect our business and financial condition. Further, there is no harmonized approach to legal compliance in many of these regions, and there is little regulatory guidance. Consequently, we could be at risk of non-compliance with applicable foreign data protection laws as we continue our international expansion.

In addition, various federal, state and foreign legislative and regulatory bodies, or self-regulatory organizations, may expand current laws or regulations, enact new laws or regulations or issue revised rules or guidance regarding privacy, data protection and consumer protection. Any such changes may force us to incur substantial costs or require us to change our business practices. This could compromise our ability to pursue our growth strategy effectively and may adversely affect our ability to acquire customers or otherwise harm our business, financial condition and operating results.

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Changes in tax treatment of companies engaged in e-commerce may adversely affect the commercial use of our sites and our financial results.

Due to the global nature of the Internet, it is possible that various states or foreign countries might attempt to impose additional or new regulation on our business or levy additional or new sales, income or other taxes relating to our activities. Tax authorities at the international, federal, state and local levels are currently reviewing the taxation of e-commerce companies and transactions of companies engaged in e-commerce. New or revised international, federal, state or local tax regulations may subject us or our customers to additional sales, income and other taxes. We cannot predict the effect of current attempts to impose sales, income or other taxes on e-commerce. New or revised taxes and, in particular, sales taxes, VAT and similar taxes would likely increase the cost of doing business online and decrease the attractiveness of advertising and selling products over the Internet. New taxes could also create significant increases in internal costs necessary to capture data and collect and remit taxes. Any of these events could have a material and adverse effect on our business, financial condition and operating results.

Taxing authorities may successfully assert that we should have collected or in the future should collect sales and use, VAT or similar taxes, and we could be subject to liability with respect to past or future sales, which could adversely affect our operating results.

We do not collect sales and use, VAT and similar taxes in every jurisdiction in which we have sales, based on our belief that such taxes are not applicable. Sales and use, VAT and similar tax laws and rates vary greatly by jurisdiction. Certain jurisdictions in which we do not collect such taxes on our sales may assert that such taxes are applicable, which could result in tax assessments, penalties and interest, and we may be required to collect such taxes in the future. Such tax assessments, penalties and interest or future requirements may materially and adversely affect our business, financial condition and operating results.

We may experience fluctuations in our tax obligations and effective tax rate, which could materially and adversely affect our operating results.

We are subject to taxes in the United States and numerous international jurisdictions. We record tax expense based on current tax payments and our estimates of future tax payments, which may include reserves for estimates of probable settlements of international and domestic tax audits. At any one time, multiple tax years and jurisdictions are subject to audit by various taxing authorities. The results of these audits and negotiations with taxing authorities may affect the ultimate settlement of these issues. As a result, we expect that throughout the year there could be ongoing variability in our quarterly tax rates as taxable events occur and uncertain tax positions are re-evaluated. Further, our effective tax rate in a given financial statement period may be materially impacted by changes in tax laws, changes in the mix and level of earnings by taxing jurisdiction, changes to existing accounting rules or regulations or by changes to our ownership or capital structures. Fluctuations in our tax obligations and effective tax rate could materially and adversely affect our results of business, financial condition and operating results.

In addition, we are evaluating and may adopt a corporate structure to more closely align with our international operations and any future international expansion, which will require us to incur expenses but could fail to achieve the intended benefits. This proposed corporate structure may result in a reduction in our overall effective tax rate through changes in how we use our intellectual property, international procurement and sales operations. This proposed corporate structure may also allow us to obtain financial and operational efficiencies. If we adopt this revised structure, it will require us to incur expenses in the near term for which we may not realize related benefits. If the intended structure is not accepted by the applicable taxing authorities, changes in domestic and international tax laws negatively impact the proposed structure, including proposed legislation to reform U.S. taxation of international business activities or we do not operate our business consistent with the proposed structure and applicable tax provisions, we may fail to achieve the financial and operational efficiencies that we anticipate as a result of the proposed structure, and our business, financial condition and operating results may be materially and adversely affected.

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Our business depends on network and mobile infrastructure, our single third-party data center hosting facility, other third-party providers, and our ability to maintain and scale our technology and provide a personalized site experience. Any significant interruptions or delays in service on our sites or any undetected errors or design faults could result in limited capacity, reduced demand, processing delays and loss of customers or vendors.

