ZULILY, INC. FORM 10-Q. (Quarterly Report) Filed 11/06/14 for the Period Ending 09/28/14

Transcription

1 ZULILY, INC. FORM 10-Q (Quarterly Report) Filed 11/06/14 for the Period Ending 09/28/14 Address 2601 ELLIOTT AVENUE, SUITE 200 SEATTLE, WA Telephone (877) CIK Symbol ZU SIC Code Catalog and Mail-Order Houses Fiscal Year 12/31 Copyright 2014, EDGAR Online, Inc. All Rights Reserved. Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use.

2 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C (Mark One) FORM 10-Q 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 zulily, inc. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number) 2601 Elliott Avenue, Suite 200, Seattle, Washington (Address of principal executive offices) (Zip Code) (877) (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 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 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 Non-accelerated filer (Do not check if a smaller reporting company) Accelerated filer Smaller reporting company Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No As of November 4, 2014, there were 58,512,210 shares of the registrant s Class A Common Stock, par value $ per share, and 66,824,168 shares of the registrant's Class B Common Stock, par value $ per share, issued and outstanding.

3 ZULILY, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 28, 2014 TABLE OF CONTENTS Part I. Financial Information Item 1. Financial Statements (Unaudited) 3 Condensed Consolidated Balance Sheets as of September 28, 2014 and December 29, Condensed Consolidated Statements of Operations for the three and nine months ended September 28, 2014 and September 29, Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 28, 2014 and September 29, Condensed Consolidated Statements of Cash Flows for the nine months ended September 28, 2014 and September 29, 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 Page 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.

4 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, ,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, ,630 DEFERRED INCOME TAXES Net 1,264 OTHER NON-CURRENT LIABILITIES 16,690 4,254 Total liabilities 205, ,884 COMMITMENTS AND CONTINGENCIES (Note 3 and Note 4) STOCKHOLDERS EQUITY Preferred stock, $ 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, $ 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, $ 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, ,385 Accumulated other comprehensive loss (33 ) (58 ) Accumulated deficit (41,125 ) (45,136 ) Total stockholders equity 260, ,203 Total liabilities and stockholders' equity $ 465,943 $ 356,087 See notes to condensed consolidated financial statements. 3

5 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, , , ,660 GROSS PROFIT 78,689 44, , ,016 OPERATING EXPENSES: Marketing 24,878 14,651 72,245 42,707 Selling, general, and administrative 54,474 32, ,073 82,202 TOTAL OPERATING EXPENSES 79,352 46, , ,909 INCOME (LOSS) FROM OPERATIONS (663 ) (2,283 ) 4, INTEREST INCOME (EXPENSE) Net OTHER INCOME (EXPENSE) Net (38 ) NET INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (495) (2,251) 4, PROVISION FOR INCOME TAXES 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, ,446,242 49,936,220 Diluted 124,984,564 53,495, ,796,014 49,936,220 See notes to condensed consolidated financial statements. 4

6 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 Foreign currency translation adjustment (19 ) 70 OTHER COMPREHENSIVE INCOME, NET TOTAL COMPREHENSIVE INCOME (LOSS) $ (765 ) $ (2,201 ) $ 4,036 $ 229 See notes to condensed consolidated financial statements. 5

7 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 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, 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 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 6

8 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, 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, 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, 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 7

9 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 , Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar tax Loss, or a Tax Credit Carryforward Exists ("ASU "). 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 is effective for annual and interim periods beginning after December 15, The Company adopted ASU 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 , Revenue from Contracts with Customers ( ASU ) 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 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 The Company commenced operations in the new Nevada fulfillment center in the three months ended September 28, 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 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, 8

10 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 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 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 timeconsuming, 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 9

11 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 $ 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. 10

12 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, ,938,487 $ $ 462,558 Granted 638, Exercised (1,869,215) 1.68 Canceled (4,605) 6.94 Forfeited (388,691) Outstanding at September 28, ,314,626 $ $ 368,111 Vested and expected to vest at September 28, ,065,195 $ $ 362,690 Exercisable at September 28, ,010,542 $ $ 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 Shares Underlying RSUs Weighted Average Grant Date Fair Value Outstanding at December 29, 2013 $ Granted 205, Vested (675) Forfeited (3,085) Outstanding at September 28, ,051 $

13 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 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. 12

14 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, ,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, ,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, ,701 13,825,873 Restricted stock unit awards 202,051 20,938 Total 12,516,677 75,795, ,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. 13

15 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, 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 Other income (expense) net (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 14

16 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 $ 15

17 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, 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 longterm 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, 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 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 16

18 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 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 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 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%. 17

19 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, 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, 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. us. Interest Income (Expense) Net Interest income (expense) net consists primarily of interest earned on cash, cash equivalents and short-term investments held by Other Income (Expense) Net Other income (expense) net consists primarily of income earned from our corporate purchasing card and realized foreign currency gains (losses). 18

20 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 September 28, 2014 Three Months Ended September 29, 2013 $ Change % Change (dollars in thousands) Net sales: North America $ 281,722 $ 163,726 $ 117, % U.K. 4,114 2,929 1, % Consolidated $ 285,836 $ 166,655 $ 119, % 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 deliverability issues with some of our subscribers during the three months ended September 28, 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 September 28, 2014 Three Months Ended September 29, 2013 $ Change % Change (dollars in thousands) Cost of sales $ 207,147 $ 122,154 $ 84, % 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. 19

21 Marketing Expenses September 28, 2014 Three Months Ended September 29, 2013 $ Change % Change (dollars in thousands) Marketing expenses $ 24,878 $ 14,651 $ 10, % 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, 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, Selling, General and Administrative Expenses September 28, 2014 Three Months Ended September 29, 2013 $ Change % Change (dollars in thousands) Selling, general and administrative expenses $ 54,474 $ 32,133 $ 22, % 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. 20

22 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, Comparison of the Nine Months Ended September 28, 2014 and September 29, 2013 Net Sales September 28, 2014 Nine Months Ended September 29, 2013 $ Change % Change (dollars in thousands) Net sales: North America $ 796,358 $ 429,891 $ 366, % U.K. 12,372 8,785 3, % Consolidated $ 808,730 $ 438,676 $ 370, % 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 September 28, 2014 Nine Months Ended September 29, 2013 $ Change % Change (dollars in thousands) Cost of sales $ 585,350 $ 313,660 $ 271, % 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 September 28, 2014 Nine Months Ended September 29, 2013 $ Change % Change (dollars in thousands) Marketing expenses $ 72,245 $ 42,707 $ 29, % 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,

23 Selling, General and Administrative Expenses September 28, 2014 Nine Months Ended September 29, 2013 $ Change % Change (dollars in thousands) Selling, general and administrative expenses $ 147,073 $ 82,202 $ 64, % 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 stockbased 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,

24 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: September 28, 2014 Three Months Ended September 29, 2013 Change % Change September 28, 2014 Nine Months Ended 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, % $ 23,465 $ 9,260 $ 14, % Free cash flow $ 31,213 $ 20,764 $ 10, % $ 32,947 $ 16,524 $ 16, % Active customers 4,531 2,632 1, % 4,531 2,632 1, % Revenue per active customer $ 63 $ 63 $ % $ 178 $ 167 $ 11 7% Total orders placed 5,937 3,652 2, % 16,825 9,348 7, % Average order value $ $ $ % $ $ $ % Non-GAAP diluted net income per share $ 0.02 $ $ % $ 0.11 $ 0.04 $ % 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. 23

25 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 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 24

26 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 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 stockbased 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: 25

27 September 28, 2014 Three Months Ended September 29, 2013 September 28, 2014 Nine Months Ended 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, ,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, ,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, ,498, ,796, ,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 shortterm 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. 26

28 Cash flow information is as follows: September 28, 2014 Nine Months Ended 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, 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, 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-toperiod 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, This was primarily attributable to purchases of short-term investments related to excess cash of $112.9 million and $

29 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, 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, 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 stockbased 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, 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, 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. 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. As of the filing date of this Quarterly Report, no amounts have been drawn down under the revolving credit facility. 28

30 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 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 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 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. 29

31 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, 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,

32 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, 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. 31

33 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 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. 32

34 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 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 s 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, 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 33

35 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, 34

36 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: 35

37 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, valueoriented 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 and mobile "push" notifications, and any restrictions on the sending of s 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 and mobile "push" notifications for promoting our sites and products. We provide daily s and mobile alerts to subscribers informing them of what is available for purchase on our sites that day, and we believe these s 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 s or mobile alerts to our subscribers, or if subscribers decline to open our s 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 may reduce the number of subscribers opening our s. For example, Google Inc. s Gmail service contains features that organize incoming s 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 36

38 providers may result in our s 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 s. 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 s 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 transmissions or otherwise experience technical difficulties that result in our inability to successfully deliver s 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 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 s 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 s, and delay or errors in the delivery of such s or other messaging we send may occur and are beyond our control. For example, the delivery of our daily s 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 s 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 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 s or other messages, termination or disruption of our relationship with our messaging service providers, including our third-party service that delivers our daily s, or any increase in our costs associated with our 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. 37

39 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 38

40 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 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 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. 39

41 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 We also believe that we have experienced slower growth in orders placed during 40

42 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. 41

43 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, 42

44 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. 43

45 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 thirdparty 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. 44

46 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 reevaluated. 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. 45

47 Our business depends on network and mobile infrastructure, our single third-party data center hosting facility, other thirdparty 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 service providers, bandwidth providers, Internet service providers and mobile networks to deliver our 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, 46

48 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. 47

49 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 timeconsuming, 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. 48

50 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. 49

51 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. 50

52 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 $ On November 5, 2014, the closing price of our Class A common stock was $ 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. 51

53 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 52

54 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 53

55 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, 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, 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; 54

56 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 ), which was declared effective by the SEC on November 14, The offering closed on November 20, Goldman, Sachs & Co., BofA Merrill Lynch, Citigroup, RBC Capital Markets, Allen & Company LLC and William Blair acted as underwriters. The aggregate 55

57 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. 56

58 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) 57

59 EXHIBIT INDEX Incorporated by Reference Exhibit No. Description of Exhibit Form File No. Exhibit Filing Date 3.1 Amended and Restated Certificate of Incorporation of zulily, inc. 8-K /21/ Amended and Restated Bylaws of zulily, inc. S /8/ Form of Class B Common Stock Certificate 10-K /28/ Third Amended and Restated Investor Rights Agreement, dated November 5, 2012 S /8/ Amendment No. 1 to Third Amended and Restated Investor Rights Agreement, dated October 17, 2013 S-1/A /25/ Lease Agreement, dated as of September 8, 2014, by and between Liberty Property Limited Partnership and zulily, inc. Certification of the Chief Executive Officer pursuant to Rule 13a-14 under the Securities 31.1 Exchange Act of * Filed Herewith Certification of the Chief Financial Officer pursuant to Rule 13a-14 under the Securities Exchange Act of X 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 X 101.INS XBRL Instance Document X 101.SCH XBRL Taxonomy Extension Schema Document X 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document X 101.LAB XBRL Taxonomy Extension Label Linkbase Document X 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document X 101.DEF XBRL Taxonomy Extension Definition Linkbase Document X X X * 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. 58

60 LEASE AGREEMENT LIBERTY PROPERTY LIMITED PARTNERSHIP Landlord AND ZULILY, INC. Tenant AT 10 Emery Street Bethlehem, Pennsylvania 18018

61 LEASE AGREEMENT INDEX Section Page 1. Basic Lease Terms and Definitions 1 2. Premises 2 3. Use 2 4. Term; Possession 2 5. Rent; Taxes 2 6. Operating Expenses 3 7. Utilities 3 8. Insurance; Waivers; Indemnification 4 9. Maintenance and Repairs Compliance Signs Alterations Mechanics Liens Landlord s Right of Entry Damage by Fire or Other Casualty Condemnation Quiet Enjoyment Assignment and Subletting Subordination; Mortgagee s Rights Tenant s Certificate; Financial Information Surrender Defaults - Remedies Tenant s Authority Liability of Landlord Miscellaneous Notices Security Deposit Construction of the Building and the Tenant Improvements Options to Renew Parking Brokers. 19 i

62 THIS LEASE AGREEMENT is made by and between LIBERTY PROPERTY LIMITED PARTNERSHIP, a Pennsylvania limited partnership ( Landlord ), and ZULILY, INC., a corporation organized under the laws of Delaware ( Tenant ), and is dated as of the date on which this Lease has been fully executed by Landlord and Tenant. 1. Basic Lease Terms and Definitions. (a) Premises : Consisting of that certain lot or plot of land located at 10 Emery Street, Bethlehem, Pennsylvania (the Land ), as shown on Exhibit A attached hereto, and all improvements located or to be located thereon, including the Building. (b) Building : That certain industrial building to be located on the Land containing approximately 800,250 rentable square feet. (c) Term : Eighty-Six (86) months (plus any partial month from the Commencement Date until the first day of the next full calendar month during the Term). (d) Commencement Date : The earlier of (i) December 31, 2014, or (ii) the date Tenant takes possession of the Premises for the conduct of Tenant s business. (e) (f) Expiration Date : The last day of the Term. Minimum Annual Rent : Payable in monthly installments as follows: Month of Term Annual Monthly $310, $3,721, $310, $3,795, $316, $3,871, $322, $3,948, $329, $4,027, $335, $4,108, $342, $4,190, $349, *The foregoing notwithstanding, Minimum Annual Rent (but not Operating Expense payments) shall be abated for the first two full calendar months of the Term. If this Lease or Tenant s right to possess the Premises is terminated on account of a Tenant default, then Landlord shall be entitled to recover from Tenant (in addition to all other rights and remedies available to Landlord) the unamortized portion of all abated Minimum Annual Rent. Landlord s management and administrative fee shall not be reduced on account of any abatement in Minimum Annual Rent, and any Minimum Annual Rent abatement shall be disregarded for purposes of calculating any management and administrative fee based on a percentage of rental revenues. Lease. (g) (h) (i) Annual Operating Expenses : $562,575.75, payable in monthly installments of $46,881.31, subject to adjustment as provided in this Tenant s Share : % (also see Definitions). Use : Warehouse, distribution and storage, together with appurtenant offices and photography studio. (j) Security Deposit : $0.00. (k) Addresses For Notices : 1

