As filed with the Securities and Exchange Commission on June 25, 2021.
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CS Disco, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 7372 | 46-4254444 | ||
(State or other jurisdiction of incorporation or organization) |
(Primary Standard Industrial Classification Code Number) |
(I.R.S. Employer Identification No.) |
3700 N. Capital of Texas Hwy.
Suite 150
Austin, Texas 78746
(833) 653-4726
(Address, including zip code and telephone number, including area code, of registrants principal executive offices)
Kiwi Camara
Chief Executive Officer
CS Disco, Inc.
3700 N. Capital of Texas Hwy.
Suite 150
Austin, Texas 78746
(833) 653-4726
(Name, address, including zip code and telephone number, including area code, of agent for service)
Copies to:
Nicole Brookshire Jodie Bourdet Nicolas H.R. Dumont Trey Reilly Cooley LLP 55 Hudson Yards New York, New York 10001 (212) 479-6000 |
Michael Lafair Chief Financial Officer CS Disco, Inc. 3700 N. Capital of Texas Hwy. Suite 150 Austin, Texas 78746 (833) 653-4726 |
Joanne R. Soslow Morgan, Lewis & Bockius LLP 1701 Market Street Philadelphia, Pennsylvania 19103 (215) 963-5000 |
Approximate date of commencement of proposed sale of the securities to the public: As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box: ☐
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
Non-accelerated filer | ☒ | Smaller reporting company | ☒ | |||
Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
CALCULATION OF REGISTRATION FEE
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Title of each class of securities to be registered |
Proposed maximum aggregate offering price(1)(2) |
Amount of registration fee | ||
Common stock, $0.001 par value per share |
$100,000,000 | $10,910 | ||
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(1) | Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) of the Securities Act of 1933, as amended. |
(2) | Includes the aggregate offering price of additional shares that the underwriters have the option to purchase. |
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant will file a further amendment which specifically states that this Registration Statement will thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement will become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
The information in this preliminary prospectus is not complete and may be changed. We and the selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. Preliminary prospectus shares Common stock This is an initial public offering of shares of common stock of CS Disco, Inc. We are offering shares of common stock. Prior to this offering, there has been no public market for our common stock. The initial public offering price is expected to be between $ and $ per share. We intend to apply to list our common stock on under the symbol LAW. We are an emerging growth company and smaller reporting company as defined under the federal securities laws and, as such, we have elected to comply with certain reduced reporting requirements for this prospectus and may elect to do so in future filings. Per share Total Initial public offering price $ $ Underwriting discounts and commissions(1) $ $ Proceeds, before expenses, to us $ $ (1) See the section titled Underwriting for a description of the compensation payable to the underwriters. The selling stockholders identified in this prospectus have granted the underwriters an option for a period of 30 days to purchase up to additional shares of common stock at the initial public offering price less the underwriting discount and commission. We will not receive any proceeds from the sale of stock by the selling stockholders. Investing in our common stock involves risks. Please see Risk Factors beginning on page 15 to read about factors you should consider before buying our common stock. Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. The underwriters expect to deliver the shares of common stock to purchasers on , 2021. J.P. Morgan BofA Securities Canaccord Genuity Cowen Needham & Company Stifel Loop Capital Markets Citigroup Jefferies , 2021 Subject to completion. dated June 25, 2021
TECHNOLOGY TO STRENGTHEN THE RULE OF LAW
Rapid growth Revenue, in $ millions 43% CAGR $21.1 $19.2 $17.9 $15.7 $15.7 $14.2 $12.7 $11.3 $10.4 1Q 19 2Q 19 3Q 19 4Q 19 1Q 20 2Q 20 3Q 20 4Q 20 1Q 21
Strong and sustained growth $74mm 37% Revenue YoY revenue growth 71% $42bn Gross Margin Estimated market size Satisfied customers at enterprise scale 900+ 150+ Customers >$100K Customers 122% 63 Net Retention NPS* * Net Promoter Score as of December 31, 2020 All metrics as of March 31, 2021 or for the last twelve months ended March 31, 2021, as applicable and unless otherwise noted. Our GAAP net loss was $(14.5)mm as of the last twelve months ended March 31, 2021.
The DISCO Ediscovery platform empowered our litigation support team to more efficiently support clients needs due to its
advanced feature res, stability, ease of use, responsiveness and pred edictable pricing.
Jim Rosenthal Director of Litigation Support
DISCO provides us with increasased speed to evidence while helping to control our co costs with outside counsel.
Stephen Gage, ge, Director of eDiscovery
We think of DISCO as more than just a
technology vendor DISCO is a true part partner to our team.
Anna Berman, Partner
We appreciate DISCOs consultative approach to our ediscovery and managed revie review needs. We have been pleased with the end-to-end service rvice offering
offering and the platform platforms e ease of use, which has resulted in significa significant time and cost savings.
Arka
Chatteterjee Senior Intellectual Property Coounsel
DISCO creates a competitive advantage for for Perkins Coie. Not only can we e move incredi incredibly
quickly when need ded, we can n ensure our be best legal minds are se eeing the most ost important important documents as soon as possible.
Geoffrey
Vance, Chair of E-Discovery Services & Strategy
DISCO is a best-in-class discovery disc platform and their team of professionals profession are true
partners in helping us leverage tec echnology to simplify the discovery process and remain focused on our client work.
Patrick Murphy, Partner
OUR VALUES INNOVATION GRACE GRIT & ALL-IN
Donating to Central Texas Food Bank Catered lunch at DISCO HQ Volunteering at Central Texas Food Bank DISCOs 2020 Company Kickoff Donating presents to Salvation Army Angel Tree DISCOs macot, Fetch Product design sprint
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS OF OUR COMMON STOCK |
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F-1 |
Through and including , 2021 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealers obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.
Neither we, the selling stockholders nor any of the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. Neither we, the selling stockholders nor any of the underwriters take responsibility for, or can provide any assurance as to the reliability of, any other information that others may give you. We, the selling stockholders and the underwriters are offering to sell, and seeking offers to buy, shares of our common stock only under circumstances and in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock.
For investors outside the United States: neither we, the selling stockholders nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside of the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of our common stock and the distribution of this prospectus outside of the United States.
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This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, including the sections titled Risk Factors, Managements Discussion and Analysis of Financial Condition and Results of Operations, Business, and our consolidated financial statements and the related notes included elsewhere in this prospectus, before making an investment decision. Unless the context otherwise requires, all references in this prospectus to CS Disco, DISCO, the company, we, our, us or similar terms refer to CS Disco, Inc. and its subsidiaries.
Our Mission
Our mission is to use technology to strengthen the rule of law.
Overview
DISCO provides a cloud-native, artificial intelligence-powered legal solution that simplifies ediscovery, legal document review and case management for enterprises, law firms, legal services providers and governments. Our scalable, integrated solution enables legal departments to easily collect, process and review enterprise data that is relevant or potentially relevant to legal matters. We leverage a cloud-native architecture and powerful artificial intelligence, or AI, models to automatically identify legally relevant documents and improve the accuracy and speed of legal document review. Our AI models continuously learn from legal work conducted on our solution and can be reused across legal matters, which further strengthens our ability to help our customers find evidence and resolve matters faster as they expand usage of our solution. We provide legal departments with the ability to centralize legal data into a single solution, improving security and privacy for our customers, enabling transparent collaboration with other legal industry participants and allowing customers to reuse data and lawyer work product across legal matters. As of March 2021, our solution held more than 10 billion files and 2.5 petabytes of data and we used more than 14 billion serverless compute calls in 2021 to process and enrich data for our customers. By automating the manual, time-consuming and error-prone parts of ediscovery, legal document review and case management, we empower legal departments to focus on delivering better legal outcomes.
Since our founding in 2013, and beginning with our founders, DISCO has assembled a team that combines strength in software engineering, cloud computing and AI, with deep legal expertise and a rich understanding of the problems that lawyers and legal professionals face and how they work. This combination of expertise means that our team is distinctly well-positioned to execute on our vision of building technology that powers the legal function across companies in every industry.
Lawyers and legal professionals love our solution, as demonstrated by our Net Promoter Score, or NPS, of 63 as of December 31, 2020. We calculate NPS based on the basis of a survey that asks, How likely are you to recommend DISCO to a colleague?. The survey respondent can choose an integer between zero and ten, with the percentage of users responding with a 6 or below subtracted from the percentage of users responding with a 9 or 10 to calculate the NPS. Our relentless focus on delivering a solution that legal professionals love is coupled with a simple and transparent usage-based business model. We believe this enables our customers to easily adopt our solution, realize rapid time-to-value, scale their usage within and across applications to match their changing needs and collaborate with others. This has allowed us to build a powerful product-led growth engine that efficiently expands the usage of our solution for more legal matters and use cases within organizations, spreads our solution across the legal ecosystem through collaboration and word-of-mouth and increases the value of our solution as we collect and process more data and lawyers do more legal work in our solution. The success of this growth model is underscored by our dollar-based net retention rate of 122% as of March 31, 2021, as well as by the fact that, in 2020, 171 law firms in the 2020 AmLaw 200, a ranking of the 200-highest grossing law firms in the United States, used DISCO in the course of legal work on behalf of their clients. As of March 31, 2021, we had 909 enterprises, law firms, legal services providers and government organizations as DISCO customers.
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Law affects everyone, from the largest multinational corporations to local mom-and-pop businesses, from the most powerful national governments to the smallest towns and from major civic organizations to individual citizens. The impact of law on the business world is only growing, with businesses today operating in more jurisdictions than ever before and increasingly exposed to a growing number of constantly changing laws and regulations that can materially damage a companys brand and operations. This has turned the corporate legal function into a mission-critical, strategic component of the modern enterprise and contributed to the growth in global spend on legal services, which is forecasted by Statista to be $767 billion in 2021. But despite its enormous scale and attractive opportunities for automation and the application of AI to improve lawyer productivity and job satisfaction, the legal industry has lagged behind other industries in digitization and cloud technology adoption.
Since our inception, our principal goal has been to create experiences that feel magical to lawyers, by delivering intuitive, intelligent offerings that are well-tailored to lawyers workflows and a joy for legal professionals to use. Our solution is enabled by our deep investment in a modern, scalable cloud architecture that accelerates application development; makes our offerings robust, scalable and secure; and enables us to act as a secure single system of record and engagement for all legal data at enterprise scale. We have built our solution to incorporate the latest advances in automation and AI directly into existing lawyer workflows to multiply lawyer productivity across the ediscovery and legal document review lifecycle. Our cloud-native, AI-powered software is augmented with deep expertise, consultative professional services and flexible customer support that enables us to be a single-source provider and meet the diverse needs of customers in every industry. With our full-stack solution, legal departments no longer need to rely on a fragmented network of slow, antiquated processes and law firms and service providers manually collecting, searching and reviewing documents. We believe this reduces legal costs, increases lawyer productivity and improves legal outcomes. We intend to extend our solution and apply it to other kinds of legal work over time, enabling us to compete for an increasing share of global spend on legal services.
Our approach has enabled us to serve a diverse set of enterprises across a broad set of industries, as well as law firms, legal services providers of all sizes and government organizations. While we serve customers across many different industries, the way in which legal professionals use our solution is similar regardless of the specific industry in which each customer operates. This commonality has created efficiencies in our sales, marketing and research and development efforts because we do not need to tailor our solution to a wide range of industries. The broad applicability of our solution across a spectrum of industries has created a significant market opportunity for us, which we estimate to be $42 billion globally.
We believe that great achievements come from aiming great people at big problems, and that our employees, who we call Discovians, are the principal driver of our success. We strive to attract, retain, develop and promote humble, curious and empathetic Discovians across all areas of our business. We are committed to fostering a diverse and inclusive workplace that values input from every corner of our business and creating an environment where all people feel welcome and connected regardless of their background. Our culture is guided by the principles we set forth in our MAGIC core values: Meaningful impact, All-in, Grit and grace, Innovation and Craft. These principles shape our culture and guide the way we work, support each other and our communities and serve our customers. We believe that our culture and commitment to giving back to our community are critical to advancing our mission of using technology to strengthen the rule of law.
We have experienced rapid growth in recent periods. Since inception, we have raised $161.0 million of capital and we had $53.6 million of cash and cash equivalents as of March 31, 2021. We generated revenue of $48.6 million and $68.4 million in 2019 and 2020, respectively, representing year-over-year growth of 41%. We generated revenue of $15.7 million and $21.1 million in the three months ended March 31, 2020 and 2021, respectively, representing period-over-period growth of 35%. Our net loss was $29.8 million, $22.9 million, $11.2 million and $2.9 million for the years ended December 31, 2019 and 2020 and the three months ended
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March 31, 2020 and 2021, respectively. We generated Adjusted EBITDA of $(25.4) million, $(19.9) million, $(10.3) million and $(1.9) million for the years ended December 31, 2019 and 2020 and the three months ended March 31, 2020 and 2021, respectively. See the section titled Managements Discussion and Analysis of Financial Condition and Results of OperationsNon-GAAP Financial Measure for the definition of Adjusted EBITDA, as well as a reconciliation of Adjusted EBITDA to net loss, the most directly comparable financial measure stated in accordance with GAAP.
Industry Background
Law is fundamental to society, affecting everyone from the largest multinational corporations to local mom-and-pop businesses, from the most powerful national governments to the smallest towns, from major civic organizations to individual citizens. The impact of law on business is only growing, with legal issues creating headline news, from the opioids epidemic to litigation over national elections to the creation of new business models such as the burgeoning gig economy. According to a study by Statista, the estimated global spend on legal services is forecasted to be $767 billion in 2021.
Key trends that are influencing the legal industry include:
The Legal Function is Increasingly Mission-Critical to Every Organization in the World
Three related trends are increasing the relative strategic importance of the legal function in organizations:
| As businesses operate in more jurisdictions, they are exposed to more and more varied laws and regulations; |
| Many jurisdictions are continuously creating more laws and regulations, often in new and evolving areas, increasing the exposure of businesses to legal liability; and |
| Legal issues increasingly create liability and front-page news for businesses, with attendant risks to a companys brand, reputation and business outcomes. |
Digital Transformations that have Happened in Other Business Functions are Now Happening in the Legal Function
Despite the enormous scale of the legal industry, the increasing sophistication of enterprise clients and rampant digital transformation in other industries, the legal industry has lagged behind nearly every other industry in digitization and cloud technology adoption. This is finally changing, driven by a growing realization that the only way to effectively cope with the increasing demand for legal services and the increasing complexity of the legal environment is to leverage technology to increase the productivity of lawyers and by the maturity of underlying technologies like cloud computing and AI that make it possible to build transformative legaltech applications.
The Volume, Variety and Velocity of Enterprise Data that can Become Documentary Evidence in Legal Matters is Exploding
The large and growing volume, variety and velocity of enterprise data has made the traditional ways of collecting, searching and reviewing enterprise data to find documentary evidence extremely cumbersome, complex and time-consuming. This is driving legal departments to adopt more sophisticated and easier to use technology solutions that can accelerate the process of collecting, searching and reviewing massive amounts of diverse enterprise data with accuracy, speed and security.
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Artificial Intelligence and Cloud Computing Have Reached a Point of Technological Maturity Where They Enable Legaltech Applications to Transform Legal Work
Cloud computing and modern approaches to AI create the conditions under which it is possible to build modern legaltech applications that can automate much of the previously manual, time-consuming work done by legal professionals. These technological advances make it possible to build legaltech applications that increase lawyer productivity, improve lawyer job satisfaction and ultimately empower lawyers to improve legal outcomes for their clients.
The Pursuit of Differentiation in the Highly Competitive Legal Industry is Driving Rapid Technology Adoption by Legal Departments, Law Firms and Legal Services Providers
The legal industry is highly fragmented and competitive. Law firms and legal services providers must differentiate themselves from their competitors or risk declining market share, declining earnings, consolidation, or all of the above. The competitive dynamics of the legal industry has led to increasing pressure to adopt legaltech.
Legal Professionals are Increasingly Seeking a Modern, Fast and Easy-to-Use Solution that is Purpose-Built for How They Work
The rapid growth in use of consumer software and other consumer technology, including the proliferation of mobile devices; the generational shift of lawyers; and the increasing career mobility of lawyers are all contributing to a radical change in expectations for legal technology.
Limitations of Existing Solutions
Today, most legal departments rely on a fragmented, services-heavy and multi-vendor approach which poses several challenges that limit the productivity of lawyers and legal professionals, including:
| Incomplete Point Solutions that are Poorly Integrated. Existing solutions generally force legal departments to coordinate the flow of work across law firms and legal services providers and require some or all of these stakeholders to manage the flow of data between multiple, non-interoperable, legacy software point solutions. |
| Extremely Manual. Existing ediscovery point solutions generally lack a robust, software-driven automation layer, which requires legal departments to rely on a heavy layer of human services provided by legal services providers. Additionally, legal document review solutions often lack robust software tools for data reuse and easy-to-use AI integrated directly into lawyer workflows, forcing existing legal document review solutions to rely on large teams of lawyers to manually review documents. |
| Difficult to Use. The complexity and poor usability of existing solutions often deter lawyers from using them directly and limit their widespread adoption across teams, preventing legal departments from fully realizing the benefits of advances in technology such as AI. |
| Slow. Most existing solutions do not take advantage of elastic computing and modern approaches to automation and AI and are slow to complete basic tasks across the spectrum of ediscovery and legal document review. Additionally, the heavy reliance on human services as part of existing solutions introduces further delays, with lawyers repeatedly waiting for legal services providers to complete tasks that they cannot complete themselves. |
| Lack Robust, Easy-to-Use AI Capabilities. Most existing solutions lack comprehensive AI capabilities that can help lawyers classify and comprehend massive amounts of structured and unstructured data quickly and reliably. Additionally, many existing solutions lack the ability to |
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continuously improve AI models in real-time based on lawyers work or train and use these models across multiple legal matters so that legal document review need not start from scratch in each new legal matter. |
| Inability to Scale. Existing solutions often fail to take advantage of modern developments in cloud computing such as elastic compute and serverless compute to dynamically scale computing resources to handle, store and process transient spikes in data required by modern legal matters in real-time. |
| Lack of Security, Privacy, Control and Extensibility. Most existing solutions fail to provide legal departments with a secure system of record and engagement for enterprise data involved in legal matters. |
| Expensive and Unpredictable. Existing solutions can require legal departments to manage multiple solutions from multiple vendors with separate, opaque pricing models. |
Our Solution
Our solution is the result of uniquely combining an ability to deliver world-class software engineering with a deep love and respect for the law. Our aim is to create a solution that feels magical to lawyers. Our full-stack solution currently includes the following offerings:
| DISCO Ediscovery automates much of the ediscovery process, saving legal departments from costly and cumbersome manual tasks associated with collecting, processing, enriching, searching, reviewing, analyzing, producing and using enterprise data that is at issue in legal matters. |
| DISCO Review is AI-powered document review that consistently delivers legal document reviews that are high quality, on time and on budget. |
| DISCO Case Builder allows legal professionals to collaborate across teams to effectively build a compelling case by offering a single place to search, organize and review witness testimony and other important legal data. |
The key elements of our solution include:
| Comprehensive and Full-Stack. We deliver an end-to-end, full-stack solution designed to address each part of the problem of managing enterprise data and witness testimony in legal matters, from ediscovery to legal document review to case management. |
| Automation that Renders Heavy Human Ediscovery Services Obsolete. We designed our solution to automate most bill-by-the-hour professional services traditionally involved in ediscovery. |
| AI that Simplifies and Streamlines Legal Document Review. Our AI models apply cloud computing and sophisticated machine learning methods to classify and sort massive amounts of data and provide precise predictions of document relevance in a fraction of the time required for traditional review. |
| Purpose-Built for Lawyers and Other Legal Professionals. The extensive background that many DISCO employees have as former practicing lawyers, as well as our deep product engagement with customers on each matter, give us a deep understanding of the needs and preferences of legal professionals. Every feature of our solution was built to seamlessly integrate with the workflows lawyers actually employ on a daily basis. |
| Powerful, Scalable and Extensible Modern Cloud Architecture. Our state-of-the-art cloud-native architecture delivers superior performance, scalability and extensibility. |
Our Business Model
We believe that the combination of our designed-for-legal applications and our usage-based business model makes it easy for customers to adopt and begin using our solution, realize rapid time to value and expand their
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usage of our solution over time. Our business model benefits from viral characteristics and powerful network effects that continuously enhance the value of our solution, extend our reach and help us efficiently acquire new customers as we grow. These effects happen along several dimensions, which together we refer to as our product-led growth engine.
| Viral Expansion Within an Organization. Our business model allows customers to easily adopt and use our solution for an initial set of legal matters, regardless of size. After realizing the benefits of our solution, customers often both expand usage of our solution to more legal matters and adopt more of our offerings. This dynamic is reflected in our 122% dollar-based net retention rate as of March 31, 2021. |
| Viral Expansion Through Our Ecosystem. We designed our solution to facilitate widespread adoption across legal industry participants by allowing for potential customers to use our solution to collaborate with existing customers. These users may then become champions and encourage the companies they work for to become customers. Since many companies use multiple law firms and most law firm represents multiple companies, this process repeats itself as we acquire more customers, enabling a frictionless cycle of adoption across the legal ecosystem. |
| Network Effects Driven by Usage. As more lawyers use our solution the scale and diversity of the data, we collect and process and the nature of the legal work done on our solution grows. We enable customers to easily retain data and reuse it for future legal matters. Additionally, our AI models improve as they are trained on more data and observe more lawyer work on that data in our solution, which allows our customers to uncover evidence more quickly as we grow. |
Key Benefits of Our Solution
Our end-to-end solution was designed to improve the everyday experience of lawyers and legal professionals and improve legal outcomes for legal departments. We deliver the following key benefits:
| Full Stack and Turnkey. We enable customers to consume our offerings in a self-service way or as a turnkey, full-stack solution, giving our customers the flexibility to tailor their ediscovery and legal document review processes to their own legal work strategy and use different combinations of our offerings on different subsets of their legal work. |
| High End-User Satisfaction Driven by Applications Built for Lawyers and Other Legal Professionals. We strive to create product experiences that feel magical to lawyers: intuitive, easy to use, powerful and comprehensive. |
| Increased Accuracy and Quality of Review. Our solution allows lawyers to use AI and analytics integrated into a lawyer-friendly and highly automated workflow to increase the accuracy and quality of legal reviews. |
| Faster Resolution of Legal Matters with Better Outcomes. Our solution enables lawyers to determine the facts and use those facts to assess legal matters and produce evidence more quickly. We believe this enables them to resolve legal matters faster, which can result in significantly reduced legal costs and the reduction or avoidance of legal risks across their full portfolio of legal matters. |
| Scalable, Secure, Single System of Record and Engagement for Legal Data. The scalability, performance and extensibility of our cloud-native architecture allows customers to use DISCO as a secure single system of record and engagement for all enterprise data related to legal matters at enterprise scale. |
| Cost Flexibility and Predictability. Our simple, all-in pricing model and flexible terms align with our customers needs, are easy to understand and guarantee costs for our customers, allowing legal departments to improve cost predictability and budget planning. |
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What Sets Us Apart
We believe that the combination of our cloud-native technology, full-stack solution, world-class engineering and our deep legal expertise has resulted in several unique competitive strengths. These competitive advantages include:
| Full-Stack, Comprehensive Solution. We offer an end-to-end solution that is used for both ediscovery (DISCO Ediscovery) and AI-powered legal document review (DISCO Review), giving our customers the flexibility to decide how much of their ediscovery and legal document review process to outsource to us versus handle internally or through law firms and legal services providers. Our cloud-native, AI-powered solution is augmented with deep expertise, consultative professional services and flexible customer support. |
| Efficient Product-Led Growth Engine with Powerful Network Effects. Our model has enabled us to build an efficient, usage-based, product-led growth engine that spreads our solution across the legal ecosystem through collaboration and powerful word-of-mouth and facilitates rapid customer adoption and expansion. |
| Lawyer-Centric Applications Built by a Unique Combination of Deep Expertise and Continuous Solution Innovation. Our expertise in both engineering and law and our unique product design and development process, which we call Law Review, allows us to understand and anticipate what legal professionals need to accelerate and improve their work. |
| Cloud-Native, Scalable and Secure Solution Built on a High-Performing Application Architecture. Designed to operate on the cloud from the beginning, our solution architecture cannot be easily replicated and offers superior performance, scalability, availability, true multi-tenancy and lower operating costs compared to legacy software providers. |
| Powerful AI Coupled with Robust Data Management. Our use of AI coupled with our ability to be a secure, single system of record and engagement for our customers legal data allows legal departments to easily gather, act on, retain and reuse enterprise data for ongoing legal work, all within our solution. Our solution transforms an organizations legal data from a potential liability into a potential competitive advantage. |
| Designed for the Enterprise. Our solution is designed for enterprise adoption and can be applied to a wide variety of enterprise use cases, including not only litigation, but also for example, internal investigations, merger clearance and compliance. |
| Founder-Led Management Team with Deep Domain Expertise. Our deep familiarity with the day-to-day needs and preferences of lawyers forms the basis for the development of our solution and has enabled us to repeatedly deliver product experiences that lawyers and legal professionals love. |
| Strong Culture Committed to Our Employees, Our Community and the Rule of Law. We foster a culture of innovation, experimentation, acceptance and compassion that extends beyond the workplace. |
Our Market Opportunity
Legal services is a massive, growing global industry that we believe is significantly underpenetrated by modern technology solutions. According to Statista, total global legal services spend is forecasted to be $767 billion in 2021 and grow to $846 billion in 2023. Within legal services, DISCO Ediscovery addresses the ediscovery market. According to International Data Corporation, the worldwide ediscovery software and services market is forecasted to be $14.7 billion in 2021 and grow to $16.9 billion by 2024.
With the introduction of DISCO Review, we expanded the portion of the total legal services market that we address to include legal document review. We estimate the market for our solution to be approximately
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$42 billion. To estimate our total market opportunity, we identified the number of companies worldwide across all industries with at least 100 employees, based on certain independent industry data from S&P Global Market Intelligence. We then segmented these companies into four categories based on total number of employees: companies with 100-249 employees, companies with 250-2,499 employees, companies with 2,500-9,999 employees and companies with 10,000 or more employees. We then multiplied the number of companies in each category by the average revenue per corporate customer (excluding law firm and legal services provider customers) in each such cohort in 2020, which we believe represents a customer that has broadly deployed our solution across the enterprise and then summed the results from each category. We believe our estimated market opportunity will continue to grow as customers expand usage of our solution for more legal matters and adopt more of our offerings for more legal use cases.
Our Growth Strategies
We are pursuing multiple levers for future growth:
Fuel the DISCO Product-Led Growth Engine
| Maintain and advance our innovation and brand; |
| Add new customers; and |
| Increase usage and penetration within our existing customer base. |
Extend Our Reach
| Expand our sales coverage and establish a digital sales channel; |
| Expand internationally; |
| Extend and strengthen our channel partnerships and integrations; |
| Expand our offering portfolio; and |
| Pursue strategic acquisitions and strategic investments. |
Risks Related to Our Business and Investment in Our Common Stock
Investing in our common stock involves substantial risk. The risks described in the section titled Risk Factors immediately following this summary may cause us to not realize the full benefits of our strengths or may cause us to be unable to successfully execute all or part of our strategy. Some of the more significant challenges include the following:
| Our recent rapid growth may not be indicative of our future growth. Our rapid growth also makes it difficult to evaluate our future prospects and may increase the risk that we will not be successful. |
| Our limited operating history and our history of operating losses makes it difficult to evaluate our current business and prospects and may increase the risks associated with your investment. |
| Our business depends on customers increasing their use of our solution and any loss of customers or decline in their use of our solution could harm our business. |
| Usage of our solution accounts for substantially all of our revenue. |
| If we are unable to attract new customers and retain existing customers, our business, financial condition and results of operations will be adversely affected. |
| We rely upon third-party providers of cloud-based infrastructure to host our cloud-based solution. Any disruption in the operations of these third-party providers, limitations on capacity or interference with our use could adversely affect our business, financial condition and results of operations. |
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| We expect fluctuations of our financial results, which may cause quarterly comparisons not to be meaningful. |
| Our revenue growth depends in part on the success of our strategic relationships with law firms and other legal services providers, and if we are unable to establish and maintain successful relationships with them, our business, operating results and financial condition could be adversely affected. |
| The markets in which we participate are competitive, and if we do not compete effectively, our business will be harmed. |
| We employ a pricing model that subjects us to various challenges, and given our limited history with our pricing model, we may not be able to accurately predict the optimal pricing necessary to attract new customers and retain existing customers. |
| We rely on the performance of highly skilled personnel, including our management and other key employees, and the loss of one or more of such personnel, or of a significant number of our team members, could harm our business. |
| Our current operations are international in scope and we plan on further geographic expansion, creating a variety of operational challenges. |
| Unfavorable conditions in our industry or the global economy or reductions in legal spending could harm our business. |
| Our business and results of operations may be materially adversely affected by the recent COVID-19 outbreak or other similar outbreaks. |
| We may in the future be subject to legal proceedings and litigation, including intellectual property disputes, which are costly and may subject us to significant liability and increased costs of doing business. Our business may suffer if it is alleged or determined that our technology infringes the intellectual property rights of others. |
| We operate in a highly regulated industry and either are or may be subject to a wide range of federal, state and local, as well as foreign, laws, rules and regulations, and our failure to comply with these laws and regulations may force us to change our operations or harm our business. |
| Our computer systems, or those of any third parties on whom we depend, may fail or suffer security or data privacy breaches or other unauthorized or improper access to, use of, or destruction of our proprietary or confidential data, employee data, or personal data, which could result in additional costs, loss of revenue, significant liabilities, harm to our brand and material disruption of our operations. |
| Insiders have substantial control over us and will be able to influence corporate matters. |
Corporate Information
We were incorporated in Delaware in December 2013. Our principal executive offices are located at 3700 N. Capital of Texas Hwy., Suite 150, Austin, Texas 78746, and our telephone number at that address is (833) 653-4726. Our website address is www.csdisco.com. Information contained on, or that can be accessed through, our website is not incorporated by reference into this prospectus, and you should not consider information on our website to be part of this prospectus or in deciding to purchase our common stock.
DISCO and our other registered and common law trade names, trademarks and service marks are the property of CS Disco, Inc. or our subsidiaries. All other trademarks, trade names and service marks appearing in this prospectus are the property of their respective owners. Solely for convenience, the trademarks and trade names in this prospectus may be referred to without the ® and symbols, but such references should not be construed as any indicator that their respective owners will not assert their rights thereto.
9
Implications of Being an Emerging Growth Company and a Smaller Reporting Company
We are an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. We may take advantage of certain exemptions from various public company reporting requirements, including not being required to have our internal control over financial reporting audited by our independent registered public accounting firm under Section 404 of the Sarbanes-Oxley Act of 2002, or 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 non-binding advisory vote on executive compensation and any golden parachute payments. We may take advantage of these exemptions for up to five years or until we are no longer an emerging growth company, whichever is earlier. In addition, the JOBS Act provides that an emerging growth company can delay adopting new or revised accounting standards until those standards apply to private companies. We have elected to use the extended transition period under the JOBS Act. Accordingly, our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards.
We will remain an emerging growth company until the earliest of: (1) the last day of the fiscal year following the fifth anniversary of this offering; (2) the last day of the first fiscal year in which our annual gross revenue is $1.07 billion or more; (3) the date on which we have, during the previous rolling three-year period, issued more than $1.0 billion in non-convertible debt securities; and (4) the last day of the fiscal year in which the market value of our common stock held by non-affiliates exceeded $700 million as of June 30 of such fiscal year.
We are also a smaller reporting company as defined in the Securities Exchange Act of 1934, as amended. We may continue to be a smaller reporting company even after we are no longer an emerging growth company. We may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as (i) the market value of our voting and non-voting common stock held by non-affiliates is less than $250 million measured on the last business day of our second fiscal quarter or (ii) our annual revenue is less than $100 million during the most recently completed fiscal year and the market value of our voting and non-voting common stock held by non-affiliates is less than $700 million measured on the last business day of our second fiscal quarter. Specifically, as a smaller reporting company, we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and have reduced disclosure obligations regarding executive compensation, and, similar to emerging growth companies, if we are a smaller reporting company with less than $100 million in annual revenue, we would not be required to obtain an attestation report on internal control over financial reporting issued by our independent registered public accounting firm.
10
Common stock offered by us |
shares |
Option to purchase additional shares of common stock offered by the selling stockholders |
shares |
Common stock to be outstanding after this offering |
shares |
Use of proceeds |
We estimate that our net proceeds from the sale of our common stock that we are offering will be approximately $ million, assuming an initial public offering price of $ per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders. |
The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our common stock and facilitate our future access to the capital markets. As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to us from this offering. However, we currently intend to use the net proceeds we receive from this offering for working capital and other general corporate purposes, including developing and enhancing our technical infrastructure, solution and services, expanding our research and development efforts and sales and marketing operations, meeting the increased compliance requirements associated with our transition to and operation as a public company and expanding into new markets. We may also use a portion of the net proceeds to acquire complementary businesses, products, services or technologies. However, we do not have agreements or commitments to enter into any acquisitions at this time. |
See the section titled Use of Proceeds for additional information. |
Concentration of ownership |
Following this offering, our executive officers, directors and stockholders holding more than 5% of our outstanding shares, together with their affiliates, will hold, in the aggregate, approximately % of our outstanding capital stock (or % of our outstanding capital stock following this offering if the underwriters exercise their option in full to purchase additional shares of common stock from the selling stockholders), without giving effect to any purchases that these |
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holders may make through our directed share program or otherwise in this offering. See the section titled Principal and Selling Stockholders for additional information. |
Directed share program |
At our request, the underwriters have reserved up to % of the common stock for sale at the initial public offering price to persons who are directors, officers, employees, or who are otherwise associated with us through a directed share program. The number of shares of common stock available for sale to the general public will be reduced by the number of directed shares purchased by participants in the program. Any directed shares not purchased will be offered by the underwriters to the general public on the same basis as all other shares of common stock offered. We have agreed to indemnify the underwriters and their affiliates against certain liabilities and expenses, including liabilities under the Securities Act, in connection with sales of the reserved shares. For additional information, see the section titled Underwriting. |
Risk factors |
You should carefully read the Risk Factors beginning on page 15 and other information included in this prospectus for a discussion of facts that you should consider before deciding to invest in shares of our common stock. |
Proposed trading symbol |
We intend to apply to list our common stock on the under the symbol LAW. |
The number of shares of our common stock that will be outstanding immediately after this offering is based on 246,894,505 shares of our common stock outstanding as of March 31, 2021, and excludes:
| 15,173,280 shares of common stock issuable upon the exercise of options outstanding as of March 31, 2021 under our 2013 Long Term Incentive Plan, or 2013 Plan, with a weighted average exercise price of $0.79 per share; |
| shares of common stock issuable upon the exercise of options granted after March 31, 2021 under our 2013 Plan, with a weighted average exercise price of $ per share; |
| 249,356 shares of common stock issuable upon the exercise of warrants outstanding as of March 31, 2021, with a weighted average exercise price of $0.59 per share; |
| shares of common stock reserved for future issuance under our 2021 Equity Incentive Plan, or 2021 Plan, plus any future increases in the number of shares of common stock reserved for issuance thereunder, as more fully described in the section titled Executive CompensationEmployee Benefit Plans; and |
| shares of common stock reserved for issuance under our 2021 Employee Stock Purchase Plan, or ESPP, plus any future increases in the number of shares of common stock reserved for issuance thereunder, as more fully described in the section titled Executive CompensationEmployee Benefit Plans. |
In addition, unless we specifically state otherwise, the information in this prospectus assumes:
| the filing of our amended and restated certificate of incorporation and the effectiveness of our amended and restated bylaws, each of which will occur immediately prior to the completion of this offering; |
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|
a -for- stock split of our common stock and redeemable convertible preferred stock effected immediately prior to the completion of this offering; |
| the automatic conversion of all outstanding shares of our redeemable convertible preferred stock into 178,967,444 shares of common stock effective immediately prior to the completion of this offering; |
| no purchase of shares of our common stock by certain individual officers and directors through the directed share program described under Underwriting; |
| no exercise of the underwriters option to purchase up to an additional shares of common stock from the selling stockholders in this offering; and |
| no exercise of the outstanding stock options or warrants. |
13
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
The summary consolidated statements of operations and comprehensive loss data for the years ended December 31, 2019 and 2020 and the summary consolidated balance sheet data as of December 31, 2020 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated statements of operations and comprehensive loss data for the three months ended March 31, 2020 and 2021 and the summary consolidated balance sheet data as of March 31, 2021 have been derived from our unaudited interim consolidated financial statements included elsewhere in this prospectus. The unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements, and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly our financial position and results of operations. You should read the consolidated financial data set forth below in conjunction with our consolidated financial statements and the accompanying notes and the information in the section titled Managements Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results to be expected for any period in the future.
Year Ended December 31, | Three Months Ended March 31, | |||||||||||||||
(in thousands, except share and per share amounts) |
2019 | 2020 | 2020 | 2021 | ||||||||||||
(unaudited) | ||||||||||||||||
Consolidated Statements of Operations and Comprehensive Loss |
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Revenue |
$ | 48,556 | $ | 68,444 | $ | 15,668 | $ | 21,131 | ||||||||
Cost of revenue(1) |
14,457 | 20,449 | 5,071 | 5,788 | ||||||||||||
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Gross profit |
34,099 | 47,995 | 10,597 | 15,343 | ||||||||||||
Operating expenses: |
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Research and development(1) |
25,352 | 26,599 | 8,203 | 6,262 | ||||||||||||
Sales and marketing(1) |
26,122 | 31,061 | 9,322 | 7,876 | ||||||||||||
General and administrative(1) |
12,975 | 13,893 | 4,258 | 4,053 | ||||||||||||
Refund of sales and use taxes |
| (1,057 | ) | | | |||||||||||
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Total operating expenses |
64,449 | 70,496 | 21,783 | 18,191 | ||||||||||||
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Loss from operations |
(30,350 | ) | (22,501 | ) | (11,186 | ) | (2,848 | ) | ||||||||
Other income (expense): |
||||||||||||||||
Interest and other income |
652 | 155 | 63 | 13 | ||||||||||||
Interest and other expense |
(124 | ) | (456 | ) | (88 | ) | (57 | ) | ||||||||
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Total other income (expense) |
528 | (301 | ) | (25 | ) | (44 | ) | |||||||||
Loss from operations before income taxes |
(29,822 | ) | (22,802 | ) | (11,211 | ) | (2,892 | ) | ||||||||
Provision for income taxes |
(10 | ) | (71 | ) | (25 | ) | (36 | ) | ||||||||
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Net loss |
$ | (29,832 | ) | $ | (22,873 | ) | $ | (11,236 | ) | $ | (2,928 | ) | ||||
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Accretion of redeemable convertible preferred stock |
(86 | ) | (92 | ) | (23 | ) | (26 | ) | ||||||||
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Net loss attributable to common stockholders |
$ | (29,918 | ) | $ | (22,965 | ) | $ | (11,259 | ) | $ | (2,954 | ) | ||||
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Net loss per share, basic and diluted(2) |
$ | (0.46 | ) | $ | (0.35 | ) | $ | (0.17 | ) | $ | (0.04 | ) | ||||
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Weighted-average shares used to compute net loss per share, basic and diluted(2) |
64,600,950 | 65,856,005 | 65,496,143 | 66,940,380 | ||||||||||||
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Pro forma net loss per share, basic and diluted(3) |
$ | (0.10 | ) | $ | (0.01 | ) | ||||||||||
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Weighted-average shares used to compute pro forma net loss per share, basic and diluted(3) |
229,830,562 | 245,907,444 | ||||||||||||||
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14
(1) | Includes stock-based compensation expense as follows: |
Year Ended December 31, |
Three Months Ended March 31, |
|||||||||||||||
(in thousands) |
2019 | 2020 | 2020 | 2021 | ||||||||||||
(unaudited) | ||||||||||||||||
Cost of revenue |
$ | 7 | $ | 28 | $ | 6 | $ | 8 | ||||||||
Research and development |
727 | 864 | 222 | 201 | ||||||||||||
Sales and marketing |
301 | 335 | 70 | 83 | ||||||||||||
General and administrative |
3,085 | 766 | 190 | 196 | ||||||||||||
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Total |
$ | 4,120 | $ | 1,993 | $ | 488 | $ | 488 | ||||||||
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(2) | See Note 13 to our consolidated financial statements included elsewhere in this prospectus for an explanation of the calculations of our basic and diluted loss per share attributable to common stockholders and the weighted-average number of shares used in the computation of the per share amounts. |
(3) | Pro forma net loss per share gives effect to the automatic conversion of all outstanding shares of redeemable convertible preferred stock into an aggregate of 178,967,444 shares of common stock. |
As of March 31, 2021 | ||||||||||||
(in thousands) |
Actual | Pro Forma(1) | Pro Forma as Adjusted(2)(3) |
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Consolidated Balance Sheet Data |
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Cash and cash equivalents |
$ | 53,632 | $ | $ | ||||||||
Working capital(4) |
58,143 | |||||||||||
Total assets |
76,188 | |||||||||||
Total liabilities |
12,577 | |||||||||||
Redeemable convertible preferred stock |
160,826 | |||||||||||
Total stockholders deficit |
(97,215 | ) |
(1) | The pro forma consolidated balance sheet data gives effect to (a) the automatic conversion of all outstanding shares of redeemable convertible preferred stock into an aggregate of 178,967,444 shares of common stock and (b) the filing and effectiveness of our amended and restated certificate of incorporation, each of which will occur immediately prior to the completion of this offering. |
(2) | The pro forma as adjusted consolidated balance sheet data gives effect to (a) the items described in footnote (1) above and (b) our receipt of estimated net proceeds from the sale of shares of common stock that we are offering at an assumed initial public offering price of $ per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. |
(3) | A $1.00 increase (decrease) in the assumed initial public offering price of $ per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) each of cash and cash equivalents, working capital, total assets and total stockholders (deficit) equity by $ million, assuming that the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions. Similarly, each increase (decrease) of 1,000,000 shares in the number of shares of common stock offered by us would increase (decrease) each of cash and cash equivalents, working capital, total assets and total stockholders (deficit) equity by $ million, assuming the assumed initial public offering price of $ per share of common stock remains the same, and after deducting the estimated underwriting discounts and commissions. |
(4) | Working capital is defined as current assets less current liabilities. |
15
This offering and an investment in our common stock involve a high degree of risk. You should carefully consider the risks described below, together with the financial and other information contained in this prospectus, including the section titled Managements Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and related notes, before you decide to purchase shares of our common stock. If any of the following risks or additional risks and uncertainties not presently known to us or that we currently believe to be immaterial actually occurs, our business, financial condition, results of operations and prospects could be materially and adversely affected. Unless otherwise indicated, references in these risk factors to our business being harmed will include harm to our business, reputation, brand, financial condition, results of operations and prospects. As a result, the trading price of our common stock could decline and you could lose all or part of your investment in our common stock.
Risks Related to Our Growth and Capital Requirements
Our recent rapid growth may not be indicative of our future growth. Our rapid growth also makes it difficult to evaluate our future prospects and may increase the risk that we will not be successful.
We have experienced substantial growth in our business since inception. For example, our revenue was $48.6 million, $68.4 million, $15.7 million, and $21.1 million for the years ended December 31, 2019 and 2020 and the three months ended March 31, 2020 and 2021, respectively. We have also experienced significant growth in headcount, our number of customers, usage and amount of data delivered across our solution. You should not rely on the revenue growth of any prior quarterly or annual period as an indication of our future performance. Even if our revenue continues to increase, we expect that our revenue growth rate may decline in the future as a result of a variety of factors, including the maturation of our business, increased competition, changes to technology, a decrease in the growth of our overall market, or our failure, for any reason, to continue to take advantage of growth opportunities. Overall growth of our revenue depends on a number of factors, including our ability to:
| price our solution effectively so that we are able to attract new customers and expand sales to our existing customers; |
| expand the functionality applications of our solution; |
| maintain and expand the rates at which customers use our solution; |
| provide our customers with support that meets their needs; |
| maintain or increase customer satisfaction with our solution; |
| continue to introduce and sell our solution to new markets; |
| continue to develop applications and new functionality on our solution and successfully further optimize our solution, including continued innovation of our artificial intelligence system for legal documents; |
| successfully identify and acquire or invest in businesses, products or technologies that we believe could complement or expand our solution; |
| recruit, hire, train and manage additional qualified developers, professionals and sales and marketing personnel; and |
| increase awareness of our brand on a global basis and successfully compete with other companies. |
We may not successfully accomplish any of these objectives, and as a result, it is difficult for us to forecast our future results of operations. If the assumptions that we use to plan our business are incorrect or change in reaction to changes in the markets in which we operate, or if we are unable to maintain consistent revenue or revenue growth, our stock price could be volatile and it may be difficult to achieve and maintain profitability.
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In addition, we expect to continue to expend substantial financial and other resources on:
| our technology infrastructure, including systems architecture, scalability, availability, performance and security; |
| sales and marketing, including a significant expansion of our sales organization to engage existing and prospective customers, increase brand awareness and drive adoption of our solution; |
| product development, including investments in our development team and the development of new applications of our solution and new functionality for our existing applications and in the protection of our intellectual property rights related to our product development; |
| services and support for the benefit and assistance of customers using our solution; |
| acquisitions or strategic investments; |
| international expansion; and |
| general administration, including increased legal and accounting expenses associated with being a public company. |
These investments may not be successful on the timeline we anticipate or at all and may not result in increased revenue growth. If we are unable to maintain or increase our revenue at a rate sufficient to offset the expected increase in our costs, our business, financial position and results of operations will be harmed and we may not be able to achieve or maintain profitability over the long term. Additionally, we have encountered, and may in the future encounter, risks and uncertainties frequently experienced by growing companies in rapidly changing industries, such as unforeseen operating expenses, difficulties, complications, delays and other known or unknown factors that may result in losses in future periods. If our revenue growth does not meet our expectations in future periods, our business, financial position and results of operations may be harmed and we may not achieve or maintain profitability in the future.
We may not be able to successfully manage our growth and, if we are not able to grow efficiently, our business, financial condition and results of operations could be harmed.
The rapid growth we have experienced in our business places significant demands on our operational infrastructure. As usage of our solution grows, we will need to devote additional resources to improving and maintaining our infrastructure and integrating with third-party applications, including open source software. In addition, we will need to appropriately scale our internal business systems and our services organization, including customer support and professional services, to serve our growing customer base. Any failure of or delay in these efforts could lead to impaired system performance and reduced customer satisfaction, resulting in decreased sales to customers, lower dollar-based net retention rates, the issuance of service credits or requested refunds, which would hurt our revenue growth and our reputation. Even if we are successful in our expansion efforts, they will be expensive and complex, and require the dedication of significant management time and attention. We could also face inefficiencies or service disruptions as a result of our efforts to scale our internal infrastructure. We cannot be sure that the expansion of and improvements to our internal infrastructure will be effectively implemented on a timely basis, if at all, and such failures could harm our business, financial condition and results of operations.
Our limited operating history and our history of operating losses makes it difficult to evaluate our current business and prospects and may increase the risks associated with your investment.
We launched our business in 2013 and have experienced net losses in each fiscal year since inception. We incurred net losses of $29.8 million, $22.9 million, $11.2 million and $2.9 million for the years ended December 31, 2019 and 2020 and the three months ended March 31, 2020 and 2021, respectively. As of March 31, 2021, we had an accumulated deficit of $106.0 million. We will need to generate and sustain increased revenue levels and manage costs in future periods in order to become profitable. Even if we achieve profitability,
17
we may not be able to maintain or increase our level of profitability. We intend to continue to incur significant costs to support further growth and further develop our solution, including expanding the functionality of our solution, technology infrastructure and business systems, expanding our direct sales force and partner ecosystem, increasing our marketing activities and growing our international operations. We will also face increased compliance costs associated with growth, expansion of our customer base and the costs of being a public company. These increased expenditures will make it harder for us to achieve or sustain profitability and we cannot predict if we will achieve or sustain profitability in the near term or at all. We may incur significant losses in the future for a number of reasons, including the other risks described herein, and unforeseen expenses, difficulties, complications and delays and other unknown events. If we are unable to achieve and sustain profitability, the value of our common stock could decline and our business may be harmed.
We have limited historical financial data and operate in a rapidly evolving market. As a result, it is difficult to evaluate our current business and our future prospects, including our ability to plan for and model future growth, and any predictions about our future revenue and expenses may not be as accurate as they would be if we had a longer operating history or operated in a more predictable market. We have encountered and will continue to encounter risks and difficulties frequently experienced by rapidly growing companies in constantly evolving industries, including the risks described in this prospectus. If we do not address these risks successfully, our business may be harmed.
Our ability to timely raise capital in the future may be limited, or such capital may be unavailable on acceptable terms, if at all.
We have funded our operations since inception primarily through payments received from our customers, sales of equity securities and borrowings under our credit facility. We cannot be certain when or if our operations will generate sufficient cash to fully fund our ongoing operations or the growth of our business. We intend to continue to make investments to support our business and may require additional funds. We evaluate financing opportunities from time to time and our ability to obtain financing will depend, among other things, on our development efforts, business plans, operating performance and condition of the capital markets at the time we seek financing. Additional financing may not be available on favorable terms, if at all. If adequate funds are not available on acceptable terms, we may be unable to invest in future growth opportunities, which could harm our business, operating results and financial condition. Furthermore, if we issue additional equity securities, stockholders will experience dilution and the new equity securities could have rights senior to those of our common stock. Because our decision to issue securities in future offerings will depend on numerous considerations, including factors beyond our control, we cannot predict or estimate the amount, timing or nature of any future issuances of debt or equity securities. As a result, our stockholders bear the risk of future issuances of debt or equity securities reducing the value of our common stock and diluting their interests.
Our issuance of additional capital stock in connection with financings, acquisitions, investments, our equity incentive plans or otherwise will dilute all other stockholders.
We may issue additional capital stock in the future that will result in dilution to all other stockholders. We expect to grant equity awards to employees, directors and consultants under our equity incentive plans. We may also raise capital through equity financings in the future. As part of our business strategy, we may acquire or make investments in companies and issue equity securities to pay for any such acquisition or investment. Any such issuances of additional capital stock may cause stockholders to experience significant dilution of their ownership interests and the per share value of our common stock to decline.
18
Risks Related to Our Business and Industry
Our business depends on customers increasing their use of our solution and any loss of customers or decline in their use of our solution could harm our business.
Our ability to grow and generate incremental revenue depends, in part, on our ability to maintain and grow our relationships with existing customers and to have them increase their usage of our solution. Customers are charged in part based on their usage of our solution. If our customers do not increase their usage of our solution, our revenue may decline and our results of operations may be harmed. Most of our customers do not have long-term contractual financial commitments to us and, therefore, most of our customers may reduce or cease their use of our solution at any time. Customers may terminate or reduce their use of our solution for any number of reasons, including the settlement or other resolution of legal matters, reductions in the volume of major legal matters experienced, customer budget constraints, customer satisfaction or negative perceptions as to the reliability of our solution relative to traditional methods of performing legal services, changes in our customers underlying businesses and financial conditions, changes in the type and size of our customers, pricing changes, legal industry trends away from litigation toward alternative forms of dispute resolution, competitive conditions and general economic conditions. In addition, even if our customers expand their usage of our solution, we cannot guarantee that they will maintain those usage levels for any meaningful period of time.
Customers under usage-based contracts can cancel their contracts or reduce their usage at any time. The loss of customers or reductions in their usage of our solution may each have a negative impact on our business, results of operations and financial condition. In addition, existing customers may negotiate lower rates for their usage in exchange for an agreement to renew, expand their usage in the future or adopt new solutions. As a result, these customers may not reduce their usage of our solution, but the revenue we derive from that usage will decrease. If our customers reduce their usage of or do not continue to use our solution, our revenue and other results of operations will decline and our business will suffer.
Our future success also depends in part on our ability to expand our existing customer relationships by increasing usage and selling additional solutions to our existing customers. The rate at which our customers purchase solutions from us depends on a number of factors, including our ability to develop additional solutions for our solution and the quality of such applications, general economic conditions and pricing and services offered by our competitors. If our efforts to increase usage and sell additional solutions to our customers are not successful, our business may be harmed.
Usage of our solution accounts for substantially all of our revenue.
We have derived and expect to continue to derive substantially all of our revenue from our solution. As such, market adoption of our solution is critical to our continued success. Our operating results could suffer due to:
| any decline in demand for our solution; |
| the failure of our solution to achieve continued market acceptance; |
| the failure of the market for cloud-based technologies for the legal market to continue to grow, or grow as quickly as we expect; |
| the introduction of products and technologies that serve as a replacement or substitute for, or represent an improvement over, our solution; |
| technological innovations or new standards that our solution does not address; |
| sensitivity to current or future prices offered by us or our competitors; |
| our customers development of their own proprietary solutions; and |
| our inability to release enhanced versions of our solution on a timely basis. |
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If the market for our solution grows more slowly than expected or if demand for our solution does not grow as quickly as anticipated, whether as a result of competition, pricing sensitivities, product obsolescence, technological change, unfavorable economic conditions, uncertain geopolitical environment, budgetary constraints of our customers or other factors, our business would be harmed.
If we are unable to attract new customers and retain existing customers, our business, financial condition and results of operations will be adversely affected.