A key element of our strategy is to generate a high volume of traffic on, and use of, our sites. Our reputation and ability to acquire, retain and serve our customers are dependent upon the reliable performance of our sites and the underlying network infrastructure. As our customer base and the amount of information shared on our sites continue to grow, we will need an increasing amount of network capacity and computing power. We have spent and expect to continue to spend substantial amounts on data centers and equipment and related network infrastructure to handle the traffic on our sites. The operation of these systems is expensive and complex and could result in operational failures. In the event that our customer base or the amount of traffic on our sites grows more quickly than anticipated, we may be required to incur significant additional costs to enhance the underlying network infrastructure. Interruptions or delays in these systems, whether due to system failures, computer viruses, physical or electronic break-ins, undetected errors, design faults or other unexpected events or causes, could affect the security or availability of our sites and prevent our customers from accessing our sites.

In order to enhance relevance for our customers, we have developed extensive data collection and analytics capabilities which allow us to anticipate the shopping preferences of our customers and then personalize their site experience. Any failure of our data analytics and personalization tools could result in reduced demand and loss of customers, which could materially and adversely affect our business, financial condition and operating results.

We depend on the development and maintenance of the Internet and mobile infrastructure. This includes maintenance of reliable Internet and mobile networks with the necessary speed, data capacity and security, as well as timely development of complementary products, for providing reliable Internet and mobile access and services.

We primarily utilize a single third-party data center hosting facility located in the United States. Nearly all of our data storage and analytics are conducted on, and the data and content we create associated with sales on our sites are processed through, servers in one facility. We are currently transitioning to a new third-party data center hosting facility located in the United States. Failure to effectively transfer our data to this new facility could result in interruptions in the availability or functionality of our sites. We also rely on third-party email service providers, bandwidth providers, Internet service providers and mobile networks to deliver our email and mobile “push” communications to subscribers and to allow subscribers to access our sites. Any damage to, or failure of, the systems of our third-party data center or our other third-party providers could result in interruptions to the availability or functionality of our sites. If for any reason our arrangements with our data center or third-party providers are terminated or interrupted, such termination or interruption could adversely affect our business. We exercise little control over these providers, which increases our vulnerability to problems with the services they provide. We could experience additional expense in arranging for new facilities, technology, services and support. In addition, the failure of our data center or any other third-party providers to meet our capacity requirements could result in interruptions in the availability or functionality of our sites.

The occurrence of a natural disaster, an act of terrorism, vandalism or sabotage, a decision to close the third-party data center on which we normally operate or the facilities of any third-party provider without adequate notice or other unanticipated problems at these facilities could result in lengthy interruptions in the availability of our solutions. While we have some limited disaster recovery arrangements in place, they have not been tested under actual disasters or similar events and may not effectively permit us to continue to provide our products in the event of any problems with respect to our data center or any other third-party facilities. To date, we have not experienced these types of events, but we cannot provide any assurances that they will not occur in the future. If any such event were to occur to our business, the delivery of our products could be impaired and our business, financial condition and operating results may be materially and adversely affected.

We may from time to time pursue acquisitions, which could have an adverse impact on our business, as could the integration of the businesses following acquisition.

As part of our business strategy, we may acquire other companies or businesses. Acquisitions involve numerous risks, any of which could harm our business, including: difficulties in integrating the technologies, operations, existing contracts and personnel of an acquired company; difficulties in supporting and transitioning vendors, if any, of an acquired company; diversion of financial and management resources from existing operations or alternative acquisition opportunities; failure to realize the anticipated benefits or synergies of a transaction; failure to identify all of the problems, liabilities or other shortcomings or challenges of an acquired company or technology,

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including issues related to intellectual property, regulatory compliance practices, revenue recognition or other accounting practices or employee or customer issues; risks of entering new markets in which we have limited or no experience; potential loss of key employees, customers and vendors from either our current business or an acquired company’s business; inability to generate sufficient net sales to offset acquisition costs; additional costs or equity dilution associated with funding the acquisition; and possible write-offs or impairment charges relating to acquired businesses.

Growth and expansion of our international business will require management attention and resources, involves additional risks, and may be unsuccessful, which could harm our future business development and existing domestic operations.