63 Landlord: Liberty Property Limited Partnership Tenant: zulily, inc. 74 West Broad Street, Suite Elliott Avenue, Suite 200 Bethlehem, PA Seattle, WA Attn: Senior Vice President /City Manager Attn: Bob Spieth With a copy to: zulily, inc Elliott Avenue, Suite 200 Seattle, WA Attn: General Counsel (l) (m) (n) Guarantor : Not required. Additional Defined Terms : See Rider 1 for the definitions of other capitalized terms. Contents : The following are attached to and made a part of this Lease: Rider 1 Additional Definitions Rider 2 Maintenance and Repair Responsibilities Exhibits: A Plan showing Premises & Parking Area B Building Rules C Estoppel Certificate Form D Prohibited Uses E Base Building Plans F Base Building Specifications G Tenant Improvement Plans H Tenant Improvement Specifications I Manufacturer s Warranties J Service Level Fees K Post Substantial Completion Work 2. Premises. Landlord leases to Tenant and Tenant leases from Landlord the Premises. Tenant accepts the Premises and the Building AS IS, without relying on any representation, covenant or warranty by Landlord other than as expressly set forth in this Lease (including, without limitation, Section 28 of this Lease). Prior to the Commencement Date, Tenant may, at Tenant s sole cost and expense, cause the total rentable square footage of the Building to be measured by an architect approved by Landlord, such approval not to be unreasonably withheld, based on the applicable Building Owners and Managers Association external wall method of measurement. Tenant shall provide Landlord with a copy of such determination and allow Landlord to review same. If the actual measurement of the Building is less than the rentable square footage set forth in Section 1(b) above by an amount which is more than 1,000 rentable square feet, then (i) Tenant s Minimum Annual Rent and Annual Operating Expense payments shall be recalculated based upon the per square foot amount payable from time to time hereunder, (ii) all other matters herein based on Tenant s rentable square footage shall be adjusted accordingly, and (iii) Landlord and Tenant shall enter into a written amendment to this Lease setting forth the revised measurement, calculations, Minimum Annual Rent and Annual Operating Expenses. If no measurement is timely made, then Landlord and Tenant stipulate and agree to the rentable square footage of the Building set forth in Section 1(b) above without regard to actual measurement. Notwithstanding the foregoing, for purposes of such calculations and all other calculations made pursuant to this Lease that are based on the rentable square foot of the Building, the rentable square foot of the Building shall in no event be deemed to be greater than 800,250 rentable square feet for purposes of calculating Minimum Annual Rent and Annual Operating Expenses. 3. Use. Tenant shall occupy and use the Premises only for the Use specified in Section l above. Tenant shall not use or permit the use of any portion of the Premises for outdoor storage or installations outside of the Building. Notwithstanding anything to the contrary contained in this Lease, Tenant shall not use any portion of the Premises for any use set forth on Exhibit D attached hereto without the prior written consent of Landlord in its sole discretion. Tenant shall have the exclusive right to use all parking and other areas on the Land and all easements benefitting the Land that are designed for use in common by all occupants of the Land and their respective employees, agents, customers, invitees and others, including without limitation any easements for access or other purposes benefiting the owners and occupants of the Land. 4. Term; Possession. The Term of this Lease shall commence on the Commencement Date and shall end on the Expiration Date, unless sooner terminated in accordance with this Lease. Landlord shall not be liable for any loss or damage to Tenant resulting from any delay in delivering possession due to circumstances outside of Landlord s reasonable control. 5. Rent; Taxes. Tenant agrees to pay to Landlord, without demand, deduction or offset, Minimum Annual Rent and Annual Operating Expenses for the Term. Tenant shall pay the Monthly Rent, in advance, on the first day of each calendar month during the Term, at Landlord s address designated in Section 1 above unless Landlord designates otherwise; provided that Monthly Rent for the third full month shall be paid at the signing of this Lease. Notwithstanding anything contained in this

64 2

65 Lease to the contrary, if the Commencement Date does not occur on the first day of a calendar month, then (i) the Monthly Rent for that partial calendar month ( Partial Month ) in which the Commencement Date occurs shall be appropriately prorated on a per diem basis at the rate of $11, per day and shall be paid by Tenant to Landlord on or before the Commencement Date, and (ii) Tenant shall not be responsible for paying Landlord monthly installments of Minimum Annual Rent for the Premises for the period ( Abatement Period ) commencing on the first day of the first full calendar month following the Partial Month and expiring on the last day of the second full calendar month following the Partial Month, as set forth in Section 1(f) of this Lease, provided, however, that Tenant shall be responsible for paying Landlord monthly installments of Annual Operating Expenses for the Premises in the amount of $46, (subject to adjustment as provided in this Lease) during such Abatement Period, as set forth in Section 1(g) of this Lease. Tenant shall pay Landlord a service and handling charge equal to 5% of any Rent not paid within 5 days after the date due. In addition, any Rent, including such charge, not paid within 5 days after the due date will bear interest at the Interest Rate from the date due to the date paid. Notwithstanding the foregoing, with respect to the first two late payments in any 12 consecutive month period, no service and handling charge or interest shall be assessed if Landlord receives such late payment within 5 days after Tenant s receipt of written notice from Landlord that such payment has not been timely received. Tenant shall pay before delinquent all taxes or other charges levied or assessed upon, measured by, or arising from: (a) the conduct of Tenant s business; (b) Tenant s leasehold estate; or (c) Tenant s property. Additionally, Tenant shall pay to Landlord all sales, use, transaction privilege, or other excise tax that may at any time be levied or imposed upon, or measured by, any amount payable by Tenant under this Lease, excluding any inheritance, estate, succession, transfer, gift, income, franchise, corporate and/or excise taxes imposed upon Landlord. 6. Operating Expenses. The amount of the Annual Operating Expenses set forth in Section 1(g) above represents Tenant s Share of the estimated Operating Expenses for the calendar year in which the Term commences, excluding the cost of electricity and gas that is separately metered to the Premises, and which shall be paid by Tenant directly to the respective utility provider, as set forth in Section 7 below. Landlord may adjust such amount from time to time if the estimated Annual Operating Expenses increase or decrease; Landlord may also invoice Tenant separately from time to time for Tenant s Share of any extraordinary or unanticipated Operating Expenses. By April 30 th of each year (and as soon as practical after the expiration or termination of this Lease or, at Landlord s option, after a sale of the Premises), Landlord shall provide Tenant with a statement of Operating Expenses for the preceding calendar year or part thereof. Within 30 days after delivery of the statement to Tenant, as the case may be, (i) Tenant shall pay to Landlord the amount of any deficiency then due from Tenant to Landlord, or (ii) Landlord shall credit Tenant s account for any overpayment by Tenant (which credit shall be applied against Rent first due and owing under this Lease) except that in the event that the Term has expired or terminated other than for Tenant s default Landlord shall pay Tenant for any such overpayment. If Tenant does not give Landlord notice within 120 days after receiving Landlord s statement that Tenant disagrees with the statement and specifying the items and amounts in dispute, Tenant shall be deemed to have waived the right to contest the statement. During such 120 day period, Tenant shall be entitled, during regular business hours, after giving to Landlord at least 5 business days prior written notice, to inspect in Landlord s business office all Landlord s records necessary to satisfy itself that all charges set forth in the statement have been correctly allocated to Tenant, and to obtain an audit thereof on a non-contingent fee basis by an independent certified public accountant (selected by Tenant with Landlord s written consent, which shall not be withheld unreasonably) to determine the accuracy of Landlord s certification of the amount of Operating Expenses charged Tenant. If it is determined that Tenant s liability for Operating Expenses is less than ninetyfive percent (95%) of that amount which Landlord previously certified to Tenant in such statement, Landlord shall pay to Tenant the reasonable cost of such audit and regardless of such percentage shall refund promptly to Tenant the amount of the Operating Expenses paid by Tenant which exceeds the amount for which Tenant actually is liable, as determined following such audit. Except as set forth above, Tenant shall bear the total cost of any such audit. Landlord s and Tenant s obligation to pay any overpayment or deficiency due the other pursuant to this Section shall survive the expiration or termination of this Lease. 7. Utilities. Tenant shall pay for water, sewer, gas, electricity, heat, power, telephone, telecommunications, data and other communication services and any other utilities supplied to the Premises. Except for utility services that are not separately metered to the Premises (the costs of which shall be included in Operating Expenses ), Tenant shall obtain utility services in its own name and timely pay all charges directly to the provider providing such utility service. Tenant shall obtain electric and gas service in its own name and timely pay all charges therefor directly to the utility company providing such services. Except for the abatement expressly set forth in this Section below, Landlord shall not be responsible or liable for any interruption in such services, nor shall such interruption affect the continuation or validity of this Lease. Landlord shall have the exclusive right to select, and, upon prior written notice to Tenant, to change, the companies providing such services to the Building or Premises, except that: (i) Tenant may select its own telecommunication and/or data services provider; and (ii) if, pursuant to Law, utility customers are permitted to determine the supplier of gas and electric services to the Premises, then Tenant shall have the exclusive right to select, and to change, the companies providing the supply of gas and electric services to the Premises. Any wiring, cabling or other equipment necessary to connect Tenant s telecommunications equipment shall be Tenant s responsibility, and shall be installed in a manner approved by Landlord. Notwithstanding the foregoing, in the event that any utility service is not 3

66 delivered for a period in excess of forty-eight (48) consecutive hours solely as a result of the negligence or willful misconduct of Landlord, and if Tenant is unable to reasonably use the Premises for the conduct of its business by reason thereof, Rent shall thereafter abate until the interrupted service is restored or Tenant conducts or is able to reasonably conduct business in the Premises. Notwithstanding anything contained herein to the contrary, in the event that Tenant is unable to reasonably use the Premises for the conduct of its business by reason of any utility service not being delivered to the Premises, Landlord shall use commercially reasonable efforts, under the circumstances, to cause the interrupted utility service to the Premises to be restored as soon as reasonably practicable. 8. Insurance; Waivers; Indemnification. (a) Landlord shall maintain insurance against loss or damage to the Building or the Premises with coverage for perils as set forth under the Causes of Loss-Special Form or equivalent property insurance policy in an amount equal to the full insurable replacement cost of the Building (excluding coverage of Tenant s personal property and any Alterations by Tenant, but including coverage of the Landlord s Work set forth in Section 28 below), and such other insurance, including rent loss coverage, as Landlord may reasonably deem appropriate or as any Mortgagee may require. (b) Tenant, at its expense, shall keep in effect commercial general liability insurance, including blanket contractual liability insurance, covering Tenant s use of the Premises, with such coverages and limits of liability as Landlord may reasonably require, but not less than a $1,000, combined single limit with a $5,000, general aggregate limit (which general aggregate limit may be satisfied by an umbrella liability policy) for bodily injury or property damage; however, such limits shall not limit Tenant s liability hereunder. The policy shall name Landlord, Liberty Property Trust and any other associated or affiliated entity as their interests may appear and at Landlord s request, any Mortgagee(s), as additional insureds, shall be written on an occurrence basis and not on a claims made basis and shall be endorsed to provide that it is primary to and not contributory to any policies carried by Landlord. Tenant expressly agrees to (i) provide Landlord with at least 30 days prior written notice of any cancellation by Tenant of such policy or of any reduction by Tenant in the limits of liability of such policy below the required limits required to be maintained by Tenant hereunder, or (ii) notify Landlord in writing within 2 business days after Tenant s receipt of notice of any cancellation by Tenant s insurer of such policy or of any reduction by Tenant s insurer in the limits of liability of such policy below the required limits required to be maintained by Tenant hereunder, all of which shall include a copy of the insurer s notice to Tenant. The insurer shall be authorized to issue such insurance, licensed to do business and admitted in the state in which the Premises is located and rated at least A VII in the most current edition of Best s Insurance Reports. Tenant shall deliver to Landlord on or before the Commencement Date or any earlier date on which Tenant accesses the Premises, and at least 30 days prior to the date of each policy renewal, a certificate of insurance evidencing such coverage. (c) Landlord and Tenant each waive, and release each other from and against, all claims for recovery against the other for any loss or damage to the property of such party arising out of fire or other casualty coverable by a standard Causes of Loss-Special Form property insurance policy with, in the case of Tenant, such endorsements and additional coverages as are considered good business practice in Tenant s business, even if such loss or damage shall be brought about by the fault or negligence of the other party or its Agents; provided, however, such waiver by Landlord shall not be effective with respect to Tenant s liability described in Section 10(d) below. This waiver and release is effective regardless of whether the releasing party actually maintains the insurance described above in this subsection and is not limited to the amount of insurance actually carried, or to the actual proceeds received after a loss. Each party shall have its insurance company that issues its property coverage waive any rights of subrogation, and shall have the insurance company include an endorsement acknowledging this waiver, if necessary. Tenant assumes all risk of damage to the property of (i) Tenant, or Tenant s Agents in or about the Building or the Premises, and (ii) any other person whose property is used, leased or stored by Tenant in or about the Building or the Premises, including in each case any loss or damage caused by water leakage, fire, windstorm, explosion, theft, act of any other occupant of the Premises, or other cause. (d) Landlord and Tenant shall not be permitted to satisfy any of its insurance obligations set forth in this Lease through any self-insurance or self-insured retention in excess of $25, (e) Subject to subsection (c) above, and except to the extent caused by the negligence or willful misconduct of Landlord or its Agents, Tenant will indemnify, defend, and hold harmless Landlord and its Agents from and against any and all claims, actions, damages, liability and expense (including fees of attorneys, investigators and experts) which may be asserted against, imposed upon, or incurred by Landlord or its Agents and to the extent arising out of or in connection with loss of life, personal injury or damage to property in or about the Building or arising out of the occupancy or use of the Premises by Tenant 4

67 or its Agents or occasioned wholly or in part by any act or omission of Tenant or its Agents, whether prior to, during or after the Term. Tenant s obligations pursuant to this subsection shall survive the expiration or termination of this Lease. (f) Subject to subsection (c) above, and except to the extent caused by the negligence or willful misconduct of Tenant or its Agents, Landlord will indemnify, defend, and hold harmless Tenant and its Agents from and against any and all claims, actions, damages, liability and expense (including fees of attorneys, investigators and experts) which may be asserted against, imposed upon, or incurred by Tenant or its Agents and to the extent arising out of or in connection with loss of life, personal injury or damage to property in or about the Premises occasioned wholly or in part by the negligence or willful misconduct of Landlord or its Agents, whether prior to, during or after the Term. Landlord s obligations pursuant to this Section shall survive the expiration or termination of this Lease. 9. Maintenance and Repairs. (a) Maintenance obligations, and the responsibility for payment and fees associated with the performance of such Maintenance, shall be allocated between Landlord and Tenant in accordance with Rider 2 (which Rider 2 may be mutually amended from time to time by Landlord and Tenant in writing) and Exhibit J, except as otherwise set forth in this Section 9. (b) Notwithstanding anything contained in this Lease to the contrary, Tenant shall be solely responsible for all costs and expenses incurred by Landlord for any Alterations, repairs or other Maintenance made necessary because of (i) Tenant s Alterations or installations, (ii) circumstances special or particular to Tenant, including Tenant s special or particular use of the Premises, or (iii) the acts or omissions of Tenant or its Agents, in each case, to the extent not covered by applicable insurance proceeds paid to Landlord (Tenant being responsible for Landlord s commercially reasonable deductible (not to exceed $25, per occurrence) notwithstanding the waiver of claims set forth in Section 8(c)). Moreover, provided Tenant has been informed of the conditions of the applicable warranty, Tenant shall be solely responsible for all costs and expenses incurred by Landlord for any Maintenance that would have been covered by warranty but is no longer covered by warranty due to the failure on the part of Tenant or its Agents to observe the conditions of the applicable warranty. Tenant agrees to pay to Landlord, within 30 days after being billed therefor, all costs and expenses for which Tenant is liable pursuant to this paragraph. (c) In the event of an emergency that constitutes an imminent danger to persons or property or materially interferes with Tenant s business operations and which requires emergency repairs to the Building or the Premises which are Landlord s responsibility under this Lease, Tenant shall, prior to making repairs, use diligent efforts to contact Landlord or any Building manager who Tenant has been notified to contact in the event of an emergency. In the event Tenant is unable to contact Landlord or such Building manager and Landlord fails to commence such repairs within a commercially reasonable time under the circumstances, Tenant shall have the right, but not the obligation, to take such minimum action as is reasonably necessary under the circumstances to repair any portion or component of the Building or the Premises. All work done in accordance herewith must be performed at a reasonable and competitive cost and expense (taking into account the circumstances of the emergency). To the extent such work performed by Tenant is Landlord s responsibility under this Lease, Landlord shall reimburse Tenant, within 30 days after Landlord s receipt of a reasonably documented invoice therefor, for any reasonable sums paid or reasonable costs incurred by Tenant in repairing any portion or component of the Building or the Premises. 10. Compliance. (a) Tenant will, at its expense, promptly comply with all Laws now or subsequently pertaining to Tenant s specific use or manner of use or occupancy of the Premises ( as opposed to Laws generally applicable to industrial buildings ) or to Alterations made by Tenant or to the acts or omissions of Tenant or its Agents; provided, however, that Tenant shall not be obligated to correct any non-compliant condition that existed in the Premises or the Building prior to the earlier of the Commencement Date or the date of Substantial Completion (as defined below) of the Landlord s Work, unless and to the extent caused by the acts or omissions of Tenant or its Agents. Neither Tenant nor its Agents shall use the Premises in any manner that under any Law would require Landlord to make any Alteration to or in the Building or the Premises (without limiting the foregoing, Tenant shall not use the Premises in any manner that would cause the Premises to be deemed a place of public accommodation under the ADA if such use would require any such Alteration). Tenant shall be responsible for compliance with the ADA, and any other Laws regarding accessibility, with respect to Tenant s specific use or manner of use or occupancy of the Premises ( as opposed to Laws generally applicable to industrial buildings ) or to Alterations made by Tenant or to the acts or omissions of Tenant or its Agents; provided, however, that Tenant shall not be obligated to correct any noncompliant condition that existed in the Premises or the Building prior to the earlier of the Commencement Date or the date of Substantial Completion of the Landlord s Work, unless and to the extent caused by the acts or omissions of Tenant or its Agents. 5