We must attract new customers and retain existing customers to continue to grow our business. Our success will depend to a substantial extent on the widespread adoption of our solution as an alternative to existing offerings, including as an alternative to traditional systems relying on manual tasks and processes. Our customers include law firms and other legal services providers, legal departments of corporate enterprises and organizations and governmental entities. We must convince potential customers of the value of our cloud software solution and that our technologies can automate and simplify legal services more accurately, efficiently and securely than lawyers and their staff and the products of our competitors. This may require significant and costly sales efforts that are targeted at law firms and legal departments of corporate enterprises and organizations and the senior management of these potential customers. In addition, our ability to attract new customers depends in part on our partner ecosystem, consisting of law firms and other legal services providers who resell our solution., We must develop and maintain strong relations with our partner ecosystem and convince our partners of the value of our solution so that they drive adoption of our solution by their customers. Additionally, our solution allows our customers to add other legal industry participants as non-paying users of our solution. Our ability to attract new customers depends in part on our ability to convert the non-paying part users. Our success also depends in part on our ability to offer compelling solutions and the effectiveness of our sales organization. Numerous other factors, many of which are out of our control, may now or in the future impact our ability to acquire new customers, including, but not limited to:
| competitive offerings; |
| potential customers commitments to other providers; |
| real or perceived costs of switching to our solution; |
| our failure to expand, retain and motivate our sales and marketing personnel; |
| our failure to develop or expand relationships with potential customers and our partner ecosystem; |
| failure by us to help our customers to successfully deploy our solution; |
| negative media or industry or financial analyst commentary regarding us or our solution; |
| negative perceptions about the reliability of cloud-based legal solutions; |
| litigation activity; |
| and deteriorating general economic conditions. |
If the legal market and the demand for legal services decline, customers may decide not to adopt our solution and our existing customers may cease using our solution to reduce costs. As a result of these and other factors, we may be unable to attract new customers or retain existing customers, which would adversely affect our business, financial condition and results of operations.
If our solution fails to perform properly due to defects, interruptions, delays in performance or similar problems and if we fail to resolve any defect, interruption, delay or other problem, we could lose customers, become subject to service performance or warranty claims or incur significant costs.
Our operations are dependent upon our ability to prevent system interruption. The technologies underlying our cloud solution are complex and may contain material defects or errors, which may cause disruptions in
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availability or other performance problems. We have from time to time found defects in our solution and may discover additional defects in the future that could result in service issues. These defects or errors could also be found in third-party applications on which we rely. We may not be able to detect and correct defects or errors before a customer begins using our solution. Consequently, we or our customers may discover defects or errors after our solution has been deployed.
In addition, we may experience system slowdowns and interruptions from time to time. Continued growth in our customer base could place additional demands on our solution and could cause or exacerbate slowdowns or interrupt the availability of our solution. If there is a substantial increase in the volume of usage on our solution, we will be required to further expand and upgrade our technology and infrastructure. There can be no assurance that we will be able to accurately project the rate or timing of increases, if any, in the use of our solution or expand and upgrade our systems and infrastructure to accommodate such increases on a timely basis. In such cases, if our users are not able to access our solution or encounter slowdowns when doing so, we may lose customers or partners. In order to remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of our solution. Our response to such slowdowns or interruptions may not be sufficient to address all aspects or any unanticipated consequence or incidents and our insurance may not be sufficient to compensate us for the losses that could occur.
Our customers use our solution to manage critical aspects of their businesses and operations. The occurrence of any defects, errors, disruptions in service or other performance problems, or delays with our solution, whether in connection with the day-to-day operations or otherwise, could result in:
| loss of customers; |
| loss of partners; |
| reduced customer usage of our solution; |
| reduced ability to attract new customers; |
| lost or delayed market acceptance and sales of our solution; |
| delays in payment to us by customers; |
| injury to our reputation and brand; |
| legal claims, including warranty claims, against us; and |
| diversion of our resources, including through increased service and warranty expenses or financial concessions, and increased insurance costs. |
The costs incurred in correcting any material defects, errors or other performance problems in our solution may be substantial and could harm our business.
Incorrect or improper use of our solution could result in customer dissatisfaction and harm our business, results of operations, financial condition and growth prospects.
We regularly train our customers in the proper use of and the variety of benefits that can be derived from our solution to maximize its potential. Our failure to train customers on how to efficiently and effectively deploy and use our solution, or our failure to provide effective support or professional services to our customers, whether actual or perceived, may result in negative publicity or legal actions against us. Also, as we continue to expand our customer base, any actual or perceived failure by us to properly provide these services will likely result in lost opportunities for follow-on sales of our related services.
Customers may find our solution to be complicated to use and it may not be easy to maximize the value of our solution without proper training. Moreover, we have designed our solution to allow for use by law firms and
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legal services providers who are not direct customers. If our customers or such third-parties perceive that our solution is too complex or time-consuming to learn and use, customer perceptions of our company and our solution may be impaired, our reputation and brand may suffer and customers may choose not to use our solution or increase their purchases of our offerings. Further, incorrect or improper use of our solution by our customers or their external legal services providers may result in negative legal outcomes and potentially subject such parties to claims of malpractice, which would adversely affect our reputation and customer confidence in our solution.
We rely upon third-party providers of cloud-based infrastructure to host our cloud-based solution. Any disruption in the operations of these third-party providers, limitations on capacity, or interference with our use could adversely affect our business, financial condition and results of operations.
Our continued growth depends in part on the ability of our existing and potential customers to continue to adopt and utilize our cloud-based solution. We outsource substantially all of the infrastructure relating to our cloud-based solution to third-party hosting services. In particular, Amazon Web Services, or AWS, provides the cloud computing infrastructure that we use to host our solution and many of the internal tools we use to operate our business. Customers of our cloud-based solution expect to be able to access our solution at any time, without interruption or degradation of performance. Our cloud-based solution depends on protecting the virtual cloud infrastructure hosted by third-party hosting services by maintaining its configuration, architecture, features and interconnection specifications, as well as the information stored in these virtual data centers, which is transmitted by third-party internet service providers. Any disruption as a result of cyber-attacks or similar issues, or any limitation on the capacity of our third-party hosting services, could impede our ability to onboard new customers or expand the usage of our existing customers or otherwise adversely affect our business, which could adversely affect our financial condition and results of operations. Due the fact that we rely on third-party providers of cloud-based infrastructure to host our cloud-based solution, it may become increasingly difficult to maintain and improve their performance, especially during peak usage times and as our cloud capabilities become more complex and our user traffic increases, because we do not control the infrastructure supporting these services. In addition, any incident affecting our third-party hosting services infrastructure that may be caused by cyber-attacks, natural disasters, fire, flood, severe storm, earthquake, power loss, telecommunications failures, outbreaks of contagious diseases, terrorist or other attacks and other similar events beyond our control could negatively affect our cloud-based solution. If our cloud-based solution is unavailable or if our users are unable to access our cloud-based solution within a reasonable amount of time or at all, we may experience a loss of customers, lost or delayed market acceptance of our solution, delays in payment to us by customers, injury to our reputation and brand, legal claims against us and the diversion of our resources. We may also incur significant costs for using alternative equipment or taking other actions in preparation for, or in reaction to, events that damage the third-party hosting services we use.
As our business grows, we may need to engage additional providers of cloud computing infrastructure to support our operations. Adequate additional support may not be available to us on acceptable terms, or at all. Furthermore, certain customers may require that we use or avoid specific providers of cloud computing infrastructure. If we fail to enter into agreements or integrate our solution with third-party offerings that our customers require to operate their businesses, or to provide the proper support or ease of integration our customers require, we may not be able to offer the functionality that our customers and their consumers expect, which would harm our business. In addition, in the event that our service agreements with our third-party hosting services are terminated, or there is a lapse of service, elimination of services or features that we utilize, interruption of internet service provider connectivity or damage to such facilities, we could experience interruptions in access to our cloud-based solution as well as significant delays and additional expense in arranging or creating new facilities and services and/or re-architecting our cloud-based solution for deployment on a different cloud infrastructure service provider, which could adversely affect our business, financial condition and results of operations.
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We rely on AWS to host our solution, and any disruption of service from AWS or material change to our arrangement with AWS could adversely affect our business.
We currently host our solution and support most of our operations using AWS, a provider of cloud infrastructure services. We do not control the operations of AWSs facilities. AWSs facilities are vulnerable to damage or interruption from earthquakes, hurricanes, floods, fires, cyber security attacks, terrorist attacks, power losses, telecommunications failures and similar events or could be subject to break-ins, computer viruses, sabotage, intentional acts of vandalism and other misconduct. The occurrence of any of these events, a decision to close the facilities or cease or limit providing services to us without adequate notice or other unanticipated problems could result in interruptions to our solution, which may be lengthy. Our solutions continuing and uninterrupted performance is critical to our success and employers and job seekers may become dissatisfied by service interruption. Sustained or repeated system failures could reduce the attractiveness of our solution to customers, cause our customers to decrease their use of or stop using our solution and otherwise adversely affect our business. Moreover, negative publicity from disruptions could damage our reputation.
AWS does not have an obligation to renew its agreements with us on commercially reasonable terms, or at all. If we cannot renew our agreement or are unable to renew on commercially reasonable terms, we may experience costs or downtime in connection with the transfer to, or the addition of, new cloud infrastructure or other data center. If these providers charge high costs for or increase the cost of their services, we will experience higher costs to operate our business and may have to increase the fees to use our marketplace and our operating results may be adversely impacted.
Upon expiration or termination of our agreement with AWS, we may not be able to replace the services provided to us in a timely manner or on terms and conditions, including service levels and cost, that are favorable to us, and a transition from one vendor to another vendor could subject us to operational delays and inefficiencies until the transition is complete. Switching our operations from AWS to another cloud or other data center provider would also be technically difficult, expensive and time consuming.
Any of the above circumstances or events may harm our reputation, cause customers to stop using our solution, impair our ability to increase revenue from existing customers, impair our ability to grow our customer base, subject us to financial penalties and liabilities under our service level agreements and otherwise harm our business, results of operations and financial condition.
We expect fluctuations of our financial results, which may cause quarterly comparisons not to be meaningful.
Our business model is usage-based and there is inherent unpredictability in the timing, duration and scope of our customers legal matters requiring use of our solution. Our operating results have fluctuated in the past and are expected to fluctuate in the future due to a variety of factors, many of which are outside of our control. As a result, our quarterly results of operations, including the levels of our revenues, working capital and cash flows, may vary significantly in the future, such that period-to-period comparisons of our results of operations may not be meaningful. Our financial results may fluctuate due to a variety of factors, many of which are outside of our control and may be difficult to predict, including, but not limited to:
| the timing of our customers usage of our solution; |
| the level of demand for or pricing of our solution; |
| our ability to grow or maintain usage by our existing customers and acquire new customers; |
| the timing and success of new functionality, features, integrations, capabilities and enhancements by us to our solution, or by our competitors to their products, or any other changes in the competitive landscape of our market; |
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| the timing and amount of our investments to expand the capacity of our third-party cloud infrastructure providers; |
| changes in our customers budgets and in the timing of their budget cycles and purchasing decisions; |
| changes in regulatory or legal environments that may cause us to incur, among other elements, expenses associated with compliance; |
| general economic conditions, both domestically and internationally, as well as economic conditions specifically affecting industries in which our customers participate; |
| the effects of potential acquisitions and their integration; |
| the impact of new accounting pronouncements; |
| changes in the competitive dynamics of our market, including consolidation among competitors or customers; |
| significant security breaches of, technical difficulties with or interruptions to the delivery and use of our solution; |
| awareness of our brand and our reputation in our target markets; |
| errors in our forecasting of the demand for our solution, which would lead to lower revenues, increased costs, or both; and |
| our ability to control costs, including research and development and sales and marketing expenses. |
Any one or more of the factors above may result in significant fluctuations in our quarterly results of operations. In addition, because we were founded in 2013 and have experienced rapid expansion of our business and revenues since such time, we do not have a long history upon which to base forecasts of future revenue and operating results. Accordingly, we may be unable to accurately forecast our revenues. As a result, our past results may not be indicative of our future performance, and the variability and unpredictability of our quarterly results of operations or other operating metrics could result in our failure to meet our expectations or those of investors or analysts with respect to revenues or other metrics for a particular period. If we fail to meet or exceed such expectations for these or any other reasons, the trading price of our common stock could decline substantially and we could face lawsuits that are costly and may divert managements attention, including securities class action suits.
If we fail to forecast our revenue accurately, or if we fail to manage our expenditures, our operating results could be adversely affected.
Because our recent growth has resulted in the rapid expansion of our business and revenues, we do not have a long history upon which to base forecasts of future revenue and operating results. We cannot accurately predict customers usage given the uncertain timing and duration of legal matters and the diversity of our customer base across industries, geographies and size and other factors. Accordingly, we may be unable to accurately forecast our revenues notwithstanding our substantial investments in sales and marketing, infrastructure and research and development in anticipation of continued growth in our business. If we do not realize returns on these investments in our growth, our results of operations could differ materially from our forecasts, which would adversely affect our results of operations and could disappoint analysts and investors, causing our stock price to decline.
If we fail to adapt and respond effectively to rapidly changing technology, evolving industry standards, changing regulations and changing customer needs, requirements or preferences, our solution may become less competitive.
The market in which we compete is relatively new and subject to rapid technological change, evolving industry standards and regulatory changes, as well as changing customer needs, requirements and preferences.
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The success of our business will depend, in part, on our ability to adapt and develop enhancements for our solution that respond effectively to these changes on a timely basis and in a user-friendly manner. If we are unable to evolve our cloud solution to satisfy our customers needs and provide enhancements or add new and innovative features and capabilities to our solution that keep pace with rapid technological and industry change, our revenue and operating results could be adversely affected. If new technologies emerge that enable our competitors to deliver competitive products, services and applications at lower prices, more efficiently, more conveniently or more securely, such technologies could adversely impact our ability to compete. If our solution does not allow us or our customers to comply with the latest regulatory requirements, our existing customers may decrease their usage on our solution and new customers will be less likely to adopt our solution.
A limited number of customers represent a substantial portion of our revenue. If we fail to retain these customers, our revenue could decline significantly.
We derive a substantial portion of our revenue from sales to our top 10% customers. As a result, our revenue could fluctuate materially and could be materially and disproportionately impacted by purchasing decisions of these customers or any other significant future customer. Any of our significant customers may decide to purchase less than they have in the past, may alter their purchasing patterns at any time with limited notice, or may decide not to continue to use our solution at all, any of which could cause our revenue to decline and adversely affect our financial condition and results of operations. If we do not further diversify our customer base, we will continue to be susceptible to risks associated with customer concentration.
Our revenue growth depends in part on the success of our strategic relationships with law firms and other legal services providers, and if we are unable to establish and maintain successful relationships with them, our business, operating results and financial condition could be adversely affected.
We seek to grow our partner ecosystem as a way to grow our business. We plan to continue to establish and maintain similar strategic relationships with law firms and other legal services providers and we expect these entities to become an increasingly important aspect of our business. Our future growth in revenue and ability to achieve and sustain profitability depends in part on our ability to identify, establish and retain successful strategic partner relationships in the United States and internationally, which will take significant time and resources and involve significant risk. In order to develop and expand our distribution channel, we must develop and improve our processes for partner introduction and training. If we do not succeed in identifying suitable strategic partners or maintain our relationships with such partners, our business, operating results and financial condition may be adversely affected.
Moreover, we cannot be certain that these law firm and other legal services provider partners will prioritize or provide adequate resources to promote or utilize our solution. Further, some of our partners also work with our competitors. As a result of these factors, many of our law firm and other legal services provider partners may choose to promote alternative technologies in addition to or in lieu of our solution, either on their own or in collaboration with others, including our competitors. We cannot assure you that our law firm and other legal services provider partners will continue to cooperate with us. In addition, actions taken or omitted to be taken by such parties may adversely affect us. Even if we are successful in establishing and maintaining these relationships with law firms and other legal services providers, we cannot assure you that these relationships will result in increased customer usage of our solution or increased revenue to us.
Failure to effectively develop and expand our marketing and sales capabilities could harm our ability to increase our customer base and achieve broader market acceptance of our solution.
Our ability to increase our customer base and achieve broader market acceptance of our solution will significantly depend on our ability to expand our marketing and sales operations. We plan to continue expanding our sales force and strategic partners, both domestically and internationally. We also plan to dedicate significant resources to sales, marketing and demand-generation programs, including various online marketing activities as
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well as targeted account-based advertising. The effectiveness of our targeted account-based advertising has varied over time and may vary in the future. All of these efforts will require us to invest significant financial and other resources and if they fail to attract additional customers, our business will be harmed. If our lead generation methods do not result in broader market acceptance of our solution, we will not realize the intended benefits of this strategy and our business will be harmed.
We believe that there is significant competition for sales personnel, including sales representatives, sales managers and sales engineers, with the skills and technical knowledge that we require. Our ability to achieve significant revenue growth will depend in large part on our success in recruiting, training and retaining sufficient numbers of sales personnel to support our growth. New hires require significant training and may take significant time before they achieve full productivity. Our recent hires may not become productive as quickly as we expect, if at all, and we may be unable to hire or retain sufficient numbers of qualified individuals in the markets where we do business or plan to do business. In addition, particularly if we continue to grow rapidly, new members of our sales force will have relatively little experience working with us, our solution and our business model. If we are unable to hire and train sufficient numbers of effective sales personnel, our sales personnel do not reach significant levels of productivity in a timely manner, or our sales personnel are not successful in acquiring new customers or expanding usage by existing customers, our business will be harmed.
The markets in which we participate are competitive, and if we do not compete effectively, our business will be harmed.
The market for technology solutions for law firms, private enterprises and government and other organizations is highly fragmented, competitive and constantly evolving. With the introduction of new technologies and market entrants, we expect that the competitive environment in which we compete will remain intense going forward. Almost all potential customers have existing solutions for ediscovery and legal document review in place, which typically consists of a mix of on-premise point solutions and human professional service providers to deliver these solutions. Our competitors include (i) legal services providers, including large dedicated legal services providers such as Consilio LLC, Epiq Systems, Inc. and KLDiscovery Inc., the legal services divisions of large professional firms such as Deloitte & Touche LLP, Ernst and Young LLP, KPMG LLP and PricewaterhouseCoopers LLP, as well as a large number of smaller regional and local services companies and certain law firms providing in-house ediscovery and document review solutions; (ii) legacy on-premise software providers, such as Nuix Limited, Open Text Corporation and Relativity ODA LLC, or Relativity, RELX PLC and Thomson Reuters Corporation; and (iii) cloud software providers, such as Everlaw, Inc., Logik Systems, Inc. (d.b.a. Logikcull), Relativitys through its RelativityOne offering and Reveal Data Corporation. In addition, we expect to expand our solution to address additional areas of the legal function and we likely face further competition from existing companies in such areas.
Some of our competitors have made or may make acquisitions or be acquired by private equity sponsors, enterprises or special purpose acquisition companies or may enter into commercial relationships or other strategic relationships that may provide more comprehensive offerings than they individually had offered. Such acquisitions or relationships may help competitors achieve greater economies of scale than us. In addition, new entrants not currently considered to be competitors may enter the market through acquisitions, partnerships or strategic relationships.
We compete on the basis of a number of factors, including:
| our solutions functionality, scalability, performance, ease of use, reliability, security, availability and cost-effectiveness relative to that of our competitors products and services; |
| our ability to utilize new and proprietary technologies to offer services and features previously not available in the marketplace; |
| our ability to identify new markets, applications and technologies; |
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| our ability to attract and retain customers; |
| our brand, reputation and trustworthiness; |
| perceptions about the security, privacy and availability of our solution relative to competitive products and services; |
| the quality of our customer support; |
| our ability to recruit software developers and sales and marketing personnel; and |
| our ability to protect our intellectual property. |
Our competitors vary in size and in the breadth and scope of the products and services offered. Many of our competitors and potential competitors have greater name recognition, greater market penetration, longer operating histories, more established customer relationships and installed customer bases and substantially greater financial, human, technical and other resources than we do and may be able to offer competing solutions to potential customers on more favorable terms than us. While some of our competitors provide a platform with applications to support one or more use cases, many others provide point-solutions that address a single use case. Other potential competitors not currently offering competitive applications may expand their product offerings to compete with our solution. Our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards and customer requirements. An existing competitor or new entrant could introduce new technology that reduces demand for our solution. In addition to application and technology competition, we face pricing competition. Some of our competitors offer their applications or services at a lower price, which has resulted in pricing pressures. Some of our larger competitors have the operating flexibility to bundle competing applications and services with other offerings, including offering them at a lower price or for no additional cost to customers as part of a larger sale of other products. For all of these reasons, we may not be able to compete successfully and competition could result in the failure of our solution to achieve or maintain market acceptance, any of which could harm our business.
If the estimates and assumptions we have used to calculate the size of our addressable market opportunity are inaccurate, our future growth rate may be limited.
We have estimated the size of our addressable market opportunity based on data published by third parties and on internally generated data and assumptions. While we believe our market size information is generally reliable, such information is inherently imprecise and relies on our and third parties projections, assumptions and estimates within our target market, which are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in this prospectus. Our market is developing and may develop differently than we expect. Market opportunity estimates and growth forecasts included in this prospectus are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. If such third-party or internally generated data prove to be inaccurate or we make errors in our projections, assumptions or estimates based on that data, including how current customer data and trends may apply to potential future customers and the number and type of potential customers, our addressable target market opportunity and/or our future growth rate may be less than we currently estimate. In addition, these inaccuracies or errors may cause us to misallocate capital and other business resources, which could divert resources from more valuable alternative projects and harm our business.
The variables that go into the calculation of our market opportunity are subject to change over time and there is no guarantee that any particular number or percentage of addressable users or companies covered by our addressable target market opportunity estimates will purchase our solution at all or generate any particular level of revenue for us. Any expansion in our market depends on a number of factors, including the cost, performance and perceived value associated with our solution and applications and those of our competitors. Even if the market in which we compete meets the size estimates and growth forecasted in this prospectus, we may not be successful in capitalizing on such market opportunity and our business could fail to grow for a variety of reasons, including reasons outside of our control, such as competition in our industry.
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Our growth is subject to many factors, including our success in expanding our international operations, continuing to expand the use of our solution by our customers and otherwise implementing our business strategy, which are subject to many risks and uncertainties. Accordingly, the information regarding the size of our addressable market opportunity included in this prospectus should not be taken as indicative of our future growth. For more information regarding our estimates of market opportunity and the forecasts of market growth included in this prospectus, see the section titled Market, Industry and Other Data.
If we fail to develop, maintain and enhance our brand, our ability to expand our customer base will be impaired and our business, results of operations and financial condition may suffer.
We believe that maintaining and enhancing our brand is important to continued market acceptance of our existing and future applications, attracting new customers and retaining existing customers. We also believe that the importance of brand recognition will increase as competition in our market increases. Successfully maintaining and enhancing our brand will depend largely on the effectiveness of our marketing efforts and strategies, our ability to provide a reliable solution that continues to meet the needs of our customers at competitive prices, our ability to maintain our customers trust, our ability to continue to develop new functionality and applications for our solution and our ability to successfully differentiate our solution from competitive products and services. Additionally, our brand and reputation may be affected if customers do not have a positive experience with our law firm and other legal services provider partners services. Our brand promotion activities may not generate customer awareness or yield increased revenue, and even if they do, any increased revenue may not offset the expenses we incurred in building our brand. If we fail to successfully promote and maintain our brand, our business may be harmed.
Furthermore, any negative publicity relating to our employees, customers or others associated with these parties may also tarnish our own reputation simply by association and may reduce the value of our brand. Damage to our brand and reputation may result in reduced demand for our solution and increased risk of losing market share to our competitors. Any efforts to restore the value of our brand and rebuild our reputation may be costly and may not be successful.
We employ a pricing model that subjects us to various challenges, and given our limited history with our pricing model, we may not be able to accurately predict the optimal pricing necessary to attract new customers and retain existing customers.
We generally charge our customers for their usage of our solution across a variety of dimensions of usage. We do not know whether our current or potential customers or the market in general will continue to accept this pricing model going forward and, if it fails to gain acceptance, our business could be harmed. In addition, we have limited experience with respect to determining the optimal pricing for our solution and, as a result, we have changed our pricing model in the past and expect that we may need to change it in the future, our pricing model from time to time. As the market for our solution matures and technology changes and improves, or as new competitors introduce new products or services that compete with ours, we may be unable to attract new customers at the same price or based on the same pricing models as we have used historically. Pricing decisions may also impact the mix of adoption among our customers and negatively impact our overall revenue. Moreover, frequent or significant users of our solution may demand substantial price concessions. As a result, in the future we may be required to reduce our prices or develop new pricing models, which could adversely affect our revenue, gross margin, profitability, financial position and cash flow.
Our sales cycles with customers can be long and unpredictable and our sales efforts require considerable time and expense.
The timing of our sales with our enterprise customers and related revenue recognition is difficult to predict because of the length and unpredictability of the sales cycle for these customers. In addition, for our enterprise customers, the lengthy sales cycle for the evaluation and implementation of our solution may also cause us to
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experience a delay between incurring expenses for such sales efforts and the generation of corresponding revenue. The length of our sales cycle for these customers can vary substantially from customer to customer. Our sales efforts involve educating our customers about the use, technical capabilities and benefits of our solution. Customers often undertake a prolonged evaluation process, which frequently involves not only our solution but also those of our competitors. In addition, the size of potential customers may lead to longer sales cycles. As the use of our solution can be dependent upon the timing of work in legal matters, our sales cycle can extend to even longer periods of time. During the sales cycle, we expend significant time and money on sales and marketing and contract negotiation activities, which may not result in a completed sale. Additional factors that may influence the length and variability of our sales cycle include:
| the effectiveness of our sales force, particularly new salespeople, as we increase the size of our sales force and train our new salespeople to sell to enterprise customers; |
| the discretionary nature of customers purchasing decisions and budget cycles; |
| customers procurement processes, including their evaluation of competing products and services; |
| economic conditions and other factors affecting customer budgets; |
| the regulatory environment in which our customers operate; |
| customers familiarity with cloud computing solutions; |
| evolving customer demands; and |
| competitive conditions. |
Given these factors, it is difficult to predict whether and when a customer will switch to our solution.
Further, some of our potential customers may undertake a significant evaluation and negotiation process due to size, organizational structure and approval requirements, all of which can lengthen our sales cycle. We may also face unexpected deployment challenges with such enterprises or more complicated deployment of our solution. These enterprises may demand additional features, support services and pricing concessions or require additional security management or control features. We may spend substantial time, effort and money on sales efforts to these customers without any assurance that our efforts will produce any sales or that these customers will deploy our solution widely enough across their organization to justify our substantial upfront investment. As a result, it is difficult to predict exactly when, or even if, we will make a sale to a potential customer or if we can increase sales to our existing customers.
If we cannot maintain our corporate culture as we grow, our success and our business and competitive position may be harmed.
We believe our culture has been a key contributor to our success to date and that the critical nature of the solution that we provide promotes a sense of greater purpose and fulfillment in our employees. We have invested in building a strong corporate culture and believe it is one of our most important and sustainable sources of competitive advantage. Any failure to preserve our culture could negatively affect our ability to retain and recruit personnel, which is critical to our growth, and to effectively focus on and pursue our corporate objectives. As we grow and develop the systems and processes associated with being a public company, we may find it difficult to maintain these important aspects of our culture. In addition, as we grow and our resources become more globally dispersed, we may find it increasingly difficult to maintain these beneficial aspects of our corporate culture. If we fail to maintain our corporate culture, or if we are unable to retain or hire key personnel, our business and competitive position may be harmed.
The success of our business depends on our customers continued and unimpeded access to our solution on the internet.
Our customers must have internet access in order to use our solution. We have experienced, and may in the future experience, disruptions, outages, defects and other performance and quality problems with the public
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cloud and internet infrastructure on which our cloud solution relies. These problems can be caused by a variety of factors, including introductions of new functionality, vulnerabilities and defects in proprietary and open source software, human error or misconduct, capacity constraints, design limitations, as well as from internal and external security breaches, malware and viruses, ransomware, cyber events, denial or degradation of service attacks or other security-related incidents. In addition, some internet providers may take measures that affect their customers ability to use our solution, such as degrading the quality of the content we transmit over their lines, giving that content lower priority, giving other content higher priority than ours, blocking our content entirely, or attempting to charge their customers more for using our solution. As we expand our operations internationally, these problems will be further exacerbated and we will face additional complexity due to our inability to control internet infrastructure outside the United States. Any disruptions, outages, defects and other security performance and quality problems with the public cloud and internet infrastructure on which our cloud solution relies, or any material change in our contractual and other business relationships with our public cloud providers, could result in reduced use of our solution, increased expenses, including significant, unplanned capital investments and harm to our brand and reputation, any of which could have a material adverse effect on our business, financial condition and results of operations.
Any failure to offer high-quality support and professional services for our customers may harm our relationships with our customers and, consequently, our business.
Once our solution is deployed, our customers sometimes request consulting and training to assist them in integrating our solution into their business and rely on our customer support personnel to resolve issues and realize the full benefits that our solution provides. Our ability to provide effective customer support is largely dependent on our ability to attract, train and retain qualified personnel with experience in supporting customers with a cloud solution such as ours and maintaining the same. The number of our customers has grown significantly, which is likely to increase demand for consulting, training, support and maintenance related to our solution and place additional pressure on our customer support teams. If we are unable to provide sufficient high-quality consulting, training, integration and maintenance resources, our customers may not effectively integrate our solution into their business or realize sufficient business value from our solution to justify further usage, which could impact our future financial performance. We may be unable to respond quickly enough to accommodate short-term increases in customer demand for technical support or maintenance assistance. We also may be unable to modify the future, scope and delivery of our maintenance services and technical support to compete with changes in the technical services provided by our competitors. Increased customer demand for support and professional services, without corresponding revenue, could increase costs and negatively affect our operating results. In addition, as we continue to grow our operations and support our global customer base, we need to be able to continue to provide efficient support and effective maintenance that meets our customers needs globally at scale. Our ability to attract new customers is highly dependent on our business reputation and on positive recommendations from our existing customers. Any failure to maintain high-quality support services, or a market perception that we do not maintain high-quality support services for our customers, would harm our business.
We rely on the performance of highly skilled personnel, including our management and other key employees and the loss of one or more of such personnel, or of a significant number of our team members, could harm our business.
We believe our success has depended, and continues to depend, on the efforts and talents of senior management and key personnel, including Kiwi Camara, our Co-Founder and Chief Executive Officer. From time to time, there may be changes in our management team resulting from the hiring or departure of executives and key employees, which could disrupt our business. We also are dependent on the continued service of our existing software engineers because of the complexity of our solution, and our existing salespeople, because of their relationship with our customers. Our senior management and key employees are employed on an at-will basis. In addition, many of our senior management and key employees may be able to receive significant proceeds from sales of our equity in the public markets after our initial public offering, which may
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reduce their motivation to continue to work for us. We cannot ensure that we will be able to retain the services of any member of our senior management or other key employees or that we would be able to timely replace members of our senior management or other key employees should any of them depart. The loss of one or more of our senior management or other key employees could harm our business.
The failure to attract and retain additional qualified personnel could prevent us from executing our business strategy.
To execute our business strategy and growth plan, we must attract and retain highly qualified personnel. Competition for executive officers, software developers, legal professionals, sales and customer support personnel and other key employees in our industry is intense. In particular, we compete with many other companies for software developers with high levels of experience in designing, developing and managing cloud-based software, as well as for legal professionals to support our solution and skilled sales and operations professionals. In addition, we believe that the success of our business and corporate culture depends on employing people with a variety of backgrounds and experiences and the competition for such diverse personnel is significant. While the market for such talented personnel is particularly competitive in Austin, Texas, where our headquarters is located, it is also competitive in other markets where we maintain operations and the increased prevalence of remote work has increased competition for employees in all markets. Moreover, to the extent we expand our operations to additional markets, we may face difficulties attracting talented personnel to such locations. Many of the companies with which we compete for experienced personnel have greater resources than we do and can frequently offer such personnel substantially greater compensation than we can offer. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business would be harmed.
Future acquisitions, strategic investments, partnerships, or alliances could be difficult to identify and integrate, divert the attention of management, disrupt our business and dilute stockholder value.
While we have not made acquisitions historically, we may in the future make acquisitions of other companies, products and technologies that we believe could complement, expand or enhance the features and functionality of our solution and technical capabilities, broaden our service offerings or offer growth opportunities. We may not be able to find suitable acquisition candidates and we may not be able to complete acquisitions on favorable terms, if at all. If we do complete acquisitions, we may not ultimately strengthen our competitive position or achieve our goals and any acquisitions we complete could be viewed negatively by customers, developers or investors. In addition, we may not be able to integrate acquired businesses successfully or effectively manage the combined company following an acquisition. If we fail to successfully integrate our acquisitions, or the people or technologies associated with those acquisitions, into our company, the results of operations of the combined company could be adversely affected. Any integration process will require significant time and resources, require significant attention from management and disrupt the ordinary functioning of our business and we may not be able to manage the process successfully, which could harm our business. In addition, we may not successfully evaluate or utilize the acquired technology and accurately forecast the financial impact of an acquisition transaction, including accounting charges.
We may have to pay cash, incur debt or issue equity securities to pay for any such acquisition, each of which could affect our financial condition or the value of our capital stock. The sale of equity to finance any such acquisitions could result in dilution to our stockholders. If we incur more debt, it would result in increased fixed obligations and could also subject us to covenants or other restrictions that would impede our ability to flexibly operate our business.
Our current operations are international in scope and we plan on further geographic expansion, creating a variety of operational challenges.
A component of our growth strategy involves the further expansion of our operations and customer base internationally. For the year ended December 31, 2020, the percentage of revenue generated from customers
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outside the United States was less than 5.0% of our total revenue. Beyond the United States, we have operational presence internationally in Canada and the United Kingdom. We are continuing to adapt to and develop strategies to address international markets but there is no guarantee that such efforts will have the desired effect. In connection with such expansion, we may face difficulties, including costs associated with expansion, varying seasonality patterns, potential adverse movement of currency exchange rates, longer payment cycle difficulties in collecting accounts receivable in some countries, increased management, travel, infrastructure and legal compliance costs associated with having operations and developing our business in multiple jurisdictions, different technical standards, existing or future regulatory and certification requirements and required features and functionality, political and economic conditions and uncertainty in each country or region in which we operate and general economic and political conditions and uncertainty around the world, tariffs and trade barriers, a variety of regulatory or contractual limitations on our ability to operate, adverse tax events, reduced protection of intellectual property rights in some countries and a geographically and culturally diverse workforce and customer base. In addition, our solution has been developed with a focus on the practice of law in the United States and the rules and regulations applicable domestically in the United States and we may be required to expend substantial time and resources to update our solution or develop new applications to address alternative systems of legal resolution in other jurisdictions. Furthermore, in certain jurisdictions in which we seek to enter, the rules and regulations governing the practice of law and e-discovery may impose additional obligations or restrictions on our operations. Failure to overcome any of these difficulties could harm our business.
Our limited experience in operating our business internationally increases the risk that any potential future expansion efforts that we may undertake will not be successful. If we invest substantial time and resources to further expand our international operations and are unable to do so successfully and in a timely manner, our business may be harmed.
We are exposed to fluctuations in currency exchange rates.
Our sales contracts are primarily denominated in U.S. dollars and therefore substantially all of our revenue is not subject to foreign currency risk. However, a strengthening of the U.S. dollar could increase the real cost of our solution to our customers outside of the United States, which could adversely affect our operating results. In addition, an increasing portion of our operating expenses is incurred and an increasing portion of our assets is held outside the United States. These operating expenses and assets are denominated in foreign currencies and are subject to fluctuations due to changes in foreign currency exchange rates. While we do not currently engage in hedging efforts, if we do not successfully hedge against the risks associated with currency fluctuations as our international operations and customer base grow, our business may be harmed.
Current and future indebtedness could restrict our operations, particularly our ability to respond to changes in our business or to take specified actions.
Our current revolving credit facility contains, and any future indebtedness would likely contain, a number of restrictive covenants that impose significant operating and financial restrictions on us, including restrictions on our ability to take actions that may otherwise be in our best interests. Our ability to meet those financial covenants can be affected by events beyond our control and we may not be able to continue to meet those covenants. In addition, a breach of a covenant under our revolving credit facility or any future indebtedness may result in a cross-default under a separate credit facility. If we seek to enter into a new or additional credit facility, we may not be able to obtain debt financing on terms that are favorable to us, if at all. The lender under our revolving credit facility has rights senior to holders of common stock to make claims on our assets and the terms of our revolving credit facility restrict our operations, including our ability to pay dividends on our common stock. If we are unable to obtain adequate financing or financing on terms that are satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired and our business may be harmed.
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Risks Related to Socioeconomic Factors
Unfavorable conditions in our industry or the global economy or reductions in legal spending could harm our business.
Our results of operations may vary based on the impact of changes in our industry or the global economy on us or our customers and potential customers. This risk is presently heightened by the uncertain economic impact of the ongoing COVID-19 pandemic. Current or future economic uncertainties or downturns could adversely affect our business and results of operations. Negative conditions in the general economy both in the United States and abroad, including conditions resulting from changes in gross domestic product growth, financial and credit market fluctuations, political turmoil, natural catastrophes, warfare and terrorist attacks on the United States, Europe, the Asia-Pacific region, or elsewhere, could cause a decrease in business investments, including spending on information technology, which would harm our business. To the extent that our solution is perceived by customers and potential customers as too costly, or difficult to deploy or migrate to, our revenue may be disproportionately affected by delays or reductions in general information technology spending. Moreover, corporate entities may elect to reduce legal spending, both internally and through outside counsel, or be less willing to try alternatives to the traditional legal function. Also, our competitors, many of whom are larger and have greater financial resources than we do, may respond to market conditions by lowering prices and attempting to lure away our customers. We cannot predict the timing, strength or duration of any economic slowdown, instability or recovery, generally or within any particular industry.
Our business and results of operations may be materially adversely affected by the recent COVID-19 outbreak or other similar outbreaks.
Our business could be materially adversely affected by the outbreak of a widespread health epidemic or pandemic, including the recent outbreak of the COVID-19, which has been declared a pandemic by the World Health Organization. The COVID-19 outbreak has reached across the globe, resulting in the implementation of significant governmental measures, including lockdowns, closures, quarantines and travel bans intended to control the spread of the virus. Government authorities, including those in Austin, Texas, where our headquarters is located, instituted policies that required most of our employees in that area to work remotely. These policies have, and are expected to continue to have, an impact on our business and the business of our customers. For example, customers inability to access their office resulted in delays in collecting data for use in legal matters and delayed increases in usage of our solution consequently reduced our revenue growth. This impact could increase if further actions that alter our operations are required by applicable government authorities or if we determine further actions are in the best interests of our customers or of our employees.
To the extent that these restrictions remain in place, additional prevention and mitigation measures are implemented in the future, or there is uncertainty about the effectiveness of these or any other measures to contain or treat COVID-19, there potentially could be an adverse impact on global economic conditions, which could materially and adversely impact our customers through reduced consumer demand for their products and services, which could in turn negatively impact our customers willingness or ability to enter into or renew contracts with us. While at this time we are working to manage and mitigate potential disruptions to our operations, the fluid nature of the pandemic and uncertainties regarding the related economic impact are likely to result in sustained market turmoil, which may harm our business, results of operations and financial condition. We cannot predict how the COVID-19 pandemic will continue to develop, whether and to what extent government regulations or other restrictions may impact our operations or those of our customers, or whether or to what extent the COVID-19 pandemic or the effects thereof may have longer-term unanticipated impacts on our business.
The extent of COVID-19s effect on our operational and financial performance will depend on future developments, including the duration, spread and intensity of the pandemic, all of which are uncertain and difficult to predict considering the rapidly evolving landscape. As a result, it is not currently possible to ascertain the overall impact of COVID-19 on our business. However, if the pandemic continues to persist as a severe
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worldwide health crisis, the disease may harm our business and may also have the effect of heightening many of the other risks described in this Risk Factors section.
Risks Related to Our Intellectual Property
Any failure to protect our proprietary technology and intellectual property rights could substantially harm our business and operating results.
Our success and ability to compete depends in part on our intellectual property and our other proprietary technology information. We seek to control access to our proprietary information by entering into a combination of confidentiality and proprietary rights agreements, invention assignment agreements and nondisclosure agreements with our employees, consultants and third parties with whom we have relationships.
As of March 31, 2021, we had two U.S. granted patents and six pending U.S. patent applications related to our solution and its technology. We cannot assure you that any of our patent applications will result in the issuance of a patent or that the examination process will not require us to narrow our claims. Any patents that issue from any patent applications may not give us the protection that we seek or may be challenged, invalidated or circumvented. Any patents that may issue in the future from our pending or future patent applications may not provide sufficiently broad protection and may not be valid and enforceable in actions against alleged infringers. Any patents we have obtained or may obtain in the future may be found to be invalid or unenforceable in light of recent and future changes in the law, or because of technology developed prior to the inventions we have sought to patent or because of defects in our patent prosecution process.
We may in the future be subject to legal proceedings and litigation, including intellectual property disputes, which are costly and may subject us to significant liability and increased costs of doing business. Our business may suffer if it is alleged or determined that our technology infringes the intellectual property rights of others.
The software industry is characterized by the existence of a large number of patents, copyrights, trademarks, trade secrets and other intellectual property rights. Companies in the software industry are often required to defend against litigation claims based on allegations of infringement, misappropriation or other violations of intellectual property rights. Our technologies may not be able to withstand any third-party claims or rights against their use. In addition, many of these companies have the capability to dedicate substantially greater resources to enforce their intellectual property rights (and may also have greater resources to defend claims that may be brought against them). Any litigation may also involve patent holding companies or other adverse patent owners that have no relevant product revenue and against which our patents may therefore provide little or no deterrence. If a third party is able to obtain an injunction preventing us from accessing such third-party intellectual property rights, or if we cannot license or develop technology for any infringing aspect of our business, we would be forced to limit or stop offering applications impacted by the claim or injunction or cease business activities covered by such intellectual property and may be unable to compete effectively. Any inability to license third-party technology in the future would have an adverse effect on our business or operating results and would adversely affect our ability to compete. We may also be contractually obligated to indemnify our customers in the event of infringement of a third partys intellectual property rights and any such claims could hurt our business as well. Such claims, regardless of their merit, can be time-consuming, costly to defend in litigation and damaging to our reputation and brand. In addition, although we carry general liability and cyber security insurance, our insurance may not be adequate to indemnify us for all liability that may be imposed or otherwise protect us from liabilities or damages with respect to claims alleging compromises of customer data and any such coverage may not continue to be available to us on acceptable terms or at all.
Lawsuits are time-consuming and expensive to resolve, and they divert managements time and attention and could cause current or potential customers to seek other providers. Although we carry insurance, our insurance may not cover potential claims of this type or may not be adequate to indemnify us for all liability that may be imposed nor the full extent of the harm that we might face. We cannot predict the outcome of lawsuits and the results of any such actions may harm our business.
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Failure to protect our intellectual property rights could impair our ability to protect our proprietary technology and our brands as well as our competitive advantage.
We currently rely on a combination of patent, trademark, copyright and trade secret laws and other intellectual property rights and confidentiality or license agreements with our employees, customers, partners and others, to protect our intellectual property rights. Our success and ability to compete depend, in part, on our ability to protect our intellectual property, including our proprietary technology and our brands. If we are unable to protect our proprietary rights adequately, our competitors could use the intellectual property we have developed to enhance their own products and services, which may harm our business. It can be difficult to successfully enforce intellectual property rights and the fact that we have certain intellectual property rights does not necessarily mean that such rights are broad or strong enough to afford us a meaningful degree of protection. Furthermore, irrespective of the scope of our intellectual property rights, we may not be able to stop competitors from developing similar technologies or offering similar solutions.
We may become involved in lawsuits to protect or enforce our intellectual property, which could be expensive, time-consuming and unsuccessful.
Third parties, including our competitors, could be infringing, misappropriating or otherwise violating our intellectual property rights. In order to protect our intellectual property rights, we may be required to spend significant resources to monitor and protect our intellectual property rights. Litigation may be necessary in the future to enforce our intellectual property rights and to protect our trade secrets. Litigation brought to protect and enforce our intellectual property rights could be costly, time-consuming and distracting to management and could result in the impairment or loss of portions of our intellectual property.
Further, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights, and if such defenses, counterclaims or countersuits are successful, we could lose valuable intellectual property rights. An adverse determination of any litigation proceedings could put our intellectual property at risk of being invalidated or interpreted narrowly and could put our related patents, patent applications and trademark filings at risk of being invalidated, not issuing or being cancelled. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential or sensitive information could be compromised by disclosure in the event of litigation. In addition, during the course of litigation there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. Our inability to protect our proprietary technology against unauthorized copying or use, as well as any costly litigation or diversion of our managements attention and resources, could delay further sales or the implementation of our solution, impair the functionality of our solution, delay introductions of new applications, result in our substituting inferior or more costly technologies into our solution or injure our reputation. Any of the foregoing could adversely impact our business, financial condition and results of operations.
We may be subject to claims asserting that our employees, consultants or advisors have wrongfully used or disclosed alleged trade secrets of their current or former employers or claims asserting ownership of what we regard as our own intellectual property.
Although we try to ensure that our employees, consultants and advisors do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or these individuals have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such individuals current or former employer. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management.
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In addition, while it is our policy to require our employees and contractors who may be involved in the creation or development of intellectual property on our behalf to execute agreements assigning such intellectual property to us, we may be unsuccessful in having all such employees and contractors execute such an agreement. The assignment of intellectual property may not be self-executing or the assignment agreement may be breached and we may be forced to bring claims against third parties or defend claims that they may bring against us to determine the ownership of what we regard as our intellectual property. Any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.
Provisions in various agreements to which we are party potentially expose us to substantial liability for intellectual property infringement, data protection and other losses.
Our agreements with customers and other third parties sometimes include provisions under which we are liable or agree to indemnify them for losses suffered or incurred as a result of claims of intellectual property infringement, data protection, damages caused by us to property or persons, or other liabilities relating to or arising from our solution, services, or other contractual obligations. Some of these agreements provide for uncapped liability for which we would be responsible, and some provisions survive termination or expiration of the applicable agreement. Large liability payments could harm our business, results of operations and financial condition. Although we normally contractually limit our liability with respect to such obligations, we may still incur substantial liability related to them, and in case of an intellectual property infringement indemnification claim, we may be required to cease use of certain functions of our solution as a result of any such claims. Any dispute with a customer with respect to such obligations could have adverse effects on our relationship with that customer and other existing customers and new customers and harm our business. Even when we have contractual protections against such customer claims, we may choose to honor a customers request for indemnification or otherwise seek to maintain customer satisfaction by issuing customer credits, assisting our customer in defending against claims, or in other ways.
Any significant change to applicable laws, regulations or industry practices regarding the collection, use, retention, security or disclosure of our customers content, or regarding the manner in which the express or implied consent of customers for the collection, use, retention or disclosure of such content is obtained, could increase our costs and require us to modify our solution, possibly in a material manner, which we may be unable to complete and may limit our ability to store and process customer data or develop new applications and features.
Risks Related to Litigation, Regulatory Compliance and Governmental Matters
Any future litigation against us could be costly and time-consuming to defend.
We are, and may become, subject to legal proceedings and claims that arise in the ordinary course of business, such as claims brought by our customers in connection with commercial disputes or employment claims made by our current or former employees. Litigation might result in substantial costs and may divert managements attention and resources, which might seriously harm our business, financial condition and results of operations. Insurance might not cover such claims, might not provide sufficient payments to cover all the costs to resolve one or more such claims and might not continue to be available on terms acceptable to us. A claim brought against us that is uninsured or underinsured could result in unanticipated costs, potentially harming our business, financial position and results of operations.
We operate in a highly regulated industry and either are or may be subject to a wide range of federal, state and local, as well as foreign, laws, rules and regulations and our failure to comply with these laws and regulations may force us to change our operations or harm our business.
The legal industry is and will continue to be subject to extensive and evolving U.S. federal, state and foreign laws, rules and regulations, including the rules and regulations of the organizations and other authorities
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governing the legal profession in the jurisdictions in which we or our customers operate. These laws, rules and regulations can vary significantly from jurisdiction to jurisdiction. For example, in the United States, each state has adopted laws, regulations and codes of ethics that provide for the licensure of attorneys, generally grant licensed attorneys the exclusive right to practice law in that state and place restrictions upon the activities of licensed lawyers. The practice of law other than by an attorney entitled to practice in the jurisdiction is generally referred to as the unauthorized practice of law. As a company, we are not authorized to practice law. In the United States, we may not provide legal advice to our clients, primarily because we do not meet the ethical and regulatory requirements, present in nearly every U.S. jurisdiction, of being exclusively owned by licensed attorneys.
Our solution includes alternatives to certain traditional methods of legal services and we therefore may face claims that we are engaged in the unauthorized practice of law. Despite our belief that our operations are not subject to, or are otherwise compliant with, the requirements of the jurisdictions in which we or our customers operate, regulators or other authorities of such jurisdictions could deem that we, our employees or our customers are engaged in the unauthorized practice of law or otherwise determine that we are subject to the relevant rules and regulations governing the conduct of attorneys. In such circumstances, regulators may enjoin our operations, subject us to rules governing conflicts of interests, require registration, seek to impose punitive fines or sanctions or take other disciplinary actions against us, our employees or our customers, any of which may inhibit our ability to do business in those jurisdictions, adversely impact our reputation, increase our operating expenses and adversely affect our financial condition and results of operations.
In addition, we are subject to regulations and laws specifically governing the internet and the collection, storage, processing, transfer and other use of personal information and other customer data. We also are subject to laws and regulations involving taxes, privacy and data security, anti-spam, content protection, electronic contracts and communications, mobile communications, unencumbered internet access to our solution, the design and operation of websites and internet neutrality.
The foregoing description of laws and regulations to which we are or may be subject is not exhaustive and the regulatory framework governing our operations is subject to evolving interpretations and continuous change. Moreover, if we expand into additional jurisdictions, we will be subject to an increased variety of new and complex laws and regulations.
We are subject to anti-corruption, anti-bribery, anti-money laundering and similar laws and noncompliance with such laws can subject us to criminal or civil liability and harm our business, financial condition and results of operations.
We are subject to the U.S. Foreign Corrupt Practices Act, or FCPA, U.S. domestic bribery laws, the United Kingdom Bribery Act and other anti-corruption and anti-money laundering laws in the countries in which we conduct activities. Due to the international scope of our operations, we must comply with these laws in each jurisdiction where we operate. Additionally, many anti-bribery and anti-corruption laws, including the FCPA, have long-arm statutes that can expand the applicability of these laws to our operations worldwide. Accordingly, we must incur significant operational costs to support our ongoing compliance with anti-bribery and anti-corruption laws at all levels of our business. If we fail to comply with these laws, we may be subject to significant penalties. Anti-corruption and anti-bribery laws have been enforced aggressively in recent years and are interpreted broadly to generally prohibit companies, their employees and their third-party intermediaries from authorizing, offering or providing, directly or indirectly, improper payments or benefits to recipients in the public or private sector. As we increase our international and public sector sales and businesses, we may engage with business partners and third-party intermediaries to market our solution and to obtain necessary permits, licenses and other regulatory approvals. In addition, we or our third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities. We can be held liable for the corrupt or other illegal activities of these third-party intermediaries and our employees, representatives, contractors, partners and agents, even if we do not explicitly authorize such activities.
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While we have policies and procedures to address compliance with such laws, we cannot assure you that all of our employees and agents will not take actions in violation of our policies and applicable law, for which we may be ultimately held responsible. As we increase our international sales and business, our risks under these laws may increase.
Detecting, investigating and resolving actual or alleged violations of anti-corruption laws can require a significant diversion of time, resources and attention from senior management. In addition, noncompliance with anti-corruption, anti-bribery or anti-money laundering laws could subject us to whistleblower complaints, investigations, sanctions, settlements, prosecution, enforcement actions, fines, damages, other civil or criminal penalties or injunctions, suspension or debarment from contracting with certain persons, reputational harm, adverse media coverage and other collateral consequences. If any subpoenas or investigations are launched, or governmental or other sanctions are imposed, or if we do not prevail in any possible civil or criminal proceeding, our business, financial condition and results of operations could be harmed. In addition, responding to any action will likely result in a materially significant diversion of managements attention and resources and significant defense costs and other professional fees.
Sales to government entities and highly regulated organizations are subject to a number of challenges and risks.
We intend to sell our solution to U.S. federal, state and local, as well as foreign, governmental agency customers, as well as to customers in highly regulated industries such as financial services and healthcare. Sales to such customers are subject to a number of challenges and risks. Selling to such customers can be highly competitive, expensive and time-consuming, often requiring significant upfront time and expense without any assurance that these efforts will generate a sale. These current and prospective customers may also be required to comply with stringent regulations in connection with purchasing and implementing our solution or particular regulations regarding third-party vendors that may be interpreted differently by different customers. In addition, Congress and regulatory agencies may impose requirements on third-party vendors generally, or our company in particular, that we may not be able to, or may not choose to, meet. In addition, government customers and customers in these highly regulated industries often have a right to conduct audits of our systems and practices, which can be time-consuming and expensive. In the event that one or more customers determine that some aspect of our business does not meet regulatory requirements, we may be limited in our ability to continue or expand our business and could be subject to audits or investigations by government enforcement personnel. In addition, if our solution does not meet the standards of new or existing regulations, we may be in breach of our contracts with these customers, allowing or requiring them to terminate their agreements.
Government contracting requirements may also change and in doing so restrict our ability to sell into the government sector until we have attained the requisite approvals or until our solution meets government requirements. Government demand and payment for our solution are affected by public sector budgetary cycles and funding authorizations, with funding reductions or delays adversely affecting public sector demand for our solution.