We have conducted limited international business in the United Kingdom, Canada and Australia but plan to grow our current business in these countries and to further expand into new international markets in order to grow our overall business. These growth and expansion plans will require management attention and resources and may be unsuccessful. We have limited experience in selling our products to conform to different local cultures, standards and policies, and the flash sales model we employ and the products we offer may not appeal to customers in the same manner, if at all, in the United Kingdom, Canada, Australia and other geographies. In addition, we may need to vary our practices in ways with which we have limited or no experience or which are less profitable or carry more risk to us. For example, we permit customer returns in the United Kingdom and expect that we may be required to adopt similar policies in other jurisdictions. We may have to compete with local companies which understand the local market better than we do. In addition, to deliver satisfactory performance for customers in international locations, it may be necessary to locate physical facilities, such as fulfillment centers in foreign markets, and we may have to invest in these facilities before the success or lack thereof of our international business. We may not be successful in growing our United Kingdom, Canada and Australia business and expanding into any other international markets or in generating desired levels of net sales from our international business. Furthermore, different privacy, censorship, liability, intellectual property and other laws and regulations in foreign countries may cause our business, financial condition and operating results to be materially and adversely affected.

Our future results could be adversely affected by a number of factors inherent in international business, including:


•	localization of our product offerings, including compliance with product safety regulatory schemes as well as translation into foreign languages and adaptation for local practices;


•	different consumer demand dynamics, which may make the flash sales model less successful compared to the United States;


•	unexpected changes in regulatory requirements, taxes, trade laws, tariffs, export quotas, custom duties or other trade restrictions;


•	more stringent regulations relating to data security and the unauthorized use of, or access to, commercial and personal information, particularly in the European Union;


•	reluctance to allow personally identifiable data related to non-U.S. citizens to be stored in databases within the United States, due to concerns over the U.S. government’s right to access information in these databases or other concerns;


•	changes in a specific country’s or region’s political or economic conditions;


•	differing labor regulations where labor laws may be more advantageous to employees as compared to the United States;


•	challenges inherent in efficiently managing an increased number of employees over large geographic distances, including the need to implement and monitor appropriate systems, policies, benefits and compliance programs;


•	risks resulting from changes in currency exchange rates;


•	limitations on our ability to reinvest earnings from operations in one country to fund the capital needs of our operations in other countries;


•	different or lesser intellectual property protection; and


•	exposure to liabilities under anti-corruption and anti-money laundering laws, including the U.S. Foreign Corrupt Practices Act and similar laws and regulations in other jurisdictions.

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Conducting business internationally requires significant management attention and financial resources. We cannot be certain that the investment and additional resources required to establish and expand our international business will produce desired levels of net sales or profitability. If we invest substantial time and resources to establish and expand our international business and are unable to do so successfully and in a timely manner, our overall business, financial condition and operating results may be materially and adversely affected.

We rely on the performance of members of management and highly skilled personnel, and if we are unable to attract, retain and motivate well-qualified employees, our business could be harmed.

We believe our success has depended, and continues to depend, on the efforts and talents of Darrell Cavens, one of our founders and our president and chief executive officer, Mark Vadon, one of our founders and chairman of the board of directors, and other members of our management team. Our success also depends on our highly skilled team of employees, including our merchandising and technology personnel. Our future success depends on our continuing ability to attract, develop, motivate and retain highly qualified and skilled employees, particularly mid-level managers and merchandising and technology personnel. The market for such positions is competitive. Qualified individuals are in high demand, and we may incur significant costs to attract them. In addition, the loss of any of our senior management or key employees or our inability to recruit and develop mid-level managers could materially and adversely affect our ability to execute our business plan, and we may not be able to find adequate replacements. We do not maintain "key person" insurance for any member of our senior management team or any of our other key employees. All of our officers and other U.S. employees are at-will employees, meaning that they may terminate their employment relationship with us at any time, and their knowledge of our business and industry would be extremely difficult to replace. In addition, we may not be able to find highly skilled personnel in international markets similar to such personnel on which the success of our U.S. operations depends. If we do not succeed in attracting well-qualified employees or retaining and motivating existing employees, our business, financial condition and operating results may be materially and adversely affected.

Our management team has limited experience managing a public company, and regulatory compliance may divert its attention from the day-to-day management of our business.

The individuals who now constitute our management team have limited experience managing a publicly-traded company and complying with the increasingly complex laws pertaining to public companies. Our management team may not successfully or efficiently manage our transition to being a public company subject to significant regulatory oversight and incremental reporting obligations under the federal securities laws. In particular, these new obligations require substantial attention from our senior management and could divert their attention away from the day-to-day management of our business, which could materially and adversely affect our business, financial condition and operating results.