68 (b) Tenant will comply, and will cause its Agents to comply, with the Building Rules. Landlord may adopt and Tenant shall comply with reasonable rules and regulations to promote energy efficiency, sustainability and environmental standards for the Premises, as the same may be changed from time to time upon reasonable notice to Tenant. Notwithstanding anything contained in this Lease to the contrary, any rules and regulations promulgated by Landlord shall (i) not conflict with the express terms of this Lease or materially increase the obligations or liabilities on Tenant; (ii) shall be uniformly applied, reasonable and not adversely affect in a material manner Tenant s use of the Premises as herein permitted; and (iii) shall not materially increase the amounts to be paid by Tenant hereunder. (c) Tenant agrees not to do anything or fail to do anything which will increase the cost of Landlord s insurance or which will prevent Landlord from procuring policies (including public liability) from companies and in a form satisfactory to Landlord. If any breach of the preceding sentence by Tenant causes the rate of fire or other insurance to be increased, Tenant shall pay the amount of such increase as additional Rent within 30 days after being billed. (d) Tenant agrees that (i) no activity will be conducted on the Premises that will use or produce any Hazardous Materials, except for activities which are part of the ordinary course of Tenant s business and are conducted in accordance with all Environmental Laws, including, the use of des minimis quantities of chemicals generally used in an office environment, such as toner for copiers and cleaning supplies ( Permitted Activities ); (ii) the Premises will not be used for storage of any Hazardous Materials, except for materials used in the Permitted Activities which are properly stored in a manner and location complying with all Environmental Laws; (iii) no portion of the Building or the Premises will be used by Tenant or Tenant s Agents for disposal of Hazardous Materials; (iv) Tenant will make available to Landlord (in electronic form), upon Landlord s request, copies of all Material Safety Data Sheets and other written information prepared by manufacturers, importers or suppliers of any chemical used, stored, consumed or otherwise located at the Premises at the time of such request; and (v) Tenant will immediately notify Landlord of any violation by Tenant or Tenant s Agents of any Environmental Laws or the release or suspected release of Hazardous Materials in, under or about the Premises, and Tenant shall immediately deliver to Landlord a copy of any notice, filing or permit sent or received by Tenant with respect to the foregoing. If at any time during or after the Term, any portion of the Premises is found to be contaminated by Tenant or Tenant s Agents or subject to conditions prohibited in this Lease caused by Tenant or Tenant s Agents, Tenant will indemnify, defend and hold Landlord harmless from all claims, demands, actions, liabilities, costs, expenses, attorneys fees, damages and obligations of any nature arising from or as a result thereof, and Landlord shall have the right to direct remediation activities, all of which shall be performed at Tenant s cost. Tenant s obligations pursuant to this subsection shall survive the expiration or termination of this Lease. In no event shall Tenant have any liability or obligation to Landlord under this Section 10(d) with respect to any Hazardous materials or violation of Environmental Laws not caused by Tenant or its Agents. (e) If at any time during or after the Term, any portion of the Premises is found to be contaminated (i) from or as a result of any activity which occurred in or about the Premises prior to the Commencement Date of this Lease, unless and to the extent caused by the acts or omissions of Tenant or its Agents, or (ii) by Landlord or Landlord s Agents, then Landlord will indemnify, defend and hold Tenant harmless from all claims, demands, actions, liabilities, costs, expenses, attorneys fees, damages and obligations of any nature arising from or as a result thereof and Landlord shall, at its sole cost and expense, perform all necessary remediation activities. Landlord s obligations pursuant to this subsection shall survive the expiration or termination of this Lease. If at any time during the Term of this Lease, any portion of the Premises is found to contain Hazardous Materials in violation of Environmental Laws other than as a result of the acts or omissions of Tenant or its Agents, then Landlord will cause the performance of all necessary remediation activities required by Environmental Laws, at no cost to Tenant, unless and to the extent caused by the acts or omissions of Tenant or its Agents. 11. Signs. Tenant shall not place any signs on the Premises without the prior consent of Landlord (which consent shall not be unreasonably withheld, conditioned or delayed so long as such signage complies with all Laws), other than signs that are located wholly within the interior of the Building and not visible from the exterior of the Building. Notwithstanding the foregoing, Tenant, at Tenant s sole cost and expense, shall be allowed to affix its signage on the exterior of the Building, subject to (i) Tenant s compliance with all Laws, and (ii) Landlord s prior written approval of such signage (which approval shall not be unreasonably withheld, conditioned or delayed), including, without limitation, approval of its appearance, size, lighting, materials and location. Tenant shall maintain all signs installed by Tenant in good condition. Tenant shall remove its signs at the termination of this Lease, shall repair any resulting damage, and shall restore the Premises to its condition existing prior to the installation of Tenant s signs. 12. Alterations. Except for non-structural Alterations that (i) do not exceed $100, (excluding the costs of carpeting and painting the Premises) in the aggregate per project, (ii) are not visible from the exterior of the Premises, (iii) do not affect any Building System or the structural strength of the Building, (iv) do not require penetrations into the floor, ceiling or walls, 6

69 and (v) do not require work within the walls, below the floor or above the ceiling, Tenant shall not make or permit any Alterations in or to the Premises without first obtaining Landlord s consent, which consent shall not be unreasonably withheld, conditioned or delayed. With respect to any Alterations made by or on behalf of Tenant (whether or not the Alteration requires Landlord s consent): (i) not less than 10 days prior to commencing any Alteration, Tenant shall deliver to Landlord the plans, specifications and necessary permits for the Alteration, together with certificates evidencing that Tenant s contractors and subcontractors have adequate insurance coverage naming Landlord, Liberty Property Trust and any other associated or affiliated entity as their interests may appear as additional insureds; (ii) Tenant shall obtain Landlord s prior written approval of any contractor or subcontractor; (iii) the Alteration shall be constructed with new materials, in a good and workmanlike manner, and in compliance with all Laws and the plans and specifications delivered to, and, if required above, approved by Landlord; (iv) the Alteration shall be performed in accordance with Landlord s reasonable requirements relating to sustainability and energy efficiency ; (v) Tenant shall pay Landlord all reasonable costs and expenses in connection with Landlord s review of Tenant s plans and specifications, and of any supervision or inspection of the construction Landlord deems necessary; and (vi) upon Landlord s request Tenant shall, prior to commencing any Alteration, provide Landlord reasonable security against liens arising out of such construction. Any Alteration by Tenant shall be the property of Tenant until the expiration or termination of this Lease; at that time without payment by Landlord the Alteration shall remain on the Premises and become the property of Landlord unless Landlord gives notice to Tenant to remove it, in which event Tenant will remove it (except that if, during the Term, Landlord notifies Tenant in writing that Tenant is not required to remove an Alteration at the expiration or termination of this Lease, then Tenant shall not be obligated to remove such Alteration at the expiration or termination of this Lease), will repair any resulting damage and will restore the Premises to the condition existing prior to Tenant s Alteration. At Tenant s request prior to Tenant making any Alterations, Landlord will notify Tenant whether Tenant is required to remove the Alterations at the expiration or termination of this Lease. Without Landlord s approval, Tenant may install or remove its trade fixtures, furniture and equipment in and from the Building (including, without limitation, the installation of Tenant s racking and/or conveyor system(s) in the Building by bolting same into the floor of the Building, provided, however, that Tenant agrees to (i) remove such system(s) at the expiration or earlier termination of this Lease, (ii) repair any damage resulting from such removal, and (iii) grind all bolts to below floor level and appropriately fill all holes to floor level), provided that the installation and removal of them will not affect any structural portion of the Premises, any Building System or any other equipment or facilities serving the Building or any occupant. 13. Mechanics Liens. Tenant promptly shall pay for any labor, services, materials, supplies or equipment furnished to Tenant in or about the Premises. Tenant shall keep the Premises free from any liens arising out of any labor, services, materials, supplies or equipment furnished or alleged to have been furnished to Tenant at Tenant s request. Tenant shall take all steps permitted by law in order to avoid the imposition of any such lien caused by Tenant or its Agents. Should any such lien or notice of such lien, caused by Tenant or its Agents, be filed against the Premises, Tenant shall discharge the same by bonding or otherwise within 15 days after Tenant has notice that the lien or claim is filed regardless of the validity of such lien or claim. Tenant, at Tenant s sole cost and expense, shall have the right to contest, in good faith, any such lien or notice of such lien filed against the Premises or the Building, provided that (i) Tenant shall discharge the same by bonding or otherwise in accordance with the foregoing sentence, (ii) such contest by Tenant does not subject Landlord or the Premises to any fines, penalties and/or liability, and (iii) Tenant shall comply with all Laws. 14. Landlord s Right of Entry. Tenant shall permit Landlord and its Agents to enter the Premises at all reasonable times following reasonable notice (except in an emergency) to inspect, Maintain, or make Alterations to the Building or the Premises, to verify that Tenant is performing its Maintenance obligations in accordance with this Lease, to exhibit the Premises for the purpose of sale or financing, and, during the last 10 months of the Term, to exhibit the Premises to any prospective tenant. Landlord will make reasonable efforts not to inconvenience Tenant in exercising such rights, but Landlord shall not be liable for any interference with Tenant s occupancy resulting from Landlord s entry. 15. Damage by Fire or Other Casualty. If the Premises shall be damaged or destroyed by fire or other casualty, Tenant shall promptly notify Landlord, and Landlord, subject to the conditions set forth in this Section, shall repair such damage and restore the Premises to substantially the same condition in which they were immediately prior to such damage or destruction, but not including the repair, restoration or replacement of the fixtures, equipment, or Alterations installed by or on behalf of Tenant, except for Landlord s Work. Landlord shall notify Tenant, within 30 days after the date of the casualty, if Landlord anticipates that the restoration will take more than 180 days from the date of the casualty to complete, such notice to include Landlord s reasonable estimate of the time required to complete such restoration; in such event, either Landlord or Tenant (unless the damage was caused by Tenant) may terminate this Lease effective as of the date of casualty by giving notice to the other within 10 days after Landlord s notice. If (i) Landlord notifies Tenant that such repair and restoration will take more than 180 days from the date of the casualty to complete and neither party terminates this Lease, or (ii) Landlord anticipates that such repair and restoration will take 180 days or less from the date of the casualty to complete, then Landlord shall commence such 7

70 repair and restoration (including, without limitation, the Landlord s Work) as promptly as reasonably possible under the circumstances and shall diligently work to complete the repair and restoration, subject to delays caused by Tenant or its Agents or delays due to Force Majeure (as defined below). Notwithstanding anything to the contrary contained in this Section, (a) in the event Landlord notifies Tenant that such repair and restoration will be completed within said 180 day time period, and such restoration is not, in fact, substantially completed within such 180 day time period, as such time period shall be extended for delays caused by Tenant or its Agents and/or delays due to Force Majeure, then Tenant (unless the damage was caused by Tenant) shall have the option to terminate this Lease on 30 days prior written notice by giving Landlord notice of such termination within 30 days after expiration of such 180 day time period, as such time period shall be extended for delays caused by Tenant or its Agents and/or delays due to Force Majeure, provided, however, that if Tenant gives such notice of termination pursuant to this paragraph and Landlord then substantially completes the restoration and repair within such 30 day time period, then Tenant s notice of termination shall be deemed revoked and this Lease shall continue in full force and effect, and (b) in the event Landlord notifies Tenant that such repair and restoration will take more than 180 days from the date of the casualty to complete and neither party terminates this Lease, such notice to include Landlord s reasonable estimate of the time required to complete such restoration, and such restoration is not in fact substantially completed within the time period set forth in Landlord s notice, as such time period shall be extended for delays caused by Tenant or its Agents and/or delays due to Force Majeure, then Tenant (unless the damage was caused by Tenant) shall have the option to terminate this Lease on 30 days prior written notice by giving Landlord notice of such termination within 30 days after expiration of such time period, as such time period shall be extended for delays caused by Tenant or its Agents and/or delays due to Force Majeure, provided, however, that if Tenant gives such notice of termination pursuant to this paragraph and Landlord then substantially completes the restoration and repair within such 30 day time period, then Tenant s notice of termination shall be deemed revoked and this Lease shall continue in full force and effect. For purposes of the foregoing sentence only, substantial completion shall mean the Premises has been restored to substantially the same condition in which it was in immediately prior to such damage or destruction, including the Landlord s Work, but excepting the repair, restoration or replacement of the fixtures, equipment, or Alterations installed by or on behalf of Tenant and incomplete items which do not adversely affect in a material way or materially interfere with Tenant s use and occupancy of the Premises, which incomplete items shall be set forth on a punch list; provided, however, that substantial completion shall not be later than the date Tenant takes possession of the Premises for the conduct of its business, if earlier. If a casualty occurs during the last 12 months of the Term, Landlord may terminate this Lease unless Tenant has the right to extend the Term for at least 3 more years and does so within 30 days after Landlord s notice to terminate. Moreover, Landlord may terminate this Lease if the loss is not covered by the terms of the insurance policies required to be maintained and actually maintained by Landlord under this Lease. Notwithstanding the foregoing, Landlord shall have no right to terminate this Lease under the preceding sentence if the damage to the Premises is sufficiently minor in scope such that (i) Rent or any portion thereof would not be abated as a result thereof, or (ii) Landlord reasonably anticipates that less than 30 days will be required to restore any damage. Tenant will receive an abatement of Minimum Annual Rent and Annual Operating Expenses to the extent the Premises are rendered untenantable as a result of the casualty. In the event of a casualty, Tenant may elect, in its sole discretion, whether to restore, at its expense, any Alterations destroyed by such casualty and required to be removed at the end of the Term. 16. Condemnation. If (a) all of the Premises are Taken, (b) any part of the Building is Taken and the remainder is insufficient for the reasonable operation of Tenant s business for the Use set forth in Section 1(i), as mutually agreed upon by Landlord and Tenant in good faith (provided, however, that if Landlord and Tenant cannot so mutually agree upon same, then Landlord and Tenant shall mutually agree upon and appoint an architect or engineer with at least ten (10) years of continuous experience with industrial buildings in the market area to determine whether the remainder of the Building is sufficient for the reasonable operation of Tenant s business for the Use set forth in Section 1(i)), or (c) any of the Premises is Taken, and, in Landlord s reasonable opinion, it would be impractical or the condemnation proceeds are insufficient to restore the remainder, then this Lease shall terminate as of the date the condemning authority takes possession. If this Lease is not terminated, Landlord shall restore the Building to a condition as near as reasonably possible to the condition prior to the Taking, the Minimum Annual Rent shall be abated for the period of time all or a part of the Building is untenantable in proportion to the square foot area untenantable, and this Lease shall be amended appropriately. The compensation awarded for a Taking shall belong to Landlord. Except for any relocation and other benefits to which Tenant may be entitled, Tenant hereby assigns all claims against the condemning authority to Landlord, including, but not limited to, any claim relating to Tenant s leasehold estate. Although all damages in the event of any condemnation are to belong to the Landlord whether such damages are awarded as compensation for diminution in value of the leasehold or to the fee of the leased premises, Tenant shall have the right to claim and recover from the condemning authority, but not from Landlord, such compensation as may be separately awarded or recoverable by Tenant in Tenant's own right on account of any and all damage to Tenant's business by reason of the condemnation and for or on account of any cost or loss to which Tenant might be put in removing Tenant's merchandise, furniture, fixtures, leasehold improvements and equipment. 8