These customers may also be subject to a rapidly evolving statutory and regulatory framework that may influence their ability to use our solution. Moreover, changes in the underlying statutory and regulatory conditions that affect these types of customers could harm our ability to efficiently provide them access to our solution and to grow or maintain our customer base. If we are unable to enhance, modify or improve our solution to keep pace with evolving customer requirements, or if new technologies emerge that are able to deliver competitive products and services at lower prices, more efficiently, more conveniently, or more securely than our solution, our business, financial condition and results of operations could be adversely affected.
Further, governmental and highly regulated entities may demand contractual terms that differ from our standard arrangements and are less favorable than terms agreed with private sector customers, including preferential pricing or most favored nation terms and conditions or are contract provisions that are otherwise
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time-consuming and expensive to satisfy and monitor. In the United States, applicable federal contracting regulations change frequently and the President may issue executive orders requiring federal contractors to adhere to new compliance requirements after a contract is signed that could result in the loss of contracts for contractors who do not meet those requirements. If we undertake to meet special standards or requirements and do not meet them, we could be subject to significant liability from our customers or federal and state regulators and enforcement agencies. Even if we do meet these special standards or requirements, the additional costs associated with providing our solution to government and highly regulated customers could harm our operating results. In addition, engaging in sales activities with foreign governments introduces additional compliance risks specific to the FCPA, the United Kingdom Bribery Act and other similar statutory requirements prohibiting bribery and corruption in the jurisdictions in which we operate.
Such entities may have statutory, contractual or other legal rights to terminate contracts with us or our partners for convenience or for other reasons. Any such termination may adversely affect our ability to contract with other government customers as well as our reputation, business, financial condition and results of operations.
We are subject to governmental export and import controls that could impair our ability to compete in international markets or subject us to liability if we violate such controls.
Our solution is subject to U.S. export controls, including the Export Administration Regulations administered by the U.S. Commerce Department and economic sanctions administered by the Office of Foreign Assets Control, or OFAC, of the U.S. Treasury Department, and we incorporate encryption technology into certain of our applications. These encryption products and the underlying technology may be exported outside of the United States or accessed by foreign persons within the United States only with the required export authorizations.
Furthermore, our activities are subject to U.S. economic sanctions laws and regulations that generally prohibit the direct or indirect exportation or provision of products and services without the required export authorizations to countries, governments and individuals and entities targeted by U.S. embargoes or sanctions, except to the extent authorized by OFAC or exempt from sanctions. Obtaining the necessary export license or other authorization for a particular sale may not always be possible, and, even if the export license is ultimately granted, the process may be time-consuming and may result in the delay or loss of sales opportunities. Violations of U.S. sanctions or export control laws can result in significant fines or penalties and possible incarceration for responsible employees and managers could be imposed for criminal violations of these laws.
Other countries also regulate the import and export of certain encryption products and technology through import and export licensing requirements and have enacted laws that could limit our ability to distribute our solution or could limit our customers ability to implement our solution in those countries. Changes in our solution or future changes in export and import regulations may create delays in the introduction of our solution in international markets, prevent our customers with international operations from deploying our solution globally, or, in some cases, prevent the export or import of our solution to certain countries, governments or persons altogether. From time to time, various governmental agencies have proposed additional regulation of encryption products and technology, including the escrow and government recovery of private encryption keys. Any change in export or import regulations, economic sanctions or related legislation, increased export and import controls, or change in the countries, governments, persons or technologies targeted by such regulations could result in decreased use of our solution by, or in our decreased ability to export or sell our solution to, existing or potential customers with international operations. Any decreased use of our solution or limitation on our ability to export or sell our solution would harm our business.
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Risks Related to Information Technology and Cybersecurity
The unavailability of or change in the terms or nature of access to third-party technology could harm our business
We license certain software from third parties and incorporate or integrate such components into and with our solution. Certain third-party software has become central to the operation and delivery of our solution. Any inability to license necessary third-party technology in the future, or maintain sufficient rights or reasonable terms under existing third-party technology that we rely upon, could have an adverse effect on our business or operating results and adversely affect our ability to compete.
A large portion of our third-party software license contracts have fixed durations and may be renewed only by mutual consent. There is no assurance that we will be able to renew these contracts as they expire or that such renewals will be on the same or substantially similar terms or on conditions that are commercially reasonable to us. If we fail to renew these contracts as they expire, we may be unable to offer certain aspects of our solution to our customers. In addition, all of our third-party software licenses are nonexclusive; and therefore, our competitors may obtain the right to license certain of the technology covered by these agreements to compete directly with us.
If certain of our third-party licensors were to change product offerings, cease actively supporting the technologies, fail to update and enhance the technologies to keep pace with changing industry standards, encounter technical difficulties in the continuing development of these technologies, significantly increase prices, terminate our licenses, suffer significant capacity or supply chain constraints or suffer significant disruptions, we would need to seek alternative suppliers and incur additional internal or external development costs to ensure continued performance of our solution. Such alternatives may not be available on attractive terms or may not be as widely accepted or as effective as the current licenses provided by our existing suppliers. Furthermore, certain customers may require that we use or ensure that our solution is compatible with certain enterprise software offerings, such as Microsoft Office 365. If we fail to obtain licenses to use such third-party offerings or otherwise integrate our solution with such offerings, our business may be harmed. If the cost of licensing or maintaining the third-party intellectual property significantly increases, our operating earnings could significantly decrease. In addition, interruption in functionality of our solution as a result of changes in or with third-party licensors could adversely affect our commitments to customers, future sales of our solution and harm our business.
Elements of our solution use open source software, which may restrict the functionality of our solution or require that we release the source code of certain applications subject to those licenses.
Our solution incorporates software licensed under open source licenses and we expect to continue to incorporate software licensed under open source licenses in the future. Such open source licenses sometimes require that 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. Few courts have interpreted open source licenses and the manner in which these licenses may be interpreted and enforced is therefore subject to some uncertainty. We rely on multiple software programmers to design our proprietary technologies and we do not exercise complete control over the development efforts of our programmers and we cannot be certain that our programmers have not incorporated open source software into our proprietary solution and technologies or that they will not do so in the future. There is a risk that open source licenses could be construed in a manner that imposes unanticipated conditions, restrictions or costs on our ability to provide or distribute our software solution. To that end, while we try to mitigate the likelihood of such risks, we may from time to time face claims from third parties alleging ownership of, or demanding release or general availability 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, which could be costly for us to defend and could adversely affect our core functionality and services. If we face such problems and attempt or are required to re-engineer our solution to mitigate them, it could require significant additional research and development resources and we may not be able
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to complete it successfully or in a timely manner. In addition to risks related to license requirements, usage 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 or controls on the origin of software. Many of these risks could be difficult to eliminate or manage and could reduce or eliminate the value of our solution and technologies and materially and adversely affect our ability to sustain and grow our business.
Our actual or perceived failure to comply with privacy, data protection and information security laws, regulations and similar non-regulatory obligations could harm our business.
We are subject to numerous federal, state, local and international laws and regulations regarding privacy, data protection, information security and the storing, sharing, use, processing, transfer, disclosure and protection of personal information and other content, the scope of which is changing, subject to differing interpretations and may be inconsistent among countries, or conflict with other rules. We are also subject to the terms of our privacy policies and obligations to third parties (including contractual) related to privacy, data protection and information security. We strive to comply with applicable laws, regulations, policies and other legal obligations relating to privacy, data protection and information security. However, the regulatory framework for privacy and data protection worldwide is unclear, and is likely to remain uncertain, for the foreseeable future, and it is possible that these or other actual or perceived obligations 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 also expect that there will continue to be new laws, regulations and industry standards concerning privacy, data protection and information security proposed and enacted in various jurisdictions.
The collection, use, storage, disclosure, transfer or other processing of personal data regarding European Union, or EU, data subjects in the European Economic Area, or EEA, and/or carried out in the context of the activities of our establishment in any EEA member state, may be subject to the General Data Protection Regulation, or GDPR, which became effective on May 25, 2018. The GDPR is wide-ranging in scope and imposes numerous additional requirements on companies that process personal data of individuals residing in Europe, requiring that consent of individuals to whom the personal data relates is obtained in certain circumstances, requiring additional disclosures to individuals regarding data processing activities, requiring that appropriate safeguards are implemented to protect the security and confidentiality of personal data, creating mandatory data breach notification requirements in certain circumstances and requiring that certain measures (including contractual requirements) are put in place when engaging third-party data processors. The GDPR permits data protection authorities to impose large penalties for violations of the GDPR, including potential fines of up to 20 million or 4% of annual global revenue, whichever is greater. The GDPR also provides individuals with various rights in respect of their personal data, including rights of access, erasure, portability, rectification, restriction and objection and confers a private right of action on data subjects and consumer associations to lodge complaints with supervisory authorities, seek judicial remedies and obtain compensation for damages resulting from violations of the GDPR. The GDPR requirements may apply not only to third-party transactions, but also to transfers of information between us and our subsidiaries, including employee information.
Although there are legal mechanisms to allow for the transfer of personal data from the United Kingdom, the EEA and Switzerland to the United States, uncertainty about compliance with such data protection laws remains and such mechanisms may not be available or applicable with respect to the personal data processing activities necessary to research, develop and market our solution. For example, legal challenges in Europe to the mechanisms allowing companies to transfer personal data from the EEA to the United States could result in further limitations on the ability to transfer personal data across borders, particularly if governments are unable or unwilling to reach agreement on or maintain existing mechanisms designed to support cross-border data transfers, such as the EU-U.S. and Swiss-U.S. Privacy Shield Frameworks, or the Privacy Shield Frameworks. Specifically, on July 16, 2020, the Court of Justice of the EU invalidated Decision 2016/1250 which had deemed the protection provided by the EU-U.S. Privacy Shield Framework adequate under EU privacy law, specifically under the GDPR. To the extent that we or any of our vendors, contractors or consultants had been relying on the EU-U.S. Privacy Shield Framework, we will not be able to do so in the future, which could increase our costs,
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inhibit transfer of any personal data to the United States and may limit our ability to process personal data from the EU. The same decision also cast doubt on the ability to use one of the primary alternatives to the Privacy Shield Frameworks, namely, the European Commissions Standard Contractual Clauses, to lawfully transfer personal data from Europe to the United States and most other countries. At present, there are few if any viable alternatives to the Privacy Shield Frameworks and the Standard Contractual Clauses for the foregoing purposes. On September 8, 2020, Switzerlands Federal Data Protection and Information Commissioner similarly invalidated the use of the Privacy Shield Frameworks as a vehicle for lawful data transfers from those countries to the United States and authorities in the United Kingdom may likewise invalidate use of the Privacy Shield Frameworks as a mechanism for lawful data transfers to the United States. As such, our processing of personal data from Europe may not comply with European data protection law, may increase our exposure to the GDPRs heightened sanctions for violations of its cross-border data transfer restrictions and may reduce demand for our services from companies subject to European data protection laws. Challenges involving import personal data from Europe may also require us to increase our data processing capabilities in Europe at significant expense. Additionally, other countries outside of Europe have enacted or are considering enacting similar cross-border data transfer restrictions and laws requiring local data residency, which could increase the cost and complexity of delivering our services and operating our business.
Further, the exit of the United Kingdom from the EU, often referred to as Brexit, has created uncertainty with regard to data protection regulation in the United Kingdom. Specifically, the United Kingdom exited the EU on January 1, 2020, subject to a transition period that ended December 31, 2020. Under the post-Brexit Trade and Cooperation Agreement between the EU and the United Kingdom, the United Kingdom and EU have agreed that transfers of personal data to the United Kingdom from EEA member states will not be treated as restricted transfers to a non-EEA country for a period of up to four months from January 1, 2021, plus a potential further two-month extension, or the Extended Adequacy Assessment Period. Although the current maximum duration of the Extended Adequacy Assessment Period is six months, it may end sooner, for example, in the event that the European Commission adopts an adequacy decision in respect of the United Kingdom, or the United Kingdom amends the United Kingdom General Data Protection Regulation, or UK GDPR, and/or makes certain changes regarding data transfers under the UK GDPR/Data Protection Act 2018 without the consent of the EU (unless those amendments or decisions are made simply to keep relevant UK laws aligned with the EUs data protection regime). If the European Commission does not adopt an adequacy decision in respect of the United Kingdom prior to the expiry of the Extended Adequacy Assessment Period, from that point onwards the United Kingdom will be an inadequate third country under the GDPR and transfers of personal data from the EEA to the United Kingdom will require a transfer mechanism such as the Standard Contractual Clauses.
California also enacted the California Consumer Privacy Act of 2018, or CCPA, which affords consumers expanded privacy protections as of January 1, 2020. The potential effects of this legislation are far reaching and may require us to modify our data processing practices and policies and to incur substantial costs and expenses in an effort to comply, where applicable. For example, the CCPA gives California residents expanded rights to access and require deletion of their personal information, opt out of certain personal information sharing and receive detailed information about how their personal information is used. The CCPA also provides for civil penalties for violations, as well as a private right of action for data breaches that may increase data breach litigation. In addition, the CCPA has prompted a number of proposals for new federal and state privacy legislation that, if passed, could increase our potential liability, increase our compliance costs and adversely affect our business. Additionally, a new privacy law, the California Privacy Rights Act, or CPRA, was passed by voters in California as part of the November 3, 2020 election. The CPRA is expected to significantly modify the CCPA, potentially resulting in further uncertainty and requiring us to incur additional costs and expenses in an effort to comply. The enactment of the CCPA is prompting a wave of similar legislative developments in other states in the United States, which could create the potential for a patchwork of overlapping but different state laws. For example, on March 2, 2021, the Virginia Consumer Data Protection Act was signed into law and will go into effect on January 1, 2023. Some countries also are considering or have passed legislation requiring local storage and processing of data, or similar requirements, which could increase the cost and complexity of operating our solution and other aspects of our business.
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With laws and regulations such as the GDPR in the EU and the CCPA and other state statutes in the United States imposing new and relatively burdensome obligations, and with substantial uncertainty over the interpretation and application of these and other laws and regulations, there is a risk that the requirements of these laws and regulations, or of contractual or other obligations relating to privacy, data protection or information security, will be interpreted or applied in a manner that is, or is alleged to be, inconsistent with our management and processing practices, our policies or procedures or the features of our solution. We may face challenges in addressing their requirements and making necessary changes to our policies and practices and may incur significant costs and expenses in an effort to do so. Although we endeavor to comply with our published policies, certifications and documentation, we may at times fail to do so or may be perceived to have failed to do so. Moreover, despite our efforts, we may not be successful in achieving compliance if our employees or vendors do not comply with our published policies and documentation. Any failure or perceived failure by us to comply with our privacy policies, our privacy-, data protection- or information security-related obligations to customers or other third parties or any of our other legal obligations relating to privacy, data protection or information security may result in governmental investigations or enforcement actions, litigation, claims or public statements against us by consumer advocacy groups or others and could result in significant liability or cause our customers to lose trust in us, which could have an adverse effect on our reputation and business. Furthermore, the costs of compliance with, and other burdens imposed by, the laws, regulations and policies that are applicable to the businesses of our customers may limit the adoption and use of, and reduce the overall demand for, our solution. Additionally, if third parties we work with, such as vendors or developers, violate applicable laws or regulations or our policies, such violations may also put our customers content at risk and could in turn have an adverse effect on our business.
Any significant change to applicable laws, regulations or industry practices regarding the collection, use, retention, security or disclosure of our customers content, or regarding the manner in which the express or implied consent of customers for the collection, use, retention or disclosure of such content is obtained, could increase our costs and require us to modify our solution, possibly in a material manner, which we may be unable to complete and may limit our ability to store and process customer data or develop new applications and features.
Our computer systems, or those of any third parties on whom we depend, may fail or suffer security or data privacy breaches or other unauthorized or improper access to, use of, or destruction of our proprietary or confidential data, employee data, or personal data, which could result in additional costs, loss of revenue, significant liabilities, harm to our brand and material disruption of our operations.
Despite the implementation of security measures in an effort to protect systems that store our information, given their size and complexity and the increasing amounts of information maintained on our information technology systems and those of our third-party contractors and consultants, these systems are potentially vulnerable to breakdown or other damage or interruption from service interruptions, system malfunction, natural disasters, terrorism, war and telecommunication and electrical failures, as well as security breaches from inadvertent or intentional actions by our employees, contractors, consultants, business partners and/or other third parties, or from cyber-attacks by malicious third parties (including supply chain cyber attacks or the deployment of harmful malware, ransomware, denial-of-service attacks, social engineering and other means to affect service reliability and threaten the confidentiality, integrity and availability of information), which may compromise our system infrastructure or lead to the loss, destruction, alteration, denial of access to, disclosure or dissemination of, or damage or unauthorized access to, our data (including trade secrets or other confidential information, intellectual property, proprietary business information and personal information) or data that is processed or maintained on our behalf, or other assets, which could result in financial, legal, business and reputational harm to us.
Companies have, in general, experienced an increase in phishing and social engineering attacks from third parties in connection with the COVID-19 pandemic and the increase in remote working further increases security threats. To the extent that any disruption or security incident were to result in any loss, destruction,
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unavailability, alteration, disclosure or dissemination of, or damage or unauthorized access to, our applications, any other data processed or maintained on our behalf or other assets, or for it to be believed or reported that any of these occurred, we could incur liability, financial harm and reputational damage. We cannot assure you that our data protection efforts and our investment in information technology, or the efforts or investments of our consultants or other third parties, will prevent significant breakdowns or breaches in systems or other cyber incidents that cause loss, destruction, unavailability, alteration or dissemination of, or damage or unauthorized access to, our data and other data processed or maintained on our behalf or other assets that could have a material adverse effect upon our reputation, business, operations or financial condition. Further, any such event that leads to loss, damage, or unauthorized access to, or use, alteration, or disclosure or dissemination of, personal information, including personal information regarding our clinical trial subjects or employees, could harm our reputation directly, compel us to comply with federal and/or state breach notification laws and foreign law equivalents, subject us to mandatory corrective action and otherwise subject us to liability under laws and regulations that protect the privacy and security of personal information, which could result in significant legal and financial exposure and reputational damages that could potentially have an adverse effect on our business.
Notifications and follow-up actions related to a security incident could impact our reputation and cause us to incur significant costs, including legal expenses and remediation costs. We expect to incur significant costs in our ongoing efforts to detect and prevent security incidents and we may face increased costs and requirements to expend substantial resources in the event of an actual or perceived security incident. To the extent that any disruption or security incident were to result in any loss, destruction, or alteration of, or damage or unauthorized access to, our data or other information that is processed or maintained on our behalf, or inappropriate disclosure of or dissemination of any such information, we could be exposed to litigation and governmental investigations and we could be subject to significant fines or penalties for any noncompliance with certain state, federal and/or international privacy and security laws.
Our insurance policies may not be adequate to compensate us for the potential losses arising from any such disruption in or failure or security breach of our systems or third-party systems where information important to our business operations or commercial development is stored. In addition, such insurance may not be available to us in the future on economically reasonable terms, or at all. Further, our insurance may not cover all claims made against us and could have high deductibles in any event, and defending a suit, regardless of its merit, could be costly and divert management attention.
If the security of the personal information that we (or our vendors) collect, store, or process is compromised or is otherwise accessed without authorization, or if we fail to comply with our commitments and assurances regarding the privacy and security of such information, our reputation may be harmed and we may be exposed to liability and loss of business.
Our business involves the collection and storage of potentially highly sensitive electronic documentation for use in various legal matters, including litigation and governmental investigations. In addition, we collect and maintain data about individuals and customers, including personally identifiable information, as well as other confidential, privileged or proprietary information. We may use third-party service providers and sub-processors to help us deliver services to our customers. These vendors may store or process personal information on our behalf.
Cyberattacks and other malicious internet-based activity continue to increase. In addition to traditional computer hackers, malicious code (such as viruses, worms and ransomware), employee theft or misuse and denial-of-service attacks, sophisticated nation-state and nation-state supported actors and organized crime now engage in attacks (including advanced persistent threat intrusions). We cannot guarantee that our or our vendors security measures will be sufficient to protect against unauthorized access to or other compromise of personal information and our confidential or proprietary information. Due to the COVID-19 pandemic, our employees are temporarily working remotely, which may pose additional data security risks. The techniques used to sabotage or to obtain unauthorized access to our or our vendors solutions, systems, networks and/or physical facilities in
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which data is stored or through which data is transmitted change frequently and we or our vendors may be unable to implement adequate preventative measures or stop security breaches while they are occurring. The recovery systems, security protocols, network protection mechanisms and other security measures that we have integrated into our solution, systems, networks and physical facilities and any such measures implemented by our vendors, which are designed to protect against, detect and minimize security breaches, may not be adequate to prevent or detect service interruption, system failure, or data loss. Our solution, systems, networks and physical facilities, and those of our vendors, in the past have been, and in the future could be, attacked and/or breached and personal information has been and could be otherwise compromised. Third parties could attempt to fraudulently induce our employees or our customers to disclose information or user names and/or passwords, or otherwise compromise the security of our solution, networks, systems and/or physical facilities. Third parties have exploited in the past, and could exploit in the future, vulnerabilities in, or could obtain unauthorized access to, platforms, systems, networks and/or physical facilities utilized by our vendors.
We are required to comply with laws, rules, regulations and other obligations that require us to maintain the security of personal information. We may have contractual and other legal obligations to notify relevant stakeholders of security breaches. We operate in an industry that is prone to cyber-attacks. We have previously and may in the future become the target of cyber-attacks by third parties seeking unauthorized access to such data, including our or our customers data or to disrupt our ability to provide our services. Failure to prevent or mitigate cyber-attacks could result in the unauthorized access to personal information. Most jurisdictions have enacted laws requiring companies to notify individuals, regulatory authorities and others of security breaches involving certain types of data. In addition, our agreements with certain customers and partners may require us to notify them in the event of a security breach. Such mandatory disclosures are costly, could lead to negative publicity, may cause our customers to lose confidence in the effectiveness of our security measures and require us to expend significant capital and other resources to respond to and/or alleviate problems caused by the actual or perceived security breach. A security breach of any of our vendors that processes personal information of our customers may pose similar risks. The costs to respond to a security breach and/or to mitigate any security vulnerabilities that may be identified could be significant, our efforts to address these issues may not be successful, and these issues could result in interruptions, delays, cessation of service, negative publicity, loss of customer trust, diminished use of our solution as well as other harms to our business and our competitive position. Remediation of any potential security breach may involve significant time, resources and expenses. Any security breach may result in regulatory inquiries, litigation or other investigations and can affect our financial and operational condition.
A security breach may cause us to violate the terms of our customer contracts. Our agreements with certain customers may require us to use industry-standard or reasonable measures to safeguard personal information. We also may be subject to laws that require us to use industry-standard or reasonable security measures to safeguard personal information. A security breach could lead to claims by our customers or other relevant stakeholders that we have failed to comply with such legal or contractual obligations. As a result, we could be subject to legal action or our customers could end their relationships with us. There can be no assurance that the limitations of liability in our contracts would be enforceable or adequate or would otherwise protect us from liabilities or damages and in some cases our customer agreements do not limit our remediation costs or liability with respect to data breaches.
Litigation resulting from security breaches may adversely affect our business. Unauthorized access to our solution, systems, networks, or physical facilities, or those of our vendors, could result in litigation with our customers or other relevant stakeholders. These proceedings could force us to spend money in defense or settlement, divert managements time and attention, increase our costs of doing business, or adversely affect our reputation. We could be required to fundamentally change our business activities and practices or modify our solution and/or platform capabilities in response to such litigation, which could have an adverse effect on our business. If a security breach were to occur, and the confidentiality, integrity, or availability of personal information was disrupted, we could incur significant liability, or our solution, systems, or networks may be perceived as less desirable, which could negatively affect our business and damage our reputation.
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We may not have adequate insurance coverage for security incidents or breaches. The successful assertion of one or more large claims against us that exceeds our available insurance coverage, or results in changes to our insurance policies (including premium increases or the imposition of large deductible or co-insurance requirements), could have an adverse effect on our business. In addition, we cannot be sure that our existing insurance coverage and coverage for errors and omissions will continue to be available on acceptable terms or that our insurers will not deny coverage as to any future claim.
Risks Related to Tax and Accounting Matters
Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations.
Our net operating loss, or NOL, carryforwards could expire unused and be unavailable to offset future income tax liabilities. Our NOLs generated in tax years beginning on or prior to December 31, 2017 are only permitted to be carried forward for 20 years under applicable U.S. tax law. Under legislation enacted in 2017, informally titled the Tax Cuts and Jobs Act, or Tax Act, as modified by the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, our federal NOLs generated in tax years beginning after December 31, 2017 may be carried forward indefinitely, but the deductibility of such federal NOLs in tax years beginning after December 31, 2020 is limited to 80% of current year taxable income. It is uncertain if and to what extent various states will conform to the Tax Act or the CARES Act.
In addition, under Section 382 of the U.S. Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an ownership change is generally subject to limitations on its ability to utilize its pre-change NOLs to offset post-change taxable income. We may have experienced ownership changes in the past and may experience ownership changes in the future as a result of this offering and/or subsequent shifts in our stock ownership (some of which shifts are outside our control). Furthermore, our ability to utilize NOLs of companies that we may acquire in the future may be subject to limitations. For these reasons, we may not be able to utilize a material portion of the NOLs, even if we were to achieve profitability.
Our international operations may subject us to potential adverse tax consequences.
We are expanding our international operations and staff to better support our growth into international markets. Our corporate structure and associated transfer pricing policies contemplate future growth into the international markets and consider the functions, risks and assets of the various entities involved in the intercompany transactions. The amount of taxes we pay in different jurisdictions may depend on the application of the tax laws of the various jurisdictions, including the United States, to our international business activities; changes in tax rates; new or revised tax laws or interpretations of existing tax laws and policies; and our ability to operate our business in a manner consistent with our corporate structure and intercompany arrangements. The taxing authorities of the jurisdictions in which we operate may challenge our methodologies for pricing intercompany transactions pursuant to our intercompany arrangements or disagree with our determinations as to the income and expenses attributable to specific jurisdictions. If such a challenge or disagreement were to occur, and our position was not sustained, we could be required to pay additional taxes, interest and penalties, which could result in one-time tax charges, higher effective tax rates, reduced cash flows and lower overall profitability of our operations. Our financial statements could fail to reflect adequate reserves to cover such a contingency.
Our results of operations may be harmed if we are required to collect sales or other related taxes for our subscriptions in jurisdictions where we have not historically done so.
We collect and remit sales tax in a number of jurisdictions where we, through our employees, have a presence and where we have determined, based on the U.S. Supreme Court decision in South Dakota v. Wayfair, Inc. and legal precedents in the jurisdiction, that we have economic nexus or sales of our solution are otherwise classified as taxable. The application of indirect taxes (such as sales and use tax, value-added tax, or VAT, goods and services tax, or GST, business tax and gross receipt tax) to businesses that transact online, such as ours, is a
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complex and evolving area. There is uncertainty as to what constitutes sufficient physical presence or nexus for a state or local jurisdiction to levy taxes, fees and surcharges for sales made over the internet and our characterization of our solution as not taxable in certain jurisdictions may not be accepted by state and local taxing authorities. As a result, it may be necessary to reevaluate whether our activities give rise to sales, use and other indirect taxes as a result of any nexus or transaction thresholds in those states in which we are not currently registered to collect and remit taxes. A successful assertion by a state, country, or other jurisdiction that we should have been or should be collecting additional sales, use, or other taxes could, among other things, result in substantial tax payments, create significant administrative burdens for us, discourage potential customers from subscribing to our solution due to the incremental cost of any such sales or other related taxes, or otherwise harm our business. We continue to analyze our exposure for such taxes and liabilities.
Additionally, we have not historically collected VAT or GST on sales of our solution, generally, because we make all of our sales through our office in the United States, and we believe, based on information provided to us by our customers, that most of our sales are made to business customers. Taxing authorities may challenge our position that we do not have sufficient nexus in a taxing jurisdiction or that our solution is subject to use, VAT, GST and other taxes, which could result in increased tax liabilities for us or our customers, which could harm our business.
The application of existing, new or future laws, whether in the United States or internationally, could harm our business. There have been, and will continue to be, substantial ongoing costs associated with complying with the various indirect tax requirements in the numerous markets in which we conduct or will conduct business.
Changes in our effective tax rate or tax liability may harm our business.
Our effective tax rate could be adversely impacted by several factors, including:
| Changes in the relative amounts of income before taxes in the various jurisdictions in which we operate that have differing statutory tax rates; |
| Changes in tax laws, tax treaties and regulations or the interpretation of them, including the Tax Act; |
| Changes to our assessment about our ability to realize our deferred tax assets that are based on estimates of our future results, the prudence and feasibility of possible tax-planning strategies and the economic and political environments in which we do business; |
| The outcome of current and future tax audits, examinations or administrative appeals; and |
| Limitations or adverse findings regarding our ability to do business in some jurisdictions. |
Should our effective tax rate rise, our business could be harmed.
Our financial results may be adversely affected by changes in accounting principles applicable to us.
Generally accepted accounting principles in the United States, or U.S. GAAP, are subject to interpretation by the Financial Accounting Standards Board, the Securities and Exchange Commission, or SEC, and other various bodies formed to promulgate and interpret appropriate accounting principles. Changes in these accounting principles could adversely affect our financial results. Any difficulties in implementing these pronouncements could cause us to fail to meet our financial reporting obligations, which could result in regulatory discipline and harm our business.
If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our results of operations could be adversely affected.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and
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accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in the section titled Managements Discussion and Analysis of Financial Condition and Results of OperationsCritical Accounting Policies. The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities and equity and the amount of revenue and expenses that are not readily apparent from other sources. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to allowance for credit losses, fair value of financial instruments, valuation of stock-based compensation, valuation of warrant liabilities and the valuation allowance for deferred income taxes. Our results of operations may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our results of operations to fall below the expectations of securities analysts and investors, resulting in a decline in the trading price of our common stock. Significant judgments, estimates and assumptions used in preparing our consolidated financial statements include, or may in the future include, those related to revenue recognition, stock-based compensation expense, income taxes, goodwill and intangible assets.
Risks Related to Being a Public Company
We will incur increased costs as a result of operating as a public company and our management will be required to devote substantial time to compliance with our public company responsibilities and corporate governance practices.
As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company, which we expect to further increase after we are no longer an emerging growth company. The Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of and other applicable securities rules and regulations impose various requirements on public companies. Our management and other personnel are expected to devote a substantial amount of time to compliance with these requirements, which may divert their attention from managing our business operations. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. We cannot predict or estimate the amount of additional costs we will incur as a public company or the specific timing of such costs.
Our management team has limited experience managing a public company.
Our management team has limited experience managing a publicly traded company, interacting with public company investors and securities analysts and complying with the increasingly complex laws pertaining to public companies. These new obligations and constituents require significant attention from our management team and could divert their attention away from the day-to-day management of our business, which could harm our business, results of operations and financial condition.
We have identified a material weakness in our internal control over financial reporting. If our remediation of the material weakness is not effective, or we fail to develop and maintain effective internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable laws and regulations could be impaired.
Neither our management nor an independent registered public accounting firm has ever performed an evaluation of our internal controls over financial reporting in accordance with the provisions of the Sarbanes-Oxley Act because no such evaluation has been required. We will be required, pursuant to Section 404 of the Sarbanes-Oxley Act, or Section 404, to furnish a report by management on, among other things, the effectiveness of our internal controls over financial reporting for the fiscal year ending December 31, 2022. In addition, our independent registered public accounting firm will be required to attest to the effectiveness of our internal controls over financial reporting in our first annual report required to be filed with the SEC following the date we are no longer an emerging growth company. We have recently commenced the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to comply
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with Section 404, but we may not be able to complete our evaluation, testing and any required remediation in a timely fashion once initiated. Our compliance with Section 404 will require that we incur substantial expenses and expend significant management efforts. We will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge and compile the system and process documentation necessary to perform the evaluation needed to comply with Section 404.
During the evaluation and testing process of our internal controls, if we identify one or more material weaknesses in our internal controls over financial reporting, we will be unable to certify that our internal controls over financial reporting is effective. A material weakness is a deficiency, or combination of deficiencies, in internal controls over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
In the course of preparing our audited consolidated financial statements for the year ended December 31, 2019, a material weakness was identified in our internal controls over financial reporting related to secondary sales transactions by current and former employees. Specifically, we did not design and maintain effective controls to evaluate and assess secondary sales transactions in our common stock to determine, in a timely manner, whether additional compensation expense was incurred based on the nature of the transaction.
We have begun implementation of a plan to remediate the material weakness described above. Those remediation measures are ongoing and include the following:
| We are recruiting additional personnel, in addition to utilizing third-party consultants and specialists, to supplement the quality, depth and experience of our accounting and finance internal resources; and |
| We engaged an external advisor to assist us with designing and implementing improved processes and internal controls and monitoring remediation progress. |
We cannot assure you the measures we are taking to remediate the material weakness will be sufficient or that they will prevent future material weaknesses. Additional material weaknesses or failure to maintain effective internal control over financial reporting could cause us to fail to meet our reporting obligations as a public company and may result in a restatement of our financial statements for prior periods.
We may not be able to successfully manage the growth of our business if we are unable to improve our internal systems, processes and controls.
We need to continue to improve our internal systems, processes and controls to effectively manage our operations and growth. We may not be able to successfully implement and scale improvements to our systems and processes in a timely or efficient manner or in a manner that does not negatively affect our operating results. For example, we may not be able to effectively monitor certain extraordinary contract requirements or provisions that are individually negotiated by our sales force as the number of transactions continues to grow. In addition, our systems and processes may not prevent or detect all errors, omissions or fraud. We may experience difficulties in managing improvements to our systems, processes and controls or in connection with third-party software, which could impair our ability to offer our solution to our customers in a timely manner, causing us to lose customers, limit us to smaller deployments of our solution or increase our technical support costs.
We are an emerging growth company and a smaller reporting company, and we cannot be certain if the reduced reporting and disclosure requirements applicable to emerging growth companies and smaller reporting companies will make our 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 the auditor attestation requirements of Section 404, reduced disclosure obligations regarding executive compensation in our periodic
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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. Pursuant to Section 107 of the JOBS Act, as an emerging growth company, we have elected to use the extended transition period for complying with new or revised accounting standards until those standards would otherwise apply to private companies. As a result, our consolidated financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies, which may make our common stock less attractive to investors. In addition, if we cease to be an emerging growth company, we will no longer be able to use the extended transition period for complying with new or revised accounting standards.
We will remain an emerging growth company until the earliest of: (1) the last day of the fiscal year following the fifth anniversary of this offering; (2) the last day of the first fiscal year in which our annual gross revenue is $1.07 billion or more; (3) the date on which we have, during the previous rolling three-year period, issued more than $1 billion in non-convertible debt securities; and (4) the last day of the fiscal year in which the market value of our common stock held by non-affiliates exceeds $700 million as of June 30 of such fiscal year.
We may continue to be a smaller reporting company even after we are no longer an emerging growth company. We may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as (i) the market value of our voting and non-voting common stock held by non-affiliates is less than $250 million measured on the last business day of our second fiscal quarter or (ii) our annual revenue is less than $100 million during the most recently completed fiscal year and the market value of our voting and non-voting common stock held by non-affiliates is less than $700 million measured on the last business day of our second fiscal quarter.
We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. For example, if we do not adopt a new or revised accounting standard, our future results of operations may not be as comparable to the results of operations of certain other companies in our industry that adopted such standards. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
Risks Related to Ownership of Our Common Stock and This Offering
We will have broad discretion in the use of the net proceeds that we receive from this offering and may not use them effectively.
We will have broad discretion in the application of the net proceeds that we receive from this offering, including for any of the purposes described in the section titled Use of Proceeds, and you will not have the opportunity as part of your investment decision to assess whether the net proceeds are being used appropriately. Because of the number and variability of factors that will determine our use of the net proceeds from this offering, our ultimate use may vary substantially from our currently intended use. Investors will need to rely upon the judgment of our management with respect to the use of such proceeds. Pending use, we may invest the net proceeds that we receive from this offering in short-term, investment-grade, interest-bearing securities, such as money market accounts, certificates of deposit, commercial paper and guaranteed obligations of the U.S. government that may not generate a high yield for our stockholders. If we do not use the net proceeds that we receive in this offering effectively, our business, results of operations and financial condition could be harmed, and the market price of our common stock could decline.
Insiders have substantial control over us and will be able to influence corporate matters.
Following this offering, our directors, officers and their respective affiliates will beneficially own, in the aggregate, approximately % of our outstanding common stock (or approximately % if the underwriters option to purchase additional shares of common stock from the selling stockholders is exercised in
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full), based on the number of shares outstanding as of March 31, 2021 and without giving effect to any purchases that these holders may make through our directed share program or otherwise in this offering. As a result, these stockholders will be able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership will limit the ability of other stockholders to influence corporate matters and may cause us to make strategic decisions that could involve risks to you or that may not be aligned with your interests. This control may adversely affect the market price of our common stock.
You will experience immediate and substantial dilution in the net tangible book value of the shares of common stock you purchase in this offering.
The initial public offering price of our common stock is substantially higher than the pro forma net tangible book value per share of our common stock immediately after this offering. If you purchase shares of our common stock in this offering, you will suffer immediate dilution of $ per share, representing the difference between our pro forma as adjusted net tangible book value per share after giving effect to the sale of common stock in this offering and the initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover of this prospectus. See the section titled Dilution.
Our stock price may be volatile, and the value of our common stock may decline.
The market price of our common stock may be highly volatile and may fluctuate or decline substantially as a result of a variety of factors, some of which are beyond our control, including:
| actual or anticipated fluctuations in our financial condition or results of operations; |
| variance in our financial performance from expectations of securities analysts; |
| changes in the pricing of our solution; |
| changes in our projected operating and financial results; |
| announcements by us or our competitors of significant business developments, acquisitions or new offerings; |
| changes in laws or regulations applicable to our solution; |
| significant data breaches, disruptions to or other incidents involving our software; |
| our involvement in litigation; |
| future sales of our common stock by us or our stockholders, as well as the anticipation of lock-up releases; |
| changes in senior management or key personnel; |
| the trading volume of our common stock; |
| changes in the anticipated future size and growth rate of our market; and |
| general economic and market conditions. |
Broad market and industry fluctuations, as well as general economic, political, regulatory and market conditions, may also negatively impact the market price of our common stock.
No public market for our common stock currently exists and an active public trading market may not develop or be sustained following this offering.
No public market for our common stock currently exists. An active public trading market for our common stock may not develop following the completion of this offering or, if developed, it may not be sustained. The
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lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair value of your shares. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies by using our shares as consideration.
Future sales of our common stock in the public market could cause the market price of our common stock to decline.
Sales of a substantial number of shares of our common stock in the public market following the completion of this offering, or the perception that these sales might occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. Many of our existing equityholders have substantial unrecognized gains on the value of the equity they hold based upon the price of this offering and therefore they may take steps to sell their shares or otherwise secure the unrecognized gains on those shares. We are unable to predict the timing of or the effect that such sales may have on the prevailing market price of our common stock.
All of our directors and officers, the selling stockholders and the holders of substantially all of our capital stock and securities convertible into our capital stock are subject to lock-up agreements that restrict their ability to offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale or otherwise dispose of any of our shares of common stock, any options or warrants to purchase any of our shares of common stock or any securities convertible into or exchangeable for or that represent the right to receive shares of our common stock for days from the date of this prospectus, subject to certain exceptions. J.P. Morgan Securities LLC and BofA Securities, Inc. may, in their sole discretion, permit our stockholders who are subject to these lock-up agreements to sell shares prior to the expiration of the lock-up agreements, subject to applicable notice requirements. If not earlier released, all of the shares of common stock sold in this offering will become eligible for sale upon expiration of the day lock-up period, except for any shares held by our affiliates as defined in Rule 144 under the Securities Act of 1933, or the Securities Act.
In addition, there were 15,173,280 shares of common stock issuable upon the exercise of options outstanding as of March 31, 2021. We intend to register all of the shares of common stock issuable upon the exercise of outstanding options or other equity incentives we may grant in the future, for public resale under the Securities Act. The shares of common stock will become eligible for sale in the public market to the extent such options are exercised, subject to the lock-up agreements described above and compliance with applicable securities laws.
Further, based on shares outstanding as of March 31, 2021, holders of an aggregate of 196,714,951 and 238,943,144 shares of our capital stock after the completion of this offering, will have rights, subject to some conditions, to require us to file registration statements covering the sale of their shares or to include their shares in registration statements that we may file for ourselves or other stockholders, respectively.
If securities or industry analysts do not publish research or publish unfavorable or inaccurate research about our business, the market price and trading volume of our common stock could decline.
The market price and trading volume of our common stock following the completion of this offering will be heavily influenced by the way analysts interpret our financial information and other disclosures. We do not have control over these analysts. If few securities analysts commence coverage of us, or if industry analysts cease coverage of us, our stock price would be negatively affected. If securities or industry analysts do not publish research or reports about our business, downgrade our common stock, or publish negative reports about our business, our stock price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our common stock could decrease, which might cause our stock price to decline and could decrease the trading volume of our common stock.
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We do not intend to pay dividends for the foreseeable future and, as a result, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.
We have never declared or paid any cash dividends on our capital stock and we do not intend to pay any cash dividends in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors. Accordingly, you may need to rely on sales of our common stock after price appreciation, which may never occur, as the only way to realize any future gains on your investment.
Anti-takeover provisions in our charter documents and under Delaware 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 common stock.
Provisions in our amended and restated certificate of incorporation and amended and restated bylaws, as they will be in effect upon the completion of this offering, may have the effect of delaying or preventing a change of control or changes in our management. Our amended and restated certificate of incorporation and amended and restated bylaws will include provisions that:
| authorize our board of directors to issue, without further action by the stockholders, shares of undesignated preferred stock with terms, rights and preferences determined by our board of directors that may be senior to our common stock; |
| require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent; |
| specify that special meetings of our stockholders can be called only by our board of directors, the chairperson of our board of directors or our chief executive officer; |
| establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our board of directors; |
| establish that our board of directors is divided into three classes, with each class serving three- year staggered terms; |
| prohibit cumulative voting in the election of directors; |
| provide that our directors may be removed for cause only upon the vote of at least 66 2/3% of our outstanding shares of voting stock; |
| provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum; and |
| require the approval of our board of directors or the holders of at least 66 2/3% of our outstanding shares of voting stock to amend our bylaws and certain provisions of our certificate of incorporation. |
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, subject to certain exceptions, prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any interested stockholder for a period of three years following the date on which the stockholder became an interested stockholder. Any of the foregoing provisions could limit the price that investors might be willing to pay in the future for shares of our common stock and they could deter potential acquirers of our company, thereby reducing the likelihood that you would receive a premium for your shares of our common stock in an acquisition.
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Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware and the federal district courts of the United States of America will be the exclusive forums 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 amended and restated certificate of incorporation, as will be in effect upon the completion of this offering, will provide that the Court of Chancery of the State of Delaware is the exclusive forum for the following types of actions or proceedings under Delaware statutory or common law:
| any derivative claim or cause of action brought on our behalf; |
| any claim or cause of action asserting a breach of fiduciary duty; |
| any claim or cause of action against us arising under the Delaware General Corporation Law; |
| any claim or cause of action arising under or seeking to interpret our amended and restated certificate of incorporation or our amended and restated bylaws; and |
| any claim or cause of action against us that is governed by the internal affairs doctrine. |
The provisions would not apply to suits brought to enforce a duty or liability created by the Securities Exchange Act of 1934. Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all such Securities Act actions. Accordingly, both state and federal courts have jurisdiction to entertain such claims. To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, our amended and restated certificate of incorporation will further provide that the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause or causes of action arising under the Securities Act, including all causes of action asserted against any defendant to such complaint. For the avoidance of doubt, this provision is intended to benefit and may be enforced by us, our officers and directors, the underwriters to any offering giving rise to such complaint and any other professional entity whose profession gives authority to a statement made by that person or entity and who has prepared or certified any part of the documents underlying the offering.
While the Delaware courts have determined that such choice of forum provisions are facially valid, a stockholder may nevertheless seek to bring a claim in a venue other than those designated in the exclusive forum provisions. In such instance, we would expect to vigorously assert the validity and enforceability of the exclusive forum provisions of our amended and restated certificate of incorporation. This may require significant additional costs associated with resolving such action in other jurisdictions and there can be no assurance that the provisions will be enforced by a court in those other jurisdictions.
These exclusive forum provisions may limit a stockholders 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 lawsuits against us and our directors, officers and other employees. If a court were to find either exclusive-forum provision in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur further significant additional costs associated with resolving the dispute in other jurisdictions, all of which could seriously harm our business.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations or financial condition, business strategy and plans and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as anticipate, believe, contemplate, continue, could, estimate, expect, intend, may, plan, potential, predict, project, should, target, will or would or the negative of these words or other similar terms or expressions. These forward-looking statements include, but are not limited to, statements concerning the following:
| our expectations regarding our revenue, expenses, dollar-based net retention rate and other operating results; |
| our ability to acquire new customers and successfully retain existing customers; |
| our ability to increase usage of our solution; |
| our ability to effectively manage our growth; |
| our ability to achieve or sustain profitability; |
| future investments in our business, our anticipated capital expenditures and our estimates regarding our capital requirements; |
| the costs and success of our sales and marketing efforts and our ability to promote our brand; |
| our growth strategies for our solution; |
| the estimated addressable market opportunity for our solution; |
| our reliance on key personnel and our ability to identify, recruit and retain skilled personnel; |
| our ability to effectively manage our growth, including any international expansion; |
| our ability to maintain, protect and enforce our intellectual property rights and any costs associated therewith; |
| the effects of COVID-19 or other public health crises on our business and the global economy; |
| our ability to compete effectively with existing competitors and new market entrants; and |
| the growth rates of the markets in which we compete. |
You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this prospectus primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition and operating results. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in the section titled Risk Factors and elsewhere in this prospectus. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this prospectus. The results, events and circumstances reflected in the forward-looking statements may not be achieved or occur and actual results, events or circumstances could differ materially from those described in the forward-looking statements.
In addition, statements that we believe and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this prospectus. While we believe that such information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely on these statements.
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The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this prospectus to reflect events or circumstances after the date of this prospectus or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments.
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This prospectus contains statistical data, estimates and forecasts that are based on independent industry publications or other publicly available information, as well as other information based on our internal sources. While we believe the industry and market data included in this prospectus are reliable and are based on reasonable assumptions, these data involve many assumptions and limitations and you are cautioned not to give undue weight to these estimates. We have not independently verified the accuracy or completeness of the data contained in these industry publications and other publicly available information. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the sections titled Risk Factors and Special Note Regarding Forward-Looking Statements. These and other factors could cause results to differ materially from those expressed in the projections and estimates made by the independent third parties and us.
The sources of certain statistical data, estimates and forecasts contained in this prospectus are the following independent industry publications or reports:
| Federal Register Statistics, Code of Federal Regulations, Total Pages and Volumes, published July 2020; |
| International Data Corporation, Worldwide Global DataSphere Forecast, 20212025: The World Keeps Creating More DataNow, What Do We Do with It All?, published March 2021; |
| International Data Corporation, Worldwide eDiscovery Services Forecast, 20202024, published September 2020; |
| International Data Corporation, Worldwide eDiscovery Software Forecast, 20202024, published June 2020; |
| S&P Global Market Intelligence, S&P Capital IQ Database, accessed in May 2021; |
| Statista, Size of the Global Legal Services Market 2015-2023, published November 2020; and |
| Thomson Reuters Acritas, 2021 Report on the State of the Legal Market, published January 2021. |
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We estimate that the net proceeds from the sale of shares of our common stock that we are selling in this offering will be approximately $ million based on the assumed initial public offering price of $ per share of common stock, the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses. We will not receive any of the proceeds from the sale of common stock in this offering by the selling stockholders identified in this prospectus in the event that the underwriters exercise their option to purchase additional shares.
A $1.00 increase (decrease) in the assumed initial public offering price of $ per share of common stock would increase (decrease) the net proceeds to us from this offering by approximately $ million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions. Similarly, each increase (decrease) of 1,000,000 shares in the number of shares of common stock offered by us would increase (decrease) the net proceeds to us from this offering by approximately $ million, assuming the assumed initial public offering price of $ per share of common stock remains the same, and after deducting estimated underwriting discounts and commissions.
The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our common stock and facilitate our future access to the capital markets. As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to us from this offering. However, we currently intend to use the net proceeds we receive from this offering for working capital and other general corporate purposes, including developing and enhancing our technical infrastructure, solution and services, expanding our research and development efforts and sales and marketing operations, meeting the increased compliance requirements associated with our transition to and operation as a public company and expanding into new markets. We may also use a portion of the net proceeds to acquire complementary businesses, products, services or technologies. However, we do not have agreements or commitments to enter into any acquisitions at this time.
We will have broad discretion over how to use the net proceeds to us from this offering. We intend to invest the net proceeds to us from the offering that are not used as described above in investment-grade, interest-bearing instruments.
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We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and future earnings, if any, to fund the development and expansion of our business, and we do not anticipate declaring or paying any cash dividends in the foreseeable future. Any future determination regarding the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend on then-existing conditions, including our financial condition, operating results, contractual restrictions (including any restrictions in our then-existing debt arrangements), capital requirements, business prospects and other factors our board of directors may deem relevant. In addition, our revolving credit facility places restrictions on our ability to pay cash dividends without the prior written consent of the lender.
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The following table sets forth our cash and cash equivalents and capitalization as of March 31, 2021:
| on an actual basis; |
| on a pro forma basis, giving effect to (1) the automatic conversion of all of our outstanding shares of redeemable convertible preferred stock into shares of common stock and (2) the filing and effectiveness of our amended and restated certificate of incorporation, both of which will occur immediately prior to the completion of this offering; and |
| on a pro forma as adjusted basis, giving effect to (1) the pro forma adjustments set forth above and (2) our receipt of estimated net proceeds from the sale of shares of common stock that we are offering at the assumed initial public offering price of $ per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses. |
You should read this table together with the section titled Managements Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and related notes included elsewhere in this prospectus.
As of March 31, 2021 | ||||||||||||
(in thousands except share and per share amounts) |
Actual | Pro Forma | Pro Forma as Adjusted |
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Cash and cash equivalents |
$ | 53,632 | $ | $ | ||||||||
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Redeemable convertible preferred stock, $0.001 par value, 178,967,444 shares authorized, issued and outstanding, actual, and no shares authorized, issued and outstanding, pro forma and pro forma as adjusted |
160,826 | |||||||||||
Stockholders (deficit) equity: |
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Preferred stock, $0.001 par value, no shares authorized, issued, and outstanding, actual, and shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted |
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Common stock, $0.001 par value, 277,406,431 shares authorized, 67,927,061 shares issued and outstanding, actual, shares authorized and shares issued and outstanding, pro forma, and shares authorized and shares issued and outstanding, pro forma as adjusted |
68 | |||||||||||
Additional paid-in capital |
8,765 | |||||||||||
Accumulated deficit |
(106,048 | ) | ||||||||||
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Total stockholders (deficit) equity |
$ | (97,215 | ) | $ | $ | |||||||
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Total capitalization |
$ | 63,611 | $ | $ | ||||||||
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A $1.00 increase (decrease) in the assumed initial public offering price of $ per share of common stock, the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) each of our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders (deficit) equity and total capitalization by approximately $ million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions. Similarly, each increase (decrease) of 1,000,000 shares in the number of shares of common stock offered by us would increase (decrease) each of our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders (deficit) equity and total capitalization by approximately $ million, assuming the assumed initial public offering price of $ per share of common stock remains the same, and after deducting estimated underwriting discounts and commissions.
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The number of shares of our common stock that will be outstanding immediately after this offering is based on 246,894,505 shares of our common stock outstanding as of March 31, 2021, and excludes:
| 15,173,280 shares of common stock issuable upon the exercise of options outstanding as of March 31, 2021 under our 2013 Plan, with a weighted average exercise price of $0.79 per share; |
| shares of common stock issuable upon the exercise of options granted after March 31, 2021 under our 2013 Plan, with a weighted average exercise price of $ per share; |
| 249,356 shares of common stock issuable upon the exercise of warrants outstanding as of March 31, 2021, with a weighted average exercise price of $0.59 per share; |
| shares of common stock reserved for future issuance under our 2021 Plan, plus any future increases in the number of shares of common stock reserved for issuance thereunder, as more fully described in the section titled Executive CompensationEmployee Benefit plans; and |
| shares of common stock reserved for issuance under our ESPP, plus any future increases in the number of shares of common stock reserved for issuance thereunder, as more fully described in the section titled Executive CompensationEmployee benefit plans. |
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If you invest in our common stock in this offering, your interest will be diluted to the extent of the difference between the initial public offering price per share of common stock and the pro forma as adjusted net tangible book value per share immediately after this offering.
Our pro forma net tangible book value as of March 31, 2021 was $63.6 million, or $0.26 per share. Pro forma net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the number of our shares of common stock outstanding as of March 31, 2021, after giving effect to the automatic conversion of all outstanding shares of redeemable convertible preferred stock into an aggregate of 178,967,444 shares of common stock immediately prior to the completion of this offering.