Adverse litigation judgments or settlements resulting from legal proceedings in which we may be involved could expose us to monetary damages or limit our ability to operate our business.

We may become involved from time to time in private actions, collective actions, investigations and various other legal proceedings by customers, employees, suppliers, competitors, government agencies or others. The results of any such litigation, investigations and other legal proceedings are inherently unpredictable and expensive. Any claims against us, whether meritorious or not, could be time-consuming, result in costly litigation, damage our reputation, require significant amounts of management time and divert significant resources. If any of these legal proceedings were to be determined adversely to us, or we were to enter into a settlement arrangement, we could be exposed to monetary damages or limits on our ability to operate our business, which could have a material adverse effect on our business, financial condition and operating results.

We may not be able to adequately protect our intellectual property rights.

We regard our subscriber list, marks, domain names, copyrights, patents, trade dress, trade secrets, proprietary technology and similar intellectual property as critical to our success, and we rely on trademark, copyright and patent law, trade secret protection, agreements and other methods with our employees and others to protect our proprietary rights. We might not be able to obtain effective intellectual property protection in every country in which we sell products. The protection of our intellectual property rights may require the expenditure of significant financial, managerial and operational resources. Moreover, the steps we take to protect our intellectual property may not adequately protect our rights or prevent third parties from infringing or misappropriating our proprietary rights. Any of our patents, marks, copyrights or other intellectual property rights may be challenged by others or invalidated through administrative process or litigation. Our patent applications may never be granted.

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Additionally, the process of obtaining patent protection is expensive and time-consuming, and we may not be able to prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. Even if issued, there can be no assurance that these patents will adequately protect our intellectual property, as the legal standards relating to the validity, enforceability and scope of protection of patent and other intellectual property rights are uncertain. We also cannot be certain that others will not independently develop or otherwise acquire equivalent or superior technology or intellectual property rights.

We might be required to spend significant resources to monitor and protect our intellectual property rights. We may not be able to discover or determine the extent of any infringement, misappropriation or other violation of our intellectual property rights and other proprietary rights. We may initiate claims or litigation against others for infringement, misappropriation or violation of our intellectual property rights or proprietary rights or to establish the validity of such rights. Despite our efforts, we may be unable to prevent third parties from infringing upon, misappropriating or otherwise violating our intellectual property rights and other proprietary rights. Any litigation, whether or not it is resolved in our favor, could result in significant expense to us and divert the efforts of our technical and management personnel, which may materially and adversely affect our business, financial condition and operating results.

We may be accused of infringing intellectual property rights of third parties.

We may be subject to litigation and disputes related to our intellectual property rights and technology, as well as disputes related to intellectual property and product offerings of third-party vendors featured by us. The costs of supporting such litigation and disputes are considerable, and there can be no assurances that favorable outcomes will be obtained.

The e-commerce industry is characterized by vigorous protection and pursuit of intellectual property rights, which has resulted in protracted and expensive litigation for many companies. We are subject to claims and litigation by third parties that we infringe their intellectual property rights, and we expect additional claims and litigation with respect to infringement to occur in the future. As our business expands and the number of competitors in our market increases and overlaps occur, we expect that infringement claims may increase in number and significance. Any claims or proceedings against us, whether meritorious or not, could be time-consuming, result in costly litigation, require significant amounts of management time or result in the diversion of significant operational resources, any of which could materially and adversely affect our business, financial condition and operating results.

Legal claims regarding intellectual property rights are subject to inherent uncertainties due to the oftentimes complex issues involved, and we cannot be certain that we will be successful in defending ourselves against such claims. In addition, some of our larger competitors have extensive portfolios of issued patents. Many potential litigants, including patent holding companies, have the ability to dedicate substantially greater resources to enforce their intellectual property rights and to defend claims that may be brought against them. Furthermore, a successful claimant could secure a judgment that requires us to pay substantial damages or prevents us from conducting our business as we have historically done or may desire to do in the future. We might also be required to seek a license and pay royalties for the use of such intellectual property, which may not be available on commercially acceptable terms, or at all. Alternatively, we may be required to develop non-infringing technology or intellectual property, which could require significant effort and expense and may ultimately not be successful.