71 17. Quiet Enjoyment. Landlord covenants that Tenant, so long as no default exists hereunder beyond any applicable notice and cure periods under this Lease, shall have quiet and peaceful possession of the Premises as against anyone claiming by or through Landlord, subject, however, to the terms of this Lease. 18. Assignment and Subletting. (a) Except as provided in Section (b) below, Tenant shall not enter into nor permit any Transfer voluntarily or by operation of law, without the prior consent of Landlord, which consent shall not be unreasonably withheld, conditioned or delayed. Without limitation, Tenant agrees that Landlord s consent shall not be considered unreasonably withheld if (i) Tenant proposes the Transfer to Landlord during the first four Lease Years of this Lease and the proposed transferee is an existing tenant of Landlord in Northampton County or Lehigh County in Pennsylvania, (ii) the business, business reputation or creditworthiness of the proposed transferee is unacceptable to Landlord, in the exercise of Landlord s reasonable discretion, (iii) Tenant proposes the Transfer to Landlord during the first four Lease Years of this Lease and Landlord has comparable space available for lease by the proposed transferee in Northampton County or Lehigh County in Pennsylvania, or (iv) Tenant is in default under this Lease beyond any applicable notice and cure periods provided in this Lease or any act or omission has occurred which would constitute a default with the giving of notice and/or the passage of time. A consent to one Transfer shall not be deemed to be a consent to any subsequent Transfer. In no event shall any Transfer relieve Tenant from any obligation under this Lease. Landlord s acceptance of Rent from any person shall not be deemed to be a waiver by Landlord of any provision of this Lease or to be a consent to any Transfer. Any Transfer not in conformity with this Section 18 shall be void at the option of Landlord. (b) Landlord s consent shall not be required in the event of any Transfer by Tenant to an Affiliate provided that (i) the Affiliate has a minimum net worth of at least $50,000, as of the date of the Transfer, (ii) Tenant provides Landlord notice of the Transfer at least 15 days prior to the effective date, together with current financial statements of the Affiliate certified by an executive officer of the Affiliate, and (iii) in the case of an assignment or sublease, Tenant delivers to Landlord an assumption agreement (in the event of an assignment), or a sublease agreement (in the event of a sublease), in each case, reasonably acceptable to Landlord executed by Tenant and the Affiliate, together with a certificate of insurance evidencing the Affiliate s compliance with the insurance requirements of Tenant under this Lease. (c) The provisions of subsection (a) above notwithstanding, if Tenant proposes to Transfer all of the Premises (other than to an Affiliate), Landlord may terminate this Lease, either conditioned on execution of a new lease between Landlord and the proposed transferee or without that condition. If Tenant proposes to enter into a Transfer of less than all of the Premises (other than to an Affiliate), Landlord may amend this Lease to remove the portion of the Premises to be transferred, either conditioned on execution of a new lease between Landlord and the proposed transferee or without that condition. If this Lease is not so terminated or amended, Tenant shall pay to Landlord, immediately upon receipt, 50% of the excess of (i) all compensation received by Tenant for the Transfer, less the commercially reasonable costs incurred by Tenant in connection with such Transfer (including, without limitation, commercially reasonable and customary legal fees, brokerage commissions, tenant improvement allowances, marketing expense), over (ii) the Rent allocable to the Premises transferred. (d) If Tenant requests Landlord s consent to a Transfer, Tenant shall provide Landlord, at least 10 days prior to the proposed Transfer, current financial statements of the transferee certified by an executive officer of the transferee, a complete copy of the proposed Transfer documents, and any other information Landlord reasonably requests. Immediately following any approved assignment or sublease, Tenant shall deliver to Landlord an assumption agreement (in the event of an assignment), or a sublease agreement (in the event of a sublease), in each case, reasonably acceptable to Landlord executed by Tenant and the transferee, together with a certificate of insurance evidencing the transferee s compliance with the insurance requirements of Tenant under this Lease. Tenant agrees to reimburse Landlord for reasonable administrative and attorneys fees in connection with the processing and documentation of any Transfer for which Landlord s consent is requested. 19. Subordination; Mortgagee s Rights. (a) Tenant accepts this Lease subject and subordinate to the lien of any Mortgage now or in the future affecting the Premises, provided that Tenant s right of possession of the Premises shall not be disturbed by the Mortgagee so long as Tenant is not in default beyond any applicable notice and cure periods under this Lease. This clause shall be self-operative, but within 10 days after request, Tenant shall execute and deliver any further instruments confirming the subordination of this Lease and any further instruments of attornment that the Mortgagee may reasonably request. However, any Mortgagee may at any time subordinate its Mortgage to this Lease, without Tenant s consent, by giving notice to Tenant, and this Lease shall then be deemed prior to such Mortgage without regard to their respective dates of execution and delivery; provided that such subordination shall not affect any Mortgagee s rights with respect to condemnation awards, casualty insurance proceeds, intervening liens or 9

72 any right which shall arise between the recording of such Mortgage and the execution of this Lease. Landlord represents to Tenant that no Mortgage affects the Premises as of the date of this Lease. Upon receipt of Tenant s written request, Landlord shall request and use commercially reasonable efforts to obtain a commercially reasonable non-disturbance agreement for Tenant from the holder of any future Mortgage affecting the Premises.. (b) No Mortgagee shall be (i) liable for any act or omission of a prior landlord unless such act or omission continues after the Mortgagee takes title to the Premises, (ii) subject to any rental offsets or defenses against a prior landlord, (iii) bound by any amendment of this Lease made without its written consent (unless such amendment was made prior to the date on which Tenant was notified of such Mortgagee s interest), or (iv) bound by payment of Monthly Rent more than one month in advance or liable for any other funds paid by Tenant to Landlord unless such funds actually have been transferred to the Mortgagee by Landlord. (c) The provisions of Sections 15 and 16 above notwithstanding, Landlord s obligation to restore the Premises after a casualty or condemnation shall be subject to the consent and prior rights of any Mortgagee. 20. Tenant s Certificate; Financial Information. Within 15 days after Landlord s request from time to time, (a) Tenant shall execute, acknowledge and deliver to Landlord, for the benefit of Landlord, Mortgagee, any prospective Mortgagee, and any prospective purchaser of Landlord s interest in the Premises, an estoppel certificate in the form of attached Exhibit C (or other form requested by Landlord), modified as necessary to accurately state the facts represented, and (b) Tenant shall furnish to Landlord, Landlord s Mortgagee, prospective Mortgagee and/or prospective purchaser reasonably requested financial information, provided, however, if Tenant (or Tenant s parent company with whom Tenant files consolidated financial statements) is a publicly traded entity, publicly available information of Tenant (or Tenant s parent company with whom Tenant files consolidated financial statements) shall be sufficient. Landlord agrees to keep any private financial information provided to it by Tenant confidential (except for disclosure to the parties listed in this subsection (b)), and any Mortgagee, prospective Mortgagee and/or prospective purchaser with which Landlord shares such information shall be informed by Landlord of the obligation to keep such information confidential. 21. Surrender. (a) On the date on which this Lease expires or terminates, Tenant shall return possession of the Premises to Landlord in good condition, except for ordinary wear and tear, and except for casualty damage or other conditions that Tenant is not required to remedy under this Lease. Prior to the expiration or termination of this Lease, Tenant shall remove from the Premises all furniture, fixtures, equipment, wiring and cabling, and all other personal property installed by Tenant or its assignees or subtenants. Tenant shall repair any damage resulting from such removal and shall restore the Premises to good order and condition. Any of Tenant s personal property not removed as required shall be deemed abandoned, and Landlord, at Tenant s expense, may remove, store, sell or otherwise dispose of such property in such manner as Landlord may see fit and/or Landlord may retain such property or sale proceeds as its property. If Tenant does not return possession of the Premises to Landlord in the condition required under this Lease, Tenant shall pay Landlord all resulting damages Landlord may suffer. Within ten (10) days after Landlord s receipt of written request from Tenant, made not more than thirty-five (35) days prior to the expiration or earlier termination of this Lease, Landlord and Tenant will conduct a walkthrough inspection of the Premises and then Landlord will provide Tenant with a comprehensive list of any restorations or repairs that Landlord requests Tenant to complete prior to the expiration or earlier termination of this Lease. Tenant shall not be obligated to make restorations or repairs not included in such list or otherwise not the obligation of Tenant pursuant to the express terms and conditions of this Lease, excepting: (i) damage to the Premises caused by Tenant s or its Agents removal of Alterations or of its furniture, fixtures, equipment, wiring and cabling or any other personal property installed by Tenant or its assignees or subtenants; (ii) damage caused after the date of such list; and (iii) any damage or defect caused by Tenant or its Agents to any structural portion of the Premises or any Building System that was not visibly observable during the walk-through because such item was located above the ceiling, below the floor or within the walls (provided, however, that Tenant s obligations pursuant to this subsection (iii) shall only survive the expiration or termination of this Lease for a period of two (2) years following the expiration or termination of this Lease). Notwithstanding the foregoing, in no event shall Tenant be relieved from any of Tenant s continuing obligations pursuant to Section 10(d) of this Lease. (b) If Tenant remains in possession of the Premises after the expiration or termination of this Lease, Tenant s occupancy of the Premises shall be that of a tenancy at will. Tenant s occupancy during any holdover period shall otherwise be subject to the provisions of this Lease (unless clearly inapplicable), except that the Monthly Rent for each of the first and second months of any holdover period shall be 125% of the Monthly Rent payable for the last full month immediately preceding the holdover, the Monthly Rent for each of the third and fourth months of any holdover period shall be 150% of the Monthly Rent 10

73 payable for the last full month immediately preceding the holdover, and the Monthly Rent for every month of the holdover period thereafter shall be 200% of the Monthly Rent payable for the last full month immediately preceding the holdover. No holdover or payment by Tenant after the expiration or termination of this Lease shall operate to extend the Term or prevent Landlord from immediate recovery of possession of the Premises by summary proceedings or otherwise. Any provision in this Lease to the contrary notwithstanding, any holdover by Tenant shall constitute a default on the part of Tenant under this Lease entitling Landlord to exercise, without obligation to provide Tenant any notice or cure period, all of the remedies available to Landlord in the event of a Tenant default, and Tenant shall be liable for all damages, including consequential damages, that Landlord suffers as a result of the holdover. In the event Tenant s renewal option set forth below has lapsed and any person or entity desires to lease any portion of the Premises after the Expiration Date and submits to Landlord a letter of intent or comparable proposal in connection therewith which Landlord desires to accept, Landlord shall endeavor to notify Tenant of the same (but Landlord shall not be obligated to provide Tenant with a copy of, or the contents of, such letter of intent or comparable proposal and this sentence shall not be deemed to grant Tenant any type of right of first offer or right of first refusal or the like ). Landlord shall advise Tenant in writing promptly after Landlord enters into a lease providing for occupancy of any portion of the Premises by a tenant after the Expiration Date ( Landlord s New Lease Notice ). Notwithstanding anything to the contrary herein contained, Tenant shall not be liable for any consequential damages as a result of a holdover unless such holdover continues for a period of more than 30 days after Tenant s receipt of Landlord s New Lease Notice. (For example, (i) if Tenant receives Landlord s New Lease Notice 30 or more days prior to the Expiration Date, then Tenant will be liable for consequential damages as a result of any holdover after the Expiration Date, and (ii) if Tenant receives Landlord s New Lease Notice 15 days prior to the Expiration Date, then Tenant will be liable for consequential damages as a result of the holdover only if it holds over for more than 15 days after the Expiration Date). 22. Defaults - Remedies. (a) It shall be an Event of Default: (i) If Tenant does not pay in full when due any and all Rent and, except as provided in Section 22(c) below, Tenant fails to cure such default on or before the date that is 5 business days after Landlord gives Tenant notice of default; (ii) If Tenant enters into or permits any Transfer in violation of Section 18 above and Tenant does not void such Transfer within 10 days after the date that Landlord notifies Tenant in writing that Tenant is in violation of Section 18; (iii) If Tenant fails to observe and perform or otherwise breaches any other provision of this Lease, and, except as provided in Section 22(c) below, Tenant fails to cure the default on or before the date that is 30 days after Landlord gives Tenant notice of default; provided, however, if the default cannot reasonably be cured within 30 days following Landlord s giving of notice, Tenant shall be afforded additional reasonable time to cure the default if Tenant begins to cure the default within 30 days following Landlord s notice and continues diligently in good faith to completely cure the default; or (iv) If Tenant becomes insolvent or makes a general assignment for the benefit of creditors or offers a settlement to creditors, or if a petition in bankruptcy or for reorganization or for an arrangement with creditors under any federal or state law is filed by or against Tenant, or a bill in equity or other proceeding for the appointment of a receiver for any of Tenant s assets is commenced, or if any of the real or personal property of Tenant shall be levied upon; provided that any proceeding brought by anyone other than Landlord or Tenant under any bankruptcy, insolvency, receivership or similar law shall not constitute an Event of Default until such proceeding has continued unstayed for more than 60 consecutive days. (b) If an Event of Default occurs, Landlord shall have the following rights and remedies: (i) Landlord, without any obligation to do so, may elect to cure the default on behalf of Tenant, in which event Tenant shall reimburse Landlord upon demand for any sums paid or costs incurred by Landlord (together with an administrative fee of 10% thereof) in curing the default, plus interest at the Interest Rate from the respective dates of Landlord s incurring such costs, which sums and costs together with interest at the Interest Rate shall be deemed additional Rent; (ii) Following 24 hours prior telephonic notice to Tenant, to enter and repossess the Premises lawfully, by breaking open locked doors if necessary and lawful, and remove all persons and all or any property, by action at law or otherwise in accordance with law, without being liable for prosecution or damages. Landlord may, at Landlord s option, make Alterations and repairs in order to relet the Premises and relet all or any part(s) of the Premises for Tenant s account. Tenant agrees to pay to Landlord on demand any deficiency (taking into account all costs incurred by Landlord) that may arise by reason of such 11