After giving effect to the sale by us of shares of common stock in this offering at the assumed initial public offering price of $ per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses, our pro forma as adjusted net tangible book value as of March 31, 2021 would have been $ million, or $ per share. This amount represents an immediate increase in pro forma as adjusted net tangible book value of $ per share to our existing stockholders and an immediate dilution in pro forma as adjusted net tangible book value of $ per share to new investors purchasing common stock in this offering. We determine dilution by subtracting the pro forma as adjusted net tangible book value per share after this offering from the amount of cash that a new investor paid for a share of common stock. The following table illustrates this dilution on a per share basis:
Assumed initial public offering price per share |
$ | |||||||
Pro forma net tangible book value per share as of March 31, 2021 |
$ | 0.26 | ||||||
Increase in pro forma as adjusted net tangible book value per share attributable to new investors purchasing shares in this offering |
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Pro forma as adjusted net tangible book value per share after this offering |
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Dilution in pro forma as adjusted net tangible book value per share to new investors in this offering |
$ | |||||||
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The dilution information discussed above is illustrative only and may change based on the actual initial public offering price and other terms of this offering. A $1.00 increase (decrease) in the assumed initial public offering price of $ per share of common stock, the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted net tangible book value per share after this offering by $ per share and increase (decrease) the dilution to new investors by $ per share, in each case assuming the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions. Similarly, each increase of 1,000,000 shares in the number of shares of common stock offered by us would increase our pro forma as adjusted net tangible book value by approximately $ per share and decrease the dilution to new investors by approximately $ per share, and each decrease of 1,000,000 shares in the number of shares of common stock offered by us would decrease our pro forma as adjusted tangible book value by approximately $ per share, in each case assuming the assumed initial public offering price of $ per share of common stock remains the same, and after deducting estimated underwriting discounts and commissions.
If the underwriters exercise their option to purchase additional shares of common stock in full, the pro forma net tangible book value per share, as adjusted to give effect to this offering, would be $ per share, and the dilution in pro forma net tangible book value per share to investors in this offering would be $ per share.
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The following table summarizes, as of March 31, 2021, on a pro forma as adjusted basis as described above, the number of shares of our common stock, the total consideration and the average price per share (1) paid to us by existing stockholders and (2) to be paid by new investors acquiring our common stock in this offering at the assumed initial public offering price of $ per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses.
Shares Purchased | Total Consideration | Average Price Per Share |
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Number | Percent | Amount | Percent | |||||||||||||||||
Existing stockholders |
% | % | ||||||||||||||||||
New investors |
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Totals |
100.0 | % | $ | 100.0 | % | |||||||||||||||
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Sales by the selling stockholders in this offering will cause the number of shares held by existing stockholders to be reduced to shares, or % of the total number of shares of our capital stock outstanding following the completion of this offering, and will increase the number of shares held by new investors to shares, or % of the total number of shares of our capital stock outstanding following the completion of this offering.
Each $1.00 increase (decrease) in the assumed initial public offering price of $ per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) the total consideration paid by new investors and total consideration paid by all stockholders by approximately $ million, assuming that the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions.
The number of shares of our common stock that will be outstanding immediately after this offering is based on 246,894,505 shares of our common stock outstanding as of March 31, 2021, and excludes:
| 15,173,280 shares of common stock issuable upon the exercise of options outstanding as of March 31, 2021 under our 2013 Plan, with a weighted average exercise price of $0.79 per share; |
| shares of common stock issuable upon the exercise of options granted after March 31, 2021 under our 2013 Plan, with a weighted average exercise price of $ per share; |
| 249,356 shares of common stock issuable upon the exercise of warrants outstanding as of March 31, 2021, with a weighted average exercise price of $0.59 per share; |
| shares of common stock reserved for future issuance under our 2021 Plan, plus any future increases in the number of shares of common stock reserved for issuance thereunder, as more fully described in the section titled Executive CompensationEmployee Benefit Plans; and |
| shares of common stock reserved for issuance under our ESPP, plus any future increases in the number of shares of common stock reserved for issuance thereunder, as more fully described in the section titled Executive CompensationEmployee Benefit Plans. |
To the extent that any outstanding options are exercised or new options are issued under our stock-based compensation plans, or we issue additional shares of common stock in the future, there will be further dilution to investors participating in this offering. If all outstanding options under our 2013 Plan as of March 31, 2021 were exercised or settled, then our existing stockholders, including the holders of these options, would own % and our new investors would own % of the total number of shares of our common stock outstanding upon the completion of this offering.
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included elsewhere in this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the Risk Factors section of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
DISCO provides a cloud-native, artificial intelligence-powered legal solution that simplifies ediscovery, legal document review and case management for enterprises, law firms, legal services providers and governments. Our scalable, integrated solution enables legal departments to easily collect, process and review enterprise data that is relevant or potentially relevant to legal matters. We leverage a cloud-native architecture and powerful artificial intelligence, or AI, models to automatically identify legally relevant documents and improve the accuracy and speed of legal document review. Our AI models continuously learn from legal work conducted on our solution and can be reused across legal matters, which further strengthens our ability to help our customers find evidence and resolve matters faster as they expand usage of our solution. We provide legal departments with the ability to centralize legal data into a single solution, improving security and privacy for our customers, enabling transparent collaboration with other legal industry participants and allowing customers to reuse data and lawyer work product across legal matters. As of March 2021, our solution held more than 10 billion files and 2.5 petabytes of data and we used more than 14 billion serverless compute calls in 2021 to process and enrich data for our customers. By automating the manual, time-consuming and error-prone parts of ediscovery, legal document review and case management, we empower legal departments to focus on delivering better legal outcomes.
DISCO was founded in 2013 with the vision of replacing conventional ediscovery tools with an integrated technology-focused solution. Since that time, we have expanded our operations and offerings to provide a full-stack solution to address ediscovery, legal document review and case management. The key milestones in our history include the following:
| 2013: Founded |
| 2014: First AmLaw 200 customer |
| 2014: Surpassed 50 customers |
| 2016: Launched DISCO AI |
| 2016: Surpassed 150 customers |
| 2017: Launched DISCO Review |
| 2017: Launched DISCO Cares, our corporate social responsibility program |
| 2018: Moved our headquarters to Austin, TX and opened our first international office in London, UK |
| 2018: Surpassed 400 customers; 75+ customers spent over $100,000 |
| 2020: Launched DISCO Case Builder |
| 2020: Named to Forbes Cloud 100 |
| 2020: Surpassed 800 customers; 140+ customers spent over $100,000 |
| 2020: Had 171 of the AmLaw 200 law firms using DISCO, including 49 out of the largest 50 firms |
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We generate substantially all of our revenue from our customers usage of our solution. Our revenues are based on our customers actual usage of our solution. Customers generally do not commit to purchase a specific amount of usage on our solution and their usage can fluctuate based on the number and nature of legal matters they have at any particular time. As a result, our revenue and other financial results can fluctuate from period to period given the inherent unpredictability of the timing, duration and scope of legal casework. We also offer our customers the option to enter into subscriptions based on committed minimum usage on an annual or multi-year basis, which represented 12%, 14% and 13% of our revenue for the years ended December 31, 2019 and 2020, and the three months ended March 31, 2021, respectively. In addition, we generate revenue from a range of professional services aimed at accelerating the time-to-value for our customers.
After using and realizing the benefits of our solution, our customers often increase usage of our solution to cover additional legal matters and adopt more of our offerings. As our customers use our solution over time, the amount of enterprise data in our solution increases, enhancing the strategic value and stickiness of our solution within an organization. This dynamic of increased activity from our existing customer accounts and overall customer satisfaction is best demonstrated by our dollar-based net retention rate. As of December 31, 2019, December 31, 2020, March 31, 2020 and March 31, 2021, our dollar-based net retention rate was 146%, 127%, 136% and 122%, respectively.
Our customers include a diverse set of enterprises across a broad set of industries, as well as law firms, legal services providers of all sizes and government organizations. While we serve customers across many different industries, the way in which lawyers and legal professionals use our solution is similar regardless of the specific industry in which each customer operates. This commonality has created efficiencies in our sales and marketing and research and development activities because we do not need to tailor our sales and marketing activities to a wide range of different customer use cases. As of March 31, 2021, we had 909 customers, increasing from 635 and 825 customers as of December 31, 2019 and 2020, respectively. As of March 31, 2021 we had 157 large customers, defined as customers with revenue in excess of $100,000 over the previous 12-month period, increasing from 113 and 141 large customers as of December 31, 2019 and 2020, respectively. Large customers accounted for approximately 75%, 74%, and 74% of our revenue for the trailing twelve months ended March 31, 2021 and the years ended December 31, 2019 and 2020, respectively.
Our go-to-market strategy is focused on acquiring new customers and driving continued use and increased usage of our solution for existing customers. We primarily sell through a direct sales force, which is organized based on the stages of our sales motion. Our sales organization is segmented into sales development representatives, field sales, inside sales, solution architects and our customer success team. In addition, our solution is designed such that customers can grant access to third parties, including law firms and other legal service providers, to use our applications on the customers behalf. This access facilitates widespread adoption of our solution, as these law firms and other legal service providers often become customers on their own or recommend our solution to other legal industry participants after realizing the benefits of working on our solution. Likewise, if a law firm is our customer, the law firm may add users from its clients legal departments to our solution in order to collaborate with them. These users may then become champions and encourage the companies they work for to become customers.
We have experienced rapid growth in recent periods. Since inception, we have raised $161.0 million of capital, and we had $53.6 million of cash and cash equivalents as of March 31, 2021. We generated revenue of $48.6 million and $68.4 million in 2019 and 2020, respectively, representing year-over-year growth of 41%. We generated revenue of $15.7 million and $21.1 million in the three months ended March 31, 2020 and 2021, respectively, representing a period-over-period growth of 35%. Our net loss was $29.8 million, $22.9 million, $11.2 million and $2.9 million for the years ended December 31, 2019 and 2020 and the three months ended March 31, 2020 and 2021, respectively. We generated Adjusted EBITDA of $(25.4) million, $(19.9) million, $(10.3) million, and $(1.9) million for the years ended December 31, 2019 and 2020 and the three months ended March 31, 2020 and 2021, respectively. See the section titled Non-GAAP Financial Measure for the definition of Adjusted EBITDA, as well as a reconciliation of Adjusted EBITDA to net loss, the most directly comparable financial measure stated in accordance with GAAP.
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Impact of COVID-19 on Our Business
The COVID-19 pandemic has caused general business disruption worldwide beginning in January 2020. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations, cash flows and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted. As a result of the COVID-19 pandemic, governments in many of the jurisdictions in which we or our customers operate instituted shelter-in-place orders in March and April 2020 to mitigate the outbreak of COVID-19, forcing court closures and causing general delays in litigation proceedings, as well as leading to delays in the collection of enterprise data. Due to these factors, we experienced flat revenue growth in the second quarter of 2020 from the first quarter of 2020, during which we generated $15.7 million in each quarter, and saw a softening in our dollar-based net retention rate compared to the prior year period, decreasing from 146% as of December 31, 2019 to 127% as of December 31, 2020. In addition, we executed a reduction in our workforce in March 2020 in response to the COVID-19 pandemic. This reduction in workforce resulted in a total impact of $0.7 million of charges related to severance. As shelter-in-place orders expired and businesses and court systems adjusted their operations to accommodate remote work policies, usage in our solution increased and our revenue in the third quarter of 2020 returned to pre-pandemic levels of growth.
We have also experienced, and may continue to experience, a modest positive impact on other aspects of our business, including slower growth in certain operating expenses due to reduced business travel, deferred hiring for some positions and the virtualization or cancellation of customer and employee events. While a reduction in operating expenses may have an immediate positive impact on our results of operations, we do not yet have visibility into the full impact this will have on our business.
We cannot predict how long we will continue to experience these impacts as shelter-in-place orders and other related measures are expected to change over time. However, as certain of our customers or partners experience downturns or uncertainty in their own business operations or revenue resulting from the spread of COVID-19, they may decrease or delay their legal spending or request pricing discounts, any of which may result in decreased revenue for us. In addition, we may experience customer losses, including due to bankruptcy or our customers ceasing operations, which may result in an inability to collect accounts receivable from these customers. In addition, in response to the spread of COVID-19, we have required substantially all of our employees to work remotely to minimize the risk of the virus to our employees and the communities in which we operate and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners.
The global impact of COVID-19 continues to rapidly evolve and we will continue to monitor the situation and the effects on our business and operations closely. We do not yet know the full extent of potential impacts on our business or operations or on the global economy as a whole, particularly if the COVID-19 pandemic continues and persists for an extended period of time. Given the uncertainty, we cannot reasonably estimate the impact on our future results of operations, cash flows or financial condition. For additional details, see the section titled Risk Factors
Key Factors Affecting Our Performance
We believe that the growth and future success of our business depends on many factors. While each of these factors present significant opportunities for our business, they also pose important challenges that we must successfully address in order to sustain our growth, improve our results of operations and establish and maintain profitability.
Maintain and Advance Our Innovation and Brand
Our success depends in part on our ability to maintain and advance our innovation and brand. We have a strong history of innovation, demonstrated by our DISCO Ediscovery, DISCO Review and DISCO Case Builder
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offerings, and have built a research and development process that reliably produces applications and features that lawyers love. We intend to continue combining our deep legal domain expertise and commitment to world-class software engineering to continue delivering features that lawyers love and introducing new applications to address more areas of legal work. Our future success is dependent on our ability to successfully develop, market and sell existing and new applications of our solution to both new and existing customers.
Add New Customers
We believe we have a significant opportunity to continue to grow our customer base. As enterprises continue their digital transformation journeys and the demand for differentiation in the competitive market for legal services continues to grow, we expect more and more companies will struggle with existing legal solutions and ultimately will adopt integrated, easy-to-use solutions like DISCO to improve productivity and legal outcomes. We believe our market leadership and differentiated solution will enable us to efficiently acquire new customers across all channels. As of March 31, 2021, we had 909 customers, increasing from 635 and 825 customers as of December 31, 2019 and 2020, respectively. Our ability to attract new customers will depend on a number of factors, including the effectiveness and pricing of our products, the offerings of our competitors and the effectiveness of our marketing efforts. We will need to dedicate significant resources to further develop the market for our solution and expand, retain and motivate our sales and marketing personnel.
Increase Usage and Penetration Within Our Existing Customer Base
Our large base of customers represents a significant opportunity for further sales expansion. We believe that we will be able to continue expanding customer relationships by increasing customers usage of offerings that they already buy from us, selling more of our existing offerings to existing customers, and, in the future, introducing additional offerings to sell to existing customers. Our long-term offerings strategy is aimed at building features and offerings that address more and more types of legal work so that customers can continue to centralize on our solution as the system of record and engagement for the legal function. Our ability to increase sales to existing customers will depend on a number of factors, including our customers satisfaction with our solution, competition, pricing and overall changes in our customers spending levels. Even if our customers expand their usage of our solution, we cannot guarantee that they will maintain those usage levels for any meaningful period of time or that they will renew their commitments.
We have a history of growing with our customers as they increase their annual spend with us over time. The chart below illustrates the total revenue generated within a given cohort over the years presented. Each cohort represents customers from which we received revenue for the first time in a given fiscal year. For example, the 2017 cohort represents all customers who generated revenue for us for the first time at any point between January 1, 2017 and December 31, 2017. We have seen significant expansion across all of our cohorts. We expect cohort revenue will fluctuate from one period to another depending on, among other factors, our ability to increase revenue generated by the customers within a given cohort and other changes to offerings we sell to such customers. While we believe these cohorts are a fair representation of our overall customer base, there is no assurance that they will be representative of any future group of customers or periods.
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A further indication of the propensity of our customers to continue to work with and expand their relationship with us over time is our dollar-based net retention rate, which compares our revenue from the same set of customers in one period to the prior year period. As of March 31, 2020 and 2021, our dollar-based net retention rate was 136% and 122%, respectively, and as of December 31, 2019 and 2020, it was 146% and 127%, respectively. We calculate our dollar-based net retention rate as of the end of a period by using (a) the revenue from all customers during the twelve months ending one year prior to such period as the denominator and (b) the revenue from all customers during the twelve months ending as of the end of such period minus the revenue from all customers who are new customers during those twelve months as the numerator. While we have maintained this high net retention over the past three years, this number has decreased and may further decrease over time as our customer base matures and the amount of revenue used in the denominator to calculate net retention grows.
Expand Our Sales Coverage and Establish a Digital Sales Channel
We intend to continue to increase our salesforce headcount in strategic locations across the United States and globally. Additionally, we plan to develop a digital, self-service sales channel that can simplify the sales process and enable customers to easily adopt our solution through our website without the need to speak with a sales representative. Our ability to achieve significant revenue growth will depend, in large part, on our success in recruiting, training and retaining sufficient numbers of sales personnel to support our growth. We will need to spend significant resources to expand, retain and motivate our sales and marketing personnel.
Expand Internationally
Our market is global and we believe there is a significant opportunity to expand internationally. In 2020, less than 5% of our revenue was generated by customers outside of the United States. International expansion, including our global sales efforts, will add increased complexity and cost to our business.
Extend and Strengthen Our Channel Partnerships and Integrations
Our partnerships, including with legal services providers and cloud infrastructure providers, assist us in driving awareness and adoption of DISCO and extending our reach. We intend to cultivate and leverage channel partners to grow our market presence, enhance the virality of our solution and drive greater sales efficiency. Our future success is dependent in part on our ability to develop and maintain relations with these partners.
Expand Our Offering Portfolio
We believe that our technology, and especially our approach to automation and AI, is applicable to a wider range of legal processes outside of our current core offerings. We intend to leverage our technology to introduce
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further offerings that increase lawyer productivity across more and more areas of legal work over time. We may expend significant resources in the development of additional offerings. Our ability to successfully develop, market and sell new offerings will depend on a number of factors, including the availability of capital to invest in innovation, our customers satisfaction with such offerings, competition, pricing and overall changes in our customers spending levels.
Pursue Strategic Acquisitions and Strategic Investments
We intend to selectively pursue acquisitions and strategic investments that we believe can expand the functionality and value of our solution and bring talent to our company. We believe that the combination of our market leadership, deep legal expertise and powerful end-to-end solution provides an advantage in pursuing select acquisitions. We may be required to expend significant resources in connection with the pursuit of acquisitions and investments.
Key Components of Statement of Operations
Revenue
All of our revenue-generating activities directly relate to the sale and support of our legal solution within a single operating segment. We have two primary types of contractual arrangements: usage-based and subscription solutions. Our usage-based revenue is derived from contracts under which customers are billed monthly based on their usage of our offerings. Subscription revenue is derived from contracts where customers are contractually committed to a minimum data volume over a period of time. Revenue received from usage amounts above the fixed data volume in our subscription contracts is considered usage-based revenue.
In the years ended December 31, 2019 and 2020 and three months ended March 31, 2020 and 2021, usage-based revenue represented 88%, 86%, 87%, and 87% of our total revenue, respectively. In the years ended December 31, 2019 and 2020 and three months ended March 31, 2020 and 2021, subscription revenue fees represented 12%, 14%, 13%, and 13% of total revenue, respectively.
Cost of Revenue
Cost of revenue consists primarily of third-party cloud infrastructure expenses incurred in connection with our customers use of our solution. Cost of revenue also includes outsourced staffing costs, amortization of internal-use software and personnel costs from employees involved in the delivery of our solution. Personnel costs include salaries, benefits, bonuses and stock-based compensation and allocated overhead costs. We intend to continue to invest additional resources in our infrastructure to expand the capability of solutions and ensure that our customers are realizing the full benefit of our solutions. The level, timing and relative investment in our cloud infrastructure could affect our cost of revenue in the future. Additionally, cost of revenue in future periods could be impacted by changes in outsourced staffing costs and amortization associated with capitalized internal-use software costs.
Operating Expenses
Our operating expenses consist of research and development, sales and marketing, general and administrative expenses and refund of sales and use taxes. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, share-based compensation expenses and sales commissions. Operating expenses also include overhead costs for facilities and shared IT related expenses, including depreciation expense. During the year ended December 31, 2020, certain operating expenses decreased as a result of the COVID-19 pandemic and a related reduction in force. We expect certain expenses impacted by COVID-19 to resume in the second half of 2021, although the timing and magnitude of these expenses will depend on a number of factors including the trend of the pandemic and potential lifting of stay-at-home orders.
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Research and Development
Research and development expenses consist primarily of personnel-related costs for our development team, including salaries, benefits, bonuses, stock-based compensation expenses and allocated overhead costs. Research and development expenses also include contractor or professional services fees and third-party cloud infrastructure expenses incurred in developing our solution. During the year ended December 31, 2020, growth in research and development expenses was offset by a one-time reduction in force in response to the COVID-19 pandemic. We expect that our research and development expenses will increase in absolute dollars as our business grows, particularly as we incur additional costs related to continued investments in our solution. However, we expect that our research and development expenses will decrease as a percentage of our revenue over time. In addition, research and development expenses that qualify as internal-use software development costs are capitalized, the amount of which may fluctuate significantly from period to period.
Sales and Marketing
Sales and marketing expenses consist primarily of personnel-related costs directly associated with our sales and marketing staff, including salaries, benefits, bonuses, commissions and stock-based compensation, and allocated overhead costs. Sales and marketing expenses also include advertising costs and other expenses associated with our marketing and business development programs. In addition, sales and marketing expenses are comprised of travel-related expenses, software services dedicated for use by our sales and marketing organizations and outside services contracted for sales and marketing purposes. Travel-related expenses, decreased in the year ended December 31, 2020 due to the COVID-19 pandemic. We currently expect travel-related expenses to resume in the second half of 2021, although the timing is uncertain and related to the trend of the pandemic. We expect that our sales and marketing expenses will increase in absolute dollars and continue to be our largest operating expense for the foreseeable future as we grow our business. However, we expect that our sales and marketing expenses will decrease as a percentage of our revenue over time.
General and Administrative
General and administrative expenses consist of personnel-related costs associated with our finance, legal, human resources and administrative personnel, including salaries, benefits, bonuses, stock-based compensation and allocated overhead costs. General and administrative expenses also include external legal, accounting and other professional services fees, software services dedicated for use by our general and administrative functions, insurance and other corporate expenses.
Following the completion of this offering, we expect to incur additional expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations and increased expenses for insurance, investor relations and professional services. We expect that our general and administrative expenses will increase in absolute dollars as our business grows. However, we expect that our general and administrative expenses will decrease as a percentage of our revenue as our revenue grows over the longer term.
Refund of Sales and Use Taxes
Refund of sales and uses taxes consist of a one-time gain due to a sales tax refund related to sales tax paid in prior periods based on the resolution of a sales tax audit.
Other Income (Expense), Net
Other income (expense), net consists primarily of interest income, income related to non-operating activities, interest expense and gains and losses from foreign currency transactions and remeasurements of foreign currency-denominated monetary assets and liabilities to the U.S. Dollar.
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Provision for Income Taxes
Provision for income taxes consists primarily of income taxes related to foreign and state jurisdictions in which we conduct business. We maintain a valuation allowance on our federal and state deferred tax assets as we have concluded that it is not more likely than not that the deferred assets will be utilized.
Results of Operations
The following tables set forth our results of operations and such data as a percentage of our revenue for each of the periods presented.
Year Ended December 31, |
Three Months Ended March 31, |
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(in thousands) |
2019 | 2020 | 2020 | 2021 | ||||||||||||
(unaudited) | ||||||||||||||||
Revenue |
$ | 48,556 | $ | 68,444 | $ | 15,668 | $ | 21,131 | ||||||||
Cost of revenue(1) |
14,457 | 20,449 | 5,071 | 5,788 | ||||||||||||
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Gross profit |
34,099 | 47,995 | 10,597 | 15,343 | ||||||||||||
Operating expenses: |
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Research and development(1) |
25,352 | 26,599 | 8,203 | 6,262 | ||||||||||||
Sales and marketing(1) |
26,122 | 31,061 | 9,322 | 7,876 | ||||||||||||
General and administrative(1) |
12,975 | 13,893 | 4,258 | 4,053 | ||||||||||||
Refund of sales and use taxes |
| (1,057 | ) | | | |||||||||||
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Total operating expenses |
64,449 | 70,496 | 21,783 | 18,191 | ||||||||||||
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Loss from operations |
(30,350 | ) | (22,501 | ) | (11,186 | ) | (2,848 | ) | ||||||||
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Other income (expense): |
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Interest and other income |
652 | 155 | 63 | 13 | ||||||||||||
Interest and other expense |
(124 | ) | (456 | ) | (88 | ) | (57 | ) | ||||||||
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Total other income (expense) |
528 | (301 | ) | (25 | ) | (44 | ) | |||||||||
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Loss before income taxes |
(29,822 | ) | (22,802 | ) | (11,211 | ) | (2,892 | ) | ||||||||
Provision for income taxes |
(10 | ) | (71 | ) | (25 | ) | (36 | ) | ||||||||
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Net loss |
$ | (29,832 | ) | $ | (22,873 | ) | $ | (11,236 | ) | $ | (2,928 | ) | ||||
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Accretion of redeemable convertible preferred stock |
(86 | ) | (92 | ) | (23 | ) | (26 | ) | ||||||||
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Net loss attributed to common stockholders |
$ | (29,918 | ) | $ | (22,965 | ) | $ | (11,259 | ) | $ | (2,954 | ) | ||||
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(1) | Includes stock-based compensation expense as follows: |
Year Ended December 31, |
Three Months Ended March 31, |
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(in thousands) |
2019 | 2020 | 2020 | 2021 | ||||||||||||
(unaudited) | ||||||||||||||||
Cost of revenue |
$ | 7 | $ | 28 | $ | 6 | $ | 8 | ||||||||
Research and development |
727 | 864 | 222 | 201 | ||||||||||||
Sales and marketing |
301 | 335 | 70 | 83 | ||||||||||||
General and administrative |
3,085 | 766 | 190 | 196 | ||||||||||||
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|
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Total |
$ | 4,120 | $ | 1,993 | $ | 488 | $ | 488 | ||||||||
|
|
|
|
|
|
|
|
71
Year Ended December 31, |
Three Months Ended March 31, |
|||||||||||||||
2019 | 2020 | 2020 | 2021 | |||||||||||||
(unaudited) | ||||||||||||||||
Consolidated Statement of Operations and Comprehensive Loss as a percentage of revenue:** |
||||||||||||||||
Revenue |
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
Cost of revenue(1) |
30 | 30 | 32 | 27 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Gross profit |
70 | 70 | 68 | 73 | ||||||||||||
Operating expenses: |
||||||||||||||||
Research and development(1) |
52 | 39 | 52 | 30 | ||||||||||||
Sales and marketing(1) |
54 | 45 | 59 | 37 | ||||||||||||
General and administrative(1) |
27 | 20 | 27 | 19 | ||||||||||||
Refund of sales and use taxes |
| (2 | ) | | | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total operating expenses |
133 | 103 | 139 | 86 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Loss from operations |
(63 | ) | (33 | ) | (71 | ) | (13 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Other income (expense): |
||||||||||||||||
Interest and other income |
1 | * | * | * | ||||||||||||
Interest and other expense |
* | (1 | ) | (1 | ) | * | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other income (expense) |
1 | * | * | * | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Loss before income taxes |
(61 | ) | (33 | ) | (72 | ) | (14 | ) | ||||||||
Provision for income taxes |
* | * | * | * | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net loss |
(61 | ) | (33 | ) | (72 | ) | (14 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Accretion of redeemable convertible preferred stock |
* | * | * | * | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net loss attributed to common stockholders |
(62 | ) | (34 | ) | (72 | ) | (14 | ) | ||||||||
|
|
|
|
|
|
|
|
* | Less than 0.5% of revenue. |
** | Columns may not add up to 100% due to rounding. |
Comparison of Three Months March 31, 2020 and 2021
Revenue
Three Months Ended March 31, |
|
|
||||||||||||||
2020 | 2021 | Change | % Change | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Revenue |
$ | 15,668 | $ | 21,131 | $ | 5,463 | 35 | % |
Total revenue increased by $5.5 million, or 35%, for the three months ended March 31, 2021 compared to the same period in 2020. Approximately 27% of the increase related to additional usage and adoption of our solution by our existing customers. The remaining 73% increase in revenue related to new customers added during the period. The number of customers increased from 713 customers as of March 31, 2020, to 909 customers as of March 31, 2021, an increase of 196, or 27%.
72
Cost of Revenue
Three Months Ended March 31, |
|
|
||||||||||||||
2020 | 2021 | Change | % Change | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Cost of revenue |
$ | 5,071 | $ | 5,788 | $ | 717 | 14 | % |
Total cost of revenue increased by $0.7 million, or 14%, for the three months ended March 31, 2021 compared to the same period in 2020. The increase was primarily driven by an increase in costs for cloud hosting of $0.2 million related to increased usage of our solution, an increase in salary and benefits costs related to an increase in headcount of $0.5 million, including stock-based compensation. Gross margin increased five percentage points for the three months ended March 31, 2021 compared to the same period in 2020, due to hosting costs decreasing on a relative basis due to continued growth and savings due to scale.
Operating Expenses
Research and Development
Three Months Ended March 31, |
|
|
||||||||||||||
2020 | 2021 | Change | % Change | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Research and development |
$ | 8,203 | $ | 6,262 | $ | (1,941 | ) | (24 | )% | |||||||
Percentage of revenue |
52 | % | 30 | % |
Research and development expenses decreased by $1.9 million, or 24%, for the three months ended March 31, 2021 compared to the same period in 2020. The decrease was primarily due to a decrease of $1.3 million in salaries, including stock-based compensation, due to the decrease in headcount as well as $0.5 million related to a one-time reduction in force that occurred in the first quarter of 2020. Additionally, expense decreased by $0.2 million related to decreased allocated corporate overhead due to decreased operating costs related to the COVID-19 pandemic.
Sales and Marketing
Three Months Ended March 31, |
|
|
||||||||||||||
2020 | 2021 | Change | % Change | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Sales and marketing |
$ | 9,322 | $ | 7,876 | $ | (1,446 | ) | (16 | )% | |||||||
Percentage of revenue |
59 | % | 37 | % |
Sales and marketing expenses decreased by $1.4 million, or 16%, for the three months ended March 31, 2021 compared to the same period in 2020. The decrease was primarily related to salary and related costs of $0.6 million, including stock-based compensation, due to the decrease in headcount as well as $0.2 million related to a one-time reduction in force that occurred in the first quarter of 2020. Additionally, the decrease in sales and marketing expenses included decreases in travel and entertainment expenses of $0.3 million and marketing events of $0.2 million, both of which relate to our response to the COVID-19 pandemic.
73
General and Administrative
Three Months Ended March 31, |
|
|
||||||||||||||
2020 | 2021 | Change | % Change | |||||||||||||
(dollars in thousands) | ||||||||||||||||
General and administrative |
$ | 4,258 | $ | 4,053 | $ | (205 | ) | (5 | )% | |||||||
Percentage of revenue |
27 | % | 19 | % |
General and administrative expenses decreased by $0.2 million, or 5%, for the three months ended March 31, 2021 compared to the same period in 2020. The decrease was primarily due to a $0.5 million decrease in travel and entertainment related to our response to the COVID-19 pandemic and a decrease in salary and related costs due to a decrease in headcount of $0.1 million, including stock-based compensation. The decrease in general and administrative expenses was offset by an increase in professional services of $0.4 million related to supporting our growth.
Comparison of the Years Ended December 31, 2019 and 2020
Revenue
Year Ended December 31, |
|
|
||||||||||||||
2019 | 2020 | Change | % Change | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Revenue |
$ | 48,556 | $ | 68,444 | $ | 19,888 | 41 | % |
Total revenue increased by $19.9 million, or 41%, for the year ended December 31, 2020 compared to the same period in 2019. Approximately 67% of the increase related to additional usage and adoption of our solution by our existing customers. The remaining 33% increase in revenue related to new customers added throughout the period. The number of customers increased from 635 customers as of December 31, 2019, to 825 customers as of December 31, 2020, an increase of 190, or 30%.
Cost of Revenue
Year Ended December 31, |
|
|
||||||||||||||
2019 | 2020 | Change | % Change | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Cost of revenue |
$ | 14,457 | $ | 20,449 | $ | 5,992 | 41% |
Total cost of revenue increased by $6.0 million, or 41%, for the year ended December 31, 2020 compared to the same period in 2019. The increase was primarily driven by an increase in costs for cloud hosting of $3.1 million related to increased usage of our solution, an increase in salary and benefits costs related to an increase in headcount of $1.2 million, including stock-based compensation and an increase in outsourced staffing vendors fees of $1.2 million.
Operating Expenses
Research and Development
Year Ended December 31, |
|
|
||||||||||||||
2019 | 2020 | Change | % Change | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Research and development |
$ | 25,352 | $ | 26,599 | $ | 1,247 | 5% | |||||||||
Percentage of revenue |
52% | 39% |
74
Research and development expenses increased by $1.2 million, or 5%, for the year ended December 31, 2020 compared to the same period in 2019. The increase was primarily due to hosting and software fees of $0.7 million and an increase of $0.5 million in salaries, including stock-based compensation, related to personnel involved in continued enhancements to our solution. The increase also includes $0.5 million related to a one-time reduction in force, offset by a $0.8 million decrease in recruiting costs related to our response to the COVID-19 pandemic. Additionally, expense increased by $0.5 million due to a decrease in capitalization of internal-use software development costs.
Sales and Marketing
Year Ended December 31, |
|
|
||||||||||||||
2019 | 2020 | Change | % Change | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Sales and marketing |
$ | 26,122 | $ | 31,061 | $ | 4,939 | 19% | |||||||||
Percentage of revenue |
54% | 45% |
Sales and marketing expenses increased by $4.9 million, or 19%, for the year ended December 31, 2020 compared to the same period in 2019. The increase was primarily related to salary and related costs of $6.1 million, including stock-based compensation, as well as software related expenses of $0.5 million due to the growth of our sales and marketing organization. The increase in sales and marketing expenses was partially offset by decreases in travel and entertainment expenses of $1.3 million and recruiting costs of $0.3 million, both of which relate to our response to the COVID-19 pandemic.
General and Administrative
Year Ended December 31, |
|
|
||||||||||||||
2019 | 2020 | Change | % Change | |||||||||||||
(dollars in thousands) | ||||||||||||||||
General and administrative |
$ | 12,975 | $ | 13,893 | $ | 918 | 7% | |||||||||
Percentage of revenue |
27% | 20% |
General and administrative expenses increased by $0.9 million, or 7%, for the year ended December 31, 2020 compared to the same period in 2019. The increase was primarily due to an increase in salary and related costs related to an increase in headcount of $2.4 million, including stock-based compensation, a $0.6 million increase in software related expenses related to continued investments to support the growth of our business. The increase in general and administrative expenses was partially offset by a decrease of $2.5 million in stock-based compensation expense related to common stock sold in excess of fair value in 2019. There were no similar transactions in the current period. The increase in general and administrative expenses was further offset by a decrease in travel and entertainment of $0.3 million related to our response to the COVID-19 pandemic.
Refund of Sales and Use Taxes
Year Ended December 31, |
|
|
||||||||||||||
2019 | 2020 | Change | % Change | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Refund of sales and use taxes |
$ | | $ | (1,057 | ) | $ | (1,057 | ) | % | |||||||
Percentage of revenue |
% | 2% |
During the year ended December 31, 2020, we received a sales tax refund of $1.1 million related to sales tax paid in prior periods based on the resolution of a sales tax audit. There were no similar transactions in the prior period.
75
Non-GAAP Financial Measure
We report our financial results in accordance with generally accepted accounting principles, or GAAP. However, management believes that Adjusted EBITDA, a non-GAAP financial measure, provides investors with additional useful information in evaluating our performance. We define Adjusted EBITDA as net loss, adjusted to exclude: depreciation and amortization expense, provision for income taxes, interest and other, net, stock-based compensation expense, refund of sales and use taxes related to sales tax in prior periods and other one-time, non-recurring items, when applicable. We monitor Adjusted EBITDA as a non-GAAP financial measure to supplement the financial information we present in accordance with generally accepted accounting principles, or GAAP, to provide investors with additional information regarding our financial results.
Adjusted EBITDA is a financial measure that is not required by or presented in accordance with GAAP. We believe that Adjusted EBITDA, when taken together with our financial results presented in accordance with GAAP, provides meaningful supplemental information regarding our operating performance and facilitates internal comparisons of our historical operating performance on a more consistent basis by excluding certain items that may not be indicative of our business, results of operations or outlook. In particular, we believe that the use of Adjusted EBITDA is helpful to our investors as it is a measure used by management in assessing the health of our business and evaluating our operating performance, as well as for internal planning and forecasting purposes.
Adjusted EBITDA is presented for supplemental informational purposes only, has limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. Some of these limitations include that: (i) it does not properly reflect capital commitments to be paid in the future; (ii) although depreciation and amortization expense is a non-cash charge, the underlying assets may need to be replaced and Adjusted EBITDA does not reflect these capital expenditures; (iii) it does not consider the impact of stock-based compensation expense; (iv) it does not reflect other non-operating expenses, including interest expense; (v) it does not consider the impact of any contingent consideration liability valuation adjustments and (vi) it does not reflect tax payments that may represent a reduction in cash available to us. In addition, our use of Adjusted EBITDA may not be comparable to similarly titled measures of other companies because they may not calculate Adjusted EBITDA in the same manner, limiting its usefulness as a comparative measure. Because of these limitations, when evaluating our performance, you should consider Adjusted EBITDA alongside other financial measures, including our net loss and other results stated in accordance with GAAP. We expect Adjusted EBITDA to fluctuate in the near term as we continue to invest in our business and improve over the long term as we achieve greater scale in our business and efficiencies in our operating expenses.
The following table presents a reconciliation of Adjusted EBITDA to net loss, the most directly comparable financial measure stated in accordance with GAAP, for the periods presented:
Year Ended December 31, |
Three Months Ended March 31, |
|||||||||||||||
2019 | 2020 | 2020 | 2021 | |||||||||||||
(in thousands) | ||||||||||||||||
Net loss |
$ | (29,832 | ) | $ | (22,873 | ) | $ | (11,236 | ) | $ | (2,928 | ) | ||||
Depreciation and amortization expense |
803 | 1,624 | 378 | 424 | ||||||||||||
Provision for income taxes |
10 | 71 | 25 | 36 | ||||||||||||
Interest and other, net |
(528 | ) | 301 | 25 | 44 | |||||||||||
Stock-based compensation expense |
4,120 | 1,993 | 488 | 488 | ||||||||||||
Refund of sales and use taxes |
| (1,057 | ) | | | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Adjusted EBITDA |
$ | (25,427 | ) | $ | (19,941 | ) | $ | (10,320 | ) | $ | (1,936 | ) | ||||
|
|
|
|
|
|
|
|
76
Quarterly Results of Operations
The following tables summarize our selected unaudited quarterly consolidated statements of operations and comprehensive loss data for each of the quarters indicated, as well as the percentage that each line item represents of our revenue for each quarter presented. The information for each of these quarters has been prepared on the same basis as our audited annual consolidated financial statements and reflect, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for the fair statement of the results of operations for these periods. This data should be read in conjunction with our consolidated financial statements included elsewhere in this prospectus. Historical results are not necessarily indicative of the results that may be expected for the full fiscal year or any other period.
Three months ended | ||||||||||||||||||||||||||||||||||||
March 31, 2019 |
June 30, 2019 |
September 30, 2019 |
December 31, 2019 |
March 31, 2020 |
June 30, 2020 |
September 30, 2020 |
December 31, 2020 |
March 31, 2021 |
||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||||||
Revenue |
$ | 10,378 | $ | 11,305 | $ | 12,652 | $ | 14,221 | $ | 15,668 | $ | 15,727 | $ | 17,863 | $ | 19,186 | $ | 21,131 | ||||||||||||||||||
Cost of revenue(1) |
2,902 | 3,307 | 3,620 | 4,628 | 5,071 | 4,509 | 5,522 | 5,347 | 5,788 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Gross profit |
7,476 | 7,998 | 9,032 | 9,593 | 10,597 | 11,218 | 12,341 | 13,839 | 15,343 | |||||||||||||||||||||||||||
Operating expenses: |
||||||||||||||||||||||||||||||||||||
Research and |
4,809 | 6,471 | 7,190 | 6,882 | 8,203 | 6,215 | 6,227 | 5,954 | 6,262 | |||||||||||||||||||||||||||
Sales and marketing(1) |
5,346 | 5,890 | 6,998 | 7,888 | 9,322 | 7,170 | 7,182 | 7,387 | 7,876 | |||||||||||||||||||||||||||
General and |
4,417 | 2,866 | 2,631 | 3,061 | 4,258 | 3,144 | 3,030 | 3,461 | 4,053 | |||||||||||||||||||||||||||
Refund of sales and use taxes |
| | | | | | (1,057 | ) | | | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total operating expenses |
14,572 | 15,227 | 16,819 | 17,831 | 21,783 | 16,529 | 15,382 | 16,802 | 18,191 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Loss from operations |
(7,096 | ) | (7,229 | ) | (7,787 | ) | (8,238 | ) | (11,186 | ) | (5,311 | ) | (3,041 | ) | (2,963 | ) | (2,848 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Other income (expense): |
||||||||||||||||||||||||||||||||||||
Interest and other income |
180 | 202 | 156 | 113 | 63 | 15 | 55 | 22 | 13 | |||||||||||||||||||||||||||
Interest and other expense |
(33 | ) | (22 | ) | (28 | ) | (40 | ) | (88 | ) | (161 | ) | (170 | ) | (37 | ) | (57 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total other income (expense) |
147 | 180 | 128 | 73 | (25 | ) | (146 | ) | (115 | ) | (15 | ) | (44 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Loss before operations |
(6,949 | ) | (7,049 | ) | (7,659 | ) | (8,165 | ) | (11,211 | ) | (5,457 | ) | (3,156 | ) | (2,978 | ) | (2,892 | ) | ||||||||||||||||||
Provision for income taxes |
(3 | ) | (2 | ) | (2 | ) | (3 | ) | (25 | ) | (20 | ) | (13 | ) | (13 | ) | (36 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Net loss |
$ | (6,952 | ) | $ | (7,051 | ) | $ | (7,661 | ) | $ | (8,168 | ) | $ | (11,236 | ) | $ | (5,477 | ) | $ | (3,169 | ) | $ | (2,991 | ) | $ | (2,928 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Accretion of redeemable convertible preferred stock |
(22 | ) | (22 | ) | (22 | ) | (22 | ) | (23 | ) | (23 | ) | (23 | ) | (23 | ) | (26 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Net loss attributed to common stockholders |
$ | (6,974 | ) | $ | (7,073 | ) | $ | (7,683 | ) | $ | (8,190 | ) | $ | (11,259 | ) | $ | (5,500 | ) | $ | (3,192 | ) | $ | (3,014 | ) | $ | (2,954 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Includes stock-based compensation expense as follows: |
Three months ended | ||||||||||||||||||||||||||||||||||||
March 31, 2019 |
June 30, 2019 |
September 30, 2019 |
December 31, 2019 |
March 31, 2020 |
June 30, 2020 |
September 30, 2020 |
December 31, 2020 |
March 31, 2021 |
||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||||||
Cost of revenue |
$ | | $ | 3 | $ | 2 | $ | 2 | $ | 6 | $ | 7 | $ | 7 | $ | 8 | $ | 8 | ||||||||||||||||||
Research and development |
48 | 228 | 222 | 229 | 222 | 217 | 217 | 208 | 201 | |||||||||||||||||||||||||||
Sales and marketing |
90 | 69 | 52 | 90 | 70 | 88 | 89 | 88 | 83 | |||||||||||||||||||||||||||
General and administrative |
2,494 | 234 | 177 | 180 | 190 | 192 | 193 | 191 | 196 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total |
$ | 2,632 | $ | 534 | $ | 453 | $ | 501 | $ | 488 | $ | 504 | $ | 506 | $ | 495 | $ | 488 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
Three Months Ended | ||||||||||||||||||||||||||||||||||||
March 31, 2019 |
June 30, 2019 |
September 30, 2019 |
December 31, 2019 |
March 31, 2020 |
June 30, 2020 |
September 30, 2020 |
December 31, 2020 |
March 31, 2021 |
||||||||||||||||||||||||||||
Consolidated Statement of Operations and Comprehensive Loss as a percentage of revenue:** |
||||||||||||||||||||||||||||||||||||
Revenue |
100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||||||||
Cost of revenue |
28 | 29 | 29 | 33 | 32 | 29 | 31 | 28 | 27 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Gross profit |
72 | 71 | 71 | 67 | 68 | 71 | 69 | 72 | 73 | |||||||||||||||||||||||||||
Operating expenses: |
||||||||||||||||||||||||||||||||||||
Research and development |
46 | 57 | 57 | 48 | 52 | 40 | 35 | 31 | 30 | |||||||||||||||||||||||||||
Sales and marketing |
52 | 52 | 55 | 55 | 59 | 46 | 40 | 39 | 37 | |||||||||||||||||||||||||||
General and administrative |
43 | 25 | 21 | 22 | 27 | 20 | 17 | 18 | 19 | |||||||||||||||||||||||||||
Refund of sales and use taxes |
| | | | | | (6 | ) | | | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total operating expenses |
140 | 135 | 133 | 125 | 139 | 105 | 86 | 88 | 86 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Loss from operations |
(68 | ) | (64 | ) | (62 | ) | (58 | ) | (71 | ) | (34 | ) | (17 | ) | (15 | ) | (13 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Other income (expense): |
||||||||||||||||||||||||||||||||||||
Interest and other income |
2 | 1 | 2 | 1 | * | * | * | * | * | |||||||||||||||||||||||||||
Interest and other expense |
* | * | (1 | ) | * | (1 | ) | (1 | ) | (1 | ) | * | * | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total other income (expense) |
1 | 2 | 1 | 1 | * | (1 | ) | (1 | ) | * | * | |||||||||||||||||||||||||
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Loss before operations |
(67 | ) | (62 | ) | (61 | ) | (57 | ) | (72 | ) | (35 | ) | (18 | ) | (16 | ) | (14 | ) | ||||||||||||||||||
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* | * | * | * | * | * | * | * | * | |||||||||||||||||||||||||||
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Net loss |
(67 | ) | (62 | ) | (61 | ) | (57 | ) | (72 | ) | (35 | ) | (18 | ) | (16 | ) | (14 | ) | ||||||||||||||||||
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Accretion of redeemable convertible preferred stock |
* | * | * | * | * | * | * | * | * | |||||||||||||||||||||||||||
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Net loss attributed to common stockholders |
(67 | ) | (63 | ) | (61 | ) | (58 | ) | (72 | ) | (35 | ) | (18 | ) | (16 | ) | (14 | ) | ||||||||||||||||||
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* | Less than 0.5% of revenue. |
** | Columns may not add up to 100% due to rounding. |
Revenue
Our revenue increased sequentially in each of the quarters presented due to the acquisition of new customers and the continued and increasing usage of our solution by existing customers. The number of customers increased from 459 as of December 31, 2018 to 909 as of March 31, 2021.
Cost of Revenue and Gross Margin
On a quarterly basis, cost of revenue increased in absolute dollars for all quarters presented, except for a nominal decrease in the second and fourth quarters of 2020, primarily due to the growth from new customers and increased usage from existing customers. Throughout all quarters in 2019, 2020, and 2021, gross margin (gross profit as a percentage of revenue) remained relatively consistent and reflects our continued commitment to operational efficiencies and maintaining costs proportionate to revenue growth.
Sales and Marketing
On a quarterly basis throughout 2019 and the first quarter of 2020, sales and marketing expenses remained consistent at over 50% as a percentage of revenue as we continued to invest in our go-to-market strategy focused on acquiring new customers and driving continued use and increased usage of our solution for existing customers. Beginning in the second quarter of 2020, our sales and marketing costs decreased primarily due to a reduction in workforce, reduced travel and entertainment, and reduced marketing events, all of which related to our response to the COVID-19 pandemic. Sales and marketing expense increased on an absolute dollar basis beginning in the fourth quarter of 2020 as we began reinvesting in our go-to-market strategy.
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Research and Development
On a quarterly basis, our research and development expenses increased for the first three quarters of 2019 and the first quarter of 2020, primarily driven by personnel related expenses from increased headcount. The reduction in research and development expense in the fourth quarter relates to an increase in internal-use software development costs. Our research and development expenses decreased in the second quarter of 2020 due to decreased personnel related costs resulting from the reduction in workforce in response to the COVID-19 pandemic. Our research and development expense on an absolute dollar basis remained relatively consistent from the second quarter of 2020 through the first quarter of 2021.
General and Administrative
The first quarter of 2019 included $2.5 million of stock-based compensation expense related to secondary sales of common stock by certain current and former employees described in Note 10 of our consolidated financial statements included elsewhere in this prospectus. Excluding this expense, our general and administrative expenses increased in the first, second and fourth quarters of 2019 and the first quarter of 2020 on an absolute dollar basis driven by increased headcount and professional services fees to support the growth in our business. In response to the impact of the COVID-19 pandemic, we reduced non-essential expenditures and implemented a reduction in workforce, which decreased our general and administrative expense in the second and third quarters of 2020. General and administrative expenses increased the first quarter of 2021 as we began reinvesting in headcount and professional services needed to support the growth in our business.
Refund of Sales and Use Taxes
During the third quarter of 2020, we received a sales tax refund of $1.1 million related to sales tax paid in prior periods based on the resolution of a sales tax audit. There were no similar transactions in the periods presented.
Liquidity and Capital Resources
We have financed operations since our inception primarily through customer payments and net proceeds from sales of equity securities, as well as borrowings under our revolving credit facility. As of December 31, 2019 and 2020 and March 31, 2020 and 2021, our principal sources of liquidity were cash and cash equivalents, totaling $23.2 million, $58.6 million, $29.4 million, and $53.6 million, respectively. We have also entered into a senior secured revolving credit facility with an available borrowing capacity of $40.0 million. We believe our existing cash and cash equivalents and borrowing capacity will be sufficient to fund anticipated cash requirements for the next 12 months.
Our future capital requirements will depend on many factors, including our revenue growth rate, usage of our solution, billing frequency, the timing and extent of spending to support further sales and marketing and research and development efforts, the continuing market acceptance of our solution. We may, in the future, enter into arrangements to acquire or invest in complementary businesses, products and technologies. We may be required to seek additional equity or debt financing. In the event that we require additional financing, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in continued innovation, we may not be able to compete successfully, which would harm our business, operations and financial condition.
Credit Facility
In December 2020, we entered into a Second Amended and Restated Loan and Security Agreement, or the Credit Agreement, with Comerica Bank, which provides a $40.0 million revolving credit facility with a maturity date of November 30, 2023. Our obligations under the Credit Agreement are secured by substantially all of our
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assets. The Credit Agreement contains certain customary covenants, including, but not limited to, those relating to additional indebtedness, liens, asset divestitures and affiliate transactions. We may use the proceeds of future borrowings under the Credit Agreement for refinancing other indebtedness, working capital, capital expenditures and other general corporate purposes, including permitted business acquisitions.
Borrowings under the Credit Agreement bear interest at a prime referenced rate, as defined in the Credit Agreement, plus a margin of 0.25%. The Credit Agreement is subject to customary fees for loan facilities of this type, including an ongoing commitment fee at a rate of 0.25% per annum payable on a quarterly basis on the average daily unused portion of the loan facility during each quarter. As of December 31, 2020 and March 31, 2021, we had no outstanding debt under the Credit Agreement and we were in compliance with our covenants thereunder.
Cash Flows
The following table summarizes our cash flows for the period indicated:
Year Ended December 31, |
Three Months Ended March 31, | |||||||||||||||
2019 | 2020 | 2020 | 2021 | |||||||||||||
(in thousands) | ||||||||||||||||
Cash used in operating activities |
$ | (27,299 | ) | $ | (22,712 | ) | $ | (10,114 | ) | $ | (4,496 | ) | ||||
Cash used in investing activities |
(3,325 | ) | (1,904 | ) | (663 | ) | (586 | ) | ||||||||
Cash provided by financing activities |
44,104 | 59,961 | 16,951 | 145 | ||||||||||||
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Net increase in cash and cash equivalents |
$ | 13,480 | $ | 35,345 | $ | 6,174 | $ | (4,937 | ) | |||||||
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Operating Activities
Our largest source of operating cash is payments received from our customers. Our primary uses of cash from operating activities are for personnel-related expenses, marketing expenses, hosting expenses and allocated overhead expenses. We have historically generated negative cash flows and have supplemented working capital requirements primarily through net proceeds from the sale of equity securities.
Net cash used in operating activities of $4.5 million for the three months ended March 31, 2021 was primarily due to a net loss of $2.9 million, partially offset by non-cash charges for stock-based compensation of $0.5 million, depreciation and amortization of $0.4 million and non-cash operating lease costs of $0.2 million. Changes in operating assets and liabilities resulted in a decrease to operating cash flow of $2.9 million primarily due to an increase in accounts receivable of $2.2 million from our increases in sales and $1.5 million decrease in accounts payable and accrued expenses, partially offset by increases in deferred revenue of $1.1 million due to our growth.
Net cash used in operating activities of $10.1 million for the three months ended March 31, 2020 was primarily due to a net loss of $11.2 million, partially offset by non-cash charges for stock-based compensation of $0.5 million, depreciation and amortization of $0.4 million and non-cash operating lease costs of $0.4 million. Changes in operating assets and liabilities resulted in a decrease to operating cash flow of $0.3 million primarily due to an increase in accounts receivable of $0.9 million partially offset by increases in accounts payable and accrued expenses of $0.7 million.
Net cash used in operating activities of $22.7 million for the year ended December 31, 2020 was primarily due to a net loss of $22.9 million, partially offset by non-cash charges for stock-based compensation of $2.0 million, depreciation and amortization of $1.6 million and non-cash operating lease costs of $1.3 million. Changes in operating assets and liabilities resulted in a decrease to operating cash flow of $5.3 million primarily due to an increase in accounts receivable of $6.0 million from our increases in sales partially offset by increases in accounts payable and accrued expenses of $1.9 million due to our growth and a decrease in operating lease liabilities of $1.4 million.
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Net cash used in operating activities of $27.3 million for the year ended December 31, 2019 was primarily due to a net loss of $29.8 million, partially offset by non-cash charges for stock-based compensation of $4.1 million and depreciation and amortization of $0.8 million. Changes in operating assets and liabilities were unfavorable to cash flows from operations by $2.8 million primarily due to increases in our accounts receivable of $4.6 million and an increase in accounts payable and accrued expenses of $1.5 million.