We have received in the past, and we anticipate receiving in the future, communications alleging that certain items posted on or sold through our sites violate third-party copyrights, marks and trade names or other intellectual property rights or other proprietary rights. Brand and content owners and other proprietary rights owners have actively asserted their purported rights against online companies, including zulily. In addition to litigation from rights owners, we may be subject to regulatory, civil or criminal proceedings and penalties if governmental authorities believe we have aided and abetted in the sale of counterfeit or infringing products.

Such claims, whether or not meritorious, may result in the expenditure of significant financial, managerial and operational resources, injunctions against us or the payment of damages by us. We may need to obtain licenses from third parties who allege that we have violated their rights, but such licenses may not be available on terms acceptable to us, or at all. These risks have been amplified by the increase in third parties whose sole or primary business is to assert such claims.

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The inability to acquire, use or maintain our “zulily” mark and domain names for our sites could substantially harm our business and operating results.

We currently are the registrant of the “zulily” mark in numerous jurisdictions and are the registrant of the Internet domain name for our website, zulily.com, as well as various related domain names. However, we have not registered the mark or domain name in all major international jurisdictions. Domain names generally are regulated by Internet regulatory bodies and are also controlled by trademark and other related laws of each country. If we do not have or cannot obtain on reasonable terms the ability to use our “zulily” mark in a particular country, or to use or register our domain name, we could be forced either to incur significant additional expenses to market our products within that country, including the development of a new brand and the creation of new promotional materials and packaging, or to elect not to sell products in that country. Either result could materially and adversely affect our business, financial condition and operating results.

Furthermore, the regulations governing domain names and laws protecting marks and similar proprietary rights could change in ways that block or interfere with our ability to use relevant domains or our current brand. Also, we might not be able to prevent third parties from registering, using or retaining domain names that interfere with our consumer communications or infringe or otherwise decrease the value of our marks, domain names and other proprietary rights. Regulatory bodies have established and may create additional generic or country-code top-level domains or may allow modifications of the requirements for registering, holding or using domain names. As a result, we might not be able to register, use or maintain the domain names that utilize the name zulily in all of the countries in which we currently or intend to conduct business.

Some of our software and systems contain open source software, which may pose particular risks to our proprietary software and solutions.

We use open source software in our software and systems and will use open source software in the future. The licenses applicable to open source software typically require that the source code subject to the license be made available to the public and that any modifications or derivative works to open source software continue to be licensed under open source licenses. From time to time, we may face claims from third parties claiming infringement of their intellectual property rights, or demanding the release or license of the open source software or derivative works that we developed using such software (which could include our proprietary source code) or otherwise seeking to enforce the terms of the applicable open source license. These claims could result in litigation and could require us to purchase a costly license, publicly release the affected portions of our source code, be limited in the licensing of our technologies or cease offering the implicated solutions unless and until we can re-engineer them to avoid infringement or change the use of the implicated open source software. In addition to risks related to license requirements, use of certain open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties, indemnities or other contractual protections with respect to the software (for example, non-infringement or functionality). Our use of open source software may also present additional security risks because the source code for open source software is publicly available, which may make it easier for hackers and other third parties to determine how to breach our sites and systems that rely on open source software. Any of these risks could be difficult to eliminate or manage, and, if not addressed, could have a material and adverse effect on our business, financial condition and operating results.

Our results could be adversely affected by natural disasters, public health crises, political crises or other catastrophic events.

Our principal offices are located in Seattle, Washington, an area that has experienced earthquakes in the past, and are thus vulnerable to damage. Natural disasters, such as hurricanes, tornadoes, floods, earthquakes and other adverse weather and climate conditions; unforeseen public health crises, such as pandemics and epidemics; political crises, such as terrorist attacks, war and other political instability; or other catastrophic events, whether occurring in the United States or internationally, could disrupt our operations or the operations of one or more of our vendors. In particular, these types of events could impact our product supply chain, including our ability to ship products to customers, from or to the impacted region and could impact our ability or the ability of third parties to operate our sites and ship products. In addition, these types of events could negatively impact consumer spending in the impacted regions or depending upon the severity, globally. To the extent any of these events occur, our business, financial condition and operating results could be materially and adversely affected.

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Our ability to raise capital in the future may be limited, and our failure to raise capital when needed could prevent us from growing.