74 reletting. In the event of reletting without termination of this Lease, Landlord may at any time thereafter elect to terminate this Lease for such previous breach; (iii) To accelerate the whole or any part of the Rent for the balance of the Term, and declare the same to be immediately due and payable (and, for purposes of acceleration of Annual Operating Expenses, the amount to be accelerated shall be based upon the assumption that Annual Operating Expenses for each Lease Year of the balance of the Term would be equal to the amount of Annual Operating Expenses which were payable by Tenant in the Lease Year immediately preceding the acceleration); provided, however, Tenant shall have the right, in any judicial proceedings brought to collect same, to assert a credit for the fair rental value of the Premises for the balance of the Term (which Landlord shall have the right to defend against), the burden of proving such credit to be on Tenant. The fair rental value of the Premises shall be net of the costs which would be reasonably incurred by Landlord in re-leasing the Premises, including without limitation, reasonable demolition and fit-out costs, brokerage commissions and legal fees and expenses. The accelerated amount determined to be payable to Landlord hereunder shall be reduced to present value at the rate of 6% per annum at the time of actual payment; (iv) To terminate this Lease and the Term without any right on the part of Tenant to save the forfeiture by payment of any sum due or by other performance of any condition, term or covenant broken; and (v) Notwithstanding anything to the contrary in this Lease, Landlord shall use commercially reasonable efforts to relet the Premises in order to mitigate its damages hereunder. (c) Any provision to the contrary in this Section 22 notwithstanding: (i) Landlord shall not be required to give Tenant the notice and opportunity to cure provided in Section 22(a)(i) above for any default in the payment of Rent more than twice in any consecutive 12-month period, and thereafter during the balance of such consecutive 12-month period Landlord may declare an Event of Default for failure to pay Rent without affording Tenant any of the notice and cure rights provided under Section 22(a)(i) of this Lease; (ii) Landlord shall not be required to give such notice prior to exercising its rights under Section 22(b)(i) in the event of an emergency that constitutes an imminent danger to persons or property or which requires emergency repairs to the Premises; (iii) only an additional 10 business day notice to Tenant shall be required by Landlord prior to Landlord exercising its rights under Section 22(b) if Tenant fails to discharge any lien or claim in accordance with Section 13 during the 15 day cure period provided in Section 13; and (iv) if Tenant fails, during the 15 day time period provided in Section 20, to (A) execute, acknowledge and deliver to Landlord an estoppel certificate, or (B) furnish to Landlord, Landlord s Mortgagee, prospective Mortgagee and/or prospective purchaser reasonably requested financial information (provided, however, if Tenant (or Tenant s parent company with whom Tenant files consolidated financial statements) is a publicly traded entity, publicly available information of Tenant (or Tenant s parent company with whom Tenant files consolidated financial statements) shall be sufficient), then Landlord shall only be required to give Tenant an additional 5 business day notice prior to Landlord exercising its rights under Section 22(b). (d) No waiver by Landlord of any breach by Tenant shall be a waiver of any subsequent breach, nor shall any forbearance by Landlord to seek a remedy for any breach by Tenant be a waiver by Landlord of any rights and remedies with respect to such or any subsequent breach. Despite Landlord s duty to mitigate in accordance with Section 22(b)(v), efforts by Landlord to mitigate the damages caused by Tenant s default shall not constitute a waiver of Landlord s right to recover damages hereunder. No right or remedy herein conferred upon or reserved to Landlord is intended to be exclusive of any other right or remedy provided herein or by law unless it so expressly provides, but each shall be cumulative and in addition to every other right or remedy given herein or now or hereafter existing at law or in equity. No payment by Tenant or receipt or acceptance by Landlord of a lesser amount than the total amount due Landlord under this Lease shall be deemed to be other than on account, nor shall any endorsement or statement on any check or payment be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord s right to recover the balance of Rent due, or Landlord s right to pursue any other available remedy. (e) If either party commences an action against the other party arising out of or in connection with this Lease, the prevailing party shall be entitled to have and recover from the other party attorneys fees, costs of suit, investigation expenses and discovery and other litigation costs, including costs of appeal. Lease. (f) Landlord and Tenant waive the right to a trial by jury in any action or proceeding based upon or related to, the subject matter of this (g) When this Lease and the Term or any extension thereof shall have been terminated on account of any monetary default or material nonmonetary default (which includes, but is not limited to, any inability by Landlord to sell or refinance the 12

75 Premises due to Tenant s failure to timely execute, acknowledge and deliver to Landlord an estoppel certificate as set forth in Section 20) by Tenant which has continued beyond any applicable notice and cure periods provided in this Lease, or when the Term or any extension thereof shall have expired, Tenant hereby authorizes any attorney of any court of record of the Commonwealth of Pennsylvania, upon an additional 10 business days prior written notice to Tenant, to appear for Tenant and for anyone claiming by, through or under Tenant and to confess judgment against all such parties, and in favor of Landlord, in ejectment and for the recovery of possession of the Premises, for which this Lease or a true and correct copy hereof shall be good and sufficient warrant. AFTER THE ENTRY OF ANY SUCH JUDGMENT A WRIT OF POSSESSION MAY BE ISSUED IN ACCORDANCE WITH THE PENNSYLVANIA RULES OF CIVIL PROCEDURE. If for any reason after such action shall have been commenced it shall be determined and possession of the Premises remain in or be restored to Tenant, Landlord shall have the right for the same default and upon any subsequent default(s) or upon the termination of this Lease or Tenant's right of possession as herein set forth, to again confess judgment as herein provided, for which this Lease or a true and correct copy hereof shall be good and sufficient warrant. Initials on behalf of Tenant: /s/ D.C. (h) The warrant to confess judgment set forth above shall continue in full force and effect and be unaffected by amendments to this Lease or other agreements between Landlord and Tenant even if any such amendments or other agreements increase Tenant's obligations or expand the size of the Premises. (i) EXCEPT FOR NOTICES EXPRESSLY REQUIRED TO BE GIVEN TO TENANT UNDER THIS SECTION 22 AND/OR THE PENNSYLVANIA RULES OF CIVIL PROCEDURE, TENANT EXPRESSLY AND ABSOLUTELY KNOWINGLY AND EXPRESSLY WAIVES AND RELEASES (i) ANY RIGHT, INCLUDING, WITHOUT LIMITATION, UNDER ANY APPLICABLE STATUTE, WHICH TENANT MAY HAVE TO RECEIVE A NOTICE TO QUIT PRIOR TO LANDLORD COMMENCING AN ACTION FOR REPOSSESSION OF THE PREMISES, AND (ii) ANY PROCEDURAL ERRORS IN CONNECTION WITH THE ENTRY OF ANY SUCH JUDGMENT OR IN THE ISSUANCE OF ANY ONE OR MORE WRITS OF POSSESSION THEREON. Initials on behalf of Tenant: /s/ D.C. (j) Notwithstanding anything to the contrary contained in this Section 22, Tenant does not hereby waive or relinquish its right, pursuant to the Pennsylvania Rules of Civil Procedure, to file a petition to strike and/or open a judgment confessed by Landlord hereunder. (k) Landlord shall not be in default under this Lease unless Landlord fails to commence performance of the obligations required of Landlord within thirty (30) days after receipt of written notice by Tenant to Landlord specifying that Landlord has failed to perform such obligation, provided, however, that if the nature of Landlord s obligation is such that more than the specified cure period is required for performance, then Landlord shall not be in default if Landlord commences performance within the specified cure period and thereafter diligently prosecutes the same to completion. In the event Landlord does not commence performance within the period provided herein, then in addition to any other rights of Tenant granted under this Lease, upon not less than five (5) days additional prior written notice from Tenant to Landlord after the end of the cure period that Tenant intends to perform the obligation on Landlord s behalf, Tenant shall have the right, but not the obligation, to take such minimum action as is reasonably necessary under the circumstances to perform such obligation. All work done in accordance herewith must be performed at a reasonable and competitive cost and expense (taking into account the circumstances of the obligation). To the extent such work performed by Tenant is Landlord s responsibility under this Lease, Landlord shall reimburse Tenant, within 30 days after Landlord s receipt of a reasonably documented invoice therefor, for any reasonable sums paid or reasonable costs incurred by Tenant in curing the default. If Landlord fails to reimburse Tenant within 30 days after Landlord s receipt of a reasonably documented invoice therefor, for any reasonable sums paid or reasonable costs incurred by Tenant in curing Landlord s default in accordance with the terms, conditions and provisions of this Section, then Tenant may bring an action for damages against Landlord to recover such costs, fees and expenses, together with interest thereon at Interest Rate, and reasonable attorney s fees incurred by Tenant in bringing such action for damages. 23. Tenant s Authority. Tenant represents and warrants to Landlord that: (a) Tenant is duly formed, validly existing and in good standing under the laws of the state under which Tenant is organized, and qualified to do business in the state in which the Premises is located, and (b) the person(s) signing this Lease are duly authorized to execute and deliver this Lease on behalf of Tenant. 13

76 24. Liability of Landlord; Liability of Tenant. (a) The word Landlord in this Lease includes the Landlord executing this Lease as well as its successors and assigns, each of which shall have the same rights, remedies, powers, authorities and privileges as it would have had it originally signed this Lease as Landlord. Any such person or entity, whether or not named in this Lease, shall have no liability under this Lease after it ceases to hold title to the Premises except for obligations already accrued. Tenant shall look solely to Landlord s successor in interest for the performance of the covenants and obligations of the Landlord hereunder which subsequently accrue. In no event shall Landlord be liable to Tenant for any loss of business or profits of Tenant or for consequential, punitive or special damages of any kind. Neither any principal, shareholder, officer, director, partner, member or manager of Landlord nor any owner of the Premises, whether disclosed or undisclosed, shall have any personal liability with respect to any of the provisions of this Lease or the Premises; Tenant shall look solely to the equity of Landlord in the Premises (including, without limitation, rents, condemnation awards, insurance and sale proceeds) for the satisfaction of any claim by Tenant against Landlord. (b) The individual principals, shareholders, officers, directors, partners, members or managers of Tenant shall have absolutely no personal liability with respect to any provision of this Lease, or any obligation or liability arising therefrom or in connection therewith. Landlord shall look solely to the assets of Tenant and its successors and assigns or to any insurance which Tenant is obligated to provide under the terms of this Lease for the satisfaction of any remedies of Landlord in the event of a breach by Tenant of any of its obligations thereunder. Notwithstanding anything to the contrary contained in this Lease, Tenant shall not be liable for any loss of business or profits of Landlord or for consequential, punitive or special damages of any kind under this Lease, unless due to a holdover by Tenant pursuant to Section 21(b) or unless due to contamination of the Premises or the Building by Tenant or its Agents pursuant to Section 10(d). 25. Miscellaneous. (a) The captions in this Lease are for convenience only, are not a part of this Lease and do not in any way define, limit, describe or amplify the terms of this Lease. (b) This Lease represents the entire agreement between the parties hereto and there are no collateral or oral agreements or understandings between Landlord and Tenant with respect to the Premises. No rights, easements or licenses are acquired in the Premises or any land adjacent to the Premises by Tenant by implication or otherwise except as expressly set forth in this Lease. This Lease shall not be modified in any manner except by an instrument in writing executed by the parties. The masculine (or neuter) pronoun and the singular number shall include the masculine, feminine and neuter genders and the singular and plural number. The word including followed by any specific item(s) is deemed to refer to examples rather than to be words of limitation. The word person includes a natural person, a partnership, a corporation, a limited liability company, an association and any other form of business association or entity. Both parties having participated fully and equally in the negotiation and preparation of this Lease, this Lease shall not be more strictly construed, nor any ambiguities in this Lease resolved, against either Landlord or Tenant. (c) Each covenant, agreement, obligation, term, condition or other provision contained in this Lease shall be deemed and construed as a separate and independent covenant of the party bound by, undertaking or making the same, not dependent on any other provision of this Lease unless otherwise expressly provided. All of the terms and conditions set forth in this Lease shall apply throughout the Term unless otherwise expressly set forth herein. (d) If any provisions of this Lease shall be declared unenforceable in any respect, such unenforceability shall not affect any other provision of this Lease, and each such provision shall be deemed to be modified, if possible, in such a manner as to render it enforceable and to preserve to the extent possible the intent of the parties as set forth herein. This Lease shall be construed and enforced in accordance with the laws of the state in which the Premises is located. (e) This Lease shall be binding upon and inure to the benefit of Landlord and Tenant and their respective heirs, personal representatives and permitted successors and assigns. All persons liable for the obligations of Tenant under this Lease shall be jointly and severally liable for such obligations. (f) This Lease may be executed in counterparts, each of which shall constitute an original, but which, taken together, shall be one original agreement. Any counterpart of this Lease may be executed and delivered by telephone facsimile transmission (or by similar electronic transmission (including, without limitation, ) or by portable document format (including, without limitation, pdf)) and shall have the same force and effect as an original. 14

77 (g) Tenant shall not record this Lease or any memorandum thereof, or otherwise file this Lease with any governmental authority, without Landlord s prior consent, except to the extent required to do so by Law. If Tenant is so required to do so by Law, then: (i) Tenant shall promptly provide Landlord with written notice of any such obligation and a copy of any required filing; and (ii) Tenant shall only disclose those provisions, terms and conditions of this Lease that are required to be disclosed by Law and shall keep confidential all of the provisions, terms and conditions of this Lease not required to be disclosed by Law. 26. Notices. Any notice, consent or other communication under this Lease shall be in writing and addressed to Landlord or Tenant at their respective addresses specified in Section 1 above (or to such other address as either may designate by notice to the other) with a copy to any Mortgagee or other party designated by Landlord. Each notice or other communication shall be deemed given if sent by prepaid overnight delivery service or by certified mail, return receipt requested, postage prepaid or in any other manner, with delivery in any case evidenced by a receipt, and shall be deemed to have been given on the day of actual delivery to the intended recipient or on the business day delivery is refused. The giving of notice by Landlord s attorneys, representatives and agents under this Section shall be deemed to be the acts of Landlord. 27. Intentionally Omitted. 28. Construction of the Building and the Tenant Improvements. (a) The Building and all site work and other improvements to be constructed in connection therewith (including, without limitation, the lighting system, utility systems, life safety system and fire suppression system) (the Base Building Work ) shall be constructed by Landlord in accordance with the base building plans (the Base Building Plans ) attached hereto as Exhibit E and the outline specifications attached hereto as Exhibit F (the Base Building Specifications ). The interior improvements and any other modifications to the Building (the Tenant Improvements and, together with the Base building Work, collectively, the Landlord s Work ) shall be constructed by Landlord generally in accordance with the preliminary plans attached hereto as Exhibit G (the Tenant Improvement Plans ) and the outline specifications attached hereto as Exhibit H (the Tenant Improvement Specifications ); provided, however, that if the Tenant Improvement Plans and Tenant Improvement Specifications are not attached hereto upon full execution of this Lease by Landlord and Tenant, then Landlord and Tenant shall expeditiously, diligently and in good faith use their best efforts to cause the Tenant Improvement Plans and Tenant Improvement Specifications to be mutually agreed upon on or before September 3, 2014, which mutually agreed upon Tenant Improvement Plans and Tenant Improvement Specifications shall be automatically incorporated into and made a part of this Lease without necessity of further action. (b) Promptly after Landlord and Tenant mutually agree upon the Tenant Improvement Plans and Tenant Improvement Specifications, Landlord, at Tenant s sole cost and expense, shall cause its architect to prepare Construction Drawings consistent with the Tenant Improvement Plans and the Tenant Improvements Specifications, but excluding the Post Substantial Completion Work (as defined below), in sufficient detail to obtain all governmental permits and approvals required to complete the Tenant Improvements. Upon completion of the Construction Drawings, Landlord shall deliver the Construction Drawings to Tenant. The Construction Drawings shall be subject to Tenant s approval, which approval shall not be unreasonably withheld, conditioned or delayed, and which approval shall be deemed granted if Tenant fails to give Tenant s Notice (as hereinafter defined) to Landlord within five (5) business days after Tenant s receipt of the Construction Drawings. Following Tenant s receipt of the Construction Drawings, Tenant shall have five (5) business days in which to review the Construction Drawings and to give to Landlord written notice ( Tenant s Notice ) of Tenant s approval of the Construction Drawings, or its approval noted with any reasonable comments and revisions, in each case, such approval(s) not to be unreasonably withheld, conditioned or delayed. Landlord shall have three (3) business days after receipt of Tenant s Notice to review the Construction Drawings, and any Tenant comments and revisions, and to provide Tenant with Landlord s approval of the Construction Drawings, or its approval noted with any reasonable comments and revisions, in each case, such approval(s) not to be unreasonably withheld, conditioned or delayed. This process, each party having three (3) business days to respond to the other s comments, shall continue until the Construction Drawings have been approved by both parties, provided, however, that Landlord and Tenant shall expeditiously, diligently and in good faith use their best efforts to cause the Construction Drawings to be mutually agreed upon on or before October 13, 2014, which mutually agreed upon Construction Drawings shall hereinafter be referred to as the Approved Tenant Improvement Documents and shall be automatically incorporated into and made a part of this Lease without the necessity of further action. The Approved Tenant Improvement Documents shall be used by Landlord in connection with Landlord s construction of the Tenant Improvements. (c) Landlord shall have the right, from time to time, to make reasonable and non-material changes/field adjustments in and to the Base Building Documents and the Approved Tenant Improvement Documents to the extent that the same shall be 15