Investing Activities
Net cash used in investing activities for the three months ended March 31, 2020 and 2021 of $0.7 million and $0.6 million, respectively, was primarily related to purchases of property and equipment and the capitalization of internal-use software as we expanded our solution and increased our development efforts.
Net cash used in investing activities for the year ended December 31, 2020 of $1.9 million was primarily related to purchases of property and equipment and the capitalization of internal-use software as we expanded our solution and increased our development efforts.
Net cash used in investing activities for the year ended December 31, 2019 of $3.3 million related to purchases of property and equipment and the capitalization of internal-use software.
Financing Activities
Net cash provided by financing activities for the three months ended March 31, 2021 of $0.1 million consisted of proceeds from the exercise of stock options.
Net cash provided by financing activities for the three months ended March 31, 2020 of $17.0 million consisted of net proceeds from our revolving credit facility.
Net cash provided by financing activities for the year ended December 31, 2020 of $60.0 million consisted of net proceeds of $59.9 million from the issuance of our Series F redeemable convertible preferred stock, $23.3 million from debt offset by the subsequent repayment of $23.3 million of debt.
Net cash provided by financing activities for the year ended December 31, 2019 of $44.1 million consisted of net proceeds of $49.8 million from the issuance of our Series E redeemable convertible preferred stock, $0.1 million in proceeds from the exercise of stock options, offset by $5.8 million from the repayment of long-term debt.
Contractual Obligations and Other Commitments
The following table summarizes our non-cancelable contractual obligations as of December 31, 2020:
Payments Due by Period | ||||||||||||
Less than 1 Year |
1-3 Years |
Total | ||||||||||
(in thousands) | ||||||||||||
Operating lease commitments |
$ | 1,094 | $ | 911 | $ | 2,005 | ||||||
Finance lease commitments |
122 | 101 | 223 | |||||||||
Purchase commitments |
7,208 | 4,479 | 11,687 | |||||||||
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$ | 8,424 | $ | 5,491 | $ | 13,915 | ||||||
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Our non-cancelable contractual obligations do not extend beyond three years. The commitment amounts in the table above are associated with contracts that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions and the approximate timing of the actions under the contracts. The table does not include obligations under agreements that we can cancel without a significant penalty.
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During the three months ended March 31, 2021, there were no material changes to our contractual obligations and commitments.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is principally the result of fluctuations in interest rates and foreign currency exchange rates.
Interest Rate Risk
We had cash and cash equivalents of $58.6 million and $53.6 million as of December 31, 2020 and March 31, 2021, respectively, which consisted of bank deposits and money market funds. The cash and cash equivalents are held for working capital purposes. Such interest-earning instruments carry a degree of interest rate risk. The primary objective of our investment activities is to preserve principal while generating income without significantly increasing risk. We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure. Due to the short-term nature of our investments, we have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in interest rates. Under our Credit Agreement, we may borrow up to $40.0 million as of December 31, 2020 and March 31, 2021, respectively. A hypothetical 10% change in interest rates during the periods presented would not have had a material impact on our consolidated financial statements.
Foreign Currency Exchange Risk
Our revenue and expenses are primarily denominated in U.S. dollars. For our foreign operations, the majority of our revenues and expenses are denominated in other currencies, namely, British pound and Canadian dollar. Our subsidiary remeasures monetary assets and liabilities at period-end exchange rates, while non-monetary items are remeasured at historical rates. Revenue and expense accounts are remeasured at the average exchange rate in effect during the period. If there is a change in foreign currency exchange rates, the conversion of our foreign subsidiarys financial statements into U.S. dollars would result in a realized gain or loss which is recorded in our consolidated statements of operations and comprehensive loss. We do not currently engage in any hedging activity to reduce our potential exposure to currency fluctuations, although we may choose to do so in the future. A hypothetical 10% change in foreign exchange rates during the periods presented would not have had a material impact on our consolidated financial statements.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with GAAP. The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Significant estimates and assumptions made in the accompanying consolidated financial statements include, but are not limited to, the fair value of stock-based awards, software costs eligible for capitalization, the valuation of deferred tax assets and the allowance for credit losses. We evaluate our estimates and assumptions on an ongoing basis using historical experience and other factors and adjust those estimates and assumptions when facts and circumstances dictate. Actual results could differ materially from those estimates and assumptions.
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While our significant accounting policies are more fully described in Note 2 in the notes to our consolidated financial statements included elsewhere in this prospectus, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the accounting policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.
Revenue Recognition
We recognize revenue from contracts with customers using the five-step method described in Note 3 of the notes to our consolidated financial statements included elsewhere in this prospectus.
Our performance obligations consist of usage-based and subscription solutions. Our usage-based revenue is generated from solutions that are billed on a monthly basis based on actual usage. Subscription revenue is derived from contracts where customers are contractually committed to a minimum data volume over a period of time. Usage amounts above the minimum data volume are considered usage-based revenue. Subscription arrangements are typically billed on a monthly, quarterly or annual basis with revenue recognized on a ratable basis over the contractual term. On a limited basis, we enter into contracts whereby the consideration payable is contingent upon the conclusion of the legal matter. We do not recognize the revenue related to these contracts until the legal matter is resolved. Such amounts recognized have been immaterial to date.
In general, we satisfy the majority of our performance obligations over time as we transfer the promised solutions to our customers. We review the contract terms and conditions to evaluate the timing and amount of revenue recognition, the related contract balances, and our remaining performance obligations. These evaluations may require significant judgment that could affect the timing and amount of revenue recognized. Usage-based revenue is recognized monthly based on actual usage and subscription revenue is recognized on a ratable basis over the contractual term which is generally one year.
Internal-Use Software Development
We capitalize certain costs related to the development of our solution and other software applications for internal use. In accordance with authoritative guidance, we begin to capitalize our costs to develop software when preliminary development efforts are successfully completed, management has authorized and committed project funding, and it is probable that the project will be completed and the software will be used as intended. We stop capitalizing these costs when the software is substantially complete and ready for its intended use, including the completion of all significant testing. These costs are amortized on a straight-line basis over the estimated useful life of the related asset, generally estimated to be four years. We also capitalize costs related to specific upgrades and enhancements when it is probable the expenditure will result in additional functionality and expense costs incurred for maintenance and minor upgrades and enhancements. Costs incurred prior to meeting these criteria together with costs incurred for training and maintenance are expensed as incurred and recorded within product development expenses in our consolidated statements of operations and comprehensive loss. We exercise judgment in determining the point at which various projects may be capitalized, in assessing the ongoing value of the capitalized costs and in determining the estimated useful lives over which the costs are amortized. To the extent that we change the manner in which we develop and test new features and functionalities related to our solution, assess the ongoing value of capitalized assets or determine the estimated useful lives over which the costs are amortized, the amount of internal-use software development costs we capitalize and amortize could change in future periods.
Stock-Based Compensation
We account for stock-based compensation in accordance with the authoritative guidance on stock compensation. Under the fair value recognition provisions of this guidance, stock-based compensation is measured at the grant date based on the fair value of the award and is recognized as expense, over the requisite service period, which is generally the vesting period of the respective award.
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Determining the fair value of stock-based awards at the grant date requires judgment. We use the Black-Scholes option-pricing model to determine the fair value of stock options granted to our employees and directors. The grant date fair value of restricted stock units is determined using the fair value of our common stock on the date of grant. The determination of the grant date fair value of options using an option-pricing model is affected by our estimated common stock fair value as well as assumptions regarding a number of other complex and subjective variables. These variables include the fair value of our common stock, our expected stock price volatility over the expected term of the options, stock option exercise and cancellation behaviors, risk-free interest rates and expected dividends, which are estimated as follows:
| Fair value of the common stock. As our stock is not publicly traded, and is rarely traded privately, we estimate the fair value of common stock as discussed in Common Stock Valuations below. |
| Expected term. The expected term represents the period that the stock-based awards are expected to be outstanding. We use the simplified calculation of expected term, as we do not have sufficient historical data to use any other method to estimate expected term. |
| Expected volatility. The expected volatility is derived from an average of the historical volatilities of the common stock of several entities with characteristics similar to ours, such as the size and operational and economic similarities to our principle business operations. |
| Risk-free interest rate. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to the expected term of the stock-based awards. |
| Expected dividend. The expected dividend is assumed to be zero as we have never paid dividends and have no current plans to pay any dividends on our common stock. |
The following table summarizes the assumptions used in the Black-Scholes option-pricing model to determine the fair value of our stock options as follows:
Year Ended December 31, | Three months ended March 31, | |||||||||||||||
2019 | 2020 | 2020 | 2021 | |||||||||||||
Stock options: |
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Risk-free interest rate |
1.6% 2.5% | 0.4% 1.7% | 1.7% | | ||||||||||||
Weighted-average expected life of the options |
6.25 years | 6.25 years | 6.25 years | | ||||||||||||
Expected dividend rate |
% | % | | | ||||||||||||
Expected volatility |
50% 53% | 49% 52% | 49% | |
Common Stock Valuation
The fair value of the common stock underlying our stock options was determined by our board of directors. The valuations of our common stock were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. In the absence of a public trading market, our board of directors, with input from management, exercised significant judgment and considered numerous objective and subjective factors to determine the fair value of our common stock as of the date of each option grant, including the following factors:
| contemporaneous valuations performed by third-party valuation firms; |
| the prices, rights, preferences and privileges of our redeemable convertible preferred stock relative to those of our common stock; |
| the prices of redeemable convertible preferred stock sold by us to third-party investors in arms-length transactions; |
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| the lack of marketability of our common stock; |
| our actual operating and financial performance; |
| current business conditions and projections; |
| our history and the timing of the introduction of new applications; |
| our stage of development; |
| the likelihood of achieving a liquidity event, such as an initial public offering or a merger or acquisition of our business given prevailing market conditions; |
| the market performance of comparable publicly-traded companies; |
| recent secondary stock sales transactions; and |
| U.S. and global capital market conditions. |
In valuing our common stock, we utilized the income and company transaction approaches (considering within the company transaction approach both recent preferred stock financing transactions and secondary sales of our common stock), which are considered highly complex and subjective valuation methodologies. The income approach estimates the fair value of our business, or Enterprise Value, based on the present value of our future estimated cash flows and our residual value beyond the forecast period. These future cash flows, including the cash flows beyond the forecast period for the residual value, are discounted to their present values using an appropriate discount rate, to reflect the risks inherent in our achieving these estimated cash flows. The Enterprise Value determined was then adjusted to (i) add back cash on hand and (ii) remove certain long-term liabilities in order to determine an equity value, or Equity Value. The company transaction method estimates the Equity Value based on an assessment of recent transactions in our common stock as well as an assessment of recent preferred stock financing transactions.
For all approaches other than the market approach utilizing secondary transactions in our common stock, the Equity Value was allocated among the various classes of our equity securities to derive a per share value of our common stock. Through September 30, 2020, we performed this allocation using the option pricing method, or OPM, which treats the securities comprising our capital structure as call options with exercise prices based on the liquidation preferences of our various series of preferred stock and the exercise prices of our options and warrants. Beginning in January 2021, we performed this allocation using a probability weighted expected return method, or PWERM. The PWERM involves the estimation of the value of our company under multiple future potential outcomes for us and estimates of the probability of each potential outcome. The per share value of our common stock determined using the PWERM is ultimately based upon probability-weighted per share values resulting from the various future scenarios, which include an initial public offering, merger or sale or continued operation as a private company. Additionally, the PWERM was combined with the OPM to determine the value of the securities comprising our capital structure in certain of the scenarios considered in the PWERM.
After the Equity Value is determined and allocated to the various classes of shares, a discount for lack of marketability, or DLOM, is applied to arrive at the fair value of the common stock. A DLOM is meant to account for the lack of marketability of a stock that is not traded on public exchanges. For financial reporting purposes, we considered the amount of time between the valuation date and the grant date of our stock options to determine whether to use the latest common stock valuation or a straight-line interpolation between the two valuation dates. This determination included an evaluation of whether the subsequent valuation indicated that any significant change in valuation had occurred between the previous valuation and the grant date.
Once we are operating as a public company, we will rely on the closing price of our common stock as reported on the date of grant to determine the fair value of our common stock.
Based on the assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, the aggregate intrinsic value of our outstanding stock options as of March 31, 2021 was $ million, of which $ million related to vested stock option awards.
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Recent Accounting Pronouncements
See Summary of Significant Accounting Policies in Note 2 in the notes to our consolidated financial statements included elsewhere in this prospectus for more information.
JOBS Act Accounting Election
We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012, or JOBS Act, and, for so long as we continue to be an emerging growth company, 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, 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 shareholder approval of any golden parachute payments not previously approved. In addition, pursuant to Section 107 of the JOBS Act, as an emerging growth company, we have elected to take advantage of the extended transition period for complying with new or revised accounting standards until those standards would otherwise apply to private companies. If we cease to be an emerging growth company, we will no longer be able to take advantage of these exemptions or the extended transition period for complying with new or revised accounting standards.
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LETTER FROM KIWI CAMARA, OUR FOUNDER AND CEO
Law is the best solution we humans have found to the problem of human conflict.
We use law to resolve disputes. We use law to define the freedoms we enjoy and the duties we owe to each other. Law underlies the building blocks of our society, from property, to contracts, to marriages. Law structures the institutions in which we live our lives and achieve our dreams, from business partnerships, to multinational corporations, to civic groups, churches, and governments. Law is everywhere and touches every part of our lives.
Advances in civilization have been marked by advances in our laws, from the Code of Hammurabis eye for an eye, to the lex mercatoria that enabled medieval commerce, to the Magna Carta that enshrined the rights of individuals against kings, to the Constitution of the United States and its series of amendments, beginning with the Bill of Rights, that have steadily expanded and expounded on the idea of liberal democracy.
An effective rule of law is very much an aberration in history. The idea that we all should be equally subject to the same set of rules, neutrally applied based on what really happened, commands universal acclaim only until powerful people and powerful institutions find themselves on the wrong side of the law. In those moments, it falls to great lawyers to speak truth to power, to fight for the ideals of the law, to make those ideals a little bit more real every day, in every case, for every client. The stories of the law are stories of brave people fighting fearful odds for ideals that inspire.
Our mission at DISCO is to use technology to strengthen the rule of law. Technology will transform the law just as it has transformed every other area of life. This transformation creates a massive opportunity to build an iconic business: the category definer for the new category of legaltech.
Technology will help lawyers improve legal outcomes for their clients. It will improve the experience of practicing law by automating the parts of the practice that dont require human legal judgment, so that lawyers can focus on doing the kinds of work that they went to law school to do. Automation and artificial intelligence will improve the efficiency and quality of existing legal services and will enable the creation of entirely new productized legal services. Legal professionals will partner with lawyers to make the most of this technology, building impactful and exciting careers for themselves in the law. Ultimately, technology will make law more effective at securing fairness and justice for all.
We have assembled an amazing team of people at DISCO: world-class software engineers, designers, and product managers who work hand-in-hand with lawyers to build magical product experiences; a go-to-market organization that has built a product-led growth engine powered by customers who quickly become fans and advocates; and people, finance, legal, and executive teams that are committed not only to winning in todays market but to building an enduring institution.
We are committed to making DISCO the kind of place that we would like to tell other people we were involved in building, the kind of place where we would love for our kids to work. One of our values is grit and grace. Grit means we will put in the work that we need to win. Grace means that we can be kind while we do that: kind to each other, kind to our customers, kind to our partners, and kind to ourselves.
Our employee-led philanthropy program, DISCO Cares, is one example of how we live grace. More than half of our employees and every one of our executives participated in DISCO Cares activities in 2020, working with organizations on issues from housing to education to food insecurity. Our commitment to diversity, equity, and inclusion is another example of grace in action.
To spread our value of grace beyond DISCO, and inspired by the generosity of so many in tech and beyond, I intend to donate, from my personal holdings, approximately 1% of the common stock of DISCO outstanding immediately prior to this offering to support philanthropic causes following our IPO. I hope that everyone who contributes to our growth feels a part of this pledge. The more we grow, the more good we will be able to do.
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Great achievements come from aiming great people at big problems. I am humbled and delighted every day to lead DISCO and, now, to invite you to join us on our mission.
Thank you to our early believers: to our first two engineers, who quit their jobs and moved to Texas to build software at a law firm; to every person who joined our team when your friends told you you were crazy; to every customer who trusts us every day with your most important legal matters; to the investors who believed in our vision when that was really all we had.
Youll read about what weve built in this S-1. Im proud of what weve built. And I believe that were just getting started.
Come with me lets make magic together!
Kiwi Camara
Founder and CEO
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LETTER FROM KENT RADFORD, OUR FOUNDER
DISCO began with a legal teams desire to address a very specific problem. We needed to review terabytes of data with a very small team of people. The technology available to address that problem was slow, expensive, and clunky. No technology existed that worked the way we needed it to in the time frame we needed. From that sprang the thought that we can do it better.
As we sat in a room working on the requirements for what would become DISCO Ediscovery, our goal was simply to solve our pain points. We continued our legal practice while using our new software on all of our matters. Very quickly, though, it became apparent that the software did something no other technology on the market did. It was fast; it was intuitive; and it made the fact finding process dramatically easier. It was also abundantly clear that other lawyers had similar pain points and could benefit from our solutions. That was the day DISCO was truly born.
From the beginning, we built DISCO to pursue a different path than others in the space. We looked to solve problems from first principles. We tasked the company to dream up what great would look like from the legal practitioners perspective and worked to turn that dream into reality. One can see that philosophy not just in the software we build but also the process we use to build that software; the focus is on thinking through issues and solving problems before writing any code.
Our willingness to be different can also be seen in our people. We have industry veterans, who swore they would leave the industry because it was technologically stagnant, excited to sell better offerings. We have engineers who could work at any world-class product company choosing to solve big, important problems at DISCO. We also have great lawyers choosing to join DISCO from private practice because DISCO provides them with a rare opportunity to change and better the practice of law. Across every department we have people who agree that we can do it better.
Our willingness to forge a different path can also be seen in how we invest in our people. In DISCO Cares, we have a corporate social responsibility program that lets our employees choose how we engage philanthropically with the world. In DISCO University, we are building a world-class learning environment where employees can acquire skills not only to help them in their current role but also their next. We truly want DISCO to be a place where people can spend their entire careers and are putting the programs in place to help make that vision a reality.
We think DISCO is a different kind of company. We think you will as well, and we hope you will join us in transforming the legal industry.
Kent Radford
Founder
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Our Mission
Our mission is to use technology to strengthen the rule of law.
Overview
DISCO provides a cloud-native, artificial intelligence-powered legal solution that simplifies ediscovery, legal document review and case management for enterprises, law firms, legal services providers and governments. Our scalable, integrated solution enables legal departments to easily collect, process and review enterprise data that is relevant or potentially relevant to legal matters. We leverage a cloud-native architecture and powerful artificial intelligence, or AI, models to automatically identify legally relevant documents and improve the accuracy and speed of legal document review. Our AI models continuously learn from legal work conducted on our solution and can be reused across legal matters, which further strengthens our ability to help our customers find evidence and resolve matters faster as they expand usage of our solution. We provide legal departments with the ability to centralize legal data into a single solution, improving security and privacy for our customers, enabling transparent collaboration with other legal industry participants and allowing customers to reuse data and lawyer work product across legal matters. As of March 2021, our solution held more than 10 billion files and 2.5 petabytes of data and we used more than 14 billion serverless compute calls in 2021 to process and enrich data for our customers. By automating the manual, time-consuming and error-prone parts of ediscovery, legal document review and case management, we empower legal departments to focus on delivering better legal outcomes.
Since our founding in 2013, and beginning with our founders, DISCO has assembled a team that combines strength in software engineering, cloud computing and AI, with deep legal expertise and a rich understanding of the problems that lawyers and legal professionals face and how they work. This combination of expertise means that our team is distinctly well-positioned to execute on our vision of building technology that powers the legal function across companies in every industry.
Lawyers and legal professionals love our solution, as demonstrated by our Net Promoter Score, or NPS, of 63 as of December 31, 2020. We calculate NPS based on the basis of a survey that asks, How likely are you to recommend DISCO to a colleague?. The survey respondent can choose an integer between zero and ten, with the percentage of users responding with a 6 or below subtracted from the percentage of users responding with a 9 or 10 to calculate the NPS. Our relentless focus on delivering a solution that legal professionals love is coupled with a simple and transparent usage-based business model. We believe this enables our customers to easily adopt our solution, realize rapid time-to-value, scale their usage within and across applications to match their changing needs and collaborate with others. This has allowed us to build a powerful product-led growth engine that efficiently expands the usage of our solution for more legal matters and use cases within organizations, spreads our solution across the legal ecosystem through collaboration and word-of-mouth and increases the value of our solution as we collect and process more data and lawyers do more legal work in our solution. The success of this growth model is underscored by our dollar-based net retention rate of 122% as of March 31, 2021, as well as by the fact that, in 2020, 171 law firms in the 2020 AmLaw 200, a ranking of the 200-highest grossing law firms in the United States, used DISCO in the course of legal work on behalf of their clients. As of March 31, 2021, we had over 909 enterprises, law firms, legal services providers and government organizations as DISCO customers.
Law affects everyone, from the largest multinational corporations to local mom-and-pop businesses, from the most powerful national governments to the smallest towns and from major civic organizations to individual citizens. The impact of law on the business world is only growing, with businesses today operating in more jurisdictions than ever before and increasingly exposed to a growing number of constantly changing laws and regulations that can materially damage a companys brand and operations. This has turned the corporate legal function into a mission-critical, strategic component of the modern enterprise and contributed to the growth in
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global spend on legal services, which is forecasted by Statista to be $767 billion in 2021. But despite its enormous scale and attractive opportunities for automation and the application of AI to improve lawyer productivity and job satisfaction, the legal industry has lagged behind other industries in digitization and cloud technology adoption.
Legal work often requires lawyers to collect and review enterprise data to determine the facts. This process includes ediscovery, which refers to the process of collecting, searching and producing digital enterprise data that can constitute documentary evidence and legal document review, which refers to the substantive review of collected digital enterprise data by legal professionals to determine the facts and final evidence in a legal matter. Today, many legal departments rely on a complex and services-heavy network of law firms, legal services providers and legacy point solutions for ediscovery and legal document review. This fragmented, multi-vendor approach is extremely manual, difficult to use and ill-suited to handle the massive growth in the volume, variety and velocity of enterprise data that legal departments are experiencing, which ultimately limits the productivity of legal professionals and their ability to resolve legal matters quickly and on favorable terms. However, recent technological advances such as AI and cloud computing have reached a point of technological maturity where they can enable legal technology applications to transform legal work and automate much of the previously manual, time-consuming work done by legal professionals. At the same time, we believe rapid growth in use of consumer software and other consumer technology, including the proliferation of mobile devices, the generational shift of lawyers and the increasing career mobility of lawyers, are all contributing to a radical change in expectations for legal technology used in the workplace.
Since our inception, our principal goal has been to create experiences that feel magical to lawyers, by delivering intuitive, intelligent offerings that are well-tailored to lawyers workflows and a joy for legal professionals to use. Our solution is enabled by our deep investment in a modern, scalable cloud architecture that accelerates application development; makes our offerings robust, scalable and secure; and enables us to act as a secure single system of record and engagement for all legal data at enterprise scale. We have built our solution to incorporate the latest advances in automation and AI directly into existing lawyer workflows to multiply lawyer productivity across the ediscovery and legal document review lifecycle. Our cloud-native, AI-powered software is augmented with deep expertise, consultative professional services and flexible customer support that enables us to be a single-source provider and meet the diverse needs of customers in every industry. With our full-stack solution, legal departments no longer need to rely on a fragmented network of slow, antiquated processes and law firms and service providers manually collecting, searching and reviewing documents. We believe this reduces legal costs, increases lawyer productivity and improves legal outcomes. We intend to extend our solution and apply it to other kinds of legal work over time, enabling us to compete for an increasing share of global spend on legal services.
Our full-stack solution currently includes:
| DISCO Ediscovery automates much of the ediscovery process, saving legal departments from costly and cumbersome manual tasks associated with collecting, processing, enriching, searching, reviewing, analyzing, producing and using enterprise data that is at issue in legal matters. |
| DISCO Review is AI-powered document review that consistently delivers legal document reviews that are high quality, on time and on budget. |
| DISCO Case Builder allows legal professionals to collaborate across teams to effectively build a compelling case by offering a single place to search, organize and review witness testimony and other important legal data. |
Our approach has enabled us to serve a diverse set of enterprises across a broad set of industries, as well as law firms, legal services providers of all sizes and government organizations. While we serve customers across many different industries, the way in which legal professionals use our solution is similar regardless of the specific industry in which each customer operates. This commonality has created efficiencies in our sales,
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marketing and research and development efforts because we do not need to tailor our solution to a wide range of industries. The broad applicability of our solution across a spectrum of industries has created a significant market opportunity for us, which we estimate to be $42 billion globally.
We believe that great achievements come from aiming great people at big problems, and that our employees, who we call Discovians, are the principal driver of our success. We strive to attract, retain, develop and promote humble, curious and empathetic Discovians across all areas of our business. We are committed to fostering a diverse and inclusive workplace that values input from every corner of our business and creating an environment where all people feel welcome and connected regardless of their background. Our culture is guided by the principles we set forth in our MAGIC core values: Meaningful impact, All-in, Grit and grace, Innovation and Craft. These principles shape our culture and guide the way we work, support each other and our communities and serve our customers. We believe that our culture and commitment to giving back to our community are critical to advancing our mission of using technology to strengthen the rule of law.
We have experienced rapid growth in recent periods. Since inception, we have raised $161.0 million of capital, and we had $53.6 million of cash and cash equivalents as of March 31, 2021. We generated revenue of $48.6 million and $68.4 million in 2019 and 2020, respectively, representing year-over-year growth of 41%. We generated revenue of $15.7 million and $21.1 million in the three months ended March 31, 2020 and 2021, respectively, representing period-over-period growth of 35%. Our net loss was $29.8 million, $22.9 million, $11.2 million and $2.9 million for the years ended December 31, 2019 and 2020 and the three months ended March 31, 2020 and 2021, respectively. We generated Adjusted EBITDA of $(25.4) million, $(19.9) million, $(10.3) million and $(1.9) million for the years ended December 31, 2019 and 2020 and the three months ended March 31, 2020 and 2021, respectively. See the section titled Managements Discussion and Analysis of Financial Condition and Results of OperationsNon-GAAP Financial Measure for the definition of Adjusted EBITDA, as well as a reconciliation of Adjusted EBITDA to net loss, the most directly comparable financial measure stated in accordance with GAAP.
Industry Background
Law is fundamental to society, affecting everyone from the largest multinational corporations to local mom-and-pop businesses, from the most powerful national governments to the smallest towns, from major civic organizations to individual citizens. Law is the infrastructure on which companies and governments are built. It defines institutions, facilitates business transactions and is the primary mechanism for both regulation and dispute resolution in the modern world. Legal obligations are created and changed every day, both by governments around the world and through agreements between private parties. The impact of law on business is only growing, with legal issues regularly creating headline news, from the opioids epidemic to litigation over national elections to the creation of new business models such as in the burgeoning gig economy.
Introduction to the Legal Industry and Key Industry Participants
The legal industry is characterized by a wide array of participants with varying objectives and levels of organization. Most large companies have a legal function and a legal department, headed by a general counsel or chief legal officer, just as they have departments focused on finance, human resources and information technology. These legal departments both employ lawyers and other legal professionals to perform legal work internally and engage law firms and other legal services providers to perform legal work externally. According to a study by Statista, the estimated global spend on legal services is forecasted to be $767 billion in 2021. The key participants in legal work include:
| Client. The client is the principal in a legal matter, such as the plaintiff or defendant in a lawsuit or the acquirer or target in a merger transaction. |
| Legal department. Within a corporate client, the legal department is the team of lawyers and legal professionals that performs legal work internally and is responsible for coordinating legal work performed by outside law firms and legal services providers. |
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| Law firm. Law firms are engaged by clients to act for them in specific legal matters. Law firms vary significantly in their size and areas of practice, ranging from solo practices to large, international law firms with thousands of lawyers and multiple specialties. Clients often use more than one law firm for their legal work and law firms generally represent many clients. |
| Legal services provider. Legal services providers are engaged by legal departments or law firms to expand their capabilities or increase their capacity. Legal services providers often assist legal departments and law firms with ediscovery and legal document review. Like law firms, legal services providers vary significantly in their size and areas of work, ranging from small, local operations with a handful of employees to large, global enterprises focused on legal services, to the legal services divisions of major consultancies and accounting and audit firms. |
| Counterparty. The counterparty is the other principal involved in a legal matter. Most legal matters involve parallel work by the client and the counterparty, multiplying the total legal work involved. |
| Legal decision maker. The legal decision maker is typically a government official, such as a judge or regulatory agency, who is responsible for making legal determinations that affect the client and counterparty. |
Key Components of a Legal Matter
Legal work generally begins with two steps: (1) determining what the law is; and (2) determining what the facts are, so that lawyers and other legal professionals can apply the law to the facts. Determining what the law is involves collecting, searching and reviewing applicable statutes, regulations or prior decisions of courts and regulators and can involve the laws of multiple jurisdictions, such as multiple states or countries. Determining the facts depends on the context of the legal matter, but often involves collecting, searching and reviewing the testimony of witnesses, physical evidence and documentary evidence, including all enterprise data, both paper and electronic.
All kinds of enterprise data can constitute documentary evidence, including documents, spreadsheets, presentations, email, chat and other messaging data, voicemail and other audio data and video. Lawyers must collect, search and review this data to find documentary evidence that is relevant in a legal matter, to determine what the facts are, to assemble proof of those facts, and, depending on the kind of legal matter, to produce or exchange documentary evidence with the counterparty or submit documentary evidence to the legal decision maker, such as a judge or regulator. The process of collecting, searching and producing data is called ediscovery in the United States and similar names in other countries, such as edisclosure in the United Kingdom. The substantive review of collected enterprise data by lawyers and other legal professionals as part of a legal matter is called legal document review.
The image below depicts an illustrative example of a lawsuit in a typical court in the United States to describe the steps involved in collecting, searching, and reviewing enterprise data. While the precise steps are different in other kinds of legal matters and in other jurisdictions, the basic process of collecting, searching, and reviewing enterprise data to find the facts is a part of many legal matters, regardless of their type. For example, a similar process is used to produce documents to regulators to obtain clearance for a merger, to determine whether and how to reform company operations as a result of an internal investigation or compliance exercise, and in many other kinds of legal matters.
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Key Industry Trends
Key trends that are influencing the legal industry include:
The Legal Function is Increasingly Mission-Critical to Every Organization in the World
Three related trends are increasing the relative strategic importance of the legal function in organizations, transforming general counsels and chief legal officers into key strategic decision makers within their organizations and increasing overall spend on legal services. First, as businesses operate in more jurisdictions, they are exposed to more and more varied laws and regulations. For example, companies operating in both the United States and Europe must comply with distinct sets of laws governing consumer data privacy. Second, many of these jurisdictions are continuously creating more laws and regulations, often in new and evolving areas, increasing the exposure of businesses to legal liability. In the United States alone, the number of total pages published in the Code of Federal Regulations has grown from fewer than 20,000 pages in 1950 to more than 185,000 pages in 2019. Third, legal issues increasingly create liability and front-page news for businesses, with attendant risks to a companys brand, reputation and business outcomes. The litigation over the opioids epidemic, the employee or contractor regulatory determination confronting gig economy businesses and the scandal over the misreporting of emissions data by certain car manufacturers are all examples of recent bet-the-company legal issues. Organizations that fail to modernize and empower their legal function in response to these dynamics risk fines and other legal liability, reputational damage and other adverse business outcomes.
Digital Transformations that have Happened in Other Business Functions are Now Happening in the Legal Function
Like all other business functions, the legal function is being transformed by technology, with automation and AI now making it possible to increase the productivity of lawyers, improve legal outcomes and strengthen the rule of law. But despite the enormous scale of the legal industry, the increasing sophistication of enterprise clients and rampant digital transformation in other industries, the legal industry has lagged behind nearly every other industry in digitization and cloud technology adoption. This lack of digital transformation is in large part due to the historical, industry-wide focus on bill-by-the-hour professional services and the failure of legacy
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technology providers to effectively combine technology advances with a deep understanding of legal workflows to build solutions that legal professionals have confidence in and are willing to adopt.
This is finally changing, driven by a growing realization that the only way to effectively cope with the increasing demand for legal services and the increasing complexity of the legal environment is to leverage technology to increase the productivity of lawyers and by the maturity of underlying technologies like cloud computing and AI that make it possible to build transformative legaltech applications. Changes driven by the COVID-19 pandemic in the way legal departments and law firms operate, for example, the requirement to support remote work and remote collaboration, are further accelerating the adoption of legaltech and especially cloud-based solutions. According to a 2021 study conducted by Thomson Reuters Acritas, 84% of law firm partners surveyed expected their firms to increase investment in technology.
The Volume, Variety and Velocity of Enterprise Data that can Become Documentary Evidence in Legal Matters is Exploding
The large and growing volume, variety and velocity of enterprise data has made the traditional ways of collecting, searching and reviewing enterprise data to find documentary evidence extremely cumbersome, complex and time-consuming. Historically, enterprise data was stored in a limited set of paper records and a defined universe of discrete, on-premise databases. Today, by contrast, every business process, from collaboration in email and chat platforms to the use of departmental systems of record such as customer relationship management, or CRM, platforms to the capture of audio and video data from modern conferencing solutions, produces electronic data, all of which can constitute legally relevant documentary evidence. According to International Data Corporation, or IDC, the amount of data created, captured and replicated by consumers and enterprises across the world will nearly triple from 64 zettabytes in 2020 to 180 zettabytes in 2025. This is driving legal departments to adopt more sophisticated and easier to use technology solutions that can accelerate the process of collecting, searching and reviewing massive amounts of diverse enterprise data with accuracy, speed and security.
Artificial Intelligence and Cloud Computing Have Reached a Point of Technological Maturity Where They Enable Legaltech Applications to Transform Legal Work
Much of the work that legal professionals do involves collecting, searching and reviewing large volumes of data to look for legally salient information. Cloud computing, which allows systems to efficiently run compute-intensive algorithms on large and unpredictable volumes of data and modern approaches to AI, which excel at recognizing patterns in that data such as identifying the kinds of enterprise data that are relevant to specific legal
issues, create the conditions under which it is possible to build modern legaltech applications that can automate much of the previously manual, time-consuming work done by legal professionals. These technological advances make it possible to build legaltech applications that increase lawyer productivity, improve lawyer job satisfaction and ultimately empower lawyers to improve legal outcomes for their clients.
While innovations in cloud computing and AI present a powerful opportunity to transform legal work, both legacy and new software solutions have struggled to combine and incorporate these technologies into a single, comprehensive solution that addresses the entire spectrum of legal use cases. Legal departments need an end-to-end platform that effectively combines these advancements and applies them to legal problems in a software-based workflow that is intuitive to legal professionals and provides the ability to securely centralize and accurately analyze huge collections of enterprise data in a cost efficient and scalable manner.
The Pursuit of Differentiation in the Highly Competitive Legal Industry is Driving Rapid Technology Adoption by Legal Departments, Law Firms and Legal Services Providers
The legal industry is highly fragmented and competitive. Whereas the leaders in accounting and audit are commonly referred to as the Big 4 and the leaders in management consulting are commonly referred to as the
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Big 3, the highest grossing law firms by revenue in the United States are commonly referred to as the AmLaw 200. Law firms and legal services providers must differentiate themselves from their competitors or risk declining market share, declining earnings, consolidation, or all of the above. Historically, law firms and legal services providers have sought to differentiate based on the quality of their people, the sophistication of their process, the development of unique expertise, or favorable pricing. Legaltech offers a new, more profound kind of differentiation because the effective use of legal technology can dramatically increase the productivity of lawyers and other legal professionals. The competitive dynamics of the legal industry has led to increasing pressure to adopt legaltech.
Legal Professionals are Increasingly Seeking a Modern, Fast and Easy-To-Use Solution that is Purpose-Built for How They Work
The rapid growth in use of consumer software and other consumer technology, including the proliferation of mobile devices; the generational shift of lawyers; and the increasing career mobility of lawyers are all contributing to a radical change in expectations for legal technology. Lawyers and other legal professionals increasingly expect technology to be elegant, easy-to-use and provide instant value and access to information from any device. At the same time, the rise of consumption-based pricing has simplified the way legal departments and law firms purchase and implement new technology, allowing them to try new solutions much more quickly on a subset of their legal work and then scale adoption of these solutions when they are successful. These factors have decentralized decision-making and enabled the actual end users of legal technology, lawyers and legal professionals, to drive technology adoption. This consumerization of legaltech sets the stage for the success of product-led growth models in the legal industry similar to the models that have been successful in many other areas of enterprise software.
Limitations of Existing Solutions
Today, most legal departments rely on a complex network of law firms, legal services providers and legacy point solutions for ediscovery and legal document review. For ediscovery, existing solutions generally require the integration of multiple legacy, on-premise software point solutions to collect, process, enrich, search and display enterprise data. Legal departments employ a heavy layer of bill-by-the-hour human services provided by legal services providers to help operate, integrate, manage and move unpredictable flows of data between these disparate point solutions, as well as provide forensic data collection, IT infrastructure setup and maintenance and project management to carry out tasks for lawyers who are unable or unwilling to use the underlying legacy software. Existing solutions for legal document review rely on lawyers identifying a population of documents for review from the collected enterprise data and then having large teams of lawyers review those documents, assisted by a limited set of difficult to use analytics tools.
The reliance on this fragmented, services-heavy and multi-vendor approach poses several challenges that limit the productivity of lawyers and legal professionals, including:
| Incomplete Point Solutions that are Poorly Integrated. Existing solutions generally force legal departments to coordinate the flow of work across law firms and legal services providers and require some or all of these stakeholders to manage the flow of data between multiple, non-interoperable, legacy software point solutions. |
| Extremely Manual. Existing ediscovery point solutions generally lack a robust, software-driven automation layer, which requires legal departments to rely on a heavy layer of human services provided by legal services providers. Additionally, legal document review solutions often lack robust software tools for data reuse and easy-to-use AI integrated directly into lawyer workflows, forcing existing legal document review solutions to rely on large teams of lawyers to manually review documents. Both of these approaches are time-consuming and laborious for legal professionals, resulting in productivity that is largely a function of hours invested, mixed quality of legal document review and high and unpredictable costs. |
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| Difficult to Use. Most existing ediscovery solutions assume the existence of a heavy layer of human services between lawyers and the software. Consequently, companies designing this software have not focused on building product experiences that are easy to use and intuitive to the actual end users of legal software: lawyers and legal professionals. The complexity and poor usability of these existing solutions often deter lawyers from using them directly and limit their widespread adoption across teams, preventing legal departments from fully realizing the benefits of advances in technology such as AI. |
| Slow. Most existing solutions do not take advantage of elastic computing and modern approaches to automation and AI and are slow to complete basic tasks across the spectrum of ediscovery and legal document review. Additionally, the heavy reliance on human services as part of existing solutions introduces further delays, with lawyers repeatedly waiting for legal services providers to complete tasks that they cannot complete themselves. These limitations can increase the reluctance of legal professionals to use legal technology, create frustration and unhappiness and slow down the process of finding evidence and resolving legal matters. |
| Lack Robust, Easy-To-Use AI Capabilities. Most existing solutions lack comprehensive AI capabilities that can help lawyers classify and comprehend massive amounts of structured and unstructured data quickly and reliably. Additionally, many existing solutions lack the ability to continuously improve AI models in real-time based on lawyers work, or train and use these models across multiple legal matters so that legal document review need not start from scratch for each new legal matter. The AI tools that do exist are not seamlessly integrated into other ediscovery software or into the workflow that lawyers use to review documents, requiring data to move between software point solutions and requiring lawyers to take unnatural and unfamiliar workflow steps in order to leverage AI. As a result, organizations are unable to leverage modern advances in AI to accelerate legal document review and are forced to revert to the manual, time-consuming and error-prone traditional legal document review process with every new legal matter. |
| Inability to Scale. Existing solutions often fail to take advantage of modern developments in cloud computing such as elastic compute and serverless compute to dynamically scale computing resources to handle, store and process transient spikes in data required by modern legal matters in real-time. As a result, existing solutions are inflexible and incapable of scaling to meet the demands of todays legal departments without experiencing poor performance and high costs. |
| Lack of Security, Privacy, Control and Extensibility. With existing solutions, legal departments collect and send sensitive data outside the enterprise to multiple law firms and legal services providers, with limited ability to track who is accessing the data, how it is being used and how it is disposed of at the end of a legal matter. Most existing solutions fail to provide legal departments with a secure system of record and engagement for enterprise data involved in legal matters that can facilitate control over user access, leverage legal work product and AI models across multiple legal matters and increase the efficiency of ediscovery and legal document review. |
| Expensive and Unpredictable. Existing solutions can require legal departments to manage multiple solutions from multiple vendors with separate, opaque pricing models. As a result, the cost of existing solutions is high and unpredictable and prevents legal departments from accurately budgeting for discovery and legal document review at the outset of a legal matter. |
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Our Solution
Our solution is the result of uniquely combining an ability to deliver world-class software engineering with a deep love and respect for the law and a commitment to delivering product experiences that reflect a rich understanding of lawyers problems, thought process and workflows. Our aim is to create a solution that feels magical to lawyers, that is, one that feels intuitive, simple, powerful, well-tailored to lawyers problems and workflows and a joy for lawyers and other legal professionals to use. Our solution is enabled by our deep investment in a modern, scalable cloud platform that accelerates application development and makes our offerings robust, scalable and secure. We have built our solution to incorporate the latest advances in AI directly into existing lawyer workflows to multiply lawyer productivity. Our investment in training, onboarding, customer success, support and professional services are designed to ensure that customers successfully realize value from our offerings in the form of reduced cost, increased productivity, faster resolutions and increased security.
Our full-stack solution currently includes the following offerings:
| DISCO Ediscovery automates much of the ediscovery process, saving legal departments from costly and cumbersome manual tasks associated with collecting, processing, enriching, searching, reviewing, analyzing, producing and using enterprise data that is at issue in legal matters. |
| DISCO Review is AI-powered document review that consistently delivers legal document reviews that are high quality, on time and on budget. |
| DISCO Case Builder allows legal professionals to collaborate across teams to effectively build a compelling case by offering a single place to search, organize and review witness testimony and other important legal data. |
The key elements of our solution include:
| Comprehensive and Full-Stack. We deliver an end-to-end, full-stack solution designed to address each part of the problem of managing enterprise data and witness testimony in legal matters, from ediscovery to legal document review to case management. Our cloud-native, AI-powered solution is |
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augmented with deep expertise, consultative professional services and flexible customer support that enables us to be a single-source provider and meet the diverse needs of customers in any industry, regardless of the extent to which they choose to in-source or outsource different parts of the legal process. Our customers can use DISCO Ediscovery and perform their own legal document review or use DISCO Review as a turnkey solution for legal document review, powered by our own use of DISCO Ediscovery. |
| Automation that Renders Heavy Human Ediscovery Services Obsolete. We designed our solution to automate most bill-by-the-hour professional services traditionally involved in ediscovery. We deliver simple, automated data ingestion tools that enable lawyers and legal professionals or client IT departments to collect, process and enrich diverse data types from any enterprise IT system. After data is loaded into our solution, our powerful search and analytics architecture enables lawyers to instantaneously search, view and manipulate this data with an easy-to-use, visual interface. We offer robust workflow tools that automate the routing of enterprise data through lawyer workflows and empower legal departments to easily collaborate across large and complex ediscovery and legal document review processes. Lawyers and legal professionals can use our solution to gain instant access to enterprise documents that they need to do their work across the full spectrum of legal matters they handle. |
| AI that Simplifies and Streamlines Legal Document Review. Our AI models apply cloud computing and sophisticated machine learning methods to classify and sort massive amounts of data and provide precise predictions of document relevance in a fraction of the time required for traditional review. This enables our solution to learn what kinds of documents are legally relevant, recommend how documents should be classified and surface important documents. Our AI models continuously learn and improve in accuracy with every new legal matter and can be reused across other matters, driving a network effect that increases the pace of legal document review and the productivity of lawyer users as customers expand usage of our solution across more and more types of legal matters. The use of AI to scale lawyer productivity, rather than relying on simplistic search tools and large teams of lawyers reviewing documents, enables a profound shift in the productivity of the legal industry. |
| Purpose-Built for Lawyers and Other Legal Professionals. The extensive background that many DISCO employees have as former practicing lawyers, as well as our deep product engagement with customers on each matter, give us a deep understanding of the needs and preferences of legal professionals. Every feature of our solution was built to seamlessly integrate with the workflows lawyers actually employ on a daily basis. These features include easy-to-use interfaces that are intuitive to lawyers, drag-and-drop data ingestion functionality, robust data visualization tools and fluid and powerful search capabilities that use search syntax that lawyers learn in law school. We believe that investing in product experiences that lawyers love drives a viral, product-led growth flywheel in which lawyers champion our solution, use it for other legal use cases and bring it to other legal departments and law firms as they move through their careers. |
| Powerful, Scalable and Extensible Modern Cloud Architecture. Our state-of-the-art cloud-native architecture delivers superior performance, scalability and extensibility. We leverage elastic compute and serverless compute to make it possible to transfer, process and enrich large quantities of structured and unstructured data at speed from any enterprise IT system. Our cloud architecture allows us to deliver fast performance on end-user tasks such as document search, analytics and rendering of complex documents like large spreadsheets and presentations. Our multi-tenant architecture can deliver superior performance for multiple, simultaneous large matters and automatically scale and allocate resources based on the total usage of the system across all customers. The robust interoperability of our integrated solution drives significant extensibility, allowing us to easily add new functionality and applications as the needs of our customers evolve. Our architecture enables us to deploy code changes seamlessly nearly every week, which ensures that our customers are using the latest and most efficient version of our solution and accelerates our pace of innovation. |
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Our Business Model
Our business model is usage-based, with simple, transparent pricing that allows customers to easily adopt our solution, scale their usage without friction to match their changing legal needs and spread our solution to other legal industry participants with whom they collaborate. At the core of our business model is our relentless focus on delivering applications that lawyers and legal professionals love. We believe that the combination of our designed-for-legal applications and our usage-based business model makes it easy for customers to adopt and begin using our solution, realize rapid time to value and expand their usage of our solution over time. Our NPS was 63 based on an internal in-product survey conducted in December 2020.
We price our solution on the basis of usage and our customers total spend with us typically evolves over time based on their actual usage. Since the amount of enterprise data involved and the number of documents to be reviewed in a given legal matter are typically unknown when customers initially contract with us, total spend can be unpredictable and our contracts generally provide only unit pricing. We typically bill customers monthly based on their current usage. In addition, we offer subscription contracts, whereby customers are contractually committed to a minimum data volume over a period of time. Our usage-based pricing allows customers to easily begin using our solution for some of their legal matters and then, as they realize the benefits of our solution, expand their usage over time.
Our business model benefits from viral characteristics and powerful network effects that continuously enhance the value of our solution, extend our reach and help us efficiently acquire new customers as we grow. These effects happen along several dimensions, which together we refer to as our product-led growth engine:
| Viral Expansion Within an Organization. Our business model allows customers to easily adopt and use our solution for an initial set of legal matters, regardless of size. After realizing the benefits of our solution, customers often both expand usage of our solution to more legal matters and adopt more of our offerings. As our usage expands across a customer, more and more of the customers enterprise data involved in legal matters resides in our solution and more and more of a customers users become accustomed to our applications, both of which enhances the strategic value and stickiness of our solution within an organization. This dynamic is reflected in our 122% dollar-based net retention rate as of March 31, 2021. |
| Viral Expansion Through Our Ecosystem. We designed our solution to facilitate widespread adoption across legal industry participants by allowing for potential customers to use our solution to |
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collaborate with existing customers. For example, a corporation can be a customer and have several law firms representing them that are not yet paying customers. Since the corporation uses DISCO, the hired law firms will be invited to create accounts and collaborate using our solution for the corporations legal matters. After realizing the benefits of working on DISCO, these law firms will often become customers on their own or recommend our solution to the rest of their clients. Likewise, if a law firm is our customer, the law firm may add users from its clients legal departments to our solution in order to collaborate with them. These users may then become champions and encourage the companies they work for to become customers. Since many companies use multiple law firms and most law firm represents multiple companies, this process repeats itself as we acquire more customers, enabling a frictionless cycle of adoption across the legal ecosystem. This is evidenced by the fact that in 2020, approximately 50% of our users were at organizations that were not paying customers but used our applications in collaboration with one or more of our customers. Additionally, of the law firms included in the 2020 AmLaw 200, all 25 of the top 25 firms, 49 of the top 50 firms, 92 of the top 100 firms and 171 of the full AmLaw 200 used DISCO in 2020. A similar expansion dynamic can occur as a result of the mobility of lawyers and legal professionals over the course of their careers, as lawyers with experience on our solution may advocate for the adoption of our solution at new employers. We view this as another important driver in further accelerating the adoption of our solution across the legal industry. |
| Network Effects Driven by Usage. As more lawyers use our solution, apply it to more legal use cases and spread it to different customers, the scale and diversity of the data we collect and process and the nature of the legal work done on our solution grows. This benefits us and our customers in several ways. Since we can act as a single source of record and engagement for legal data for our customers, we enable them to easily retain data and reuse it for future legal matters rather than starting each legal matter from scratch. Additionally, our AI models improve as they are trained on more data and observe more lawyer work on that data in our solution, which allows our customers to uncover evidence more quickly as we grow. We believe the value of our solution will continue to expand as our data under management grows and as lawyers do more and more work on that data in our solution. |
Key Benefits of Our Solution
Our end-to-end solution was designed to improve the everyday experience of lawyers and legal professionals and improve legal outcomes for legal departments. We deliver the following key benefits:
| Full Stack and Turnkey. We enable customers to consume our offerings in a self-service way or as a turnkey, full-stack solution, giving our customers the flexibility to tailor their ediscovery and legal document review processes to their own legal work strategy and use different combinations of our offerings on different subsets of their legal work. The availability of our full-stack solution removes the need for our customers to manage workflows and data transfer between multiple services providers and point solutions, freeing up legal professionals to focus on higher value legal work. Additionally, because we use DISCO Ediscovery internally to deliver DISCO Review, we are able to maintain a tight feedback loop that accelerates improvement of our solution and training of our AI models, increasing the effectiveness of our overall solution for all customers over time. Our cloud-native, AI-powered solution is augmented with deep expertise, consultative professional services and flexible customer support, enabling us to be a single-source provider and meet the diverse needs of customers across industries. |
| High End-User Satisfaction Driven by Applications Built for Lawyers and Other Legal Professionals. We strive to create product experiences that feel magical to lawyers: intuitive, easy to use, powerful and comprehensive. Our cloud-native architecture delivers a level of performance comparable to the consumer applications that modern lawyers use every day. Our applications bring sophisticated technology, such as AI, to bear at the right points in a legal workflow in a way that feels natural and is not intimidating to the end user. These characteristics of our solution encourage and |
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accelerate widespread adoption by lawyers and other legal professionals, which in turn accelerates the time to value for our customer. |
| Increased Accuracy and Quality of Review. Our solution allows lawyers to use AI and analytics integrated into a lawyer-friendly and highly automated workflow to increase the accuracy and quality of legal reviews. These innovations allow lawyers to spend less time finding and fixing human errors and managing the routing of documents through lawyer workflows and more time on higher value tasks that require legal judgment. Customers can realize these benefits either by leveraging DISCO Review or using DISCO Ediscovery as the solution on which existing law firms and legal services providers conduct legal document review themselves. |
| Faster Resolution of Legal Matters with Better Outcomes. Our solution enables lawyers to determine the facts and use those facts to assess legal matters and produce evidence more quickly. We believe this enables them to resolve legal matters faster, which can result in significantly reduced legal costs and the reduction or avoidance of legal risks across their full portfolio of legal matters. |
| Scalable, Secure, Single System of Record and Engagement for Legal Data. The scalability, performance and extensibility of our cloud-native architecture allows customers to use DISCO as a secure single system of record and engagement for all enterprise data related to legal matters at enterprise scale. This ensures the security and integrity of our customers enterprise data involved in legal matters, provides fine-grained control over user access to this data and the workflows users employ and empowers lawyers to easily search, visualize and interact with the complete corpus of enterprise data involved in legal matters in real time and in one place. With a single system of record and engagement, our AI models can continuously learn from all of a customers data and legal work product across all legal matters, enabling our customers to gain insights from legal work performed in earlier legal matters to accelerate legal work in subsequent legal matters. |
| Cost Flexibility and Predictability. Our single, end-to-end solution replaces the fragmented landscape of solutions and vendors historically used by legal departments. The solutions we replace often include separate, high and unpredictable costs for different parts of the ediscovery and legal document review process, such as processing, the review platform, analytics and infrastructure. By contrast, our simple, all-in pricing model and flexible terms align with our customers needs, are easy to understand and guarantee costs for our customers, allowing legal departments to improve cost predictability and budget planning. |
Our Customers
As of March 31, 2021, we had 909 customers, increasing from 635 and 825 as of December 31, 2019 and 2020, respectively. Our customers include a diverse set of enterprises across a broad set of industries, as well as law firms, legal services providers of all sizes and governmental organizations. While we serve customers across many different industries, the way in which lawyers and legal professionals use our solution is similar regardless of the specific industry in which each customer operates. This commonality has created efficiencies in our sales and marketing and product development efforts because we do not need to tailor them to a wide range of different customer use cases.
We define a customer as an entity that we have a contract with and from whom we have recognized revenue during the preceding month. Legal departments that use our solution and use many law firms across their legal matters, as well as law firms and service providers that use our solution for multiple clients, are each treated as one customer. Regardless of who we contract with, the ultimate payer is almost always the corporate legal department, with law firms and service providers passing on our bills to their client for reimbursement.