In the future, we could be required to raise capital through public or private financing or other arrangements. Such financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could harm our business. We may sell Class A common stock, convertible securities and other equity securities in one or more transactions at prices and in a manner as we may determine from time to time. If we sell any such securities in subsequent transactions, investors may be materially diluted. New investors in such subsequent transactions could gain rights, preferences and privileges senior to those of holders of our Class A common stock. Debt financing, if available, may involve restrictive covenants and could reduce our operational flexibility or profitability. For example, we currently have a credit facility which requires that we meet certain customary covenants that include restrictions on, among other things, indebtedness, liens, investments, mergers, dispositions, dividends or other distributions. In addition, such credit facility contains certain financial covenants. If we cannot raise funds on acceptable terms, we may not be able to grow our business or respond to competitive pressures.

Risks Related to Ownership of our Class A Common Stock

Our stock price has been and will likely continue to be volatile and may decline regardless of our operating performance, resulting in substantial losses for investors.

The trading price of our Class A common stock has been, and is likely to continue to be, volatile for the foreseeable future. For example, since shares of our Class A common stock were sold in our IPO in November 2013, at a price of $22.00 per share, through November 5, 2014, our Class A common stock's daily closing price on the NASDAQ Global Select Market has ranged from a low of $28.16 to a high of $72.75. On November 5, 2014, the closing price of our Class A common stock was $28.16.

The market price of our Class A common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including the factors listed below and other factors described in this "Risk Factors" section:


•	actual or anticipated fluctuations in our results of operations;


•	the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;


•	failure of securities analysts to initiate or maintain coverage of our company, changes in financial estimates or ratings by any securities analysts who follow our company or our failure to meet these estimates or the expectations of investors;


•	announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, joint ventures, operating results or capital commitments;


•	changes in operating performance and stock market valuations of other technology or retail companies generally, or those in our industry in particular;


•	price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;


•	changes in our board of directors or management;


•	sales of large blocks of our Class A common stock, including sales by our executive officers, directors and significant stockholders;


•	lawsuits threatened or filed against us;


•	changes in laws or regulations applicable to our business;


•	changes in our capital structure, such as future issuances of debt or equity securities;


•	short sales, hedging and other derivative transactions involving our capital stock;


•	general economic conditions in the United States and abroad;


•	other events or factors, including those resulting from war, incidents of terrorism, public health crises or responses to these events; and


•	the other factors described in this section of our Quarterly Report captioned, “Risk Factors.”

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In addition, stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many technology companies, including e-commerce companies. Stock prices of many technology companies, including e-commerce companies, have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business and materially and adversely affect our business, financial condition and operating results.

Substantial future sales of shares of our Class A common stock could cause the market price of our Class A common stock to decline.

We have a small public float relative to the total number of shares of Class A and Class B common stock that are issued and outstanding. Sales of a substantial number of shares of our Class A common stock in the public market or a conversion of a substantial number of shares of our Class B common stock into Class A common stock, or the perception that these sales or conversions might occur, could depress the market price of our Class A common stock and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effect that such sales or conversions may have on the prevailing market price of our Class A common stock.

In addition, as of September 28, 2014, there were 732,804 shares of Class A common stock and 11,581,822 shares of Class B common stock subject to outstanding options. All of the shares of Class A common stock issuable upon exercise of options (or upon conversion of Class B common stock issued upon exercise of options) have been registered for public resale under the Securities Act. Accordingly, these shares will be able to be freely sold in the public market upon issuance as permitted by any applicable vesting requirements, subject to compliance with applicable securities laws.

As of September 28, 2014, holders of approximately 50.8 million shares of Class B common stock have rights, subject to some conditions, to require us to file registration statements for the public resale of the Class A common stock issuable upon conversion of such shares or to include such shares in registration statements that we may file for zulily or other stockholders.

The dual class structure of our common stock and the existing ownership of capital stock by our executive officers and directors have the effect of concentrating voting control with our executive officers and directors for the foreseeable future, which will limit your ability to influence corporate matters.

Our Class B common stock has ten votes per share, and our Class A common stock has one vote per share. Given the greater number of votes per share attributed to our Class B common stock, the holders of Class B common stock collectively will continue to be able to control a majority of the voting power even if their stock holdings represent as few as approximately 9.1% of the outstanding number of shares of our common stock. As of September 28, 2014, the holders of Class B common stock collectively own shares representing approximately 92.0% of the voting power of our outstanding capital stock. Our executive officers and directors, collectively, continue to beneficially own shares representing a majority of the voting power of our outstanding capital stock. This concentrated control will limit your ability to influence corporate matters for the foreseeable future and may cause us to make strategic decisions or pursue acquisitions that could involve risks to you or may not be aligned with your interests. For example, these stockholders will be able to control elections of directors, amendments of our certificate of incorporation or bylaws, increases to the number of shares available for issuance under our equity compensation plans or adoption of new equity compensation plans and approval of any merger or sale of assets for the foreseeable future. This control may adversely affect the market price of our Class A common stock.