78 necessary or desirable in order to adjust to actual field conditions or to cause the Base Building Work or the Tenant Improvements to comply with any applicable requirements of public authorities and/or requirements of insurance bodies. All such changes/field adjustments shall be noted on the applicable plans or documents. Except for changes/field adjustments (which may be made immediately but confirmed by written change order), modifications to the Approved Tenant Improvement Documents must be made and accepted only in writing as follows: within 5 business days of receipt by Landlord of Tenant s request to Landlord for a change order (which request, if not in writing, shall be made directly to Landlord s construction representative in person or by telephone), Landlord shall advise Tenant in writing if it approves of the requested change, which shall not be unreasonably withheld, and, if so, provide Tenant with the following items: (i) a cover sheet summarizing the cost of the change and advising if such change order will increase project costs or result in delay of completion; (ii) itemization of the contractor s costs (including line items per trade and unit costs); and (iii) architect drawings, if applicable. If acceptable to Tenant, Tenant shall promptly sign the cover sheet and return it to Landlord by fax (with a copy thereof by overnight mail) and such documentation will constitute an amendment to this Lease. The costs of any such change requested by Tenant and approved by Landlord shall be paid by Tenant to Landlord within 30 days after receipt of invoice therefor. (d) Prior to construction of the Tenant Improvements, Landlord shall obtain bids for the performance of the Tenant Improvements from at least three (3) contractors reasonably selected by Landlord. Landlord shall provide Tenant with a copy of such bids and allow Tenant to review and comment on the bids and proposed construction contract. Landlord, in Landlord s commercially reasonable discretion, shall accept the lowest responsible and responsive bid. (e) Landlord shall be responsible for obtaining all necessary building permits and other governmental permits and approvals necessary for construction of the Base Building Work and the Tenant Improvements. Tenant shall cooperate with Landlord, at no cost to Tenant, in Landlord s efforts to obtain such permits and other approvals. All construction comprising the Tenant Improvements shall be commenced promptly after (i) Landlord has received all permits and approvals required by the governmental authorities having jurisdiction for the construction of the Tenant Improvements, and (ii) the Base Building Work has been completed to a degree that permits commencement of construction of the Tenant Improvements. The Landlord s Work shall be constructed by Landlord in a good and workmanlike manner and shall comply, at the time of Substantial Completion thereof, with (i) all Laws (including the ADA), and (ii) the Base Building Documents and the Approved Tenant Improvement Documents. The Landlord s Work, except for that portion of the Landlord s Work set forth on Exhibit K attached hereto (the Post Substantial Completion Work ) shall be Substantially Completed and ready for use and occupancy by Tenant on or before December 31, 2014, subject to Excusable Delays (as hereinafter defined). As used in this Lease, Substantial Completion or Substantially Complete or Substantially Completed shall mean the date that: (i) Landlord has delivered to Tenant physical possession of, and access to, the Building; and (ii) Landlord has completed all of the Landlord s Work (other than the Post Substantial Completion Work ) in accordance with the Base Building Documents and the Approved Tenant Improvement Documents, subject only to incomplete minor items which do not adversely affect in a material way or materially interfere with Tenant s use and occupancy of the Building, which incomplete items shall be set forth on the Punch List (as hereinafter defined). Notwithstanding the foregoing, the time for Substantial Completion shall be extended for additional periods of time equal to the time lost by reason of Force Majeure and/or Tenant Delay (as hereinafter defined) (collectively, Excusable Delays ). (f) Landlord agrees to complete the Tenant Improvements, at Tenant s sole cost and expense, equal to the aggregate of all reasonable costs, expenses and fees incurred by or on behalf of Landlord in connection therewith (the Tenant s Cost ), including without limitation (i) architectural, engineering and design costs, (ii) the cost charged to Landlord by Landlord s general contractor and all subcontractors for performing the Tenant Improvements, and (iii) the cost to Landlord of performing directly any portion of the Tenant Improvements. Landlord agrees to credit Tenant with an allowance (the Tenant Allowance ) equal to the lesser of the Tenant s Cost or $5,771, Tenant agrees to pay to Landlord, within 10 days after being billed therefor, the excess (if any) of the Tenant s Cost above the Tenant Allowance. If the Tenant s Costs are more than the Tenant Allowance, then, at Tenant s option, Landlord will credit Tenant with an additional allowance for up to $800, (the First Additional Allowance ) of the excess of the Tenant s Costs above the Tenant Allowance, provided, however, that the First Additional Allowance shall be capitalized at the rate of 10% per annum, over the remainder of the initial Term of this Lease. In such event, Minimum Annual Rent and the monthly installments thereof shall be increased by amendment to this Lease to reflect such capitalization. (For example, if Tenant utilizes the entire $800,000.00, then Minimum Annual Rent shall increase each year by $80, per year.) If the Tenant s Costs are more than the sum of the Tenant Allowance plus the First Additional Allowance, then, at Tenant s option, Landlord will credit Tenant with another additional allowance for up to $400, (the Second Additional Allowance ) of the excess of the Tenant s Costs above the sum of the Tenant Allowance plus the First Additional Allowance, provided, however, that the Second Additional Allowance, together with interest thereon at the rate of 8.5% per annum, shall be amortized over the remainder of the initial Term of this Lease. In such event, Minimum Annual Rent and the monthly installments thereof shall be increased by amendment to this Lease to reflect such amortization. (For example, 16

79 if Tenant utilizes the entire $400,000.00, then Minimum Annual Rent shall increase each year by $76, per year.) Landlord shall have no further obligations to pay for any costs incurred in connection with the Tenant Improvements. (g) At the time of completion of the Landlord s Work, Landlord, in consultation with Tenant, shall generate a punch list of all asserted incomplete work items in the Landlord s Work (the Punch List ). Landlord shall complete all items on the Punch List within a commercially reasonable time following the date of the generation of the Punch List, unless the nature of the incomplete work item listed therein is such that a longer period of time is required to repair or correct the same or unless due to Force Majeure or Tenant Delay. (h) For purposes hereof, Force Majeure shall mean time actually lost by Landlord or Landlord s contractors, subcontractors or suppliers due to governmental restrictions, limitations and delays (including, without limitation, delays in the issuance of any governmental permit, license and/or approval required to complete the Landlord s Work ), scarcity, unavailability or delay in obtaining fuel or materials, war or other national emergency, accidents, floods, defective materials, fire damage or other casualties, adverse weather conditions which reasonably prevent Landlord from pursuing construction activities in a normal manner, or any other cause similar or dissimilar to the foregoing beyond the reasonable control of Landlord or Landlord s contractors, subcontractors or suppliers. (i) For purposes hereof, the terms Tenant Delay or Delay caused by Tenant shall mean delay in completion of construction of the Landlord s Work caused by: (A) delay (beyond the time frames set forth in subsection (b) above) by Tenant in submission or approval of the Construction Drawings; (B) the interference of Tenant with the Landlord s Work; or (C) any subsequent changes, modifications, or alterations requested by Tenant or its Agents to any of the plans and specifications of the Landlord s Work, which reasonably cause delay in the completion thereof. (j) For purposes of determining a Tenant Delay, the term Tenant shall include Tenant s contractors, agents and employees. Landlord shall promptly provide Tenant with written notice of any Tenant Delay and then again provide Tenant with written notice that Tenant has cured such Tenant Delay if and when Tenant cures same. In the event that Landlord has made a reasonable request for a certain approval or item to be provided by Tenant by a certain date (which, except in an emergency and as otherwise expressly set forth hereunder, shall never be less than 24 hours) and Tenant fails to reply or provide said item by said date, no further written notice need be provided by Landlord in the event that Tenant fails to meet such deadline in order for Landlord to claim a Tenant Delay. (k) If the date of Substantial Completion of the Landlord s Work is delayed by Tenant or its Agents, the Landlord s Work shall be deemed to be Substantially Complete on the date that the Landlord s Work would have been Substantially Completed but for such delays. (l) Tenant and its Agents shall have the right, at Tenant s own risk, expense and responsibility, at all reasonable times prior to the Commencement Date but on or after November 1, 2014, to enter the Building for the sole and exclusive purpose of taking measurements and installing its furnishings, fixtures and equipment (including, without limitation, its telecommunication and/or data wiring and/or cabling), provided that (i) Tenant does not interfere with or delay the Landlord s Work, (ii) Tenant uses contractors and workers compatible with the contractors and workers engaged by Landlord, (iii) the Building may be legally occupied by Tenant and its Agents for such purpose, and (iv) Tenant obtains Landlord s prior consent, which consent shall not be unreasonably withheld, conditioned or delayed. If Tenant and its Agents enter the Building prior to the Commencement Date pursuant to the foregoing sentence, then Tenant shall abide by the terms and conditions of this Lease as if the Term of this Lease had already commenced, except that Tenant shall have no obligation to pay the Minimum Annual Rent or Annual Operating Expenses or any portion thereof until the Commencement Date. Such entry by Tenant and its Agents prior to the Commencement Date in accordance with the first sentence of this paragraph shall not constitute possession of the Premises for the conduct of Tenant s business for purposes of Section 1(d) of this Lease. (m) Landlord guarantees, for a period of one (1) year following the Commencement Date, (i) the Tenant Improvements against defective workmanship and/or materials or non-compliance with the Approved Tenant Improvement Documents, and (ii) that the Building, including the roof, roof membrane, flashing, floors, walls, doors, dock doors and all other mechanical systems, are and shall be in good, operable condition. Landlord agrees, during said one-year period at its sole cost and expense, to (i) repair or replace any defective item occasioned by defective workmanship and/or materials or non-compliance with the Approved Tenant Improvement Documents, and (ii) make all necessary repairs to keep the Building, including the roof, floors, walls, doors, dock doors and all other mechanical systems in good, operable condition. Landlord agrees, upon Tenant s reasonable prior request, to jointly inspect the Premises with a representative of Tenant at any time during the one year guaranty period. In addition to the general warranty set forth above, Landlord covenants and agrees to obtain, and enforce for Tenant s 17

80 benefit, manufacturer's warranties with respect to the Tenant Improvements, as set forth in Exhibit I attached hereto and incorporated herein by reference. Notwithstanding anything in this paragraph to the contrary, in no event shall Landlord be obligated to make repairs or replacements to items due to (i) Tenant s failure to properly maintain any portions of the Building or the Premises or any systems contained thereon that Tenant is required to maintain pursuant to this Lease, or (ii) any act or omission of Tenant or its Agent. (n) Landlord acknowledges that the construction of the Tenant Improvements is to be administered on an open book arrangement relative to the cost of the Tenant Improvements. Landlord shall keep full and detailed accounts and exercise such controls as may be reasonably necessary for proper financial management, using accounting and control systems in accordance with sound accounting principles, consistently applied. Tenant shall be permitted to review Landlord's records relating to the cost of construction of the Tenant Improvements. (o) Tenant s Construction Representative for purposes of the Landlord s Work shall be John Appert. Landlord s Construction Representative for purposes of Landlord s Work shall be Mike Alderman. Tenant and Landlord acknowledge and agree that Tenant s Construction Representative and Landlord s Construction Representative shall have full power and authority to act on their respective behalf and any action taken by either of them shall be fully binding upon Tenant or Landlord, respectively, for purposes of the Landlord s Work. (p) Landlord shall pay any initial fee, tap-in fee, impact fee, connection fee or similar fee charged for initially bringing and connecting utilities, including water and sewer lines, to the Building for general industrial uses and purposes (excluding customer deposits or administrative type of connection fees), but only to the extent Tenant elects the power service type and design set forth in Exhibit E and Exhibit F attached hereto as of the date hereof. (q) Tenant acknowledges and agrees that (i) the Post Substantial Completion Work will not be substantially completed by the date of Substantial Completion, and (ii) the date of Substantial Completion is not contingent upon the substantial completion of the Post Substantial Completion Work. Landlord will proceed with diligence to complete the Post Substantial Completion Work within a commercially reasonable time under circumstances, subject to (i) Tenant selections of scope and design items relating to the Post-Substantial Completion Work, (ii) accommodations for order lead times of materials relating to the Post-Substantial Completion Work, (iii) accommodations for permitting (by municipal and utility providers) relating to the Post-Substantial Completion Work, (iv) Tenant coordination and/or completion of the installation of Tenant s trade fixtures, and (v) Excusable Delays. 29. Options to Renew. (a) Provided that Landlord has not given Tenant notice of monetary default or material non-monetary default more than three (3) times in the immediately preceding 12 month period, that there then exists no Event of Default by Tenant under this Lease, nor any event that with the giving of notice and/or the passage of time would constitute an Event of Default, and that Tenant and/or its Affiliate is/are the sole occupant(s) of the Premises, Tenant shall have the right and option to extend the Term of this Lease for four (4) additional periods of sixty (60) months each, exercisable by giving Landlord prior written notice, on or before that date that is ten (10) months prior to the then current Expiration Date, of Tenant s election to extend the Term of this Lease; it being agreed that time is of the essence and that this option is personal to Tenant and any assignee or sublessee to whom Tenant is permitted to transfer this Lease without Landlord s consent pursuant to Section 18(b), and is non-transferable to any other assignee or sublessee (regardless of whether any such assignment or sublease was made with or without Landlord s consent) or other party. (b) Such extensions shall be under the same terms and conditions as provided in this Lease except as follows : (i) each additional term shall begin on the day after the then current Expiration Date and thereafter the Expiration Date shall be deemed to be the date that is five (5) years after the then current Expiration ; (ii) there shall be only three (3) further options to extend following the first renewal, two (2) further options to extend following the second renewal, one (1) further option to extend following the third renewal and no further options to extend after the fourth renewal ; and (iii) the Minimum Annual Rent for each year of the additional period shall be equal to the greater of (i) the Minimum Annual Rent payable in the immediately preceding Lease Year, or (ii) 95% of the fair market rental value of the Premises and annual increases in fair market rental value (collectively, the FMR ) applicable at the time Tenant exercises such option (but in no event prior to the date that is ten (10 ) months before the then current Expiration Date ). In determining the fair market rental value of the Premises and fair market annual increases in such rental value, Landlord shall take into account and make appropriate adjustments to reflect current market terms, conditions and concessions for similar renewal transactions in similar 18

81 industrial buildings that are then generally available in the market area (and taking into account whether such terms, conditions and concessions are being made available by Landlord) at the time Tenant exercises such option (but in no event prior to the date that is ten (10) months before the then current Expiration Date). (c) Unless Landlord accepts as Tenant s Minimum Annual Rent obligation for each year of an additional period an amount equal to the Minimum Annual Rent payable in the immediately preceding Lease Year (the Prior Rent Alternative ), within fifteen (15) days after Landlord receives notice of Tenant s exercise of the option to extend the Term of this Lease, but in no event prior to the date that is ten (10) months before the then current Expiration Date, Landlord will give notice to Tenant (the Rent Notice ) of Landlord s opinion of the FMR and comparing the FMR to the Minimum Annual Rent payable in the immediately preceding Lease Year. If Tenant does not respond to the Rent Notice within fifteen (15) days after receiving it, Landlord s opinion of the FMR shall be deemed accepted as the Minimum Annual Rent due for each Lease Year of the additional period. If, during such fifteen (15) day period, Tenant gives Landlord notice that Tenant contests Landlord s determination of the FMR (an Objection Notice ), which notice must contain therein Tenant s opinion of the FMR, the parties will attempt to arrive at a mutually agreeable Minimum Annual Rent for each Lease Year of the additional period, which, in no event, shall be less than the Prior Rent Alternative. When the parties come to an agreement, they will both execute an amendment to this Lease establishing the Minimum Annual Rent for each Lease Year of the additional period. (d) If Landlord and Tenant cannot agree as to the FMR within fifteen (15) days after Landlord s receipt of the Objection Notice, the FMR shall be determined by appraisal. Within ten (10) days after the expiration of such fifteen (15) day period, Landlord and Tenant shall give written notice to the other setting forth the name and address of an appraiser designated by the party giving notice. All appraisers selected shall be members of the American Institute of Real Estate Appraisers and shall have had at least ten (10) years continuous experience in the business of appraising industrial buildings in the market area. If either party shall fail to give notice of such designation within the time period provided, then the party who has designated its appraiser (the Designating Party ) shall notify the other party (the Non-Designating Party ) in writing that the Non-Designating Party has an additional ten (10) days to give notice of its designation, otherwise the appraiser, if any, designated by the Designating Party shall conclusively determine the FMR. If two appraisers have been designated, such appraisers shall attempt to agree upon the FMR. If the two appraisers do not agree on the FMR within twenty (20) days of their designation, the two appraisers shall designate a third appraiser. If the two appraisers shall fail to agree upon the identity of a third appraiser within five (5) business days following the end of such twenty (20) day period, then either Landlord or Tenant may apply to the American Arbitration Association, or any successor thereto having jurisdiction, for the settlement of the dispute as to the designation of the third appraiser and the American Arbitration Association shall designate a third appraiser in accordance with the Real Estate Valuation Arbitration Rules of the American Arbitration Association. The three appraisers shall conduct such hearings as they may deem appropriate, shall make their determination of the FMR in writing and shall give notice to Landlord and Tenant of such determination within twenty (20) days after the appointment of the third appraiser. If the three appraisers cannot agree upon the FMR, each appraiser shall submit in writing to Landlord and Tenant the FMR as determined by such appraiser. The FMR for the purposes of this paragraph shall be equal to the arithmetic average of the two closest determinations of FMR submitted by the appraisers. Each party shall pay its own fees and expenses in connection with any appraiser selected by such party under this paragraph, and the parties shall share equally all other expenses and fees of the arbitration, including the fees and expenses charged by the third appraiser. The FMR as determined in accordance with the provisions of this Section shall be final and binding upon Landlord and Tenant. Notwithstanding anything contained in this Section to the contrary, in no event shall Tenant s Minimum Annual Rent obligation for each year of the additional period be an amount that is less than the Prior Rent Alternative. 30. Parking. Tenant shall have the exclusive right, at Tenant s sole risk and responsibility, to use all of the parking spaces in that certain parking area of the Premises delineated on Exhibit A attached hereto as the Parking Area. Landlord shall have no obligation to police usage of the Parking Area or to enforce Tenant s exclusive rights with respect thereto. 31. Brokers. The parties agree that they have dealt with no brokers in connection with this Lease, except for Proventure, whose commission shall be paid by Landlord pursuant to separate agreement. Each party agrees to indemnify and hold the other harmless from any and all claims for commissions or fees in connection with the Premises and this Lease from any other real estate brokers or agents with whom they may have dealt. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURES ON FOLLOWING PAGE] 19