In 2020, no customer accounted for more than 5% of our revenue and less than 5% of our revenue was generated from customers outside of the United States.
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The following provides a representative list of our customers as of March 31, 2021. Our customers include a diverse set of enterprises across a broad set of industries, such as Accenture, DISH, Lyft, Natera, Peloton, Southwest Airlines, WeWork and ViaStat, law firms and legal services providers of all sizes, such as Foulston, Homer Bonner, Kennedys Law, Kutak Rock, Perkins Coie, Quarles & Brady and Shearman & Sterling, as well as governmental organizations.
What Sets Us Apart
We believe that the combination of our cloud-native technology, full-stack solution, world-class engineering and our deep legal expertise has resulted in several unique competitive strengths. These competitive advantages include:
| Full-Stack, Comprehensive Solution. We offer an end-to-end solution that is used for both ediscovery (DISCO Ediscovery) and AI-powered legal document review (DISCO Review), giving our customers the flexibility to decide how much of their ediscovery and legal document review process to outsource to us versus handle internally or through law firms and legal services providers. Additionally, because our experts use our solution every day to conduct AI-powered legal document review as part of DISCO Review, we receive continuous, real-time feedback that accelerates our pace of innovation and improves our solution both for our internal users and for our customers. Our cloud-native, AI-powered solution is augmented with deep expertise, consultative professional services and flexible customer support. Our ability to be a single-source provider for our customers and our tight, internal feedback loop enables us to efficiently grow the strategic value of our solution over time. |
| Efficient Product-Led Growth Engine with Powerful Network Effects. We are intensely focused on delivering intuitive, powerful applications that legal professionals can easily adopt and use to improve their day-to-day legal work. Our model has enabled us to build an efficient, usage-based, product-led growth engine that spreads our solution across the legal ecosystem through collaboration and powerful word-of-mouth and facilitates rapid customer adoption and expansion. Additionally, as customers use our solutions on more and more legal matters, we generate more data and lawyer work to power our AI models, which makes them more effective and further increases the value of our solutions to customers. |
| Lawyer-Centric Applications Built by a Unique Combination of Deep Expertise and Continuous Solution Innovation. Our customers live and breathe the law, and so do we. Our expertise in both engineering and law and our unique product design and development process, which we call Law Review infuses legal expertise from in-house experts and from our customers into each stage of product development. This allows us to understand and anticipate what legal professionals need to accelerate and improve their work and design applications that feel natural to them and seamlessly integrate with their everyday workflows. We have built a research and development organization that allows us to systematically and repeatedly design and build product experiences that lawyers and other legal professionals love. This is reflected in our high NPS of 63 as of December 31, 2020. |
| Cloud-Native, Scalable and Secure Solution Built on a High-Performing Application Architecture. Designed to operate on the cloud from the beginning, our solution architecture cannot be easily replicated and offers superior performance, scalability, availability, true multi-tenancy and lower operating costs compared to legacy software providers. We have built an extensible application architecture on top of our solution so that we can reuse solution capabilities, such as our document processing pipeline or search engine, across future applications, accelerating our pace of innovation and reducing the cost of developing new features and applications. For example, DISCO Case Builder uses many of the capabilities originally built for use in DISCO Ediscovery. Our modern cloud solution also enables seamless incorporation of the latest advances in cloud technologies developed by cloud infrastructure providers or in the open-source community to accelerate our own product development. |
| Powerful AI Coupled with Robust Data Management. Our AI models can be used across legal matters and continuously improve as they are exposed to more data and more examples of how lawyers work on |
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that data. Our use of AI coupled with our ability to be a secure, single system of record and engagement for our customers legal data allows legal departments to easily gather, act on, retain and reuse enterprise data for ongoing legal work, all within our solution. This gives us unique access to the data and legal work product that further trains our AI models, which creates a virtuous cycle under which, the greater the adoption of our solution, the better our AI models become; and the better our AI models become, the greater are the benefits to our customers of increasing adoption of our solution. Our solution transforms an organizations legal data from a potential liability into a potential competitive advantage. |
| Designed for the Enterprise. Our solution is designed for enterprise adoption. For example, our solution handles large volumes of legal matters and enterprise data of all kinds, features a robust, role-based permissioning system and supports single sign-on integration. Our solution can be applied to a wide variety of enterprise use cases, including not only litigation, but also for example, internal investigations, merger clearance and compliance. |
| Founder-Led Management Team with Deep Domain Expertise. Our founders are former practicing lawyers who have a deep understanding of the legal industry and our customers. Additionally, of the nine members of our senior leadership team, four are lawyers and two more have previous experience working in the legal industry. These executives include our Chief Executive Officer, Chief Financial Officer, Chief Revenue Officer, Chief Technology Officer, Chief Compliance Officer and Senior Vice President of Professional Services. Our deep familiarity with the day-to-day needs and preferences of lawyers forms the basis for the development of our solution and has enabled us to repeatedly deliver product experiences that lawyers and legal professionals love. |
| Strong Culture Committed to Our Employees, Our Community and the Rule of Law. We foster a culture of innovation, experimentation, acceptance and compassion that extends beyond the workplace. We provide our software free of charge or at deeply discounted rates to legal professionals working on pro bono cases. We have received numerous accolades for our philanthropic pursuits within our communities and beyond. Our goal is to build an organization where people want to spend their entire careers, with programs such DISCO University, where employees can acquire skills to succeed in their current roles and beyond. We believe that our culture is critical to our success and helps us attract, develop and retain the best talent to achieve our long-term vision. |
Our Market Opportunity
Legal services is a massive, growing global industry that we believe is significantly underpenetrated by modern technology solutions. According to Statista, total global legal services spend is forecasted to be $767 billion in 2021 and grow to $846 billion in 2023. Within legal services, DISCO Ediscovery addresses the ediscovery market. According to IDC, the worldwide ediscovery software and services market is forecasted to be $14.7 billion in 2021 and grow to $16.9 billion by 2024.
With the introduction of DISCO Review, we expanded the portion of the total legal services market that we address to include legal document review. We estimate the market for our solution to be approximately $42 billion. To estimate our total market opportunity, we identified the number of companies worldwide across all industries with at least 100 employees, based on certain independent industry data from S&P Global Market Intelligence. We then segmented these companies into four categories based on total number of employees: companies with 100-249 employees, companies with 250-2,499 employees, companies with 2,500-9,999 employees and companies with 10,000 or more employees. We then multiplied the number of companies in each category by the average revenue per corporate customer (excluding law firm and legal services provider customers) in each such cohort in 2020, which we believe represents a customer that has broadly deployed our solution across the enterprise, and then summed the results from each category. We believe our estimated market opportunity will continue to grow as customers expand usage of our solution for more legal matters and adopt more of our offerings for more legal use cases.
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Our Growth Strategies
We are pursuing multiple levers for future growth:
Fuel the DISCO Product-Led Growth Engine
| Maintain and Advance Our Innovation and Brand. We have a strong history of innovation, demonstrated by our DISCO Ediscovery, DISCO Review and DISCO Case Builder applications and have built a research and development process that reliably produces applications and features that lawyers love. We intend to keep combining our deep legal domain expertise and commitment to world-class software engineering to continue delivering features that lawyers love and introducing new applications to address more areas of legal work. |
| Add New Customers. We believe we have a significant opportunity to further grow our customer base. As enterprises continue their digital transformation journeys and the demand for differentiation in the competitive market for legal services increases, we expect more and more companies will struggle with existing legal solutions and ultimately will adopt integrated, easy-to-use solutions like DISCO to improve productivity and legal outcomes. We believe our market leadership and differentiated solution will enable us to efficiently acquire new customers across all channels. As of March 31, 2021, we had 909 customers, increasing from 635 and 825 customers as of December 31, 2019 and 2020, respectively. |
| Increase Usage and Penetration Within Our Existing Customer Base. We have demonstrated our ability to retain and expand our customer relationships, which is underscored by our 122% dollar-based net retention rate as of March 31, 2021. We believe that we will be able to continue expanding customer relationships by increasing customers usage of applications that they already buy from us, selling more of our existing applications to existing customers, and, in the future, introducing additional applications to sell to existing customers. Our long-term product strategy is aimed at building features and applications that address more and more types of legal work so that customers can continue to centralize on our solution as the system of record and engagement for legal. |
Extend our Reach
| Expand Our Sales Coverage and Establish a Digital Sales Channel. We intend to continue to increase our salesforce headcount in strategic locations across the United States and globally. Additionally, we plan to develop a digital, self-service sales channel that can simplify the sales process and enable customers to easily adopt our solution through our website without the need to speak with a sales representative. |
| Expand Internationally. Our market is global and we have a significant opportunity to expand internationally. In 2020, less than 5% of our revenue was generated by customers outside of the United States. |
| Extend and Strengthen Our Channel Partnerships and Integrations. Our partnerships, including with legal services providers and cloud infrastructure providers, assist us in driving awareness and adoption of DISCO and extending our reach. We intend to cultivate and leverage channel partners to grow our market presence, enhance the virality of our solution and drive greater sales efficiency. |
| Expand Our Offering Portfolio. We believe that our technology, and especially our approach to automation and AI, is applicable to more legal work beyond our current offerings. We intend to leverage our technology to introduce further offerings that increase lawyer productivity across more and more areas of legal work over time. |
| Pursue Strategic Acquisitions and Strategic Investments. We intend to selectively pursue acquisitions and strategic investments that we believe can expand the functionality and value of our solution and bring talent to our company. We believe that the combination of our market leadership, deep legal expertise and powerful end-to-end solution gives us an advantage in pursuing select acquisitions. |
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Our Employees and Culture
Great achievements come from aiming great people at big problems. We call our people Discovians. We strive to attract, retain, develop and promote great Discovians across all areas of our business. Diversity, equity and inclusion is a cornerstone of our strategy in this regard: we are committed to making DISCO a place where all people feel welcome and connected regardless of their background. Our aim is to build a company where great people can do the work of their lives and where every Discovian can see the impact that their work has on advancing our mission of using technology to strengthen the rule of law. We believe one of the greatest contributors to satisfaction at work is working with people who are good at their jobs and who are also good human beings. We have focused on building a culture that encourages bold experimentation and innovation and that is rigorous about measuring the results of our innovation so that we can direct investment toward ideas that work and away from ideas that do not. Our human capital resources objectives include, as applicable, identifying, recruiting, retaining, incentivizing and integrating our existing and additional employees. The principal purposes of our equity and other incentive plans are to attract, retain and motivate selected employees, consultants and directors. As of March 31, 2021, we had 336 full-time employees.
We have developed a set of core values that shape our culture and guide the way we work, support each other and our communitie, and serve our customers. We call these core values MAGIC:
| Meaningful impact. We strive to ensure that every employee is connected to our mission and we believe that every employee is capable of driving meaningful impact to our customers and communities. |
| All in. We build bridges across teams and projects and value all opinions, perspectives and ideas no matter who or where they come from. We all work across functions as needed to ensure that we win as a team. |
| Grit and grace. We are resilient and adaptable and capable of quickly changing in response to new problems, ideas or data. We balance our grit with humility and empathy, giving grace and respect to our employees, communities, partners and customers. |
| Innovation. We approach problems with what we call the inventors spirit, the idea that you should not accept the world as it is, but instead seek ways in which it could be made better. We are curious, observe sharply, spot issues and solve problems from the ground up. We debate and strive to create an environment in which the best ideas win. |
| Craft. We are deeply passionate about our craft and believe in the importance of striving for excellence and improvement every day, whether that craft is software engineering, sales or any other aspect of our work. We continuously look for opportunities to become better at what we do. |
An important part of our culture is our commitment to philanthropy, education and the development of Discovians, as demonstrated by four key programs:
| DISCO Cares. We believe that to help is human. DISCO Cares is our philanthropic arm dedicated to working with non-profit partners to help better our community. A Discovian started DISCO Cares as a grassroots effort in 2017 to help neighbors, employees and the community during Hurricane Harvey. DISCO Cares has grown rapidly since then. In 2020, over 51% of our employees and 100% of our executives participated in a DISCO Cares event. DISCO Cares has earned recognition, including: 2020 Ethics in Business Awards (RecognizeGood) - Winner for Mid-Size Business Category; 2020 Austin Gives Generous Business AwardsHonoree for the Employee Engagement Award, 20th; Annual Greater Business AwardsHonoree for Community Relations; and 2020 Code2College IDEA AwardsNominee for Workshop of the year. |
| DISCO University. DISCO University, our centralized employee learning initiative, is one example of our commitment to providing our employees with the resources they need to develop and build fulfilling careers at and after DISCO. All of our employees have on-demand access to over 13,000 |
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easy-to-consume, micro-learning courses that span many areas of professional and technical development, including public speaking, product development, sales training and diversity, equity and inclusion training. In the three months ended March 31, 2021, we had 92% of employees active in DISCO University, with an average of 26 activity completions per active user. DISCO University also provides product certifications to Discovians, our partners and our customers. |
| DISCO for Schools. Through our DISCO for Schools program, we offer free access to our solution for law school and college students, as well as DISCO speakers and educational materials for faculty, to help them learn about the legal process and especially ediscovery and legal document review. We believe DISCO for Schools helps prepare future lawyers and legal professionals for their careers as they enter the legal industry, gives them early familiarity with our solution and helps develop future DISCO champions. |
| DISCO Pro Bono. We offer free or deeply discounted access to our solution for use by nonprofits and in cases where lawyers are representing clients pro bono. We regard this as a contribution to the legal professions efforts to ensure that all people have access to justice. |
Our Technology
Our technology includes legaltech applications like DISCO Ediscovery and DISCO Case Builder, an extensible application architecture that we call the DISCO Application Framework, a platform layer that handles data, search and analytics, and AI that we call the DISCO Platform, as well as our use of cloud and open source technologies developed by third parties and integrated into our offerings, such as elastic, serverless compute:
| Legaltech Applications. User-facing software products like DISCO Ediscovery and DISCO Case Builder. We expect that our technology will give us leverage to build and integrate additional software products over time. |
| DISCO Application Framework. An extensible application framework made up of application components that can be shared across our legaltech applications. Use of this application framework accelerates development and reduces maintenance across our software products. Examples of key components in our application framework include: |
| Document Viewer. An in-browser viewer that provides sub-second rendering of content coming from hundreds of different enterprise data types combined with work product from lawyer review and analytics from the DISCO Platform as well as tools for lawyers to carry out legal work on documents. Our document viewer includes robust support for spreadsheet files, hidden and layered content and transcripts with synced video and combines a sophisticated caching system with just-in-time rendering of content to deliver a scalable, high-performance experience for users. |
| Document Routing Workflow Engine. A workflow automation engine that allows lawyer workflows to be defined and enforced in our products, including routing documents through different workflow stages based on document characteristics, search and analytics. This workflow automation engine automates much of the project management work previously performed using heavy human services and enables dynamic workflows that respond to streams of data coming into our solution on an ongoing basis during the life of legal matters. |
| DISCO Search Language. Robust field-based search language that supports a syntax familiar to lawyers and unifies search across text, metadata, audit events and lawyer work product to enable lawyers to search data based on virtually any attribute. Our search language is easily extensible as we add additional attributes to our data, our search architecture supports performant aggregations that enable visual analytics to help lawyers explore data and our search is highly performant with sub-second search across legal matters that can involve millions or tens of millions of documents and 10s of TB of data. |
| Domain Interconnect. Our domain interconnect decouples systems that access data from systems that own data, making our solution more extensible and easier to scale by allowing |
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system components to access data without knowing details about the system components that own that data. This makes it easier to develop and improve each system component independently because changes can be made to each system component without requiring changes across every other system component. For example, we have used our domain interconnect to be able to add new analytics capabilities that add additional searchable and viewable attributes on documents without then having to update our search or document viewer facilities in order to make these additional attributes accessible through those facilities. |
| DISCO Platform. Scalable, robust and secure system for processing, managing, searching and analyzing billions of files and petabytes of data to support our software products. Our solution includes: |
| Collection. High-speed transfer of enterprise data from enterprise systems of record to the DISCO platform in the cloud. We support web-based upload for small datasets and high-speed upload for large datasets using a proprietary transfer technology that manages traffic flow directly to our secure storage in the cloud. Our high-speed transfer technology leverages presented bandwidth to maximize transfer speed through parallelization, TCP window optimization and accelerated cloud transmission protocols. |
| Document Typing and Processing. Automatic typing of enterprise data followed by routing through processing steps dependent on the type of the data to transform enterprise data in all its variety into a canonical format with searchable attributes that can be used in our applications. Typing and processing is massively parallelized not only across files but also within files, using a map-reduce strategy, where each page is partitioned, independently processed in parallel and reassembled across elastic compute infrastructure. This system also combines multiple instances of the same data, such as multiple copies of the same email collected from different witnesses, into canonical DISCO documents while retaining the underlying instances, which may be required for certain legal workflows. |
| Document Enrichment. Analyzes documents to identify relationships between them that can then be leveraged by our applications. For example, our solution identifies similar documents at different thresholds of similarity, reconstructs email conversations and identifies unique content and identifies semantically related documents. We use graph technologies to allow rapid updates to document relationships as new data is added over the life of legal matters. |
| Store, Explore and Categorize. Highly performant search engine that enables search across document text, metadata, work product applied in our applications, output of analytics and AI systems and audit events. Our solution supports sub-second search while also supporting continuous index and document database updates generated, for example, by audit events such as a lawyer viewing or tagging a document and by our AI and analytics systems such as AI scores being updated on a document based on ongoing lawyer review work on other documents. |
| Format, Package and Export. Per page custom rendering of enterprise data being exported from our solution for use in legal workflows such as production to a counterparty or legal decision maker. This includes the application of stamps and other custom marks on exported data to support legal workflows and the creation of structured load files that contain selected metadata for the data being exported. Like our processing pipeline, our export pipeline is highly parallelized to maximize end-user performance. |
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| DISCO AI. DISCO AI aims to apply the latest AI techniques and technologies, including deep learning and transfer learning, to legal use cases in a way that is highly effective, performant and intuitive to end users. Our AI system trains many models in parallel and is combined with a model scoring system that, at any point in time, promotes the results of the most effective model for use in our applications. Our AI system uses word embeddings to operate on the semantic meaning of words and phrases, respect word ordering and enable AI predictions across languages and also uses document metadata in addition to document text as attributes that can inform AI predictions. For example, our AI system can make connections between documents that refer to the same semantic concept, such as a contract or transaction, but use different words to do so. Applications of DISCO AI include: |
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| Tag Predictions. AI supports fast and efficient document review by training AI models to recognize the documents that legal document reviewers are looking for and surface them from large collections of enterprise data. Tag predictions are easy to use, requiring only that the user turn them on; require limited amounts of input data, with predictions surfaced after as few as 50 examples identified by a human and increasing in accuracy as legal document review continues; continuously updated, using massively parallel GPU-based elastic compute in the cloud; fully integrated into our solution and applications and into user-facing workflows in those applications; robust and scalable to large data volumes; and support simultaneous prediction for multiple tags corresponding to multiple legal issues. |
| Cross-Matter AI. Our solution allows customers and DISCO to curate AI models that are powered by data and legal work product on prior legal matters and then use those AI models on subsequent legal matters to generate AI tag predictions even before any documents have been reviewed in those subsequent legal matters. This means that our AI models become more powerful as more data is loaded into and more legal work is done in our solution, similar to the way in which a human lawyer doing legal document review becomes better at legal document review as the lawyer gains more experience across more documents and more legal matters. Cross-matter AI also allows our customers to embody their expertise in our solution, increasing the ongoing value of our solution the more our customers use it. |
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Our Offerings
All our applications are built on the DISCO platform. Customers can access all applications using a single login and an overall dashboard and administration interface. Key application objects include a matter, which represents a legal matter such as a case, transactional matter or investigation; a review database, which represents enterprise data collected for legal review; and an AI model, each of which learns one or more legal issues and can be used to identify data that relates to that legal issue across different review databases and matters in our solution. Our dashboard and administration interface allows customers to create, view, administer users, matters, and review databases, and curate AI models for use across legal matters, including selecting the data from which the AI models learn.
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DISCO Ediscovery
DISCO Ediscovery is our end-to-end, cloud-native ediscovery application that lawyers and legal professionals use to collect, process, enrich, search, manage, review and produce enterprise data for use in legal matters. Performance is a hallmark of DISCO Ediscovery, from sub-second search and document rendering to fast, parallel processing, enrichment and productions. The key components of DISCO Ediscovery include:
| Task-Based Navigation. DISCO Ediscovery provides a central navigation bar that allows users to access different features of different parts of the ediscovery workflow. The navigation bar is broadly organized in the order of steps for a typical ediscovery workflow. |
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| Collection. DISCO Ediscovery enables high-speed transfer of enterprise data from enterprise IT systems using our High Speed Uploader, an agent installed on the IT system from which data is being collected, as well as in our DISCO Ediscovery application through the browser. |
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| Processing and Enrichment. Once enterprise data is transferred into our solution, DISCO Ediscovery includes a full suite of processing and enrichment functions that prepare the data for lawyer review. These include, for example: unpacking compressed formats; imaging documents; extracting and indexing text and metadata; normalizing time zones; constructing document relationships such as email families, email conversations and groups of similar documents; language identification and translation; removing system files; and identifying and extracting hidden content in documents. Users can also overlay additional or different metadata onto data loaded into DISCO using our overlay feature. |
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| Search. DISCO Ediscovery includes a suite of search tools that help lawyers identify facts and documentary evidence from within the enterprise data loaded into our solution and identify sets of documents that require lawyer review. Our search tools include our search builder, global search bar supporting search syntax familiar to lawyers, search visualization that allows lawyers to visually explore and understand large collections of enterprise data, dynamic search filters that allow lawyers to filter data by a variety of metadata dimensions, saved searches that allow lawyers to collaborate as they explore data sets, search term reports that allow lawyers to experiment with the impact of different search terms on the review population, mass actions that allow users to tag, folder, export and otherwise operate on sets of search results and custom views that allow lawyers to configure different views of search results to expose the information they need for different parts of the ediscovery process. |
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| Manage. DISCO Ediscovery includes a suite of self-service tools that users can use to manage the data in our solution as well as workflow objects such as tags and folders. For example, these tools include management of users, permissions, folders that allow lawyers to organize documents within our solution, tags that allow reviewing lawyers to label documents according to their legal salience, fields that allow reviewing lawyers to add structured data to documents during a review, redaction reasons that facilitate redaction of sensitive or privileged parts of documents before production to a counterparty or legal decision maker and global highlighting that highlights key terms in documents to accelerate review. |
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| Viewer. DISCO Ediscovery includes a robust document viewer that lawyers can use to view enterprise data and then act on it, for example, by tagging documents to identify documents that are legally salient, foldering documents, viewing related documents such as similar documents or documents in the same email conversation, viewing document metadata, redacting documents, adding notes to documents and more. Our viewer supports many types of enterprise data, with specialized tools, for example, for reviewing large spreadsheets. |
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| Review. DISCO Ediscovery provides a full suite of workflow management tools that allow lawyers to organize legal document reviews into review stages, dynamically route documents between stages based on decisions made in earlier stages and the text and metadata of documents and control the organization and grouping of documents within a stage. For each review stage, lawyers can control the decisions that reviewers are asked to make about documents in that stage and the rules that govern those decisions, for example, whether certain tags are required or are mutually exclusive. Additionally, while a review is going on, lawyers can assign reviewers, assign specific batches of documents to reviewers and view real-time metrics that measure the pace, progress and quality of the review. DISCO Ediscovery also includes tools for doing quality control, including identifying reviewers whose decisions are potentially problematic, identifying review decisions that disagree with predictions from our AI models and tracking decisions that are overturned. |
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| Produce. DISCO Ediscovery allows lawyers to produce documents for delivery to the counterparty or legal decision maker; export documents for use in a legal matter, including as exhibits for depositions, motions or trials; prepare privilege logs; and process productions received from counterparties. |
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DISCO Review
DISCO Review is an AI-powered, turnkey application for legal document review. Customers use DISCO Ediscovery to identify a set of documents that require review and prepare a review protocol that describes the legal issues that the customer is looking for in those documents. DISCO Review then conducts a review of the documents in DISCO Ediscovery, using lawyers to train AI models that identify legal issues in documents. The use of DISCO Ediscovery and our heavy reliance on AI models results in greatly increased review productivity compared to a traditional, document-by-document review that does not leverage DISCO Ediscovery or AI models. As a result of this increase in productivity, DISCO Review is able to deliver high-quality document reviews with guaranteed pricing and delivery schedules
Key features of DISCO Review include easy creation of AI models for specific tags that correspond to legal issues or collections of legal issues; the ability to search documents based on scores from these AI models that reflect the likelihood that documents relate to specific legal issues, and to do so in our search builder, using interactive filters or using our search visualization interface; the ability to sort documents by scores from our AI models so that the documents most likely to be legally important are found first, and to do so both on an ad hoc basis and in review stages; the ability to see what tags are recommended or not recommended for particular documents while viewing those documents; the ability to identify documents where tags applied by human lawyers disagree with scores from our AI models, which is useful for doing quality control; and graphical reporting on the pace, progress and quality of reviews in flight.
DISCO Case Builder
DISCO Case Builder is a collaboration offering that enables lawyers to review testamentary evidence, including deposition testimony, transcripts of testimony from court proceedings and witness statements, as well as documents referenced as exhibits in each. Key features of DISCO Case Builder include the ability to search within and across transcripts, the ability to annotate transcripts with lawyer work product, identify evidence in
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transcripts and assess the impact of specific evidence on specific legal issues in the legal matter as well as the impact of witnesses and the ability to export lawyer work product for use in the legal matter and for submission in court, including the ability to export designations of testimony for use at trial. Over time, we intend to expand the functionality of DISCO Case Builder so that it serves as a collaboration offering and system of record and engagement for more and more of the work product that goes into developing a legal matter.
Our Support and Professional Services
The long-term success of our company is based on the satisfaction of our customers. In addition to our DISCO Ediscovery, DISCO Review and DISCO Case Builder offerings, we provide customer support and professional services that deliver deep expertise and personalized support at every stage of the customer relationship to maximize the value customers get from our offerings and position them for success. We have designed our support and professional services to be easily accessible, including directly in our applications. Our support and professional services offerings help to close gaps between what our applications do and the full solution a customer needs, extend a customers team as needed to meet spikes in legal demand and guide customers to best practices for the use of our applications that help customers to realize more value from our applications.
We believe that offering both a differentiated software platform and a full suite of professional services and support distinguishes us from many of our competitors. Many of our software-only competitors do not provide professional services, which means that customers who require professional services must buy a complete solution from a services provider who licenses and then resells the underlying software platform. Additionally, many of our professional services-focused competitors rely on software platforms supplied by others, which limits their ability to use technology to differentiate their offerings and deliver superior results to customers. By offering a full stack solution that includes a differentiated software platform combined with professional services and support, we are able to deliver a tightly integrated, complete solution to our customers. We believe this results in a better customer experience as well as a tighter product innovation feedback loop, as our professional services teams are in-house users of our software platform whose input we use to inform product development.
Our professional services offerings allow us to serve customers regardless of whether customers prefer a fully self-service experience, a full-service experience, or, as is the case for most of our customers, a mix of self-service and full-service, with their consumption of professional services varying based on their legal workload, internal capacity and the nature of specific legal matters. Most of our customers consume little or no professional services because of the level of automation and ease-of-use provided by our software, as well as the ability for all users to have full control rather than just an administrator. However, the availability and sophistication of professional services, if and when needed, is a factor that customers consider in selecting our solution, especially for customers who are used to being heavy users of professional services at one of our competitors.
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Our support and professional services offerings include:
| DISCO Desk. Available to all clients, this team of on-demand product experts assists with technical support and product questions, provides ad-hoc task support and evaluates client needs to prescribe solutions that can drive successful outcomes. |
| DISCO Consulting. Our subject matter experts are available at the beginning of each new legal matter with a consulting session to understand the project scope and deliver a plan to achieve an outcome that addresses the clients needs. These professionals also provide advanced and bespoke matter-specific AI consulting to increase the value that they derive from our technology, as well as help identify opportunities for our customers to expand usage of other DISCO offerings. |
| DISCO Forensics. Our forensics team helps clients collect enterprise data from enterprise IT systems, both on-premise and cloud, as well as from personal devices such as laptops or mobile phones in a forensically defensible manner. These professionals also provide supplemental services like forensic analysis to support broader client ediscovery needs. |
| DISCO Data Operations. Our data operations team helps clients transfer data into our solution and export data out of our solution and helps resolve issues presented by unusual data types and conduct remediation of data such as corrupt files. |
| DISCO Project Management. Our project management team helps customers use our applications successfully, including carrying out tasks for customers in our applications and advising our clients about best practice workflows for accomplishing specific tasks in our applications. Our project managers are DISCO experts who help ensure that our clients are getting as much value from our applications as possible. |
| DISCO University. DISCO University offers on-demand video training and knowledge base content as well as scheduled and on-demand live instruction on the use of our applications as well as best practices for legal work in our applications. |
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Customer stories
Accenture
Situation: Accenture is a global consulting agency with over 500,000 employees worldwide, servicing over 6,000 clients across 120 countries. Prior to 2018, Accenture was managing litigation across a legacy on-premise ediscovery solution and multiple outside counsels. This situation presented many challenges for Accenture, including having to deal with varied, opaque pricing structures across multiple external vendors and outside counsels that frequently resulted in high, unpredictable costs. Additionally, Accenture was billed on data expansion, which made it impossible to predict the ediscovery costs for their legal matters.
Solution: In 2018, Accenture chose to replace their in-house legacy system with our cloud-native DISCO Ediscovery offering. DISCO Ediscovery allows Accenture to process data collected for their litigation matters more quickly and provide their outside counsel with easy access to review documents for relevance and productions. The DISCO solution addresses the latency issues of existing legacy solutions, speeding up reviews exponentially for their outside counsel and saving Accenture unpredictable costs associated with outside counsel hourly billing. On one multi-TB matter alone, Accenture saved over $300,000 by using our DISCO Ediscovery application. In 2020, Accenture expanded usage of our full-stack solution and used DISCO Review on a subpoena response under a fixed fee arrangement. Knowing the review budget ahead of time gave the legal team at Accenture the ability to focus on the matter at hand without continually monitoring review spend and concerns of budget overrun.
DISCO provides us with increased speed to evidence while helping to control our costs with outside counsel. DISCOs ability to commit to a review budget is extremely valuable to us not only because of the obvious immediate cost clarity and the peace of mind that provides, but also the confidence in handing the review over to a team who is familiar with the tool, can help realize the greatest efficiencies and minimize mistakes and rework. Stephen Gage, Accenture Director of eDiscovery.
Kennedys
Situation: Kennedys is a global law firm specializing in litigation and dispute resolution, with 64 offices, associations and co-operations in 23 countries around the world. Kennedys regularly assesses and embraces technology solutions that deliver fast, efficient, and intuitive user experiences to help the firm better serve its clients. In 2018, the firms UK offices started exploring new discovery solutions to ensure they were working with the most advanced and modern technology that would empower them to meet and exceed client expectations most effectively.
Solution: Kennedys didnt have to look far to find a trusted and proven ediscovery provider. In 2017, Kennedys U.S. offices had adopted DISCO Ediscovery for multiple matters and based on our platforms speed, performance, ease of use, and accessibility from any device or location, recommended DISCO to their UK colleagues. Our cloud-based solution required zero up-front capital investment in hardware or changes to existing infrastructure, potentially reducing recurring costs related to staffing, training, and maintenance, and virtually eliminated downtime caused by system outages and upgrades. With this track record, Kennedys UK offices incorporated DISCO Ediscovery into their litigation practice while also adopting DISCO AI to improve the accuracy and speed of legal document review. One example of our successful engagement is when with one matter, DISCO AI enabled them to take 1.4 million documents to production in just four weeks.
Kutak Rock
Situation: Kutak Rock is one the nations leading full-service law firms, with services that span all aspects of business and corporate law, public finance, litigation and intellectual property law. Prior to 2019, Kutaks 500 plus attorneys had complete autonomy over which ediscovery platform they used for their cases, which resulted
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in inconsistent experiences and billing arrangements for their clients. The challenges of Kutaks existing approach were particularly evident in deposition management, where a single case could generate more than 50 different video depositions and transcripts along with hundreds of deposition exhibits.
Solution: In 2019, Kutak deployed DISCO Ediscovery for all of their attorneys. The goal was to provide one modern solution to unify case work and client deliverables across the firm. The lawyer-focused design of DISCO Ediscovery allowed every member of the litigation team, regardless of their prior expertise with ediscovery platforms, to easily search and review relevant documents for all their legal matters. Based on DISCO Ediscoverys success, Kutak adopted DISCO Case Builder in 2020 to transform the firms case management capabilities. Coupled with DISCO Ediscovery, DISCO Case Builder empowered Kutaks attorneys to easily collaborate and streamline the management and utilization of deposition-related content across the entire firm, which resulted in efficiency gains that benefit their clients. Since our initial deployment, Kutak has ingested over 7 TB of data into our solution and successfully has deployed DISCO Ediscovery, DISCO Case Builder and DISCO Review across all of Kutaks offices.
Our partnership with DISCO has provided numerous benefits to our attorneys and clients. Beyond the platforms superior performance, were able to work much more efficiently due to DISCOs intuitive design, and our team has access to DISCOs in-house expertise which is a tremendous value-added benefit to our clients. We are confident that DISCO has helped us find relevant evidence faster, which empowers us to deliver even better results. We think of DISCO as more than just a technology vendor DISCO is a true partner to our team.Anna Berman, Partner, Kutak Rock
Manatt
Situation: Manatt is a multidisciplinary professional services firm with 300 attorneys and more than 100 consulting professionals across 10 offices throughout the U.S. Composed of lawyers, business advisors, consultants and technologists, Manatt provides integrated legal and consulting services to meet the ever-evolving needs of its clients. Breaking the mold of a traditional law firm, Manatt has always been at the forefront of innovation, both in terms of how it delivers client service and in the technology it uses. In line with its rapidly expanding litigation team and capabilities, the firm engaged DISCO in 2015 to further strengthen its ediscovery processes to better support clients with their complex legal issues.
Solution: In 2015, Manatt implemented our cloud-native DISCO Ediscovery offering on a transactional basis. Based on DISCO Ediscoverys ease-of-use, automation capabilities, AI-powered functionality and ability to easily handle larger matters, Manatt expanded to a firm-wide subscription in 2017 to manage their ediscovery operations internally on one solution. Since then, Manatt has adopted DISCO Review to increase the speed, accuracy and quality of their legal reviews and further strengthen its litigation capabilities for their clients.
The DISCO Ediscovery platform empowered our litigation support team to more efficiently support clients needs due to its advanced features, stability, ease of use, responsiveness and predictable pricing. Jim Rosenthal, Director of Litigation Support
Natera
Situation: Natera is the global leader in cell-freeDNA (cfDNA) with a focus on womens health, oncology, and organ health. Their mission is to change the management of disease worldwide by using information gained from a simple blood draw to proactively inform treatment. Natera was in need of a technologically superior solution to its external legacy ediscovery platform, which was burdened by long review times, clunky software, and expensive overall costs.
Solution: DISCO EDiscovery provided Nateras IP litigation practice, during the course of an important and complex matter, with faster and easier access to important information, as well as an opportunity to reduce costs over the long term. As a result of the efficiency and scalability offered by the DISCO EDiscovery, Natera
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decided to adopt DISCO as its preferred solution going forward. In addition to the efficiencies produced by using DISCO Ediscovery, Natera leveraged DISCO Review to build a custom workflow that cut the time to find important documents by as much as one fifth.
We appreciate DISCOs consultative approach to our ediscovery and managed review needs. We have been pleased with the end-to-end service offering and the platforms ease of use, which has resulted in significant time and cost savings. Arka Chatterjee, Senior Intellectual Property Counsel
Perkins Coie
Situation: Perkins Coie is a leading international law firm with more than 1,200 lawyers in 21 offices across the United States and Asia. Their focus is providing high value, strategic solutions and services to the worlds most innovative companies and industry leaders. Perkins Coies E-Discovery Services and Strategy group historically relied on on-premises legacy solutions to support litigation, discovery and case management needs across the firm. Litigators using Perkins Coies systems expressed frustration with increasing costs and slower speeds, with too many clicks and too many people involved in even the most basic tasks. As a result, Perkins Coie was seeking an end-to-end, cloud-based solution that could provide a faster and more intuitive review experience for its lawyers and clients.
Our Solution: In 2019, Perkins Coie chose to partner with DISCO and replace their legacy on-premises ediscovery solution with our DISCO Ediscovery offering. With DISCO Ediscovery, Perkins Coie litigators were able to process data and produce documents in less than a few hours instead of several days. The ease-of-use and speed of our application empowered case teams, who traditionally refused to use ediscovery platforms because they are slow or difficult to use, to proactively request to use DISCO for their legal matters. Based on the success of DISCO Ediscovery for over 100 legal matters in the first year alone, Perkins Coie expanded usage of our solutions and implemented DISCO Case Builder in 2020 to better manage high-demand matters, enable case teams to easily collaborate across multiple offices and significantly reduce time spent on preparing work product. With our solution, Perkins Coie has reported quicker matter go-live times, more predictable matter spend and, most importantly, significantly more efficient and less frustrating experiences for Perkins Coie case teams and clients.
DISCO creates a competitive advantage for Perkins Coie. Not only can we move incredibly quickly when needed, we can ensure our best legal minds are seeing the most important documents as soon as possible. Geoffrey Vance, Chair of E-Discovery Services & StrategyPerkins Coie.
Quarles & Brady
Situation: Quarles & Brady LLP is a multidisciplinary AmLaw 200 legal services provider with approximately 475 attorneys in 10 cities across the United States. Their clients include multinational corporations, educational and research institutions, government agencies, charitable organizations and high-net-worth individuals. Prior to 2017, Quarles & Brady relied on a legacy on-premise software solution to manage ediscovery across their litigation practices. The high maintenance costs and limited functionality of this solution led the firm to explore alternatives, many of which offered improved functionality but limited the firms control over workflow. Such alternatives resulted in substantial processing delays, increased user frustration and an inability to predict when review could begin, all of which threatened to impact the firms bottom line.
Solution: In 2017, Quarles & Brady deployed our cloud-native DISCO Ediscovery offering to accelerate their ediscovery processes, reduce costs and improve the user experience. Our solution allows their attorneys to process data collected for their various litigation matters and access and review documents for relevance and productions in a fraction of the time required by their previous solution. Since the initial deployment in 2017, Quarles & Brady has expanded usage of our solution, with lawyers and paralegals across the firm using DISCO to resolve more than 226 matters over the last three years. With DISCO, Quarles & Brady can find evidence more quickly and remain focused on client work.
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DISCO is a best-in-class discovery platform and their team of professionals are true partners in helping us leverage technology to simplify the discovery process and remain focused on our client work. Patrick Murphy, Partner
Rutan & Tucker
Situation: Rutan & Tucker is one of Californias largest full-service law firms with a significant presence in Orange County, Silicon Valley and San Francisco. Rutan was seeking a technology partner to help modernize and simplify their discovery operations for their more than 150 attorneys.
Solution: Starting in 2016, Rutan deployed DISCO Ediscovery on a transactional basis. After experiencing the speed, lawyer-focused design, AI-driven automation, and analytics tools DISCO Ediscovery delivered to its litigation practice, Rutan upgraded and adopted DISCO Ediscovery firmwide in 2017. In addition to using DISCO Ediscovery internally, Rutan has also partnered with our DISCO Review team to develop innovative legal document reviews that generate faster, cost-effective resolutions of legal matters for their clients. With DISCO, Rutan has the flexibility to support review within the firm or in partnership with DISCO, offering a unique solution that sets the firm apart and puts them fully in control of their legal work.
DISCO is designed for lawyers, making it easy for our team to embrace their innovative solutions to realize faster resolutions and better outcomes of our legal matters. I value our unique and trusted partnership. Kyre Stucklin, Practice Support Manager
Sales and Marketing
We sell our solution through a direct sales force which is organized based on the stages of our sales motion. Our sales organization includes sales development representatives, field sales, inside sales, solution architects and our customer success team. Our sales development representatives are responsible for finding and initiating contact with prospective customers, booking initial meetings with our sales team and demonstrating our applications. Our field and inside sales teams are responsible for converting interested prospects into DISCO customers and then expanding our relationship with existing customers by increasing their usage of our applications and cross-selling additional applications. Our solution architects provide deep expertise in our technology and are responsible for providing current and prospective clients with technical and workflow sales consulting. Once a customer is signed, our customer success team is responsible for onboarding our customers and driving user adoption in each customer organization. Our customer success professionals maintain ongoing relationships with users at our customers and partner with our sales team to secure referrals and capture upsell opportunities.
In addition to our direct sales force, we also sell through legal services providers who buy our applications and resell them to their own customers, often in combination with professional services. The customers of our customers who are legal services providers are generally legal departments and law firms. Some of our law firm customers additionally buy our applications for the purpose of reselling them to their clients, who are legal departments, often in combination with professional services and legal services.
One particular area of focus of our sales team is the conversion of users into customers. Our typical entry into an organization is through lawyers at corporate legal departments and law firms. These or other customers also use our applications to collaborate with other legal industry participants who may or may not be our customers. For example, a legal department may add users who work at law firms that are not yet our customers. We aim to proactively secure referrals to other prospective customers as well as converting users of our solution who are not yet customers.
Our marketing activities are focused on building our brand reputation, increasing awareness of our solution among potential customers, converting users into customers and otherwise driving customer demand. We reach potential customers and generate leads for our sales team through a combination of customer prospecting, content
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marketing, social media, digital marketing, public relations, event marketing and sponsorships. We also incorporate lead generation directly into our product experience, with buttons that enable our customers to easily increase their usage, add new applications and engage our experts for additional support. Additionally, we believe we have an attractive opportunity to develop a more robust digital sales channel that can further facilitate efficient, self-service adoption by our customers.
As of March 31, 2021, we had 134 professionals in our sales and marketing organization.
Research and Development
Our research and development organization is responsible for the design, development, testing and delivery of our cloud-native solution and platform. We believe that our substantial and continued investment in research and development, including hiring top engineering talent, in conjunction with our focus on having lawyers and legal professionals involved in every aspect of the product development process is critical to expanding our leadership position and developing applications that seem magical to our users. Additionally, our product development process and roadmap are informed by the continuous feedback we receive from Discovians who use our software as part of our DISCO Review offering and in our support and professional services organization.
A centerpiece of our product development process is a product review process that we call Law Review. Law Review ensures that each feature or product we develop is reviewed by legal domain experts at five formal reviews between idea and successful deployment to our customers. At these formal reviews, we assess whether we understand the problem we are solving for our users, whether our designs are appropriate and intuitive, whether our software built prior to release is appropriate and intuitive, whether our go-to-market and customer enablement plans are likely to drive customer adoption and customer value and finally whether a product release has actually resulted in customer satisfaction and real customer value. Our Law Review process has enabled us to scale our research and development organization so that we are able to reliably deliver product experiences that we believe we are perceived as magical to lawyers and legal professionals.
In addition to developing and extending the features and functionality of our applications, our research and development organization works to ensure that our underlying technology architecture remains state of the art and supports our continued growth. The focus of these efforts is increased performance, scalability, robustness and increased efficiency in our use of cloud infrastructure and compute resources. Our research and development team also leverages advances in cloud technology, including new applications from cloud infrastructure providers, as well as advances in open source software. Our solution investment includes our AI lab, which works to incorporate advances in AI techniques, such as transfer learning, into our applications as well as to optimize the operation of the AI models that power our business and to find new opportunities for the application of AI in our solution.
Our research and development team is based in our Austin, Texas headquarters. As of March 31, 2021, we had 93 employees in our research and development organization.
Our Competition
Our market is rapidly evolving and highly competitive. Almost all potential customers have existing solutions for ediscovery and legal document review in place, which typically consists of a mix of on-premise point solutions and human professional services. To win new customers, we must displace these incumbent solutions.
We believe our competitors fall into several categories:
| Legal services providers. Competitors in this category include large dedicated legal services providers such as Consilio LLC, Epiq Systems, Inc. and KLDiscovery Inc., the legal services divisions of large |
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professional services firms such as Deloitte & Touche LLP, Ernst and Young LLP, KPMG LLP and PricewaterhouseCoopers LLP and a large number of smaller regional and local legal services providers. Certain law firms also provide ediscovery solutions and legal document review services to their clients that may compete with our solutions for discrete matters. |
| Legacy on-premise software. Competitors in this category include Nuix Limited, Open Text Corporation, Relativity ODA LLC, or Relativity, RELX PLC and Thomson Reuters Corporation, as well as many other smaller software companies. |
| Cloud software. Competitors in this category include Everlaw, Inc., Logik Systems, Inc. (d.b.a. Logikcull), Relativity through its RelativityOne product offering and Reveal Data Corporation as well as many other smaller software companies. |
In addition, we expect to expand our solution to address additional areas of the legal function and we will likely face further competition from existing companies in such areas.
We believe the principal competitive factors in our market include the following:
| level of user satisfaction; |
| ease of deployment, implementation and use; |
| scalability, reliability, security and performance; |
| breadth of offering; |
| solution features and capabilities; |
| accuracy, quality and speed of review; |
| ability to connect multiple stakeholders in a cloud-based solution; |
| quality and use of AI; |
| comprehensiveness, quality and availability of support and professional services; |
| brand awareness and reputation; and |
| cost and predictability of costs. |
We believe we generally compete favorably with our competitors on the basis of these factors. However, certain of our competitors may have greater name recognition, longer operating histories, more established customers, substantially greater financial and technical resources and larger sales and marketing budgets than we do.
Intellectual Property
We rely on certain intellectual property rights, including patents, copyrights, trademarks and trade secrets, as well as contractual protections to establish and protect our proprietary rights with respect to employees, contractors, customers and partners. However, we believe that factors such as the technological and creative skills of our personnel, development of new services, features and functionality and frequent enhancements to our solution are at least as essential to establishing and maintaining our technology leadership position.
We have certain registrations (and applications for registration) for intellectual property rights. As of March 31, 2021, we held two U.S. granted patents and six pending U.S. patent applications. Our two issued US patents are scheduled to expire on June 28, 2037. As of March 31, 2021, we held one registered U.S. trademark. As of March 31, 2021, we held four domain names in the United States and in foreign jurisdictions. The existence of a pending application is not an assurance that it will issue or lead to a registration.
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The terms of individual patents extend for varying periods of time, depending upon the date of filing of the patent application, the date of patent issuance and the legal term of patents in the countries in which they are obtained. Generally, patents issued for applications filed in the United States are effective for 20 years from the earliest effective filing date of a non-provisional patent application. However, the actual protection afforded by a patent varies on a country-to-country basis and depends upon many factors, including the type of patent, the scope of its coverage, the availability of legal remedies in a particular country and the validity and enforceability of the patent.
We also take certain technical, administrative and physical measures to control access to and use of our proprietary technology and other confidential information See the section titled Risk FactorsRisks Related to Our Intellectual Property for a description of risks related to our intellectual property.
Government Regulation
Our business is and will continue to be subject to extensive and evolving U.S. federal, state and foreign laws, rules and regulations, including the rules and regulations of the organizations and other authorities governing the legal profession in the jurisdictions in which we or our customers operate. These laws, rules and regulations can vary significantly from jurisdiction to jurisdiction. For example, in the United States, each state has adopted laws, regulations and codes of ethics that provide for the licensure of attorneys, generally grant licensed attorneys the exclusive right to practice law in that state and place restrictions upon the activities of licensed lawyers. The practice of law other than by an attorney entitled to practice in the jurisdiction is generally referred to as the unauthorized practice of law. As a company, we are not authorized to practice law. In the United States, we may not provide legal advice to our clients, primarily because we do not meet the ethical and regulatory requirements, present in nearly every U.S. jurisdiction, of being exclusively owned by licensed attorneys.
Our solution includes alternatives to certain traditional methods of legal services and we therefore may face claims that we are engaged in the unauthorized practice of law. Despite our belief that our operations are not subject to, or are otherwise compliant with, the requirements of the jurisdictions in which we or our customers operate, regulators or other authorities of such jurisdictions could deem that we, our employees or our customers are engaged in the unauthorized practice of law or otherwise determine that we are subject to the relevant rules and regulations governing the conduct of attorneys. In such circumstances, regulators may enjoin our operations, subject us to rules governing conflicts of interests, require registration, seek to impose punitive fines or sanctions or take other disciplinary actions against us, our employees or our customers, any of which may inhibit our ability to do business in those jurisdictions, adversely impact our reputation, increase our operating expenses and adversely affect our financial condition and results of operations.
Laws, regulations, rules and standards in many relevant jurisdictions apply broadly to the collection, use, retention, security, disclosure, transfer and other processing of personal data, which impose significant compliance obligations. In the United States, we are subject to data security and privacy rules and regulations promulgated under a variety of sources, including the authority of the Federal Trade Commission, the Electronic Communications Privacy Act, the Computer Fraud and Abuse Act, the California Consumer Privacy Act of 2018, or CCPA, and other state and federal laws relating to privacy and data security. The CCPA requires covered businesses to provide new disclosures to California residents and to provide them new ways to opt-out of the sale of personal information and provides a private right of action and statutory damages for data breaches. Other jurisdictions in the United States are beginning to propose laws similar to the CCPA. Other new legislation proposed or enacted in California (including the California Privacy Rights Act or CPRA), Illinois, Virginia, Massachusetts, Nevada, New Jersey, New York, Rhode Island, Washington and other states imposes, or has the potential to impose, additional obligations on companies that collect, store, use, retain, disclose, transfer and otherwise process confidential, sensitive and personal information and will continue to shape the data privacy environment nationally. State laws are changing rapidly and there is discussion in Congress of a new federal data protection and privacy law to which we would become subject if it is enacted.
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As a result of our international operations, we must comply with a multitude of data security and privacy laws that may vary significantly from jurisdiction to jurisdiction. Virtually every jurisdiction in which we operate has established or is in the process of establishing data security and privacy legal frameworks with which we or our customers must comply. Our failure to comply with the laws of each jurisdiction may subject us to significant penalties. For example, the data protection landscape in Europe, including with respect to cross-border data transfers, is currently unstable and other countries outside of Europe have enacted or are considering enacting cross-border data transfer restrictions and laws requiring local data residency.
For example, in the European Union, the processing of personal data is governed by the provisions of the General Data Protection Regulation, or GDPR, which imposes stringent data privacy and security requirements. In particular, the GDPR imposes several requirements relating to ensuring there is a lawful basis for processing personal data, extends the rights of individuals to whom the personal data relates, materially expands the definition of personal data, requires additional disclosures about how personal data is to be used, imposes limitations on retention of personal data, creates mandatory data breach notification requirements in certain circumstances and establishes onerous new obligations on service providers who process personal data simply on behalf of others. The GDPR also restricts transfers of personal data from the EEA and the United Kingdom, to the United States and most other countries unless the parties to the transfer have implemented specific safeguards to protect the transferred personal data. Certain previously available safeguards have been invalidated and reliance on alternative safeguards may be complex or not possible in certain circumstances.
For a discussion of the various risks we face from regulation and compliance matters, see the sections titled Risk FactorsRisks Related to Information Technology and Cybersecurity and Risk FactorsRisks Related to Litigation, Regulatory Compliance and Governmental Matters.
Facilities
Our corporate headquarters is located in Austin, Texas, where we lease approximately 49,000 square feet pursuant to a lease that expires in October 2022. We also have an office located in London, United Kingdom. These offices are leased, and we do not own any real property. We may lease or purchase additional space as needed to accommodate our needs.
Legal Proceedings
From time to time, we are involved in various legal proceedings arising from the normal course of business activities. We are not presently a party to any litigation the outcome of which, we believe, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, cash flows or financial condition. Defending such proceedings is costly and can impose a significant burden on management and employees. The results of any current or future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
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The following table sets forth information for our executive officers and directors as of June 30, 2021:
Name |
Age | Position | ||||
Executive Officers: |
||||||
Kiwi Camara |
37 | Co-Founder, Chief Executive Officer and Director | ||||
Michael Lafair |
56 | Chief Financial Officer | ||||
Sean Nathaniel |
44 | Chief Operating Officer | ||||
Andrew Shimek |
48 | Chief Revenue Officer | ||||
Keith Zoellner |
58 | Chief Technology Officer | ||||
Key Employees: |
||||||
Melanie Antoon |
43 | Senior Vice President, Professional Services | ||||
Melissa Frugé |
49 | Senior Vice President, General Counsel | ||||
Kent Radford |
50 | Co-Founder and Chief Ethics and Compliance Officer | ||||
Kevin Smith |
43 | Chief Product Officer | ||||
Aaron Trull |
43 | Chief Human Resources Officer | ||||
Non-Employee Directors: |
||||||
Krishna Srinivasan |
48 | Chair of the Board of Directors and Director | ||||
Tyson Baber |
42 | Director | ||||
Susan L. Blount |
63 | Director | ||||
Colette Pierce Burnette, Ed.D. |
63 | Director | ||||
Aaron Clark |
39 | Director | ||||
Robert P. Goodman |
61 | Director | ||||
Scott Hill |
53 | Director | ||||
James Offerdahl |
64 | Director |
Executive Officers
Kiwi Camara co-founded our company in December 2013 and has served as our Chief Executive Officer and a member of our board of directors since that time. Mr. Camara holds a B.S. from Hawaii Pacific University and a J.D. from Harvard Law School. We believe that Mr. Camara is qualified to serve on our board of directors due to his experience building and leading our business and his insight into corporate matters as our Chief Executive Officer.