Future transfers by holders of Class B common stock will generally result in those shares converting on a 1:1 basis to Class A common stock, which will have the effect, over time, of increasing the relative voting power of those holders of Class B common stock who retain their shares in the long-term, which may include our executive officers and directors.

If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our share price and trading volume could decline.

The trading market for our Class A common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business, our market and our competitors. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our shares or change their opinion of our shares, our share price would likely decline. If one or more of these analysts cease coverage of our

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company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.

We are an “emerging growth company,” and we cannot be certain if the reduced disclosure requirements applicable to “emerging growth companies” will make our Class A common stock less attractive to investors.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We will cease to be an “emerging growth company” at the end of our current fiscal year, as we will be deemed to be a “large accelerated filer” as defined in the Exchange Act. We cannot predict if investors will find our Class A common stock less attractive or our company less comparable to certain other public companies because we rely on these exemptions.

The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain additional executive management and qualified board members.

As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of the NASDAQ Global Select Market and other applicable securities rules and regulations. Compliance with these rules and regulations has increased our legal and financial compliance costs, made some activities more difficult, time-consuming or costly and has increased demand on our systems and resources. We expect these costs, difficulties and demands to increase after we are no longer an “emerging growth company” starting with our next fiscal year. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and results of operations. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We will be required to disclose changes made in our internal control and procedures on a quarterly basis. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could adversely affect our business and results of operations. Although we have already hired additional employees to comply with these requirements, we will need to hire additional employees or engage outside consultants, which will increase our costs and expenses.

In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time-consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us, and our business may be adversely affected.

Being a public company and these new rules and regulations have made it more expensive for us to obtain director and officer liability insurance, and in the future, we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.

As a result of disclosure of information in our filings with the SEC, our business and financial condition have become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and results of operations could be adversely affected, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and

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resources necessary to resolve them, could divert the resources of our management and materially and adversely affect our business, financial condition and operating results.

If we fail to maintain proper and effective internal control over financial reporting, our ability to produce accurate and timely financial statements could be impaired and such failure may adversely affect investor confidence in our company and, as a result, the value of our Class A common stock.

Ensuring that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. We will be required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the fiscal year ending December 28, 2014. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting, as well as a statement that our independent registered public accounting firm has issued an opinion on our internal control over financial reporting, provided that our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting until our first annual report required to be filed with the SEC following the later of the date we are deemed to be an “accelerated filer” or a “large accelerated filer,” each as defined in the Exchange Act, or the date we are no longer an “emerging growth company,” as defined in the JOBS Act. As a newly public company, we are continuing to develop and refine our internal controls and procedures and may need to undertake various actions, including hiring accounting or internal audit staff. We are beginning the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404, and we may not be able to complete our evaluation, testing and any required remediation in a timely fashion.

We and our independent registered public accounting firm previously identified a material weakness in our internal control over financial reporting, subsequent to the issuance of our consolidated financial statements for the fiscal years ended December 30, 2012, and January 1, 2012. A material weakness is a deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim consolidated financial statements will not be prevented or detected on a timely basis. The material weakness identified related to the lack of sufficient technical accounting skills within our accounting and finance organization. During the three months ended March 30, 2014, we implemented steps to address the previously identified material weakness. Based on the steps implemented, which included increasing the size, depth and experience within our accounting and finance organization, as well as designing and implementing improved processes and internal controls, we concluded that we have remediated the previously identified material weakness.

In future periods, if during the evaluation and testing process, we identify any other material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal control over financial reporting is effective. If we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal control, investors could lose confidence in the accuracy and completeness of our financial reports, which would cause the price of our Class A common stock to decline, and we may be subject to investigation or sanctions by the SEC.

Anti-takeover provisions in our charter documents and under Delaware law and Washington law could make an acquisition of our company more difficult, limit attempts by our stockholders to replace or remove our current management and limit the market price of our Class A common stock.

Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our certificate of incorporation and bylaws include provisions that:


•	establish a classified board of directors so that not all members of our board of directors are elected at one time;


•	permit the board of directors to establish the number of directors and fill any vacancies and newly created directorships;


•	provide that directors may only be removed for cause;

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•	require super-majority voting to amend some provisions in our certificate of incorporation and bylaws;


•	authorize the issuance of “blank check” preferred stock that our board of directors could use to implement a stockholder rights plan;


•	eliminate the ability of our stockholders to call special meetings of stockholders;


•	prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;


•	provide that the board of directors is expressly authorized to make, alter or repeal our bylaws;


•	restrict the forum for certain litigation against us to Delaware;


•	reflect the dual class structure of our common stock, as discussed above; and


•	establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at annual stockholder meetings.

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any holder of at least 15% of our capital stock for a period of three years following the date on which the stockholder became a 15% stockholder. Likewise, because our principal executive offices are located in Washington, the anti-takeover provisions of the Washington Business Corporation Act may apply to us under certain circumstances now or in the future. These provisions prohibit a “target corporation” from engaging in any of a broad range of business combinations with any stockholder constituting an “acquiring person” for a period of five years following the date on which the stockholder became an “acquiring person.”

Our certificate of incorporation also provides that the Court of Chancery of the State of Delaware is the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf; any action asserting a breach of fiduciary duty; any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our certificate of incorporation or our bylaws; or any action asserting a claim against us that is governed by the internal affairs doctrine. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find the choice of forum provision contained in our certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business and financial condition.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Sales of Unregistered Securities

None.

Use of Proceeds from Public Offering of Common Stock

In November 2013, we closed our IPO of 13,225,000 shares of our Class A common stock, including 7,334,125 shares sold by us and 5,890,875 shares sold by the selling stockholders, at a price to the public of $22.00 per share. The offer and sale of all of the shares in the IPO were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-191617), which was declared effective by the SEC on November 14, 2013. The offering closed on November 20, 2013. Goldman, Sachs & Co., BofA Merrill Lynch, Citigroup, RBC Capital Markets, Allen & Company LLC and William Blair acted as underwriters. The aggregate

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offering price for shares sold in the offering was approximately $291 million. We did not receive any proceeds from the sale of shares by the selling stockholders. We raised approximately $147.5 million in net proceeds from the offering, after deducting the underwriter discount with respect to the shares offered by us of approximately $10.5 million and other offering expenses of approximately $3.3 million.

There has been no material change in the planned use of proceeds from our IPO as described in our final prospectus filed with the SEC on November 15, 2013 pursuant to Rule 424(b) under the Securities Act. As of September 28, 2014, we had not used any proceeds from our IPO. Pending the uses described, we maintain the cash received in cash and cash equivalents as well as short-term investments.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

A list of exhibits filed with this report or incorporated herein by reference is found in the Exhibit Index immediately following the Signatures page of this report and is incorporated into this Item 6 by reference.

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SIGNATURES

Pursuant to the requirements 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.



		zulily, inc.
		(Registrant)

Date: November 6, 2014	By:	/s/ Marc Stolzman
		Marc Stolzman
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

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EXHIBIT INDEX

Incorporated by Reference

Exhibit No.

Description of Exhibit

Form

File No.

Exhibit

Filing Date

Filed Herewith

3.1

Amended and Restated Certificate of Incorporation of zulily, inc.

8-K

001-36188

3.1

11/21/2013

3.2

Amended and Restated Bylaws of zulily, inc.

S-1

333-191617

3.4

10/8/2013

4.1

Form of Class B Common Stock Certificate

10-K

001-36188

4.1

2/28/2014

4.2

Third Amended and Restated Investor Rights Agreement, dated November 5, 2012

S-1

333-191617

4.1

10/8/2013

4.3

Amendment No. 1 to Third Amended and Restated Investor Rights Agreement, dated October 17, 2013

S-1/A

333-191617

4.2

10/25/2013

10.1

Lease Agreement, dated as of September 8, 2014, by and between Liberty Property Limited Partnership and zulily, inc.

31.1

Certification of the Chief Executive Officer pursuant to Rule 13a-14 under the Securities Exchange Act of 1934

31.2

Certification of the Chief Financial Officer pursuant to Rule 13a-14 under the Securities Exchange Act of 1934.

32.1

Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

* Document has been furnished, is not deemed filed and is not to be incorporated by reference into any of the Company's filings under the Securities Act or the Exchange Act, irrespective of any general incorporation language contained in any such filing.

Attached files

zulily, inc. Reports

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