82 Landlord and Tenant have executed this Lease on the respective date(s) set forth below. Landlord: LIBERTY PROPERTY LIMITED PARTNERSHIP By: Liberty Property Trust, its sole general partner Date signed: September 8, 2014 By: /s/ Robert Kiel Name: Robert Kiel Title: Senior Vice President and City Manager By: /s/ George J. Alburger Jr. Name: George J. Alburger Jr. Title: Chief Financial Officer Date signed: Tenant : September 5, 2014 ZULILY, INC. Attest/Witness: /s/ Marcia Cardona By: /s/ Darrell Cavens Name: Marcia Cardona Name: Darrell Cavens Title: Executive Assistant Title: Chief Executive Officer 20

83 Rider 1 to Lease Agreement (Multi-Tenant Industrial) ADDITIONAL DEFINITIONS ADA means the Americans With Disabilities Act of 1990 (42 U.S.C et seq.), as amended and supplemented from time to time. Affiliate means (i) any entity controlling, controlled by, or under common control of, Tenant, (ii) any successor to Tenant by merger, consolidation or reorganization, and (iii) any purchaser of all or substantially all of the assets of Tenant as a going concern. Agents of a party means such party s employees, agents, representatives, contractors, licensees or invitees. Alteration means any addition, alteration or improvement to the Building or the Premises, as the case may be. Building Rules means the rules and regulations attached to this Lease as Exhibit B as they may be amended from time to time. Building Systems means any electrical, mechanical, plumbing, heating, ventilating, air conditioning, sprinkler, life safety or security systems serving the Building. Environmental Laws means all present or future federal, state or local laws, ordinances, rules or regulations (including the rules and regulations of the federal Environmental Protection Agency and comparable state agency) relating to the protection of human health or the environment. Event of Default means a default described in Section 22(a) of this Lease. Hazardous Materials means pollutants, contaminants, toxic or hazardous wastes or other materials the removal of which is required or the use, treatment, storage or disposal of which is regulated, restricted, or prohibited by any Environmental Law. Interest Rate means interest at the rate of 1½% per month. Laws means all laws, ordinances, rules, orders, regulations, guidelines and other requirements of federal, state or local governmental authorities or of any private association or contained in any restrictive covenants or other declarations or agreements, now or subsequently pertaining to the Premises or the use and occupation of the Premises. Lease Year means the period from the Commencement Date through the succeeding 12 full calendar months (including for the first Lease Year any partial month from the Commencement Date until the first day of the first full calendar month) and each successive 12-month period thereafter during the Term. Maintain or Maintenance means to provide such maintenance, repair and, to the extent necessary and appropriate, replacement, as may be needed to keep the subject property in good condition and repair. Maintenance also includes utilizing such Building or Building Systems-performance assessment tools or optimizing practices that Landlord in its discretion reasonably deems necessary or appropriate for planning, designing, installing, testing, operating and maintaining the Building, Building Systems and the Premises in a sustainable, energy efficient manner and providing a safe and comfortable work environment, with a view toward achieving improved overall performance and minimizing impact on the environment. Monthly Rent means the monthly installment of Minimum Annual Rent plus the monthly installment of estimated Annual Operating Expenses payable by Tenant under this Lease. Mortgage means any mortgage, deed of trust or other lien or encumbrance on Landlord s interest in the Premises or any portion thereof, including without limitation any ground or master lease if Landlord s interest is or becomes a leasehold estate. R-1-1

84 Mortgagee means the holder of any Mortgage, including any ground or master lessor if Landlord s interest is or becomes a leasehold estate. Operating Expenses means all costs, fees, charges and expenses incurred or charged by Landlord in connection with the ownership, operation, maintenance and repair of, and services provided to, the Premises, including, but not limited to: (i) the charges at standard retail rates for any utilities provided by Landlord pursuant to Section 7 of this Lease; (ii) the cost of insurance carried by Landlord pursuant to Section 8 of this Lease together with the cost of any commercially reasonable deductible (not to exceed $25, per occurrence) paid by Landlord in connection with an insured loss; (iii) Landlord s cost to Maintain the Premises, subject to the provisions of subsection (b) of Rider 2 of this Lease; (iv) to the extent not otherwise payable by Tenant pursuant to Section 5 of this Lease, all levies, taxes (including real estate taxes, sales taxes and gross receipt taxes), assessments, liens, license and permit fees, together with the reasonable cost of contesting any of the foregoing (provided that (i) the Operating Expenses reflect the savings resulting from such contest, and (ii) real estate taxes are contested on a contingency basis), which are applicable to the Term, and which are imposed by any authority or under any Law, or pursuant to any recorded covenants or agreements, upon or with respect to the Premises, or any improvements thereto, or directly upon this Lease or the Rent or upon amounts payable by any subtenants or other occupants of the Premises, or against Landlord because of Landlord s estate or interest in the Premises; (v) the annual amortization (over their estimated economic useful life) of the costs of improvements or replacements that would be classified as a capital expenditure under generally accepted accounting principles consistently applied; (vi) a management fee equal to two percent (2%) of the sum of all Minimum Annual Rent from the Premises; (vii) a property service fee covering employees of and vehicles owned by Landlord providing repair, maintenance and related services to the Premises, and equipment, tools and materials used in connection with and other costs related to such services, all of which shall be consistent with (A) the service level set forth in Rider 2 of this Lease, and (B) the property service fee associated with such service level as set forth in Exhibit J to the Lease; and (viii) costs to process the certification or recertification of the Building pursuant to any applicable environmental or energy rating/bench marking system (such as Energy Star or LEED) including applying, reporting, and tracking costs and related reasonable consultant s fees associated therewith. The foregoing notwithstanding, Operating Expenses will not include: (i) depreciation on the Building (including, without limitation, on the Building Systems and equipment); (ii) financing and refinancing costs (except as provided above), interest on debt or amortization payments on any mortgage, or rental under any ground or underlying lease; (iii) leasing and/or brokerage commissions, advertising expenses, tenant improvements or other costs directly related to the leasing of the Premises; (iv) federal, state, or local income taxes, franchise, gift, transfer, excise, estate, succession, inheritance, excess profits or corporate capital stock tax imposed or assessed upon Landlord, unless such tax or any similar tax is levied or assessed in lieu of all or any part of any taxes includable in Operating Expenses above; (v) depreciation and amortization; (vi) expenses incurred by Landlord to prepare, renovate, repaint, redecorate or perform any other work in any space leased to an existing tenant or prospective tenant of the Building; (vii) expenses incurred by Landlord for repairs or other work occasioned by fire, windstorm, or other insurable casualty or condemnation, to the extent of insurance proceeds (or to the extent of insurance proceeds Landlord would have received if Landlord had maintained the insurance required to be maintained by Landlord hereunder) or condemnation proceeds received by Landlord; (viii) expenses incurred by Landlord to lease space to new tenants or to retain existing tenants, including leasing commissions, advertising and promotional expenditures; (ix) expenses incurred by Landlord to resolve disputes or to enforce or negotiate lease terms with prospective or existing tenants; (x) interest, principal, points and fees, amortization or other costs associated with any debt, and rent payable under any lease to which this Lease is subject, and all costs and expenses associated with any such debt or lease and any ground lease rent, irrespective of whether this Lease is subject or subordinate thereto; (xi) costs of alterations, repairs, capital improvements, equipment replacement and other items which under generally accepted accounting principles are properly classified as capital expenditures, except that the annual amortization of these costs over their estimated economic useful life shall be included to the extent otherwise expressly permitted in this Lease; (xii) expenses for the replacement of any item covered under warranty, to the extent of the warranty; (xiii) costs to correct any penalty or fine incurred by Landlord due to Landlord s violation of any federal, state or local law or regulation and any interest or penalties due for late payment by Landlord of any of the Operating Expenses; (xiv) costs arising from the negligence or willful misconduct of Landlord or its Agents; (xv) expenses for any item or service which Tenant pays directly to a third party or separately reimburses to Landlord (other than as an Operating Expense) and expenses incurred by Landlord to the extent the same are reimbursable or reimbursed (other than as an Operating Expense) from any other tenants, occupants of the property, or third parties; (xvi) expenses for any item or service not provided to Tenant but exclusively to certain other tenants in the Building; (xvii) salaries of (a) employees above the grade of building superintendent or building manager, and (b) employees to the extent their time is not spent directly in the operation of the Premises; (xviii) Landlord s general corporate overhead and administrative expenses; (xix) reserves; (xx) fees paid to Affiliates of Landlord to the extent that such fees exceed the customary amount charged for the service provided, (xxi) costs incurred to remediate Hazardous Materials from the Premises, unless and to the extent caused by the acts or omissions of Tenant or its Agents; (xxii) the cost of sculptures, paintings and other objects of art; (xxiii) political and charitable donations attributable to the Premises; (xxiv) any bad debt loss, rent loss or reserves for bad debt or rent loss; (xxv) expenses for the defense of the Landlord s title to all or any part of the Building or the Land; or (xxvi) costs of correcting any latent defects or design defects R-1-2

85 in the original construction, materials or equipment in the Building provided that for the purposes of this clause conditions (not occasioned by design or construction defects) resulting from ordinary wear and tear and use shall not be deemed defects. If Landlord elects to prepay real estate taxes during any discount period, Tenant shall be entitled to any benefit actually realized by Landlord with respect to any such prepayment, provided, however, that the foregoing shall not impose any obligation upon Landlord to prepay real estate taxes. If and to the extent Landlord actually receives, and actually realizes savings from, any tax rebates, tax abatements, tax incentives or the like with respect to the levies, taxes, assessments, liens, fees and costs for which Tenant shall have paid or shall be obligated to pay Tenant s Share pursuant to subsection (e) of the first sentence of this paragraph and Section 5 of the Lease, then Tenant shall be entitled to any such benefit (via a pass through to Tenant) after deduction of Landlord's commercially reasonable, out-ofpocket costs, if any, of obtaining any such benefit; provided, however, that the foregoing shall not impose any obligation upon Landlord to pursue any such benefit. If Landlord elects not to contest real estate taxes or assessments now or subsequently pertaining to the Premises, then Tenant, at Tenant s sole cost and expense, shall have the right, upon prior written notice to Landlord, to contest such real estate taxes or assessments, in good faith, provided that such contest by Tenant does not (i) subject Landlord or the Premises to any fines, penalties, liens and/or liability, or (ii) result in the rescission of the tax abatement resulting from the LERTA program. Landlord shall have the right to directly perform (by itself or through an affiliate) any services provided under this Lease provided that the Landlord s charges included in Operating Expenses for any such services shall not exceed competitive market rates for comparable services. Landlord shall not be entitled to collect more than 100% of the actual Building Operating Expenses (without duplication) in any year. Rent means the Minimum Annual Rent, Annual Operating Expenses and any other amounts payable by Tenant to Landlord under this Lease. Taken or Taking means acquisition by a public authority having the power of eminent domain by condemnation or conveyance in lieu of condemnation. Tenant s Share means the percentage obtained by dividing the rentable square feet of the Premises by the rentable square feet of the Building, as set forth in Section 1 of this Lease. Transfer means (i) any assignment, transfer, pledge or other encumbrance of all or a portion of Tenant s interest in this Lease, (ii) any sublease, license or concession of all or a portion of Tenant s interest in the Premises, or (iii) any transfer of a controlling interest in Tenant R-1-3

86 Rider 2 to Lease Agreement MAINTENANCE AND REPAIR RESPONSIBILITIES Maintenance obligations, and the responsibility for payment associated with the performance of such Maintenance, shall be allocated between Landlord and Tenant in accordance with this Rider 2, except as otherwise set forth in Section 9 of this Lease. (a) Landlord s Obligation to Maintain at Landlord s Expense. Landlord, at Landlord s sole expense, without reimbursement from Tenant, shall (a) Maintain (i) the Building footings, foundations, structural steel columns, girders and the structural aspects of the floor slab and the floor slab s sub base, and (ii) the main utility lines to the point of connection into the Building (e.g., main electricity and water/sewer service to the Building), and (b) replace, to the extent necessary and appropriate, the Building roof and roof membrane and structural components of the exterior walls ; in each case, unless (A) the costs of such Maintenance or replacement would have been covered by warranty but is no longer covered by warranty due to the acts or omissions of Tenant or its Agents, or (B) such Maintenance or replacement is required due to the acts or omissions of Tenant or its Agents, in which event, Tenant agrees to pay to Landlord, within 30 days after being billed therefor, any and all costs incurred by Landlord in performing such Maintenance or replacement. (b) Landlord s Obligation to Maintain at Tenant s Expense. Landlord shall Maintain, as an Operating Expense, the following: (i) the Building roof and exterior walls (including, without limitation, exterior façade painting and caulk repair) (except that replacement of the Building roof and structural components of the exterior walls, shall be performed by Landlord, at Landlord s sole expense, as set forth in subsection (a) above); (ii) the irrigation systems, storm water facilities and detention ponds; and (iii) the driveways, sidewalks, parking, loading and landscaped areas (including, without limitation, fencing (if any), asphalt/concrete and snow and ice removal from sidewalks. In addition to the foregoing, Landlord shall, as an Operating Expense, be responsible for the following: exterior pest control; exterior window cleaning; exterior stair systems; and sanitary lift stations. If Tenant becomes aware of any condition that is Landlord s responsibility to repair under this subsection or subsection (a) above, then Tenant shall promptly notify Landlord in writing of the condition. Moreover, regardless of who bears responsibility for repair, Tenant shall immediately notify Landlord in writing if Tenant becomes aware of any areas of water intrusion or mold growth in or about the Premises. (c) Supplemental Service. If Tenant requests, and if Landlord is able to furnish, any service or maintenance over and above the scope of services or maintenance required to be provided by Landlord under this Lease, then Tenant shall pay to Landlord, within 10 days after being billed therefor, Landlord s charge for such supplemental service or maintenance (together with a supplemental service fee of 10% thereof). (d) Tenant s Obligation to Maintain at Tenant s Expense. Except as otherwise expressly provided in subsections (a) and (b) above, Tenant shall Maintain, at its sole expense, the following: (i) the Building Systems (including, without limitation, exterior lighting); and (ii) the Building and all fixtures and equipment in the Building (including, without limitation, the wearing surface of the floor slab and the floor slab s edges and caulking, all dock equipment (including dock doors, levelers, bumpers, dock shelters, ramps and dock lights) and all telephone, telecommunications, data and other communication lines); ordinary wear and tear excepted. In addition to the foregoing, Tenant, at its sole cost, shall be responsible for the following: security; interior pest control; interior window cleaning; janitorial; trash and recyclables collection services (including dumpsters); office/warehouse lighting (including all bulbs and ballasts); and ceiling tiles. Tenant shall perform each of its Maintenance obligations (i) with a service provider and a service agreement reasonably acceptable to Landlord and, if applicable, in accordance with any manufacturer s recommendations and/or warranty requirements, and (ii) provide Landlord with documentation evidencing the satisfactory payment and completion (or results) of any such Maintenance. All Maintenance by Tenant shall utilize materials and equipment which are comparable to those originally used in constructing the Building. Tenant, upon receipt and any Landlord request, shall provide Landlord with copies of all written information (including, without limitation, agreements, contracts, records, reports, certificates, invoices and receipts) relating to any Tenant Maintenance hereunder. Tenant, at its sole expense, will be solely responsible for ensuring that any Maintenance affecting the Building roof is performed in a manner that does not violate the Building s roof warranty, and Tenant shall be solely responsible for any costs or expenses that are not covered by such warranty. Notwithstanding the foregoing, if a capital replacement of any heating, ventilation and air conditioning system, or other Building System, equipment or fixture exclusively serving the Premises is required during the Term of this Lease (other than as a result of the acts or omissions of Tenant or its Agents), then Landlord shall replace such system, equipment or fixture exclusively serving the Premises, using Building standard materials, and the cost thereof shall be paid by Landlord and thereafter the cost thereof shall be amortized, at the rate of 10% per annum, over the estimated useful life thereof, and Tenant shall be responsible for paying Landlord, as additional Rent hereunder (in equal monthly installments on the first day of each month during the remaining Term or any extended Term of this Lease), that portion of the R-2-1 SL-3