Michael Lafair has served as our Chief Financial Officer since January 2018. Before joining our company, Mr. Lafair served as the Chief Financial Officer of Offers.com from November 2012 until its acquisition by Ziff Davis, LLC in December 2015. Following the acquisition, Mr. Lafair served as Global Head of Finance, Ziff Davis B2B until January 2018. Prior to Offers.com, Mr. Lafair served as Chief Financial Officer and General Counsel of All Web Leads, Inc., as well as Vice President and General Counsel of Interlogix, Inc. Mr. Lafair earlier in his career practiced corporate law at Morgan, Lewis & Bockius LLP. Mr. Lafair holds a Bachelor of Science in Economics with concentrations in Accounting and Economics from The Wharton School of the University of Pennsylvania and a J.D. from Temple University School of Law.
Sean Nathaniel has served as our Chief Operating Officer since January 2020. Prior to joining us, Mr. Nathaniel served as Chief Technology Officer of Upland Software, Inc., where he held various roles beginning in May 2013. Mr. Nathaniel joined Upland following its acquisition of FileBound Solutions, Inc., where Mr. Nathaniel served as Chief Information Officer from February 2007 to May 2013. From February 2000 to February 2007, Mr. Nathaniel served in various positions at GiftCertificates.com, most recently as Director of Technology. Mr. Nathaniel holds a B.A. in business administration from Northwestern College and an M.B.A. from the University of Nebraska.
Andrew Shimek has served as our Chief Revenue Officer since January 2018. Prior to joining us, Mr. Shimek served as President and Chief Operating Officer of Neota Logic Inc. from January 2017 to January
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2018. Prior to this, Mr. Shimek held various leadership positions at Epiq Systems, Inc. from April 2008 to December 2016, most recently serving as President of Legal Services and Electronic Discovery. Earlier in his career, from May 1999 to May 2008, Mr. Shimek held various positions at LexisNexis, most recently serving as National Director, Corporate Markets at LexisNexiss Applied Discovery division. Mr. Shimek started his career practicing law at Gray, Plant, Mooty, Mooty & Bennett, P.A. Mr. Shimek holds a B.A. in English and business administration from the University of St. Thomas and a J.D. from the University of Minnesota Law School.
Keith Zoellner has served as our Chief Technology Officer since November 2015, after first joining us as our VP, Engineering and Product Development in February 2015. Prior to joining us, Mr. Zoellner served as Chief Technology Officer and VP of Product Development at Spredfast, Inc. from 2011 to 2015. Earlier in his career, Mr. Zoellner served as Chief Technology Officer at various other information technology companies, including StoredIQ, Mshow.com, Ambac Connect and Commerce Direct International. Mr. Zoellner holds a B.S. in management information systems from the University of Missouri-St. Louis.
Key Employees
Melanie Antoon has served as our Senior Vice President, Professional Services since January 2021, after first joining us as our VP, Professional Services in November 2019. Prior to joining us, Ms. Antoon served as SVP, U.S. Operations at Inventus, LLC from August 2017 to November 2019, after first joining as its SVP, Discovery Solutions in April 2015. Prior to this, Ms. Antoon was Director of Hosting at Huron Consulting and VP, Client Services at Catalyst. Ms. Antoon holds a B.A. in psychology and womens studies from the University of Wisconsin-Madison and an M.S. in computer science from DePaul University.
Melissa Frugé has served as our Senior Vice President, General Counsel since May 2021. Before joining our company, Ms. Frugé served as the Chief Legal Officer and Executive Sponsor of Diversity and Inclusion at FinancialForce.com, Inc. from February 2020 until May 2021. Prior to that position Ms. Frugé was the Vice President of Legal at Oravel Stays Private Ltd. (d/b/a OYO) from August 2019 until February 2020. Ms. Frugé served as General Counsel of Brandless, Inc. from October 2018 until August 2019. Prior to Brandless, Ms. Frugé was the Chief Legal Officer of Khoros, LLC (f/k/a Spredfast, Inc.) from March 2016 to October 2018. From September 2009 to March 2016, Ms. Frugé was the General Counsel and Corporate Secretary of HomeAway.com, Inc. Ms. Frugé holds a B.A. in political science from the University of Southern California and a J.D. from Santa Clara University School of Law.
Kent Radford co-founded our company in December 2013 and has held various roles since that time, including his current position as our Chief Ethics and Compliance Officer. Mr. Radford was previously presiding partner at Camara and Sibley LLP. Earlier in his career, he practiced law at Vinson & Elkins LLP and helped found the Houston offices of Hogan Lovells US LLP and Pillsbury Winthrop Shaw Pittman LLP. Mr. Radford holds a B.S. in communications from West Texas A&M University, a M.A. in communications from the University of New Mexico and a J.D. from the University of Texas School of Law.
Kevin Smith has served as our Chief Product Officer since April 2021. Prior to joining us, Mr. Smith served as SVP, Portfolio Strategy and Operations for Carbon Black, Inc. (subsequently acquired by VMware, Inc.) from August 2018 until September 2020. Before this, Mr. Smith held various positions at CA Technologies from May 2011 to July 2018, most recently serving as VP, Business Unit Strategy for the Agile Management Division. Mr. Smith holds a B.B.A. from the College of William & Mary and an M.B.A. from the Tuck School of Business at Dartmouth College.
Aaron Trull has served as our Chief Human Resources Officer since December 2020, after first joining us as our VP, Human Resources in January 2019. Prior to joining us, Mr. Trull held various positions at Bazaarvoice, Inc. from January 2013 to January 2019, last serving as VP, Compensation and HR Operations. Before this, Mr. Trull spent more than a decade at technology leaders including Advanced Micro Devices, Inc., The Hewlett-Packard Company and Dell, Inc. after starting his career at Ernst & Young LLP. Mr. Trull holds a
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B.A. in business economics from the University of Texas at Austin and an M.B.A. from the McCombs School of Business at the University of Texas at Austin.
Non-Employee Directors
Krishna Srinivasan has served as a member of our board of directors since December 2013 and as chair of the board of directors since May 2021. Mr. Srinivasan is a Founding Partner of LiveOak Venture Partners, which he co-founded in January 2012. Prior to founding LiveOak Venture Partners, Mr. Srinivasan was a Partner at Austin Ventures from 2000 to 2010. Earlier in his career, he also worked at Motorola and SEMATECH. Mr. Srinivasan is or has been a member of the board of directors of numerous other portfolio companies of LiveOak Ventures Partners in the technology space. Mr. Srinivasan is also Chairman of the Board for The Miracle Foundation, a global non-profit organization that utilizes technology and proprietary best-practices to help orphans and vulnerable children achieve their full potential. Mr. Srinivasan holds a B.Tech. in mechanical engineering from the Indian Institute of Technology, a M.S. in operations research from the University of Texas at Austin and an M.B.A. from The Wharton School of the University of Pennsylvania. We believe that Mr. Srinivasan is qualified to serve as a member of our board of directors because of his extensive experience with technology companies in our industry and his service on numerous private company boards.
Tyson Baber has served as a member of our board of directors since January 2019. Mr. Baber is a Lead Investor at Georgian Partners, a position he has held since September 2014. Prior to such time, Mr. Baber was an M&A Business Development Executive at IBM. Mr. Baber currently serves on the boards of directors of various portfolio companies of Georgian Partners. Mr. Baber holds an M.B.A. in international business from the University of North Carolina Kenan-Flagler Business School and a J.D. from the University of North Carolina School of Law. We believe that Mr. Baber is qualified to serve as a member of our board of directors because of his extensive experience with technology companies in our industry and his service on various private company boards.
Susan L. Blount has served as a member of our board of directors since April 2021. Ms. Blount currently serves as an adjunct professor at the University of Texas School of Law, a position she has held since January 2016. From 1985 to 2015, Ms. Blount held various roles in the legal department at Prudential Financial, Inc., including serving as Senior and then Executive Vice President and General Counsel beginning in May 2005. She also worked directly with the board of directors of Prudential from 1995 to 2015. Since January 2019, Ms. Blount has served on the board of directors of Cavco Industries Inc. Ms. Blount is a founding member of the Center for Women in Law at the University of Texas School of Law, where she also served as Interim Executive Director from March 2019 to January 2020. Ms. Blount holds a B.A. in history from the University of Texas at Austin and a J.D. from the University of Texas School of Law. We believe that Ms. Blount is qualified to serve as a member of our board of directors because of her significant experience in public company strategy, legal and risk management.
Colette Pierce Burnette, Ed.D. has served as a member of our board of directors since April 2021. Dr. Burnette is the President of Huston-Tillotson University in Austin, Texas, a position she has held since July 2015. Dr. Burnette previously served as interim President at Pierce College in Puyallup, Washington, as well as serving in several roles at Central State University in Wilberforce, Ohio, last serving as its Vice President for Administration and Chief Financial Officer. Dr. Burnette is a leader of the Austin community, serving as co-chair of the Mayor of Austins Task Force on Institutional Racism and Systemic Inequities, Board Chair of Leadership Austin and Treasurer of the Independent Colleges and Universities of Texas, along with several other local boards and committees. Dr. Burnette holds a B.S. in industrial and systems engineering from The Ohio State University, an M.S. in administration from Georgia College and State University and an Ed.D. from the University of Pennsylvania. Dr. Burnette is also a graduate of the Harvard University Graduate School of Educations Management Development Program. We believe that Dr. Burnette is qualified to serve as a member of our board of directors because of her extensive leadership experience in the education sector and her demonstrated commitment to public service.
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Aaron Clark has served as a member of our board of directors since August 2016. Mr. Clark is a Managing Director of The Stephens Group, LLC, where he has been employed since its founding in 2006. Mr. Clark previously served on the board of directors of Bear State Financial, Inc., serving from 2011 until the companys acquisition in 2018. In addition, Mr. Clark currently serves on the boards of directors of various portfolio companies of The Stephens Group, LLC. Mr. Clark holds a B.S. in finance from the University of Arkansas at Fayetteville. We believe that Mr. Clark is qualified to serve as a member of our board of directors because of his extensive experience with technology companies in our industry, his service on private company boards and the historical knowledge and continuity he brings to our board of directors.
Robert P. Goodman has served as a member of our board of directors since November 2014. Mr. Goodman is a Partner at Bessemer Venture Partners, a venture capital firm which he joined in 1998. Bessemer Venture Partners VIII L.P. and Bessemer Venture Partners VIII Institutional L.P. are affiliated investment funds of Bessemer Venture Partners. Prior to joining Bessemer Venture Partners, Mr. Goodman founded and served as the Chief Executive Officer of three privately held telecommunications companies. Since February 2017, Mr. Goodman has served on the board of directors of ACV Auctions Inc. and he previously served on the board of directors of Blue Apron Holdings from November 2015 to December 2019. Additionally, Mr. Goodman is or has been a member of the boards of directors of numerous other portfolio companies of Bessemer Venture Partners in the areas of software, mobile and business-to-business marketplace. Mr. Goodman holds a B.A. in Latin American studies from Brown University and an M.B.A. from Columbia University. We believe that Mr. Goodman is qualified to serve as a member of our board of directors due to his experience in working with entrepreneurial companies, particularly technology companies, and his experience as a director of both public and private companies.
Scott Hill has served as a member of our board of directors since June 2021. Mr. Hill is currently an advisor to the Chief Executive Officer and previously served as the Chief Financial Officer of Intercontinental Exchange, Inc. from May 2007 to May 2021. Before that, Mr. Hill was an international finance executive for International Business Machines Corporation from 1991 to 2007. Mr. Hill currently serves on the board of directors of VVC Exploration Corporation, a position he has held since August 2017. Mr. Hill earned his B.B.A in finance from the University of Texas at Austin and his M.B.A. from New York University. We believe that Mr. Hill is qualified to serve as a member of our board of directors because of his financial expertise and his extensive management experience.
James Offerdahl has served as a member of our board of directors since August 2018. Mr. Offerdahl served as the Chief Financial Officer of Bazaarvoice, Inc. from January 2013 until its acquisition in February 2018. Prior to this, he served as the Chief Financial Officer and Vice President of Administration of Convio, Inc. from February 2005 until its acquisition in May 2012. Earlier in his career, Mr. Offerdahl held executive level positions at various other companies, including as Chief Executive Officer of Traq-Wireless, Inc., Chief Operating Officer and Chief Financial Officer of Pervasive Software, Inc. and Chief Financial Officer of Tivoli Systems, Inc. Since January 2011, Mr. Offerdahl has served on the board of directors of Q2 Holdings, Inc., where he also serves as chair of the companys audit committee. He also serves and has served on the boards of directors of several private companies. Mr. Offerdahl holds a B.S. in accounting from Illinois State University and an M.B.A. in management and finance from the University of Texas at Austin. We believe that Mr. Offerdahl is qualified to serve as a member of our board of directors because of his financial expertise and his extensive experience as an executive and director of various public and private companies.
Family Relationships
There are no family relationships among any of the directors or executive officers.
Composition of Our Board of Directors
Our business and affairs are managed under the direction of our board of directors. We currently have nine directors. Certain of our directors currently serve on the board of directors pursuant to the voting provisions of a
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stockholders agreement between us and several of our stockholders. The voting provisions of our stockholders agreement will terminate upon the completion of this offering, after which there will be no further contractual obligations regarding the election or designation of our directors. Our current directors will continue to serve as directors until their resignation, removal or successor is duly elected.
Our board of directors may establish the authorized number of directors from time to time by resolution. In accordance with our amended and restated certificate of incorporation that will be in effect upon the completion of this offering, immediately after this offering, our board of directors will be divided into three classes with staggered three-year terms. At each annual meeting of stockholders, the successors to directors whose terms then expire will be elected to serve from the time of election and qualification until the third annual meeting following election. Our directors will be divided among the three classes as follows:
| the Class I directors will be Tyson Baber, Kiwi Camara and Robert P. Goodman, whose terms will expire at the first annual meeting of stockholders to be held following the completion of this offering; |
| the Class II directors will be Colette Pierce Burnette, Aaron Clark and James Offerdahl, whose terms will expire at the second annual meeting of stockholders to be held following the completion of this offering; and |
| the Class III directors will be Susan L. Blount, Scott Hill and Krishna Srinivasan, whose terms will expire at the third annual meeting of stockholders to be held following the completion of this offering. |
We expect that any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one third of the directors. The division of our board of directors into three classes with staggered three-year terms may delay or prevent a change of our management or a change in control.
Director Independence
Our board of directors has undertaken a review of the independence of each director. Based on information provided by each director concerning her or his background, employment and affiliations, our board of directors has determined none of our directors, other than Mr. Camara, has any relationships that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is independent as that term is defined under the listing standards. In making these determinations, our board of directors considered the current and prior relationships that each non-employee director has with our company and all other facts and circumstances our board of directors deemed relevant in determining their independence, including the beneficial ownership of our shares by each non-employee director and the transactions described in the section titled Certain Relationships and Related Party Transactions.
Committees of Our Board of Directors
Our board of directors has established an audit committee, a compensation committee and a nominating and corporate governance committee. The composition and responsibilities of each of the committees of our board of directors are described below. Members serve on these committees until their resignation or until otherwise determined by our board of directors. Our board of directors may establish other committees as it deems necessary or appropriate from time to time.
Audit Committee
Our audit committee consists of Tyson Baber, Susan L. Blount, Scott Hill and James Offerdahl. Our board of directors has determined that each member satisfies the independence requirements under listing standards and Rule 10A-3(b)(1) of the Exchange Act. The chair of our audit committee is James Offerdahl, who our board of directors has determined is an audit committee financial expert within the meaning of SEC regulations. Each member of our audit committee can read and understand fundamental financial statements in
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accordance with applicable requirements. In arriving at these determinations, our board of directors has examined each audit committee members scope of experience and the nature of their employment in the corporate finance sector.
The primary purpose of the audit committee is to discharge the responsibilities of our board of directors with respect to our corporate accounting and financial reporting processes, systems of internal control and financial statement audits and to oversee our independent registered public accounting firm. Specific responsibilities of our audit committee include:
| helping our board of directors oversee our corporate accounting and financial reporting processes; |
| managing the selection, engagement, qualifications, independence and performance of a qualified firm to serve as the independent registered public accounting firm to audit our financial statements; |
| discussing the scope and results of the audit with the independent registered public accounting firm and reviewing, with management and the independent accountants, our interim and year-end operating results; |
| developing procedures for employees to submit concerns anonymously about questionable accounting or audit matters; |
| reviewing related person transactions; |
| obtaining and reviewing a report by the independent registered public accounting firm at least annually that describes our internal quality control procedures, any material issues with such procedures and any steps taken to deal with such issues when required by applicable law; and |
| approving or, as permitted, pre-approving, audit and permissible non-audit services to be performed by the independent registered public accounting firm. |
Our audit committee will operate under a written charter, to be effective prior to the completion of this offering, that satisfies the applicable listing standards of .
Compensation Committee
Our compensation committee consists of Scott Hill, Robert P. Goodman and Krishna Srinivasan. The chair of our compensation committee is Scott Hill. Our board of directors has determined that each member is independent under the listing standards and a non-employee director as defined in Rule 16b-3 promulgated under the Exchange Act.
The primary purpose of our compensation committee is to discharge the responsibilities of our board of directors in overseeing our compensation policies, plans and programs and to review and determine the compensation to be paid to our executive officers, directors and other senior management, as appropriate. Specific responsibilities of our compensation committee include:
| reviewing and approving the compensation of our chief executive officer, other executive officers and senior management; |
| reviewing, evaluating and recommending to our board of directors succession plans for our executive officers; |
| reviewing and recommending to our board of directors the compensation paid to our directors; |
| administering our equity incentive plans and other benefit programs; |
| reviewing, adopting, amending and terminating incentive compensation and equity plans, severance agreements, profit sharing plans, bonus plans, change-of-control protections and any other compensatory arrangements for our executive officers and other senior management; and |
| reviewing and establishing general policies relating to compensation and benefits of our employees, including our overall compensation philosophy. |
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Our compensation committee will operate under a written charter, to be effective prior to the completion of this offering, that satisfies the applicable listing standards of .
Nominating and Corporate Governance Committee
Our nominating and corporate governance committee consists of Susan L. Blount, Colette Pierce Burnette, Aaron Clark and Krishna Srinivasan. The chair of our nominating and corporate governance committee is Susan L. Blount. Our board of directors has determined that each member of the nominating and corporate governance committee is independent under the listing standards.
Specific responsibilities of our nominating and corporate governance committee will include:
| identifying and evaluating candidates, including the nomination of incumbent directors for reelection and nominees recommended by stockholders, to serve on our board of directors; |
| considering and making recommendations to our board of directors regarding the composition and chairmanship of the committees of our board of directors; |
| instituting plans or programs for the continuing education of our board of directors and orientation of new directors; |
| developing and making recommendations to our board of directors regarding corporate governance guidelines and matters; and |
| overseeing periodic evaluations of the board of directors performance, including committees of the board of directors. |
Our nominating and corporate governance committee will operate under a written charter, to be effective prior to the completion of this offering, that satisfies the applicable listing standards of .
Code of Conduct
We have adopted a Code of Conduct that applies to all our employees, officers and directors. This includes our principal executive officer, principal financial officer and principal accounting officer or controller or persons performing similar functions. The full text of our Code of Conduct will be posted on our website at www.csdisco.com. We intend to disclose on our website any future amendments of our Code of Conduct or waivers that exempt any principal executive officer, principal financial officer, principal accounting officer or controller, persons performing similar functions or our directors from provisions in the Code of Conduct. Information contained on, or that can be accessed through, our website is not incorporated by reference into this prospectus, and you should not consider information on our website to be part of this prospectus.
Compensation Committee Interlocks and Insider Participation
None of the members of the compensation committee are currently, or have been at any time, one of our officers or employees. None of our executive officers currently serve, or have served during the last year, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board of directors or compensation committee.
Non-Employee Director Compensation
Except as indicated below, we have not historically provided cash, equity or other compensation to any of our non-employee directors. We have reimbursed and will continue to reimburse all of our non-employee directors for their reasonable out-of-pocket expenses incurred in attending board of directors and committee meetings. The compensation of Mr. Camara as a named executive officer is set forth below under Executive CompensationSummary Compensation Table.
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In April 2020, we granted Mr. Offerdahl an option to purchase 10,000 shares of common stock with an exercise price of $1.76 per share. The option vests in 12 equal monthly installments, subject to Mr. Offerdahl remaining in service with us as of each monthly vesting date. The option includes an early exercise feature. In the event of a change of control of our company, the option shall vest in full.
We intend to adopt a non-employee director compensation policy in connection with this offering and on terms to be determined by our board of directors. Under the non-employee director policy, our non-employee directors will be eligible to receive compensation for service on our board of directors and committees of our board of directors.
Non-Employee Director Compensation Table
The following table sets forth information regarding compensation earned by or paid to our non-employee directors for the year ended December 31, 2020:
Name |
Option Awards(1)(2) |
Total | ||||||
Krishna Srinivasan |
$ | | $ | | ||||
Tyson Baber |
| | ||||||
Susan L. Blount(3) |
| | ||||||
Colette Pierce Burnette, Ed.D.(4) |
| | ||||||
Aaron Clark |
| | ||||||
Robert P. Goodman |
| | ||||||
Scott Hill(5) |
| | ||||||
James Offerdahl |
8,750 | 8,750 |
(1) | Amounts reported represent the aggregate grant date fair value of the stock options granted to our non-employee directors during 2020 under our 2013 Long Term Incentive Plan, or our 2013 Plan, computed in accordance with ASC Topic 718. The assumptions used in calculating the grant date fair value of the stock options reported in this column are set forth in the notes to our audited consolidated financial statements included elsewhere in this prospectus. This amount does not reflect the actual economic value that may be realized by the non-employee directors. |
(2) | The following table provides information regarding the number of shares of our common stock underlying options granted to our non-employee directors that were outstanding as of December 31, 2020 |
Name |
Option Awards Outstanding as of December 31, 2020 |
|||
Krishna Srinivasan |
| |||
Tyson Baber |
| |||
Susan L. Blount(3) |
| |||
Colette Pierce Burnette, Ed.D.(4) |
| |||
Aaron Clark |
| |||
Robert P. Goodman |
| |||
Scott Hill(5) |
| |||
James Offerdahl |
10,000 |
(3) | Ms. Blount joined our board of directors in April 2021. |
(4) | Dr. Burnette joined our board of directors in April 2021. |
(5) | Mr. Hill joined our board of directors in June 2021. |
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Our named executive officers, consisting of our principal executive officer and the next two most highly compensated executive officers, for the fiscal year ended December 31, 2020, were:
| Kiwi Camara, our Co-Founder, Chief Executive Officer and Director; |
| Andrew Shimek, our Chief Revenue Officer; and |
| Sean Nathaniel, our Chief Operating Officer. |
Summary Compensation Table
The following table summarizes the compensation awarded to, earned by or paid to our named executive officers for the fiscal year ended December 31, 2020.
Name and Principal Position |
Salary ($)(1) |
Option Awards ($)(2) |
Non-Equity Incentive Plan Compensation ($)(3) |
All Other Compensation ($) |
Total ($) |
|||||||||||||||
Kiwi Camara |
325,000 | | 256,077 | 2,849 | (4) | 583,926 | ||||||||||||||
Chief Executive Officer |
||||||||||||||||||||
Andrew Shimek |
350,000 | 218,755 | 437,155 | 1,197 | (4) | 1,007,107 | ||||||||||||||
Chief Revenue Officer |
||||||||||||||||||||
Sean Nathaniel(5) |
242,468 | 150,585 | 141,518 | 530 | (4) | 535,101 | ||||||||||||||
Chief Operating Officer |
(1) | Salary amounts represent actual amounts paid during 2020. See Narrative Disclosure to Summary Compensation TableAnnual Base Salary below. |
(2) | Amounts reported represent the aggregate grant date fair value of the stock options granted to our named executive officers during 2020 under our 2013 Plan, computed in accordance with ASC Topic 718. The assumptions used in calculating the grant date fair value of the stock options reported in this column are set forth in the notes to our audited consolidated financial statements included elsewhere in this prospectus. This amount does not reflect the actual economic value that may be realized by the named executive officer. |
(3) | The amounts disclosed represent performance bonuses earned in 2020 and paid in 2021. See Narrative Disclosure to Summary Compensation TableNon-Equity Incentive Plan Compensation below. |
(4) | Amounts reported represent life insurance premiums we paid for each named executive officer. |
(5) | Mr. Nathaniel commenced employment with us in January 2020. |
Narrative Disclosure to Summary Compensation Table
Annual Base Salary
Our named executive officers receive a base salary to compensate them for services rendered to us. The base salary payable to each named executive officer is intended to provide a fixed component of compensation reflecting the executives skill set, experience, role and responsibilities. The 2020 base salary for Mr. Camara was $325,000. The 2020 base salary for Mr. Shimek was $350,000. The 2020 base salary for Mr. Nathaniel was $250,000. The amount stated in the table above reflects the prorated portion of Mr. Nathaniels annual base salary from the commencement of his employment as our Chief Operating Officer in January 2020. Mr. Nathaniels base salary was increased from $250,000 to $300,000 in January 2021.
Non-Equity Incentive Plan Compensation
Our practice has been to provide for annual bonus payments to our executive officers conditioned upon the achievement of certain performance goals established by our board of directors. We have historically established target bonus amounts which we felt were appropriate considering factors such as compensation opportunities that these executive officers were foregoing from their prior employers, cash bonuses provided to executive officers
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of our peer companies, the executive officers anticipated role criticality relative to others at our company and the determination by our board of directors or committee thereof and, as applicable, the Chief Executive Officer, of the essential need to attract and retain these executive officers.
Equity-Based Incentive Awards
Our equity award program is the primary vehicle for offering long-term incentives to our executives. We believe that equity awards provide our executives with a strong link to our long-term performance, create an ownership culture and help to align the interests of our executives and our stockholders. To date, we have used stock option grants and restricted stock awards for this purpose because we believe they are an effective means by which to align the long-term interests of our executive officers with those of our stockholders. We believe that our equity awards are an important retention tool for our executive officers, as well as for our other employees.
We have historically granted stock options broadly to our employees. More recently, we have also granted restricted stock awards to our employees. Grants to our executives and other employees are made at the discretion of our board of directors and are not made at any specific time period during a year.
In January 2020, in connection with his commencement of employment with us, we granted Mr. Nathaniel a stock option to purchase 175,000 shares of common stock. In April 2020, we granted Mr. Shimek a stock option to purchase 250,000 shares of common stock. The terms of these awards are described under Outstanding Equity Awards as of December 31, 2020 below. We did not grant any equity awards to Mr. Camara in 2020.
In May 2021, we granted Mr. Nathaniel a stock option to purchase 1,500,000 shares of common stock. The option has an exercise price of $3.74 per share and is subject to a four-year vesting schedule, with 25% vesting on the first anniversary of the vesting commencement date and the balance vesting monthly over 36 months thereafter, subject to Mr. Nathaniels continued service with us.
Prior to this offering, all of the equity awards we have granted were made pursuant to our 2013 Plan. Following this offering, we will grant equity incentive awards under the terms of our 2021 Plan, and no further awards will be granted pursuant to our 2013 Plan or any other equity plan, program or arrangement after such time. The terms of our equity plans are described under Employee Benefit Plans below.
Outstanding Equity Awards as of December 31, 2020
The following table presents estimated information regarding outstanding equity awards held by our named executive officers as of December 31, 2020. All awards were granted pursuant to the 2013 Plan. See Employee Benefit PlansLong Term Incentive Plan below for additional information.
Option awards(1) | ||||||||||||||||||||||||
Name |
Grant Date | Vesting Commencement Date |
Number of Securities Underlying Unexercised Options (#) Exercisable |
Number of Securities Underlying Unexercised Options (#) Unexercisable |
Option Exercise Price ($) |
Option Expiration Date |
||||||||||||||||||
Kiwi Camara |
4/23/2019 | 2/26/2019 | 916,666 | 1,083,334 | (2) | 1.67 | 4/23/2029 | |||||||||||||||||
Andrew Shimek |
6/8/2018 | 1/16/2018 | 1,278,652 | 474,928 | (3) | 0.30 | 6/8/2028 | |||||||||||||||||
4/23/2020 | 1/16/2022 | | 250,000 | (3) | 1.76 | 4/23/2030 | ||||||||||||||||||
Sean Nathaniel |
1/30/2020 | 1/13/2020 | | 175,000 | (3) | 1.76 | 1/30/2030 |
(1) | All option awards listed in this table were granted pursuant to our Long Term Incentive Plan, or 2013 Plan, the terms of which are described below under Employee Benefit PlansLong Term Incentive Plan. |
(2) | 1/48th of the shares underlying this option vested or vest on a monthly basis following the vesting commencement date, subject to continued service to us through the applicable vesting date. In the event of Mr. Camaras termination of employment by our company without cause or his resignation for good reason, in either case following a change in control of our company, the option shall vest in full. |
(3) | 25% of the shares underlying this option vested or vest on the one-year anniversary of the vesting commencement date and the remainder vest in 36 equal monthly installments thereafter, subject to continued service to us through the applicable vesting date. |
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We did not materially modify any outstanding equity award held by our named executive officers in 2020.
Employment Arrangements with our Named Executive Officers
We have entered into an employment agreement with each of the named executive officers in connection with their employment with us, which set forth the terms and conditions of their employment. We intend to enter into new employment agreements with our named executive officers prior to the completion of this offering.
Potential Payments upon Termination or Change in Control
Regardless of the manner in which a named executive officers service terminates, each named executive officer is entitled to receive amounts earned during his term of service, including unpaid salary.
In addition, each of our named executive officers equity awards is subject to the terms of the 2013 Plan and award agreement thereunder. A description of the termination and change in control provisions in the 2013 Plan and awards granted thereunder is provided in the section titled Employee Benefit Plans and a description of the vesting provisions of each equity award held by our named executive officers which is outstanding and unvested as of December 31, 2020 is provided above under Outstanding Equity Awards as of December 31, 2020.
Health and Welfare and Retirement Benefits; Perquisites
All of our current named executive officers are eligible to participate in our employee benefit plans, including our medical, dental, vision, disability and life insurance plans, in each case on the same basis as all of our other employees. We generally do not provide perquisites or personal benefits to our named executive officers. In addition, we provide the opportunity to participate in a 401(k) plan to our employees, including each of our named executive officers, as discussed in the section below entitled 401(k) Plan.
401(k) Plan
We maintain a 401(k) plan intended to qualify as a tax-qualified plan under Section 401 of the Code, with the 401(k) plans related trust intended to be tax exempt under Section 501(a) of the Code. The 401(k) plan provides that each participant may contribute up to the lesser of 100% of his or her compensation or the statutory limit, which is $19,500 for calendar years 2020 and 2021. Participants that are 50 years or older can also make catch-up contributions, which in calendar years 2020 and 2021 may be up to an additional $6,500 above the statutory limit. We do not provide matching or profit-sharing contributions under the plan. Employees pre-tax contributions are allocated to each participants individual account and are then invested in selected investment alternatives according to the participants directions. Employees are immediately and fully vested in their contributions. As a tax-qualified retirement plan, contributions to the 401(k) plan and earnings on those contributions are not taxable to the employees until distributed from the 401(k) plan.
Employee Benefit Plans
2021 Equity Incentive Plan
Prior to the completion of this offering, we expect that our board of directors will adopt, and our stockholders will approve, our 2021 Plan. We expect our 2021 Plan will become effective on the date of the underwriting agreement related to this offering. Our 2021 Plan will come into existence upon its adoption by our board of directors, but no grants will be made under our 2021 Plan prior to its effectiveness. Once our 2021 Plan becomes effective, no further grants will be made under the 2013 Plan.
Awards. Our 2021 Plan will provide for the grant of incentive stock options, or ISOs, within the meaning of Section 422 of the Code to employees, including employees of any parent or subsidiary, and for the grant of
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nonstatutory stock options, or NSOs, stock appreciation rights, restricted stock awards, restricted stock unit, or RSU, awards, performance awards and other forms of awards to employees, directors and consultants, including employees and consultants of our affiliates.
Authorized Shares. Initially, the maximum number of shares of our common stock that may be issued under our 2021 Plan after it becomes effective will not exceed shares of our common stock, which is the sum of (1) new shares, plus (2) shares that remain available for the issuance of awards under our 2013 Plan as of immediately prior to the time our 2021 Plan becomes effective plus (3) shares of our common stock subject to outstanding stock options or other stock awards granted under our 2013 Plan that, on or after our 2021 Plan becomes effective, terminate or expire prior to exercise or settlement; are not issued because the award is settled in cash; are forfeited because of the failure to vest; or are reacquired or withheld (or not issued) to satisfy a tax withholding obligation or the purchase or exercise price, if any, as such shares become available from time to time. In addition, the number of shares of our common stock reserved for issuance under our 2021 Plan will automatically increase on January 1 of each calendar year, starting on January 1, 20 through January 1, 20 , in an amount equal to (1) % of the total number of shares of our common stock outstanding on December 31 of the year before the date of each automatic increase or (2) a lesser number of shares determined by our board of directors prior to the applicable January 1. The maximum number of shares of our common stock that may be issued on the exercise of ISOs under our 2021 Plan will be shares.
Shares subject to stock awards granted under our 2021 Plan that expire or terminate without being exercised in full or that are paid out in cash rather than in shares will not reduce the number of shares available for issuance under our 2021 Plan. Shares withheld under a stock award to satisfy the exercise, strike or purchase price of a stock award or to satisfy a tax withholding obligation will not reduce the number of shares available for issuance under our 2021 Plan. If any shares of our common stock issued pursuant to a stock award are forfeited back to or repurchased or reacquired by us (1) because of a failure to meet a contingency or condition required for the vesting of such shares, (2) to satisfy the exercise, strike or purchase price of an award or (3) to satisfy a tax withholding obligation in connection with an award, the shares that are forfeited or repurchased or reacquired will revert to and again become available for issuance under our 2021 Plan. Any shares previously issued which are reacquired in satisfaction of tax withholding obligations or as consideration for the exercise or purchase price of a stock award will again become available for issuance under our 2021 Plan.
Plan Administration. Our board of directors, or a duly authorized committee of our board of directors, will administer our 2021 Plan and is referred to as the plan administrator herein. Our board of directors may also delegate to one or more of our officers the authority to (1) designate employees (other than officers) to receive specified stock awards and (2) determine the number of shares subject to such stock awards. Under our 2021 Plan, our board of directors will have the authority to determine award recipients, grant dates, the numbers and types of stock awards to be granted, the applicable fair market value and the provisions of each stock award, including the period of exercisability and the vesting schedule applicable to a stock award.
The plan administrator will have the power to modify outstanding awards under our 2021 Plan. Subject to the terms of our 2021 Plan, the plan administrator will have the authority to reprice any outstanding stock award, cancel and re-grant any outstanding stock award in exchange for new stock awards, cash or other consideration or take any other action that is treated as a repricing under generally accepted accounting principles, or GAAP, with the consent of any adversely affected participant.
Stock Options. Our 2021 Plan allows for the grant of ISOs and NSOs pursuant to stock option agreements adopted by the plan administrator. The plan administrator will determine the exercise price for stock options, within the terms and conditions of our 2021 Plan, provided that the exercise price of a stock option generally cannot be less than 100% of the fair market value of our common stock on the date of grant for NSOs and 110% of the fair market value of the stock subject to the option on the date of grant for ISOs. Options granted under our 2021 Plan will vest at the rate specified in the stock option agreement as determined by the plan administrator.
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The plan administrator will determine the term of stock options granted under our 2021 Plan, up to a maximum of 10 years. Unless the terms of an optionholders stock option agreement, or other written agreement between us and the recipient approved by the plan administrator, provide otherwise, if an optionholders service relationship with us or any of our affiliates ceases for any reason other than disability, death or cause, the optionholder may generally exercise any vested options for a period of three months following the cessation of service. This period may be extended in the event that either an exercise of the option or an immediate sale of shares acquired upon exercise of the option following such a termination of service is prohibited by applicable securities laws or our insider trading policy. If an optionholders service relationship with us or any of our affiliates ceases due to death, or an optionholder dies within a certain period following cessation of service, the optionholder or a beneficiary may generally exercise any vested options for a period of 18 months following the date of death. If an optionholders service relationship with us or any of our affiliates ceases due to disability, the optionholder may generally exercise any vested options for a period of 12 months following the cessation of service. In the event of a termination for cause, options generally terminate upon the termination date. In no event may an option be exercised beyond the expiration of its term.
Acceptable consideration for the purchase of common stock issued upon the exercise of a stock option will be determined by the plan administrator and may include (1) cash, check, bank draft or money order, (2) a broker-assisted cashless exercise, (3) the tender of shares of our common stock previously owned by the optionholder, (4) a net exercise of the option if it is an NSO or (5) other legal consideration approved by the plan administrator.
Unless the plan administrator provides otherwise, options or stock appreciation rights generally are not transferable except by will or the laws of descent and distribution. Subject to approval of the plan administrator or a duly authorized officer, an option may be transferred pursuant to a domestic relations order, official marital settlement agreement or other divorce or separation instrument.
Tax Limitations on ISOs. The aggregate fair market value, determined at the time of grant, of our common stock with respect to ISOs that are exercisable for the first time by an award holder during any calendar year under all of our stock plans may not exceed $100,000. Options or portions thereof that exceed such limit will generally be treated as NSOs. No ISO may be granted to any person who, at the time of the grant, owns or is deemed to own stock possessing more than 10% of our total combined voting power or that of any of our parent or subsidiary corporations unless (1) the option exercise price is at least 110% of the fair market value of the stock subject to the option on the date of grant and (2) the term of the ISO does not exceed five years from the date of grant.
Restricted Stock Unit Awards. Our 2021 Plan allows for the grant of RSU awards pursuant to restricted stock unit award agreements adopted by the plan administrator. RSU awards may be granted in consideration for any form of legal consideration that may be acceptable to our board of directors and permissible under applicable law. An RSU award may be settled by cash, delivery of stock, a combination of cash and stock as deemed appropriate by the plan administrator or in any other form of consideration set forth in the RSU award agreement. Additionally, dividend equivalents may be credited in respect of shares covered by an RSU award. Except as otherwise provided in the applicable award agreement or other written agreement between us and the recipient approved by the plan administrator, RSU awards that have not vested will be forfeited once the participants continuous service ends for any reason.
Restricted Stock Awards. Our 2021 Plan allows for the grant of restricted stock awards pursuant to restricted stock award agreements adopted by the plan administrator. A restricted stock award may be awarded in consideration for cash, check, bank draft or money order, past or future services to us or any other form of legal consideration that may be acceptable to our board of directors and permissible under applicable law. The plan administrator will determine the terms and conditions of restricted stock awards, including vesting and forfeiture terms. If a participants service relationship with us ends for any reason, we may receive any or all of the shares of common stock held by the participant that have not vested as of the date the participant terminates service with us through a forfeiture condition or a repurchase right.
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Stock Appreciation Rights. Our 2021 Plan allows for the grant of stock appreciation rights pursuant to stock appreciation right agreements adopted by the plan administrator. The plan administrator will determine the purchase price or strike price for a stock appreciation right, which generally will not be less than 100% of the fair market value of our common stock on the date of grant. A stock appreciation right granted under our 2021 Plan will vest at the rate specified in the stock appreciation right agreement as determined by the plan administrator. Stock appreciation rights may be settled in cash or shares of common stock or in any other form of payment as determined by our board of directors and specified in the stock appreciation right agreement.
The plan administrator will determine the term of stock appreciation rights granted under our 2021 Plan, up to a maximum of 10 years. If a participants service relationship with us or any of our affiliates ceases for any reason other than cause, disability or death, the participant may generally exercise any vested stock appreciation right for a period of three months following the cessation of service. This period may be further extended in the event that exercise of the stock appreciation right following such a termination of service is prohibited by applicable securities laws. If a participants service relationship with us, or any of our affiliates, ceases due to disability or death, or a participant dies within a certain period following cessation of service, the participant or a beneficiary may generally exercise any vested stock appreciation right for a period of 12 months in the event of disability and 18 months in the event of death. In the event of a termination for cause, stock appreciation rights generally terminate immediately upon the occurrence of the event giving rise to the termination of the individual for cause. In no event may a stock appreciation right be exercised beyond the expiration of its term.
Performance Awards. Our 2021 Plan will permit the grant of performance awards that may be settled in stock, cash or other property. Performance awards may be structured so that the stock or cash will be issued or paid only following the achievement of certain pre-established performance goals during a designated performance period. Performance awards that are settled in cash or other property are not required to be valued in whole or in part by reference to, or otherwise based on, the common stock.
The performance goals may be based on anyone of, or combination of, the following as determined by the plan administrator: earnings (including earnings per share and net earnings); earnings before interest, taxes and depreciation; earnings before interest, taxes, depreciation and amortization; total stockholder return; return on equity or average stockholders equity; return on assets, investment, or capital employed; stock price; margin (including gross margin); income (before or after taxes); operating income; operating income after taxes; pre-tax profit; operating cash flow; sales or revenue targets; increases in revenue or product revenue; expenses and cost reduction goals; improvement in or attainment of working capital levels; economic value added (or an equivalent metric); market share; cash flow; cash flow per share; share price performance; debt reduction; customer satisfaction; stockholders equity; capital expenditures; debt levels; operating profit or net operating profit; workforce diversity; growth of net income or operating income; billings; financing; regulatory milestones; stockholder liquidity; corporate governance and compliance; intellectual property; personnel matters; progress of internal research; progress of partnered programs; partner satisfaction; budget management; partner or collaborator achievements; internal controls, including those related to the Sarbanes-Oxley Act of 2002; investor relations, analysts and communication; implementation or completion of projects or processes; employee retention; number of users, including unique users; strategic partnerships or transactions (including in-licensing and out-licensing of intellectual property); establishing relationships with respect to the marketing, distribution and sale of the Companys products; supply chain achievements; co-development, co-marketing, profit sharing, joint venture or other similar arrangements; individual performance goals; corporate development and planning goals; and other measures of performance selected by the plan administrator. The performance goals may be based on company-wide performance or performance of one or more business units, divisions, affiliates or business segments, and may be either absolute or relative to the performance of one or more comparable companies or the performance of one or more relevant indices. Unless specified otherwise by the board of directors at the time the performance award is granted, the board will appropriately make adjustments in the method of calculating the attainment of performance goals as follows: (1) to exclude restructuring and/or other nonrecurring charges; (2) to exclude exchange rate effects; (3) to exclude the effects of changes to GAAP; (4) to exclude the effects of any statutory adjustments to corporate tax rates; (5) to exclude the effects of items that are
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unusual in nature or occur infrequently as determined under GAAP; (6) to exclude the dilutive effects of acquisitions or joint ventures; (7) to assume that any portion of our business which is divested achieved performance objectives at targeted levels during the balance of a performance period following such divestiture; (8) to exclude the effect of any change in the outstanding shares of our common stock by reason of any stock dividend or split, stock repurchase, reorganization, recapitalization, merger, consolidation, spin-off, combination or exchange of shares or other similar corporate change or any distributions to common stockholders other than regular cash dividends; (9) to exclude the effects of stock based compensation and the award of bonuses under our bonus plans; (10) to exclude costs incurred in connection with potential acquisitions or divestitures that are required to be expensed under GAAP; and (11) to exclude the goodwill and intangible asset impairment charges that are required to be recorded under GAAP.
Other Stock Awards. The plan administrator will be permitted to grant other awards based in whole or in part by reference to our common stock. The plan administrator will set the number of shares under the stock award (or cash equivalent) and all other terms and conditions of such awards.
Non-Employee Director Compensation Limit. The aggregate value of all compensation granted or paid to any non-employee director with respect to any period commencing on the date of our annual meeting of stockholders for a particular year and ending on the day immediately prior to the date of the meeting for the next subsequent year, including stock awards granted and cash fees paid by us to such non employee director, will not exceed $ in total value, or with respect to such period in which a non-employee director is first appointed or elected to our board, $ in total value (in each case, calculating the value of any such stock awards based on their grant date fair value for financial reporting purposes).
Changes to Capital Structure. In the event there is a specified type of change in our capital structure, such as a stock split, reverse stock split or recapitalization, appropriate adjustments will be made to (1) the class and maximum number of shares reserved for issuance under our 2021 Plan, (2) the class and maximum number of shares by which the share reserve may increase automatically each year, (3) the class and maximum number of shares that may be issued on the exercise of ISOs and (4) the class and number of shares and exercise price, strike price or purchase price, if applicable, of all outstanding stock awards.
Corporate Transactions. In the event of a corporate transaction, unless otherwise provided in a participants stock award agreement or other written agreement with us or one of our affiliates or unless otherwise expressly provided by the plan administrator at the time of grant, any stock awards outstanding under our 2021 Plan may be assumed, continued or substituted for by any surviving or acquiring corporation (or its parent company), and any reacquisition or repurchase rights held by us with respect to the stock award may be assigned to the successor (or its parent company). If the surviving or acquiring corporation (or its parent company) does not assume, continue or substitute for such stock awards, then (1) with respect to any such stock awards that are held by participants whose continuous service has not terminated prior to the effective time of the corporate transaction, or current participants, the vesting (and exercisability, if applicable) of such stock awards will be accelerated in full to a date prior to the effective time of the corporate transaction (contingent upon the effectiveness of the corporate transaction), and such stock awards will terminate if not exercised (if applicable) at or prior to the effective time of the corporate transaction, and any reacquisition or repurchase rights held by us with respect to such stock awards will lapse (contingent upon the effectiveness of the corporate transaction) and (2) any such stock awards that are held by persons other than current participants will terminate if not exercised (if applicable) prior to the effective time of the corporate transaction, except that any reacquisition or repurchase rights held by us with respect to such stock awards will not terminate and may continue to be exercised notwithstanding the corporate transaction.
In the event a stock award will terminate if not exercised prior to the effective time of a corporate transaction, the plan administrator may provide, in its sole discretion, that the holder of such stock award may not exercise such stock award but instead will receive a payment equal in value to the excess (if any) of (1) the per share amount payable to holders of common stock in connection with the corporate transaction, over (2) any per
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share exercise price payable by such holder, if applicable. In addition, any escrow, holdback, earn out or similar provisions in the definitive agreement for the corporate transaction may apply to such payment to the same extent and in the same manner as such provisions apply to the holders of common stock.
Under our 2021 Plan, a corporate transaction is generally defined as the consummation of: (1) a sale of all or substantially all of our assets, (2) the sale or disposition of at least 50% of our outstanding securities, (3) a merger or consolidation where we do not survive the transaction or (4) a merger or consolidation where we do survive the transaction but the shares of our common stock outstanding immediately before such transaction are converted or exchanged into other property by virtue of the transaction.
Change in Control. Awards granted under our 2021 Plan may be subject to acceleration of vesting and exercisability upon or after a change in control as may be provided in the applicable stock award agreement or in any other written agreement between us or any affiliate and the participant, but in the absence of such provision, no such acceleration will automatically occur.
Under our 2021 Plan, a change in control is generally defined as: (1) the acquisition by any person or company of more than 50% of the combined voting power of our then outstanding stock; (2) a consummated merger, consolidation or similar transaction in which our stockholders immediately before the transaction do not own, directly or indirectly, more than 50% of the combined voting power of the surviving entity (or the parent of the surviving entity) in substantially the same proportions as their ownership immediately prior to such transaction; (3) a consummated sale, lease, exclusive license or other disposition of all or substantially all of our assets other than to an entity more than 50% of the combined voting power of which is owned by our stockholders in substantially the same proportions as their ownership of our outstanding voting securities immediately prior to such transaction; or (4) when a majority of our board of directors becomes comprised of individuals who were not serving on our board of directors on the date our 2021 Plan was adopted by the board of directors, or the incumbent board, or whose nomination, appointment, or election was not approved by a majority of the incumbent board still in office.
Plan Amendment or Termination. Our board of directors has the authority to amend, suspend or terminate our 2021 Plan, provided that such action does not materially impair the existing rights of any participant without such participants written consent. Certain material amendments also require the approval of our stockholders. No ISOs may be granted after the tenth anniversary of the date our board of directors adopts our 2021 Plan. No stock awards may be granted under our 2021 Plan while it is suspended or after it is terminated.
2021 Employee Stock Purchase Plan
Prior to the completion of this offering, we expect that our board of directors will adopt and our stockholders will approve our ESPP. Our ESPP will become effective immediately prior to and contingent upon the date of the underwriting agreement related to this offering. The purpose of our ESPP will be to secure the services of new employees, to retain the services of existing employees and to provide incentives for such individuals to exert maximum efforts toward our success and that of our affiliates. Our ESPP will include two components. One component will be designed to allow eligible U.S. employees to purchase our common stock in a manner that may qualify for favorable tax treatment under Section 423 of the Code. The other component will permit the grant of purchase rights that do not qualify for such favorable tax treatment in order to allow deviations necessary to permit participation by eligible employees who are foreign nationals or employed outside of the United States while complying with applicable foreign laws.
Share Reserve. Following this offering, the ESPP will authorize the issuance of shares of our common stock under purchase rights granted to our employees or to employees of any of our designated affiliates. The number of shares of our common stock reserved for issuance will automatically increase on January 1 of each calendar year, beginning on January 1, 20 through January 1, 20 , by the lesser of (1) % of the total number of shares of our common stock outstanding on the last day of the
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year before the date of the automatic increase and (2) shares; provided that before the date of any such increase, our board of directors may determine that such increase will be less than the amount set forth in clauses (1) and (2).
Administration. Our board of directors will administer the ESPP and may delegate its authority to administer the ESPP to our compensation committee. The ESPP will be implemented through a series of offerings under which eligible employees are granted purchase rights to purchase shares of our common stock on specified dates during such offerings. Under the ESPP, our board of directors will be permitted to specify offerings with durations of not more than 27 months and may specify shorter purchase periods within each offering. Each offering will have one or more purchase dates on which shares of our common stock will be purchased for employees participating in the offering. An offering under the ESPP may be terminated under certain circumstances.
Payroll Deductions. Generally, all regular employees, including executive officers, employed by us or by any of our designated affiliates, will be eligible to participate in the ESPP and may contribute, normally through payroll deductions, up to % of their earnings (as defined in the ESPP) for the purchase of our common stock under the ESPP. Unless otherwise determined by our board of directors, common stock will be purchased for the accounts of employees participating in the ESPP at a price per share that is at least the lesser of (1) 85% of the fair market value of a share of our common stock on the first date of an offering or (2) 85% of the fair market value of a share of our common stock on the date of purchase.
Limitations. Employees may have to satisfy one or more of the following service requirements before participating in the ESPP, as determined by our board of directors, including: (1) being customarily employed for more than 20 hours per week, (2) being customarily employed for more than five months per calendar year or (3) continuous employment with us or one of our affiliates for a period of time (not to exceed two years). No employee will be permitted to purchase shares under the ESPP at a rate in excess of $25,000 worth of our common stock based on the fair market value per share of our common stock at the beginning of an offering for each calendar year such a purchase right is outstanding. Finally, no employee will be eligible for the grant of any purchase rights under the ESPP if immediately after such rights are granted, such employee has voting power over 5% or more of our outstanding capital stock measured by vote or value under Section 424(d) of the Code.
Changes to Capital Structure. In the event that there occurs a change in our capital structure through such actions as a stock split, merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, large nonrecurring cash dividend, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or similar transaction, the board of directors will make appropriate adjustments to: (1) the class(es) and maximum number of shares reserved under the ESPP, (2) the class(es) and maximum number of shares by which the share reserve may increase automatically each year, (3) the class(es) and number of shares subject to and purchase price applicable to outstanding offerings and purchase rights and (4) the class(es) and number of shares that are subject to purchase limits under ongoing offerings.
Corporate Transactions. In the event of certain significant corporate transactions, any then-outstanding rights to purchase our stock under the ESPP may be assumed, continued or substituted for by any surviving or acquiring entity (or its parent company). If the surviving or acquiring entity (or its parent company) elects not to assume, continue or substitute for such purchase rights, then the participants accumulated payroll contributions will be used to purchase shares of our common stock within 10 business days before such corporate transaction, and such purchase rights will terminate immediately after such purchase.
Under the ESPP, a corporate transaction is generally the consummation of: (1) a sale of all or substantially all of our assets, (2) the sale or disposition of more than 50% of our outstanding securities, (3) a merger or consolidation where we do not survive the transaction and (4) a merger or consolidation where we do survive the transaction but the shares of our common stock outstanding immediately before such transaction are converted or exchanged into other property by virtue of the transaction.
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ESPP Amendment or Termination. Our board of directors will have the authority to amend or terminate our ESPP, provided that except in certain circumstances such amendment or termination may not materially impair any outstanding purchase rights without the holders consent. We will obtain stockholder approval of any amendment to our ESPP as required by applicable law or listing requirements.
Long Term Incentive Plan
In 2013, our board of directors adopted and our stockholders approved our Long Term Incentive Plan, or 2013 Plan, which was subsequently amended, most recently in April 2021. Our 2013 Plan will be suspended prior to the completion of this offering in connection with our adoption of our 2021 Plan and no further awards will be granted under our 2013 Plan thereafter. However, awards outstanding under our 2013 Plan will continue in full effect in accordance with their existing terms.
Awards. Our 2013 Plan provides for the grant of incentive stock options, or ISOs, within the meaning of Section 422 of the Code to employees, and for the grant of nonstatutory stock options, or NSOs, restricted stock awards, stock appreciation rights, or SARs, restricted stock units, or RSUs, bonus stock, dividend equivalents, other stock-based awards, performance awards and annual incentive awards to employees, directors and consultants.
Shares Available for Awards. Subject to certain capitalization adjustments, the aggregate number of shares of common stock that may be issued pursuant to awards under the 2013 Plan will not exceed 30,062,135 shares. The maximum number of shares of our common stock that may be issued pursuant to the exercise of ISOs under our 2013 Plan is 30,062,135 shares. As of March 31, 2021, options to purchase15,173,280 shares of our common stock were outstanding.