87 costs for such replacement which is attributable to the portion of the useful life of such replacement which falls within the then remaining term or any extended Term of this Lease. (e) Tenant s Failure to Maintain. If Tenant fails to Maintain the Premises in accordance with this Lease, then Landlord, subject to Tenant s notice and cure rights expressly provided in this Lease, shall have the rights and remedies set forth in Section 22 of this Lease; provided, however, that in the case of a condition that Landlord reasonably believes poses an imminent threat to life, safety or damage to property, Landlord may take immediate action to correct such failure, and Tenant shall pay to Landlord, within 10 days after being billed therefor, any and all reasonable costs incurred by Landlord in connection with such correction, together with an administrative fee of 10% of such costs. R-2-2 SL-3

88 EXHIBIT A PLAN SHOWING PREMISES A-1

89 EXHIBIT B BUILDING RULES 1. Any sidewalks, lobbies, passages and stairways shall not be obstructed or used by Tenant for any purpose other than ingress and egress from and to the Premises. Landlord shall in all cases retain the right to control or prevent access by all persons whose presence, in the judgment of Landlord, shall be prejudicial to the safety, peace or character of the Premises. 2. The toilet rooms, toilets, urinals, sinks, faucets, plumbing or other service apparatus of any kind shall not be used for any purposes other than those for which they were installed, and no sweepings, rubbish, rags, ashes, chemicals or other refuse or injurious substances shall be placed therein or used in connection therewith or left in any lobbies, passages, elevators or stairways. 3. Tenant shall not impair in any way the fire safety system and shall comply with all safety, fire protection and evacuation procedures and regulations established by Landlord, any governmental agency or any insurance company insuring the Building, including without limitation the insurer s Red Tag Permit System, Hot Work Permit System and all other fire protection impairment procedures. No person shall go on the roof without Landlord s prior written permission. 4. Skylights, windows, doors and transoms shall not be covered or obstructed by Tenant, and Tenant shall not install any window covering which would affect the exterior appearance of the Building, except as approved in writing by Landlord. Tenant shall not remove, without Landlord s prior written consent, any shades, blinds or curtains in the Premises. 5. Without Landlord s prior written consent, Tenant shall not hang, install, mount, suspend or attach anything from or to any sprinkler, plumbing, utility or other lines. If Tenant hangs, installs, mounts, suspends or attaches anything from or to any doors, windows, walls, floors or ceilings, Tenant shall spackle and sand all holes and repair any damage caused thereby or by the removal thereof at or prior to the expiration or termination of the Lease. If Tenant elects to seal the floor, Tenant shall seal the entire unfinished floor area within the Premises. 6. Tenant shall not change any locks or place additional locks upon any doors. 7. Tenant shall not use or keep in the Building any matter having an offensive odor or which may negatively affect the indoor air quality of the Building, or any explosive or highly flammable material; nor shall any animals other than service animals in the company of their handlers be brought into or kept in or about the Premises. 8. If Tenant desires to introduce electrical, signaling, telegraphic, telephonic, protective alarm or other wires, apparatus or devices, Landlord shall direct where and how the same are to be placed, and except as so directed, no installation boring or cutting shall be permitted. Landlord shall have the right to prevent and to cut off the transmission of excessive or dangerous current of electricity or annoyances into or through the Building or the Premises and to require the changing of wiring connections or layout at Tenant s expense, to the extent that Landlord may deem necessary, and further to require compliance with such reasonable rules as Landlord may establish relating thereto, and in the event of non-compliance with the requirements or rules, Landlord shall have the right immediately to cut wiring or to do what it considers necessary to remove the danger, annoyance or electrical interference with apparatus in any part of the Building. All wires installed by Tenant must be clearly tagged at the distributing boards and junction boxes and elsewhere where required by Landlord, with the number of the office to which said wires lead, and the purpose for which the wires respectively are used, together with the name of the concern, if any, operating same. 9. Tenant shall not place weights anywhere beyond the safe carrying capacity of the Building. 10. The use of rooms as sleeping quarters is strictly prohibited at all times. 11. Tenant shall comply with all parking regulations promulgated by Landlord from time to time for the orderly use of the vehicle parking areas, including without limitation the following: Parking shall be limited to automobiles, passenger or equivalent vans, motorcycles, light four wheel pickup trucks and (in designated areas) bicycles. No vehicles shall be left in the parking lot overnight without Landlord s prior written approval. Parked vehicles shall not be used for vending or any other business or other activity while parked in the parking areas, except that Tenant shall be permitted to have food trucks on the Premises to serve food to its employees and contractors. Vehicles shall be parked only in striped parking spaces, except for loading and unloading, which shall occur solely in zones marked for such purpose, and be so conducted as to not unreasonably B-1

90 interfere with traffic flow within the Premises. Employee and tenant vehicles shall not be parked in spaces marked for visitor parking or other specific use. All vehicles entering or parking in the parking areas shall do so at owner s sole risk and Landlord assumes no responsibility for any damage, destruction, vandalism or theft. Tenant shall cooperate with Landlord in any measures implemented by Landlord to control abuse of the parking areas, including without limitation access control programs, tenant and guest vehicle identification programs, and validated parking programs, provided that no such validated parking program shall result in Tenant being charged for spaces to which it has a right to free use under its Lease. Each vehicle owner shall promptly respond to any sounding vehicle alarm or horn, and failure to do so may result in temporary or permanent exclusion of such vehicle from the parking areas. Any vehicle which violates the parking regulations may be cited, towed at the expense of the owner, temporarily or permanently excluded from the parking areas, or subject to other lawful consequence. 12. If Landlord designates the Building as a non-smoking building, Tenant and its Agents shall not smoke in the Building or at the Building entrances and exits or in any other areas around the Building designated by Landlord as non-smoking areas. 13. If at Tenant s request, Landlord consents to Tenant having a dumpster at the Premises, Tenant shall locate the dumpster in the area designated by Landlord and shall keep and maintain the dumpster clean and painted with lids and doors in good working order and, at Landlord s request, locked. 14. Tenant shall provide Landlord with a written identification of any vendors engaged by Tenant to perform services for Tenant at the Premises (examples: cleaners, security guards/monitors, trash haulers, telecommunications installers/maintenance). 15. Tenant shall comply with any move-in/move-out rules provided by Landlord. 16. Tenant shall comply with the following additional sustainability requirements: a. Tenant shall provide, within ten (10) days after Landlord s request from time to time, reasonably requested energy and water consumption data and related information in connection with Tenant s use of the Premises and all construction, maintenance, repairs, cleaning, trash disposal and recycling relating to the Premises performed by or on behalf of Tenant all to be used for purposes of monitoring and improving building efficiencies. b. Low/No VOC Paint. Tenant shall use only interior paints and coatings (including primers) meeting the environmental requirements of the current Green Seal TM Environmental Standard For Paints And Coatings GS-11. c. Green Cleaning Products. All cleaning products used in the Premises must be certified under the current Green Seal TM Environmental Standard for Industrial and Institutional Cleaners GS-37. d. Recycling. The following items must be recycled according to local capabilities, guidelines and regulations: (i) Paper; (ii) Cardboard; (iii) Plastics; (iv) Aluminum Cans/Metals; and (v) Glass. 17. Tenant shall cause all of Tenant s Agents to comply with these Building Rules. 18. Landlord reserves the right to rescind, suspend or modify any rules or regulations, either on a temporary or permanent basis, and to make such other rules and regulations as, in Landlord s reasonable judgment, may from time to time be needed for the safety, care, maintenance, operation and cleanliness of the Premises. Notice of any action by Landlord referred to in this section, given to Tenant, shall have the same force and effect as if originally made a part of the foregoing Lease. New rules or regulations will not, however, be unreasonably inconsistent with the proper and rightful enjoyment of the Premises by Tenant under the Lease. B-2

91 EXHIBIT C TENANT ESTOPPEL CERTIFICATE Please refer to the documents described in Schedule 1 hereto, (the Lease Documents ) including the Lease therein described; all defined terms in this Certificate shall have the same meanings as set forth in the Lease unless otherwise expressly set forth herein. The undersigned Tenant hereby certifies that it is the tenant under the Lease. Tenant hereby further acknowledges that it has been advised that the Lease may be collaterally assigned in connection with a proposed financing secured by the Premises and/or may be assigned in connection with a sale of the Premises and certifies both to Landlord and to any and all prospective mortgagees and purchasers of the Premises, including any trustee on behalf of any holders of notes or other similar instruments, any holders from time to time of such notes or other instruments, and their respective successors and assigns (the Beneficiaries ) that as of the date hereof: 1. The information set forth in attached Schedule 1 is true and correct. 2. Tenant is in occupancy of the Premises and the Lease is in full force and effect, and, except by such writings as are identified on Schedule l, has not been modified, assigned, supplemented or amended since its original execution, nor are there any other agreements between Landlord and Tenant concerning the Premises, whether oral or written. 3. To Tenant s actual, present knowledge, after due inquiry of Tenant s facility manager for the Building, all conditions and agreements under the Lease to be satisfied or performed by Landlord have been satisfied and performed. 4. Tenant is not in default under the Lease Documents, Tenant has not received any notice of default under the Lease Documents, and, to Tenant s knowledge, there are no events which have occurred that, with the giving of notice and/or the passage of time, would result in a default by Tenant under the Lease Documents. 5. Tenant has not paid any Rent due under the Lease more than 30 days in advance of the date due under the Lease and Tenant has no rights of setoff, counterclaim, concession or other rights of diminution of any Rent due and payable under the Lease except as set forth in Schedule To Tenant s actual, present knowledge, after due inquiry of Tenant s facility manager for the Building, there are no uncured defaults on the part of Landlord under the Lease Documents. Tenant has not sent any notice of default under the Lease Documents to Landlord, and, to Tenant s knowledge, there are no events which have occurred that, with the giving of notice and/or the passage of time, would result in a default by Landlord thereunder, and that at the present time Tenant has no claim against Landlord under the Lease Documents. 7. Except as expressly set forth in Part G of Schedule 1, there are no provisions for any, and Tenant has no, options with respect to all or any portion of the Premises. 8. No action, voluntary or involuntary, is pending against Tenant under federal or state bankruptcy or insolvency law. 9. The undersigned has the authority to execute and deliver this Certificate on behalf of Tenant and acknowledges that all Beneficiaries will rely upon this Certificate in purchasing the Premises or extending credit to Landlord or its successors in interest. 10. This Certificate shall be binding upon the successors, assigns and representatives of Tenant and any party claiming through or under Tenant and shall inure to the benefit of all Beneficiaries. IN WITNESS WHEREOF, Tenant has executed this Certificate this day of, 2. Name of Tenant By: Title: C-1

92 SCHEDULE 1 TO TENANT ESTOPPEL CERTIFICATE Lease Documents, Lease Terms and Current Status A. Date of Lease: B. Parties: 1. Landlord: 2. Tenant: C. Premises: D. Modifications, Assignments, Supplements or Amendments to Lease: E. Commencement Date: F. Expiration of Current Term: G. Option Rights: H. Security Deposit Paid to Landlord: $ I. Current Minimum Annual Rent: $ J. Current Annual Operating Expenses: $ K. Current Total Rent: $ L. Square Feet Demised: C-2

93 EXHIBIT D PROHIBITED USES The following uses are prohibited in or about the Premises: 1. Automobile/truck maintenance, repair or fueling, except for ancillary mobile refueling and repair work as is required for trucks used in any tenant s warehouse and distribution business; 2. Battery manufacturing or reclamation; 3. Ceramics and jewelry manufacturing or finishing, except for the assembly of finished ceramics and jewelry components; 4. Chemical (organic or inorganic) manufacturing; 5. Drum recycling; 6. Dry cleaning; 7. Manufacturing, storage and use of explosives. For purposes hereof, explosives shall mean an explosive material, such as TNT, ammunition and/or fireworks; 8. Hazardous Materials, except for (a) storage and distribution of products containing Hazardous Materials, such as, perfumes, colognes, fragrances, aerosol cans and building materials, and (b) activities which are incidental to the ordinary course of any tenant s business, kept in reasonable quantities for such incidental activities, and are conducted in accordance with all Environmental Laws; 9. Leather production, tanning or finishing; 10. Hospitals; and the processing, treatment or storage of bio-hazardous waste in the Building, other than the storage of minimal quantities of such materials, which storage is incidental to the ordinary course of another tenant s business and are stored in accordance with all Environmental Laws; 11. Metal shredding, recycling or reclamation; 12. Metal smelting and refining; 13. Mining; 14. Paint, pigment and coating operations, other than (a) storage and distribution of same, and (b) the minimal use of such materials that are prudently used by other tenants in the usual and ordinary course of such other tenants business and are conducted in accordance with all Environmental Laws; 15. Petroleum refining; 16. Tire and rubber manufacturing; storage of tires in the Building with the exception that a de minimus number of spare tires for trucks may be retained; 17. Above-ground and/or underground fuel storage tanks (except for two (2) above-ground fuel tanks not in excess of 1,000 gallons each). Landlord acknowledges that Landlord or any other tenant shall be responsible, at Landlord s or such other tenant s sole cost and expense, for (a) obtaining all permits and approvals required for such fuel tanks, and (b) all compliance relating to or arising out of the use or presence of such fuel tanks; 18. Bulk Commercial storage of coffee beans, cocoa beans or powder, fresh fruits or vegetables not packaged for retail consumption; and 19. Residential use or occupancy. D-1

94 EXHIBIT E BASE BUILDING PLANS The following drawings, prepared by Allied Construction and its design consultants are incorporated in this Lease by reference: E-1 PHDATA _ 2 3