Shares subject to awards granted under our 2013 Plan that expire or are canceled, forfeited, exchanged, settled in cash or otherwise terminated or are used to pay the exercise or purchase price of an award or to satisfy the tax withholding obligations related to an award will revert to and again become available for issuance under the 2013 Plan. Following the effectiveness of our 2021 Plan, such shares will again become available for awards under our 2021 Plan.
Administration. The 2013 Plan is administered by a committee designated by the board of directors and made up of two or more directors, or, if no such committee is designated, by the board of directors. We refer to the plan administrator as the committee herein. The committee has broad discretion to administer the 2013 Plan, including the power to determine the eligible individuals to whom awards will be granted, the number and type of awards to be granted and the terms and conditions of awards. The committee may also accelerate the vesting or exercise of any award and make all other determinations, perform all other acts and exercise all other powers and authority necessary or desirable for the administration of the 2013 Plan. In addition, the committee may amend the terms of any outstanding award granted under the 2013 Plan without the participants consent so long as the amendment would not materially and adversely affect the rights of a participant under a previously granted award.
Stock Options. ISOs and NSOs are granted under option agreements adopted by the committee. The committee determines the exercise price for stock options, within the terms and conditions of the 2013 Plan, provided that the exercise price of a stock option generally cannot be less than 100% of the fair market value of our common stock on the date of grant for NSOs and 110% of the fair market value of our common stock on the date of grant for ISOs. Options granted under the 2013 Plan vest at the rate specified in the option agreement as determined by the committee. The term of an option may not exceed 10 years. After the termination of service of an employee, director or consultant, the participant may exercise his or her option, to the extent vested, for the period of time stated in his or her option agreement. Generally, if termination is due to death or disability, the option will remain exercisable for one year. In all other cases, the option will generally remain exercisable for
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three months following the termination of service. However, in no event may an option be exercised later than the expiration of its term
Tax Limitations on ISOs. The aggregate fair market value, determined at the time of grant, of our common stock with respect to ISOs that are exercisable for the first time by an optionholder during any calendar year under all of our stock plans may not exceed $100,000. Options or portions thereof that exceed such limit will generally be treated as NSOs. No ISO may be granted to any person who, at the time of the grant, owns or is deemed to own stock possessing more than 10% of our total combined voting power unless (1) the option exercise price is at least 110% of the fair market value of the stock subject to the option on the date of grant and (2) the term of the ISO does not exceed five years from the date of grant.
Restricted Stock Awards. Restricted stock awards are granted under restricted stock agreements adopted by the committee. The committee determines the terms and conditions of restricted stock awards, including vesting and forfeiture terms. Unless otherwise determined by the committee, in the event that the Company grants dividends prior to the vesting of a restricted stock award, the participant will receive dividend equivalents that will be subject to the same restrictions and risk of forfeiture as the restricted stock award with respect to which the distribution was made. If a participants service relationship with us ends for any reason, we may receive any or all of the shares of common stock held by the participant that have not vested as of the date the participant terminates service with us through forfeiture restrictions.
Transferability. Awards are generally not transferable other than by will or the laws of descent and distribution. The committee may allow transfers to certain permitted transferees for no consideration, as provided in the 2013 Plan. An award may be transferred to a permitted transferee pursuant to a domestic relations order entered or approved by a court by written notice to us.
Adjustments. In the event of certain corporate events or changes in our capitalization, the committee will make adjustments to one or more of the number and kind of shares that may be delivered under the 2013 Plan and/or the number, kind and price of shares covered by each outstanding award.
Change in Control. Upon a change in control, without the consent of any participant, the committee may provide for any one or more of the following:
| accelerate the time of exercisability of an award, |
| require awards to be surrendered in exchange for a cash payment (including canceling a stock option or SAR for no consideration if it has an exercise price or the grant price less than the value paid in the transaction), or |
| make any other adjustments to awards that the committee deems appropriate to reflect the applicable transaction or event. |
Under the 2013 Plan, a change in control is generally (1) the consummation of an agreement to acquire or a tender offer for beneficial ownership of, 50% or more of either the then outstanding shares of stock or the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors; (2) the consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of our company or an acquisition of assets of another entity; or (3) certain dissolutions, liquidations and changes in the board of directors.
Plan Amendment and Termination. Our board of directors may terminate or amend the 2013 Plan at any time, subject to stockholder approval if required by applicable law, rule or regulation, so long as the action would not materially and adversely affect the rights of a participant under a previously granted award without the participants consent.
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Indemnification Matters
Upon the completion of this offering, our amended and restated certificate of incorporation will contain provisions that limit the liability of our current and former directors for monetary damages to the fullest extent permitted by Delaware law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for any breach of fiduciary duties as directors, except liability for:
| any breach of the directors duty of loyalty to the corporation or its stockholders; |
| any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law; |
| unlawful payments of dividends or unlawful stock repurchases or redemptions; or |
| any transaction from which the director derived an improper personal benefit. |
Such limitation of liability does not apply to liabilities arising under federal securities laws and does not affect the availability of equitable remedies such as injunctive relief or rescission.
Our amended and restated certificate of incorporation that will be in effect upon the completion of this offering will authorize us to indemnify our directors, officers, employees and other agents to the fullest extent permitted by Delaware law. Our amended and restated bylaws that will be in effect upon the completion of this offering will provide that we are required to indemnify our directors and officers to the fullest extent permitted by Delaware law and may indemnify our other employees and agents. Our amended and restated bylaws that will be in effect upon the completion of this offering will also provide that, on satisfaction of certain conditions, we will advance expenses incurred by a director or officer in advance of the final disposition of any action or proceeding, and permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in that capacity regardless of whether we would otherwise be permitted to indemnify him or her under the provisions of Delaware law. We have entered and expect to continue to enter into agreements to indemnify our directors, executive officers and other employees as determined by the board of directors. With certain exceptions, these agreements provide for indemnification for related expenses including attorneys fees, judgments, fines and settlement amounts incurred by any of these individuals in any action or proceeding. We believe that these amended and restated certificate of incorporation and amended and restated bylaw provisions and indemnification agreements are necessary to attract and retain qualified persons as directors and officers. We also maintain customary directors and officers liability insurance.
The limitation of liability and indemnification provisions in our amended and restated certificate of incorporation and amended and restated bylaws may discourage stockholders from bringing a lawsuit against our directors for breach of their fiduciary duty. They may also reduce the likelihood of derivative litigation against our directors and officers, even though an action, if successful, might benefit us and other stockholders. Further, a stockholders investment may be adversely affected to the extent that we pay the costs of settlement and damage awards against directors and officers as required by these indemnification provisions.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted for directors, executive officers or persons controlling us, we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
Rule 10b5-1 Sales Plans
Our directors and officers may adopt written plans, known as Rule 10b5-1 plans, in which they will contract with a broker to buy or sell shares of our common stock on a periodic basis. Under a Rule 10b5-1 plan, a broker executes trades under parameters established by the director or officer when entering into the plan, without further direction from them. The director or officer may amend a Rule 10b5-1 plan in some circumstances and may terminate a plan at any time. Our directors and executive officers may also buy or sell additional shares outside of a Rule 10b5-1 plan when they do not possess of material nonpublic information, subject to compliance with the terms of our insider trading policy.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Other than compensation arrangements for our directors and executive officers, which are described elsewhere in this prospectus, below we describe transactions since January 1, 2018 to which we were a party or will be a party, in which:
| the amounts involved exceeded or will exceed $120,000; and |
| any of our directors, executive officers or holders of more than 5% of our capital stock, or any member of the immediate family of, or person sharing the household with, the foregoing persons, had or will have a direct or indirect material interest. |
Preferred Stock Financings
Series D Redeemable Convertible Preferred Stock
In December 2017, January 2018 and April 2018, we issued and sold an aggregate of 33,281,620 shares of our Series D redeemable convertible preferred stock in multiple closings at a purchase price of $0.6042 per share, for an aggregate purchase price of $20.1 million. Each share of our Series D redeemable convertible preferred stock will convert automatically convert into one share of our common stock immediately prior to the completion of this offering.
The table below sets forth the number of shares of our Series D redeemable convertible preferred stock purchased by our related parties.
Stockholder |
Shares of Series D Convertible Preferred Stock |
Total Purchase Price ($) |
||||||
Entities affiliated with Bessemer Venture Partners(1) |
14,762,290 | 8,919,376 | ||||||
SG-Disco, LLC(2) |
12,546,547 | 7,580,624 | ||||||
Entities affiliated with LiveOak Venture Partners(3) |
5,792,783 | 3,499,999 |
(1) | The entities affiliated with Bessemer Venture Partners holding our Series D redeemable convertible preferred stock whose shares are aggregated for purposes of reporting share ownership information are Bessemer Venture Partners VIII L.P. and Bessemer Venture Partners VIII Institutional L.P. These entities collectively beneficially own more than 5% of our outstanding capital stock and Robert P. Goodman, a member of our board of directors, is a Partner of Bessemer Venture Partners. See Principal and Selling Stockholders for additional information. |
(2) | The Stephens Group, LLC, or The Stephens Group, is the manager of SG-Disco, LLC. SG-Disco, LLC beneficially owns more than 5% of our outstanding capital stock and Aaron Clark, a member of our board of directors, is a Managing Director of The Stephens Group. See Principal and Selling Stockholders for additional information. |
(3) | The entities affiliated with LiveOak Venture Partners holding our Series D redeemable convertible preferred stock whose shares are aggregated for purposes of reporting share ownership information are LiveOak Venture Partners 1A, L.P. and LiveOak I Co-Invest L.P. These entities together with other entities affiliated with LiveOak Venture Partners beneficially own more than 5% of our outstanding capital stock and Krishna Srinivasan, the chair of our board of directors and a member of our board of directors, is a Founding Partner of LiveOak Venture Partners. See Principal and Selling Stockholders for additional information. |
Series E Redeemable Convertible Preferred Stock
In January 2019, we issued and sold an aggregate of 24,911,563 shares of our Series E redeemable convertible preferred stock in at a purchase price of $2.0071 per share, for an aggregate purchase price of $50.0 million. Each share of our Series E redeemable convertible preferred stock will convert automatically convert into one share of our common stock immediately prior to the completion of this offering.
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The table below sets forth the number of shares of our Series E redeemable convertible preferred stock purchased by our related parties.
Stockholder |
Shares of Series E Convertible Preferred Stock |
Total Purchase Price ($) |
||||||
Entities affiliated with Georgian Partners(1) |
12,057,196 | 24,199,998 | ||||||
Entities affiliated with Bessemer Venture Partners(2) |
5,879,129 | 11,800,000 | ||||||
Entities affiliated with LiveOak Venture Partners(3) |
4,484,082 | 9,000,001 | ||||||
SG-Disco, LLC(4) |
2,491,156 | 4,999,999 |
(1) | The entities affiliated with Georgian Partners holding our Series E redeemable convertible preferred stock whose shares are aggregated for purposes of reporting share ownership information are Georgian Partners Growth Fund IV, LP, Georgian Partners Growth Fund (International) IV, LP and Georgian Council II ULC. These entities collectively beneficially own more than 5% of our outstanding capital stock and Tyson Baber, a member of our board of directors, is a Lead Investor of Georgian Partners. See Principal and Selling Stockholders for additional information. |
(2) | The entities affiliated with Bessemer Venture Partners holding our Series E redeemable convertible preferred stock whose shares are aggregated for purposes of reporting share ownership information are Bessemer Venture Partners VIII L.P. and Bessemer Venture Partners VIII Institutional L.P. These entities collectively beneficially own more than 5% of our outstanding capital stock and Robert P. Goodman, a member of our board of directors, is a Partner of Bessemer Venture Partners. See Principal and Selling Stockholders for additional information. |
(3) | The entity affiliated with LiveOak Venture Partners holding our Series E redeemable convertible preferred stock whose shares are aggregated for purposes of reporting share ownership information is LiveOak I Co-Invest II L.P. This entity together with other entities affiliated with LiveOak Venture Partners beneficially own more than 5% of our outstanding capital stock and Krishna Srinivasan, the chair of our board of directors and a member of our board of directors, is a Founding Partner of LiveOak Venture Partners. See Principal and Selling Stockholders for additional information. |
(4) | The Stephens Group is the manager of SG-Disco, LLC. SG-Disco, LLC beneficially owns more than 5% of our outstanding capital stock and Aaron Clark, a member of our board of directors, is a Managing Director of The Stephens Group. See Principal and Selling Stockholders for additional information. |
Series F Redeemable Convertible Preferred stock
In September 2020 and October 2020, we issued and sold an aggregate of 20,193,371 shares of our Series F redeemable convertible preferred stock in multiple closings at a purchase price of $2.9713 per share, for an aggregate purchase price of $60.0 million. Each share of our Series F redeemable convertible preferred stock will convert automatically convert into one share of our common stock immediately prior to the completion of this offering.
The table below sets forth the number of shares of our Series F redeemable convertible preferred stock purchased by our related parties.
Stockholder |
Shares of Series F Convertible Preferred Stock |
Total Purchase Price ($) |
||||||
Entities affiliated with Georgian Partners(1) |
10,096,781 | 30,000,565 | ||||||
Entities affiliated with Bessemer Venture Partners(2) |
4,038,636 | 11,999,999 | ||||||
SG-Disco, LLC(3) |
3,365,530 | 9,999,999 | ||||||
Entities affiliated with LiveOak Venture Partners(4) |
1,009,659 | 3,000,000 |
(1) | The entities affiliated with Georgian Partners holding our Series F redeemable convertible preferred stock whose shares are aggregated for purposes of reporting share ownership information are Georgian Partners Growth Fund IV, LP, Georgian Partners Growth Fund (International) IV, LP and Georgian Council II ULC. These entities beneficially own more than 5% of our outstanding capital stock and Tyson Baber, a member of our board of directors, is a Lead Investor of Georgian Partners. See Principal and Selling Stockholders for additional information. |
(2) | The entities affiliated with Bessemer Venture Partners holding our Series F redeemable convertible preferred stock whose shares are aggregated for purposes of reporting share ownership information are Bessemer Venture Partners VIII L.P. and Bessemer Venture Partners VIII Institutional L.P. These entities collectively beneficially own more than 5% of our outstanding capital stock and Robert P. Goodman, a member of our board of directors, is a Partner of Bessemer Venture Partners. See Principal and Selling Stockholders for additional information. |
(3) | The Stephens Group is the manager of SG-DISCO, LLC. SG-Disco, LLC beneficially owns more than 5% of our outstanding capital stock and Aaron Clark, a member of our board of directors, is a Managing Director of The Stephens Group. See Principal and Selling Stockholders for additional information. |
(4) | The entity affiliated with LiveOak Venture Partners holding our Series F redeemable convertible preferred stock whose shares are aggregated for purposes of reporting share ownership information is LiveOak I Co-Invest IV L.P. This entity together with other entities affiliated with LiveOak Venture Partners beneficially own more than 5% of our outstanding capital stock and Krishna Srinivasan, the chair of our board of directors and a member of our board of directors, is a Founding Partner of LiveOak Venture Partners. See Principal and Selling Stockholders for additional information. |
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Our Relationship with Bessemer Venture Partners
During the year ended December 31, 2018, we recognized approximately $0.2 million in revenue from the usage of our solution by certain affiliates of Bessemer Venture Partners, a holder of more than 5% of our outstanding capital stock.
Promissory Note with Mr. Lafair
In October 2018, we entered into a promissory note with Michael Lafair, our Chief Financial Officer, pursuant to which we loaned to Mr. Lafair the principal amount of $150,795, with interest accruing at a rate of 2.83% per annum, in connection with the exercise by Mr. Lafair of options to purchase an aggregate of 502,649 shares of our common stock. In connection with entering the promissory note, Mr. Lafair also granted us a security interest in the shares to be purchased as collateral for the note. Mr. Lafair repaid the loan in full in June 2021.
Stockholders Agreement and Investors Rights Agreement
In connection with our preferred stock financings, we entered into a stockholders agreement and an investors rights agreements containing registration rights, information rights, voting rights and rights of first refusal, among other things, with certain holders of our preferred stock and certain holders of our common stock, including entities affiliated with LiveOak Venture Partners, Bessemer Ventures Partners, The Stephens Group, Georgian Partners, Kiwi Camara, our Co-Founder, Chief Executive Officer and a member of our board of directors, Michael Lafair, our Chief Financial Officer, and Kent Radford, our Co-Founder, Chief Ethics and Compliance Officer and a holder of more than 5% of our outstanding capital stock. These agreements will terminate upon the closing of this offering, except for the registration rights granted under our investor rights agreement, as more fully described in Description of Capital StockRegistration Rights.
Pursuant to the terms of the stockholders agreement, certain holders of common stock party thereto have granted Mr. Camara a proxy to represent and vote all shares of common stock owned by such holders with respect to all matters upon which such shares of common stock are entitled to vote. This proxy will be automatically revoked upon the earlier to occur of Mr. Camara no longer serving in a full-time role as our employee or the termination of the stockholders agreement according to its terms, including the consummation of this offering.
Equity Grants to Directors and Executive Officers
We have granted stock options and restricted stock awards to certain of our directors and executive officers. For more information regarding the equity awards granted to our directors and named executive officers, see the sections titled ManagementDirector Compensation and Executive Compensation.
Directed Share Program
At our request, the underwriters have reserved up to % of the shares of common stock offered by this prospectus for sale at the initial public offering price to certain individuals identified by our officers and directors who express an interest in purchasing shares of common stock in this offering. See the section titled Underwriting for additional information.
Indemnification Agreements
Our amended and restated certificate of incorporation that will be in effect upon the completion of this offering will contain provisions limiting the liability of directors and our amended and restated bylaws that will be in effect upon the completion of this offering will provide that we will indemnify each of our directors and officers to the fullest extent permitted under Delaware law. Our amended and restated certificate of incorporation and amended and restated bylaws that will be in effect upon the completion of this offering will also provide our board of directors with discretion to indemnify our employees and other agents when determined appropriate by
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the board. In addition, we have entered into an indemnification agreement with each of our directors and executive officers, which requires us to indemnify them. For more information regarding these agreements, see the section Executive CompensationIndemnification Matters.
Policies and Procedures for Transactions with Related Persons
In connection with this offering, we intend to adopt a policy that our executive officers, directors, nominees for election as a director, beneficial owners of more than 5% of any class of our common stock and any members of the immediate family of any of the foregoing persons are not permitted to enter into a related person transaction with us without the approval or ratification of our board of directors or our audit committee. Any request for us to enter into a transaction with an executive officer, director, nominee for election as a director, beneficial owner of more than 5% of any class of our common stock or any member of the immediate family of any of the foregoing persons, in which the amount involved exceeds $120,000 and such person would have a direct or indirect interest, must be presented to our board of directors or our audit committee for review, consideration and approval. In approving or rejecting any such proposal, our board of directors or our audit committee is to consider the material facts of the transaction, including whether the transaction is on terms no less favorable than terms generally available to an unaffiliated third party under the same or similar circumstances and the extent of the related persons interest in the transaction.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information with respect to the beneficial ownership of our shares as of March 31, 2021 by:
| each of our named executive officers; |
| each of our directors; |
| all of our current directors and executive officers as a group; |
| each of the selling stockholders; and |
| each person known by us to be the beneficial owner of more than 5% of our common stock. |
We have determined beneficial ownership in accordance with the rules and regulations of the SEC and the information is not necessarily indicative of beneficial ownership for any other purpose. Except as indicated by the footnotes below, we believe, based on information furnished to us, that the persons and entities named in the table below have sole voting and sole investment power with respect to all shares that they beneficially own, subject to applicable community property laws.
Applicable percentage ownership before the offering is based on 246,894,505 shares of common stock outstanding as of March 31, 2021, assuming the automatic conversion of all outstanding shares of redeemable convertible preferred stock into 178,967,444 shares of common stock, which will occur immediately prior to the completion of this offering. Applicable percentage ownership after the offering, both assuming no exercise and assuming full exercise of the underwriters option to purchase additional shares of common stock from the selling stockholders, is based on shares of common stock outstanding immediately after the completion of this offering, excluding any potential purchases by the persons and entities named in the table below through our directed share program or otherwise in this offering. In computing the number of shares beneficially owned by a person and the percentage ownership of such person, we deemed to be outstanding all shares subject to options held by the person that are currently exercisable, or exercisable or would vest based on service-based vesting conditions within 60 days of March 31, 2021. However, except as described above, we did not deem such shares outstanding for the purpose of computing the percentage ownership of any other person.
Unless otherwise indicated, the address of each beneficial owner listed in the table below is c/o CS Disco, Inc., 3700 N. Capital of Texas Highway, Suite 150, Austin, TX 78746.
Beneficial Ownership Before the Offering |
Number of Shares Being Offered |
Beneficial Ownership After the Offering |
||||||||||||||||||||||||||
Assuming No Exercise of the Underwriters Option |
Assuming the Underwriters Option is Exercised in Full |
|||||||||||||||||||||||||||
Name of Beneficial Owner |
Shares | % | Shares | % | Shares | % | ||||||||||||||||||||||
5% Stockholders: |
||||||||||||||||||||||||||||
Entities affiliated with Bessemer Venture Partners(1) |
65,127,316 | 26.4 | % | |||||||||||||||||||||||||
SG-Disco, LLC(2) |
52,779,573 | 21.4 | ||||||||||||||||||||||||||
Entities affiliated with LiveOak Venture Partners(3) |
47,317,853 | 19.2 | ||||||||||||||||||||||||||
Entities affiliated with Georgian Partners(4) |
29,627,444 | 12.0 | ||||||||||||||||||||||||||
Kiwi Camara(5) |
24,499,253 | 9.9 | ||||||||||||||||||||||||||
Kent Radford(6) |
13,854,301 | 5.6 |
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Beneficial Ownership Before the Offering |
Number of Shares Being Offered |
Beneficial Ownership After the Offering |
||||||||||||||||||||||||||
Assuming No Exercise of the Underwriters Option |
Assuming the Underwriters Option is Exercised in Full |
|||||||||||||||||||||||||||
Name of Beneficial Owner |
Shares | % | Shares | % | Shares | % | ||||||||||||||||||||||
Directors and Named Executive Officers: |
||||||||||||||||||||||||||||
Kiwi Camara(5) |
24,499,253 | 9.9 | ||||||||||||||||||||||||||
Andrew Shimek(7) |
1,292,397 | * | ||||||||||||||||||||||||||
Sean Nathaniel(8) |
58,333 | * | ||||||||||||||||||||||||||
Krishna Srinivasan(3) |
47,317,853 | 19.2 | ||||||||||||||||||||||||||
Tyson Baber(4) |
29,627,444 | 12.0 | ||||||||||||||||||||||||||
Susan L. Blount |
| | ||||||||||||||||||||||||||
Colette Pierce Burnette, Ed.D. |
| | ||||||||||||||||||||||||||
Aaron Clark |
| | ||||||||||||||||||||||||||
Robert P. Goodman |
| | ||||||||||||||||||||||||||
Scott Hill |
| | ||||||||||||||||||||||||||
James Offerdahl(9) |
645,243 | * | ||||||||||||||||||||||||||
All directors and executive officers as a group (13 persons)(10) |
108,429,702 | 43.2 | ||||||||||||||||||||||||||
Selling Stockholders: |
* | Represents beneficial ownership of less than 1%. |
(1) | Consists of (a) 29,567,802 shares of common stock held by Bessemer Venture Partners VIII L.P. and (b) 35,559,514 shares of common stock held by Bessemer Venture Partners VIII Institutional L.P., which we collectively refer to as the Bessemer Entities. Deer VIII & Co. L.P. is the general partner of the Bessemer Entities. Deer VIII & Co. Ltd. is the general partner of Deer VIII & Co. L.P. Robert P. Goodman, David Cowan, Jeremy Levine, Byron Deeter and Robert M. Stavis are the directors of Deer VIII & Co. Ltd. and hold the voting and dispositive power for the Bessemer Entities. Investment and voting decisions with respect to the shares held by the Bessemer Entities are made by the directors of Deer VIII & Co. Ltd. acting as an investment committee. Mr. Goodman disclaims beneficial ownership of the shares held by the Bessemer Entities, except to the extent of his pecuniary interest, if any, in such shares by virtue of his interest in Deer VIII & Co. L.P. and his indirect limited partnership interest in the Bessemer Entities. The address of each of the Bessemer Entities is c/o Bessemer Venture Partners, 1865 Palmer Ave., Suite 104, Larchmont, NY 10538. |
(2) | Consists of 52,779,573 shares of common stock held by SG-Disco, LLC. The Stephens Group, LLC, or The Stephens Group, is the sole manager of SG-Disco, LLC and has voting and dispositive power over the shares held by SG-Disco, LLC. Investment and voting decisions with respect to the shares beneficially owned by The Stephens Group are made by W.R. Stephens and Elizabeth S. Campbell, acting as an executive committee. Mr. Stephens and Ms. Campbell may be deemed to possess voting and dispositive control over the shares held by SG-Disco, LLC. The address of SG-Disco, LLC and The Stephens Group is 100 River Bluff Drive, Suite 500, Little Rock, AR 72202. |
(3) | Consists of (a) 10,000,000 shares of common stock held by LiveOak Venture Partners I, L.P., (b) 28,547,052 shares of common stock held by LiveOak Venture Partners 1A, L.P., (c) 3,277,060 shares of common stock held by LiveOak I Co-Invest L.P., (d) 4,484,082 shares of common stock held by LiveOak I Co-Invest II L.P. and (e) 1,009,659 shares of common stock held by LiveOak I Co-Invest IV LP, which we collectively refer to as the LiveOak Entities. LOVP GP I, L.P. is the general partner of LiveOak Venture Partners I, L.P. LOVP TDA GP, LP is the general partner of each of LiveOak I Co-Invest L.P. and LiveOak I Co-Invest II L.P. LOVP Upper Tier GP I, L.L.C. is the general partner of each of LOVP GP I, L.P. and LOVP TDA GP, LP. LOVP SBIC Management Services, L.L.C. is the general partner of LiveOak Venture Partners 1A, L.P. LiveOak Co-Invest GP, LLC is the general partner of LiveOak I Co-Invest IV LP. Investment and voting decisions with respect to the shares held by the LiveOak Entities are made by Krishna Srinivasan, the chair of our board of directors and a member of our board of directors, and Venu Shmapant, acting as the managers of the ultimate general partner of the LiveOak Entities. The address of each of the LiveOak Entities is 805 Las Cimas Parkway, Suite 125, Austin, TX 78746. |
(4) | Consists of (a) 10,354,339 shares of common stock held by Georgian Partners Growth Fund IV, LP, or Georgian IV, (b) 18,857,414 shares of common stock held by Georgian Partners Growth Fund (International) IV, LP, or Georgian International IV, and (c) 415,691 shares of common stock held by Georgian Council II ULC, or Georgian Council. Georgian IV and Georgian International IV are managed by Georgian Partners Growth LP, or Georgian Manager, and the ultimate general partner of Georgian IV and Georgian International IV is Georgian Partners IV GP Inc., or Georgian IV GP. Justin LaFayette, Simon Chong and John Berton are the directors of each of Georgian Manager, Georgian IV GP and Georgian Council. Investment and voting decisions with respect to the shares held by Georgian IV, Georgian International IV and Georgian Council are made by the directors acting as an investment committee. In addition, Tyson Baber, a member of our board of directors, serves as a lead investor of each of Georgian Manager, Georgian IV GP and Georgian Council, and may be deemed to possess investment and voting control over the shares held by Georgian IV, Georgian International IV and Georgian Council. The address of each of these entities is 2 St. Clair Avenue West, Suite 1400, Toronto, ON M4V 1L5, Canada. |
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(5) | Consists of (a) 23,374,253 shares of common stock held by Mr. Camara and (b) 1,125,000 shares issuable upon exercise of stock options held by Mr. Camara that are currently exercisable or exercisable within 60 days of March 31, 2021. |
(6) | Consists of 13,854,301 shares of common stock held by Mr. Radford. |
(7) | Consists of 1,292,397 shares issuable upon exercise of stock options held by Mr. Shimek that are currently exercisable or exercisable within 60 days of March 31, 2021. Excludes (a) 84,460 shares transfered to the Isabella P. Stevenson-Shimek 2021 Irrevocable Trust in June 2021 and (b) 84,459 shares transfered to the Harper L. Stevenson-Shimek 2021 Irrevoacble Trust in June 2021. |
(8) | Consists of 58,333 shares issuable upon exercise of stock options held by Mr. Nathaniel that are currently exercisable or exercisable within 60 days of March 31, 2021. |
(9) | Consists of (a) 635,243 shares of common stock held by Mr. Offerdahl and (b) 10,000 shares issuable upon exercise of stock options held by Mr. Offerdahl that are currently exercisable or exercisable within 60 days of March 31, 2021. |
(10) | Consists of (a) 104,313,625 shares of common stock held by our directors and executive officers and (b) 4,116,077 shares issuable upon exercise of stock options held by our directors and executive officers that are currently exercisable or exercisable within 60 days of March 31, 2021. |
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General
The following description of our capital stock and certain provisions of our amended and restated certificate of incorporation and amended and restated bylaws are summaries and are qualified by reference to the amended and restated certificate of incorporation and the amended and restated bylaws that will be in effect upon the completion of this offering. Copies of these documents have been filed with the SEC as exhibits to our registration statement, of which this prospectus forms a part. The descriptions of the common stock and preferred stock reflect changes to our capital structure that will be in effect upon the completion of this offering.
Immediately following the completion of this offering, our authorized capital stock will consist of 1,100,000,000 shares, all with a $0.001 par value per share, of which:
| 1,000,000,000 shares are designated as common stock; and |
| 100,000,000 shares are designated as preferred stock. |
As of March 31, 2021, after giving effect to the automatic conversion of all outstanding shares of our redeemable convertible preferred stock into an aggregate of 178,967,444 shares of our common stock immediately prior to the closing of this offering, there would have been 246,894,505 shares of our common stock outstanding, held of record by 110 stockholders.
Common Stock
Voting Rights
Each holder of common stock is entitled to one vote for each share on all matters submitted to a vote of the stockholders. The affirmative vote of holders of at least 662⁄3% of the voting power of all of the then-outstanding shares of capital stock, voting as a single class, will be required to amend certain provisions of our amended and restated certificate of incorporation, including provisions relating to amending our amended and restated bylaws, the classified board, the size of our board, removal of directors, director liability, vacancies on our board, special meetings, stockholder notices, actions by written consent and exclusive jurisdiction.
Economic Rights
Except as otherwise expressly provided in our amended and restated certificate of incorporation or required by applicable law, all shares of common stock will have the same rights and privileges and rank equally, share ratably and be identical in all respects for all matters, including those described below.
Dividends and Distributions. Subject to preferences that may apply to any outstanding preferred stock, holders of our common stock are entitled to receive ratably any dividends that our board of directors may declare out of funds legally available for that purpose on a non-cumulative basis.
Liquidation Rights. In the event of our liquidation, dissolution or winding up, holders of our common stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preference of any outstanding preferred stock.
No Preemptive or Similar Rights
Holders of our common stock have no preemptive, conversion or subscription rights and there are no redemption or sinking fund provisions applicable to our common stock. The rights, preferences and privileges of the holders of our common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of our preferred stock that we may designate and issue in the future.
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Fully Paid and Non-assessable
In connection with this offering, our legal counsel will opine that the shares of our common stock to be issued under this offering will be fully paid and non-assessable.
Preferred Stock
As of March 31, 2021, there were 178,967,444 shares of our redeemable convertible preferred stock outstanding. Immediately prior to the completion of this offering, each outstanding share of our redeemable convertible preferred stock will convert into one share of our common stock.
Upon the completion of this offering and under our amended and restated certificate of incorporation that will be in effect upon the completion of this offering, our board of directors may, without further action by our stockholders, fix the rights, preferences, privileges and restrictions of up to an aggregate of 100,000,000 shares of preferred stock in one or more series and authorize their issuance. These rights, preferences and privileges could include dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences and the number of shares constituting any series or the designation of such series, any or all of which may be greater than the rights common stock. Any issuance of our preferred stock could adversely affect the voting power of holders of our common stock and the likelihood that such holders would receive dividend payments and payments on liquidation. In addition, the issuance of preferred stock could have the effect of delaying, deferring or preventing a change of control or other corporate action. Upon the completion of this offering, no shares of preferred stock will be outstanding. We have no present plan to issue any shares of preferred stock.
Options
As of March 31, 2021, we had outstanding options to purchase an aggregate of 15,173,280 shares of our common stock under our 2013 Plan, with a weighted-average exercise price of $0.79 per share. For additional information regarding terms of our equity incentive plans, see the section titled Executive CompensationEmployee Benefit Plans.
Warrants
As of March 31, 2021, we had outstanding warrants to purchase an aggregate of 249,356 shares of our outstanding common stock. The warrants are exercisable at a weighted-average exercise price of $0.59 per share. These warrants contain provisions for the adjustment of the exercise price and the number of shares issuable upon the exercise of the warrant in the event of certain stock dividends, stock splits, reorganizations, reclassifications and consolidations.
Registration Rights
We are party to an investors rights agreement that provides that certain holders of our capital stock, including certain holders of at least 5% of our capital stock and entities affiliated with certain of our directors, have certain registration rights, as set forth below. This investors rights agreement was originally entered into as of December 18, 2013 and most recently amended and restated as of September 29, 2020. The registration of shares of our common stock by the exercise of registration rights described below would enable the holders to sell these shares without restriction under the Securities Act when the applicable registration statement is declared effective. We will pay the registration expenses, other than underwriting discounts and commissions, of the shares registered by the demand, piggyback and Form S-3 registrations described below.
Generally, in an underwritten offering, the managing underwriter, if any, has the right, subject to specified conditions, to limit the number of shares such holders may include. The demand, piggyback and Form S-3 registration rights described below will expire upon the earliest to occur of: (a) five years after the closing of this
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offering; (b) the closing of a Deemed Liquidation Event, as defined in our amended and restated certificate of incorporation in effect prior to this offering; or (c) with respect to any particular stockholder, such time as such stockholder can, in the opinion of our counsel, sell all of its shares under Rule 144 of the Securities Act.
Demand Registration Rights
The holders of an aggregate of 196,714,951 shares of our common stock will be entitled to certain demand registration rights. At any time beginning 180 days after the effective date of the registration statement of which this prospectus is a part, such holders are entitled to registration rights under the investors rights agreement, on not more than two occasions and not more than once in any 12-month period, provided that the holders of at least a majority of such shares as are then outstanding request that we register all or a portion of their shares. Such request for registration must cover at least 25% of the registrable securities then outstanding and having an anticipated aggregate price (net of underwriting discounts and commissions) to the public of not less than $40 million.
Piggyback Registration Rights
In connection with this offering, the holders of an aggregate of 238,943,144 shares of our common stock were entitled to, and the necessary percentage of holders waived, their rights to notice of this offering and to include their shares of registrable securities in this offering. After this offering, in the event that we propose to register any of our securities under the Securities Act, either for our own account or for the account of other security holders, the holders of these shares will be entitled to certain piggyback registration rights allowing such holders to include their shares in such registration, subject to certain marketing and other limitations. As a result, whenever we propose to file a registration statement under the Securities Act, subject to certain exceptions, the holders of these shares are entitled to notice of the registration and have the right to include their shares in the registration, subject to limitations that the underwriters may impose on the number of shares included in the offering.
Form S-3 Registration Rights
The holders of an aggregate of 238,943,144 shares of common stock will be entitled to certain Form S-3 registration rights. If we are eligible to file a registration statement on Form S-3, these holders have the right, upon written request from such holders, to have such shares registered by us if the anticipated aggregate offering price of such shares, net of underwriting discounts and commissions, is at least $10.0 million, subject to exceptions set forth in the investors rights agreement. We are not obligated to effect a demand for registration on Form S-3 by holders of our registrable securities more than twice during any 12-month period.
Anti-Takeover Provisions
Certificate of Incorporation and Bylaws to be in Effect upon the Completion of this Offering
Because our stockholders do not have cumulative voting rights, stockholders holding a majority of the voting power of our shares of common stock will be able to elect all of our directors. Our amended and restated certificate of incorporation and amended and restated bylaws to be effective upon the completion of this offering will provide for stockholder actions at a duly called meeting of stockholders. A special meeting of stockholders may be called by a majority of our board of directors, the chair of our board of directors, our chief executive officer or our lead independent director. Our amended and restated bylaws to be effective upon the completion of this offering will establish an advance notice procedure for stockholder proposals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to our board of directors. In addition, our amended and restated certificate of incorporation and amended and restated bylaws to be effective on the completion of this offering will eliminate the right of stockholders to act by written consent without a meeting.
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In accordance with our amended and restated certificate of incorporation to be effective upon the completion of this offering, immediately after this offering, our board of directors will be divided into three classes with staggered three-year terms.
The foregoing provisions will make it more difficult for another party to obtain control of us by replacing our board of directors. Since our board of directors has the power to retain and discharge our officers, these provisions could also make it more difficult for existing stockholders or another party to effect a change in management. In addition, the authorization of undesignated preferred stock makes it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change our control.
These provisions are intended to preserve our existing control structure after completion of this offering, facilitate our continued product innovation and the risk-taking that it requires, permit us to continue to prioritize our long-term goals rather than short-term results, enhance the likelihood of continued stability in the composition of our board of directors and its policies and to discourage certain types of transactions that may involve an actual or threatened acquisition of us. These provisions are also designed to reduce our vulnerability to an unsolicited acquisition proposal and to discourage certain tactics that may be used in proxy fights. However, such provisions could have the effect of discouraging others from making tender offers for our shares and may have the effect of deterring hostile takeovers or delaying changes in our control or management. As a consequence, these provisions may also inhibit fluctuations in the market price of our stock that could result from actual or rumored takeover attempts.
Section 203 of the Delaware General Corporation Law
When we have a class of voting stock that is either listed on a national securities exchange or held of record by more than 2,000 stockholders, we will be subject to Section 203 of the Delaware General Corporation Law, which prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years after the date that such stockholder became an interested stockholder, subject to certain exceptions.
Choice of Forum
Our amended and restated certificate of incorporation to be effective upon the completion of this offering will provide that the Court of Chancery of the State of Delaware (or, if and only if the Court of Chancery of the State of Delaware lacks subject matter jurisdiction, any state court located within the State of Delaware or, if and only if all such state courts lack subject matter jurisdiction, the federal district court for the District of Delaware) is the sole and exclusive forum for the following claims or causes of action under Delaware statutory or common law: (1) any derivative claim or cause of action brought on our behalf; (2) any claim or cause of action asserting a claim of breach of a fiduciary duty owed by any of our current or former directors, officers or other employees to us or our stockholders; (3) any claim or cause of action against us or any of our current or former directors, officers or other employees arising out of or pursuant to any provision of the Delaware General Corporation Law, our amended and restated certificate of incorporation or our amended and restated bylaws; (4) any claim or cause of action arising under or seeking to interpret, apply, enforce or determine the validity of our amended and restated certificate of incorporation or our amended and restated bylaws (including any right, obligation or remedy thereunder); and (5) any claim or cause of action against us or any of our current or former directors, officers or other employees that is governed by the internal-affairs doctrine, in all cases to the fullest extent permitted by law and subject to the court having personal jurisdiction over the indispensable parties named as defendants. This choice of forum provision would not apply to suits brought to enforce a duty or liability created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction, or the Securities Act.
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Our amended and restated certificate of incorporation to be effective upon the completion of this offering will further provide that, unless we consent in writing to the selection of an alternative forum, to the fullest extent permitted by law, the federal district courts of the United States will be the exclusive forum for resolving any complaint asserting a cause or causes of action arising under the Securities Act, including all causes of action asserted against any defendant to such complaint. For the avoidance of doubt, this provision is intended to benefit and may be enforced by us, our officers and directors, the underwriters to any offering giving rise to such complaint and any other professional entity whose profession gives authority to a statement made by that person or entity and who has prepared or certified any part of the documents underlying the offering.
While the Delaware courts have determined that such choice of forum provisions are facially valid, there is no assurance that a court in another jurisdiction would enforce the choice of forum provision contained in the amended and restated certificate of incorporation to be effective upon the completion of this offering. If a court were to find such provision to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm their business, operating results and financial condition. Additionally, our amended and restated certificate of incorporation to be effective upon the completion of this offering will provide that any person or entity holding, owning or otherwise acquiring any interest in any of our securities shall be deemed to have notice of and consented to these provisions. Investors also cannot waive compliance with the federal securities laws and the rules and regulations thereunder.
Limitations of Liability and Indemnification
See the section titled Executive CompensationIndemnification Matters.
Exchange Listing
Our common stock is currently not listed on any securities exchange. We intend to apply to have our common stock approved for listing on under the symbol LAW.
Transfer Agent and Registrar
Upon the completion of this offering, the transfer agent and registrar for our common stock will be American Stock Transfer & Trust Company. The transfer agents address is 6201 15th Avenue, Brooklyn, NY 11219.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common stock. Future sales of substantial amounts of our common stock, including shares issued on the exercise of outstanding options, in the public market after this offering, or the possibility of these sales or issuances occurring, could adversely affect the prevailing market price for our common stock or impair our ability to raise equity capital.
Based on our shares outstanding as of March 31, 2021, upon the completion of this offering, a total of shares of common stock will be outstanding, assuming the automatic conversion of all of our outstanding shares of redeemable convertible preferred stock into an aggregate of 178,967,444 shares of common stock. Of these shares, all of the common stock sold in this offering by us, plus any shares sold by the selling stockholders pursuant to the exercise of the underwriters option to purchase additional common stock from the selling stockholders, will be freely tradable in the public market without restriction or further registration under the Securities Act, unless these shares are held by affiliates, as that term is defined in Rule 144 under the Securities Act, or unless these shares are sold to our directors or executive officers pursuant to our directed share program.
The remaining shares of common stock will be, and shares of common stock subject to stock options will be on issuance, restricted securities, as that term is defined in Rule 144 under the Securities Act. These restricted securities are eligible for public sale only if they are registered under the Securities Act or if they qualify for an exemption from registration under Rule 144 or Rule 701 under the Securities Act, which are summarized below. Restricted securities may also be sold outside of the United States to non-U.S. persons in accordance with Rule 904 of Regulation S.
Subject to the lock-up agreements described below and the provisions of Rule 144, Rule 701 or Regulation S under the Securities Act, as well as our insider trading policy, these restricted securities will be available for sale in the public market after the date of this prospectus.
As a result of the lock-up agreements and market standoff agreements described below and subject to the provisions of Rules 144 or 701, these restricted securities will be available for sale in the public market as follows:
Earliest Date Available for Sale in the Public Market |
Number of Shares of Common Stock | |
days after the date of this prospectus |
shares |
Rule 144
In general, under Rule 144 as currently in effect, once we have been subject to public company reporting requirements of Section 13 or Section 15(d) of the Exchange Act for at least 90 days, an eligible stockholder is entitled to sell such shares without complying with the manner of sale, volume limitation or notice provisions of Rule 144, subject to compliance with the public information requirements of Rule 144. To be an eligible stockholder under Rule 144, such stockholder must not be deemed to have been one of our affiliates for purposes of the Securities Act at any time during the 90 days preceding a sale and must have beneficially owned the shares proposed to be sold for at least six months, including the holding period of any prior owner other than our affiliates. If such a person has beneficially owned the shares proposed to be sold for at least one year, including the holding period of any prior owner other than our affiliates, then such person is entitled to sell such shares without complying with any of the requirements of Rule 144, subject to the expiration of the lock-up agreements described below.
In general, under Rule 144, as currently in effect, our affiliates or persons selling shares on behalf of our affiliates are entitled to sell shares on expiration of the lock-up agreements described below, subject, in the case of restricted securities, to such shares having been beneficially owned for at least six months. Beginning 90 days
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after the date of this prospectus, within any three-month period, such stockholders may sell a number of shares that does not exceed the greater of:
| 1% of the number of shares of common stock then outstanding, which will equal approximately shares immediately after this offering, assuming no exercise of the underwriters option to purchase additional shares of common stock from the selling stockholders; or |
| the average weekly trading volume of our common stock on the during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale. |
Sales under Rule 144 by our affiliates or persons selling shares on behalf of our affiliates are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about us.
Rule 701
Rule 701 generally allows a stockholder who was issued shares under a written compensatory plan or contract and who is not deemed to have been an affiliate of our company during the immediately preceding 90 days, to sell these shares in reliance on Rule 144, but without being required to comply with the public information, holding period, volume limitation or notice provisions of Rule 144. Rule 701 also permits affiliates of our company to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. All holders of Rule 701 shares, however, are required by that rule to wait until 90 days after the date of this prospectus before selling those shares under Rule 701, subject to the expiration of the lock-up agreements described below.
Form S-8 Registration Statements
We intend to file one or more registration statements on Form S-8 under the Securities Act with the SEC to register the offer and sale of shares of our common stock that are issuable under our 2013 Plan, 2021 Plan and ESPP. These registration statements will become effective immediately on filing. Shares covered by these registration statements will then be eligible for sale in the public markets, subject to vesting restrictions, any applicable lock-up agreements described below and Rule 144 limitations applicable to affiliates.
Lock-Up Arrangements
We, all of our directors, executive officers and the holders of substantially all of our common stock and securities exercisable for or convertible into our common stock outstanding immediately upon the completion of this offering, have agreed, or will agree, with the underwriters that, until days after the date of this prospectus, we and they will not, without the prior written consent of J.P. Morgan Securities LLC and BofA Securities, Inc., offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale or otherwise dispose of any of our shares of common stock, any options or warrants to purchase any of our shares of common stock or any securities convertible into or exchangeable for or that represent the right to receive shares of our common stock. These agreements are described in the section titled Underwriting. J.P. Morgan Securities LLC and BofA Securities, Inc. may release any of the securities subject to these lock-up agreements at any time.
In addition to the restrictions contained in the lock-up agreements described above, we have entered into agreements with substantially all of our security holders that contain market stand-off provisions imposing restrictions on the ability of such security holders to offer, sell or transfer our equity securities for a period of up to 180 days following the date of this prospectus.
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Registration Rights
Upon the completion of this offering, certain holders of shares of our common stock will be entitled to certain rights with respect to the registration of the offer and sale of their shares under the Securities Act. Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act immediately on the effectiveness of the registration. See the section titled Description of Capital StockRegistration Rights for additional information.
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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS OF OUR COMMON STOCK
The following is a summary of the material U.S. federal income tax consequences to non-U.S. holders (as defined below) of the acquisition, ownership and disposition of our common stock issued pursuant to this offering. This discussion is not a complete analysis of all potential U.S. federal income tax consequences relating thereto, does not address the potential application of the Medicare contribution tax on net investment income, the alternative minimum tax or the special tax accounting rules under Section 451(b) of the Code and does not address any estate or gift tax consequences or any tax consequences arising under any state, local or foreign tax laws or any other U.S. federal tax laws. This discussion is based on the Internal Revenue Code of 1986, as amended, or the Code, and applicable Treasury Regulations promulgated thereunder, judicial decisions and published rulings and administrative pronouncements of the Internal Revenue Service, or IRS, all as in effect as of the date hereof. These authorities are subject to differing interpretations and may change, possibly retroactively, resulting in U.S. federal income tax consequences different from those discussed below. We have not requested a ruling from the IRS with respect to the statements made and the conclusions reached in the following summary, and there can be no assurance that the IRS or a court will agree with such statements and conclusions.
This discussion is limited to non-U.S. holders who purchase our common stock pursuant to this offering and who hold our common stock as a capital asset within the meaning of Section 1221 of the Code (generally, property held for investment). This discussion does not address all of the U.S. federal income tax consequences that may be relevant to a particular holder in light of such holders particular circumstances. This discussion also does not consider any specific facts or circumstances that may be relevant to holders subject to special rules under the U.S. federal income tax laws, including:
| certain former citizens or long-term residents of the United States; |
| controlled foreign corporations; |
| passive foreign investment companies; |
| corporations that accumulate earnings to avoid U.S. federal income tax; |
| banks, financial institutions, investment funds, insurance companies, brokers, dealers or traders in securities; |
| tax-exempt organizations and governmental organizations; |
| tax-qualified retirement plans; |
| qualified foreign pension funds as defined in Section 897(l)(2) of the Code and entities all of the interests of which are held by qualified foreign pension funds; |
| persons that own, or have owned, actually or constructively, more than 5% of our common stock at any time; |
| persons who have elected to mark securities to market; and |
| persons holding our common stock as part of a hedging or conversion transaction or straddle, or a constructive sale, or other risk reduction strategy or integrated investment. |
If an entity or arrangement that is classified as a partnership for U.S. federal income tax purposes holds our common stock, the U.S. federal income tax treatment of a partner in the partnership will generally depend on the status of the partner and the activities of the partnership. Partnerships holding our common stock and the partners in such partnerships are urged to consult their tax advisors about the particular U.S. federal income tax consequences to them of holding and disposing of our common stock.
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THIS DISCUSSION IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT TAX ADVICE. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR TAX ADVISORS REGARDING THE PARTICULAR U.S. FEDERAL INCOME TAX CONSEQUENCES TO THEM OF ACQUIRING, OWNING AND DISPOSING OF OUR COMMON STOCK, AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER ANY STATE, LOCAL OR FOREIGN TAX LAWS AND ANY OTHER U.S. FEDERAL TAX LAWS.
Definition of Non-U.S. Holder
For purposes of this discussion, the term non-U.S. holder means any beneficial owner of our common stock that is not a U.S. person or a partnership (including any entity or arrangement treated as a partnership) for U.S. federal income tax purposes. A U.S. person is any person that, for U.S. federal income tax purposes, is or is treated as any of the following:
| an individual who is a citizen or resident of the United States; |
| a corporation (or entity treated as a corporation for U.S. federal income tax purposes) created or organized under the laws of the United States, any state thereof or the District of Columbia; |
| an estate, the income of which is subject to U.S. federal income tax regardless of its source; or |
| a trust (1) whose administration is subject to the primary supervision of a U.S. court and which has one or more U.S. persons who have the authority to control all substantial decisions of the trust or (2) that has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person. |
Distributions on Our Common Stock
We have not paid dividends on our common stock and do not anticipate paying dividends on our common stock for the foreseeable future. See the section titled Dividend Policy. However, if we make cash or other property distributions on our common stock, such distributions will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Amounts not treated as dividends for U.S. federal income tax purposes will constitute a return of capital and will first be applied against and reduce a holders tax basis in our common stock, but not below zero. Any excess will be treated as gain realized on the sale or other disposition of our common stock and will be treated as described under the section titled Gain on Disposition of Our Common Stock below.
Subject to the discussions below regarding effectively connected income, backup withholding and Sections 1471 through 1474 of the Code (commonly referred to as FATCA), dividends paid to a non-U.S. holder generally will be subject to U.S. federal withholding tax at a rate of 30% of the gross amount of the dividends or such lower rate specified by an applicable income tax treaty. To receive the benefit of a reduced treaty rate, a non-U.S. holder must furnish us or our paying agent with a valid IRS Form W-8BEN or IRS Form W-8BEN-E (or applicable successor form) and satisfy applicable certification and other requirements. This certification must be provided to us or our paying agent before the payment of dividends and must be updated periodically. If the non-U.S. holder holds the stock through a financial institution or other agent acting on the non-U.S. holders behalf, the non-U.S. holder will be required to provide appropriate documentation to the agent, which then will be required to provide certification to us or our paying agent, either directly or through other intermediaries.
If a non-U.S. holder holds our common stock in connection with the conduct of a trade or business in the United States and dividends paid on our common stock are effectively connected with such holders U.S. trade or business (and are attributable to such holders permanent establishment in the United States if required by an applicable tax treaty), the non-U.S. holder will be exempt from U.S. federal withholding tax. To claim the exemption, the non-U.S. holder must generally furnish a valid IRS Form W-8ECI (or applicable successor form) to us or our paying agent. However, any such effectively connected dividends paid on our common stock generally will be subject to U.S. federal income tax on a net income basis at the regular U.S. federal income tax
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rates in the same manner as if such holder were a resident of the United States. A non-U.S. holder that is a foreign corporation also may be subject to an additional branch profits tax equal to 30% (or such lower rate specified by an applicable income tax treaty) of its effectively connected earnings and profits for the taxable year, as adjusted for certain items. Non-U.S. holders should consult their tax advisors regarding any applicable income tax treaties that may provide for different rules.
Non-U.S. holders that do not provide the required certification on a timely basis, but that qualify for a reduced treaty rate, may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with the IRS.
Gain on Disposition of Our Common Stock
Subject to the discussions below regarding backup withholding and FATCA, a non-U.S. holder generally will not be subject to U.S. federal income tax on any gain realized on the sale or other disposition of our common stock, unless:
| the gain is effectively connected with the non-U.S. holders conduct of a trade or business in the United States, and if required by an applicable income tax treaty, is attributable to a permanent establishment maintained by the non-U.S. holder in the United States; |
| the non-U.S. holder is a nonresident alien individual present in the United States for 183 days or more during the taxable year of the disposition and certain other requirements are met; or |
| our common stock constitutes a United States real property interest, or USRPI, by reason of our status as a United States real property holding corporation, or USRPHC, for U.S. federal income tax purposes at any time within the shorter of the five-year period preceding the disposition or the non-U.S. holders holding period for our common stock. |
The determination of whether we are a USRPHC depends on the fair market value of our USRPIs relative to the fair market value of worldwide real property interests and our other assets used or held for use in a trade or business. We believe that we are not currently and do not anticipate becoming a USRPHC for U.S. federal income tax purposes, although there can be no assurance we will not in the future become a USRPHC. Even if we are or were to become a USRPHC, gain arising from the sale or other taxable disposition of our common stock by a non-U.S. holder will not be subject to U.S. federal income tax if our common stock is regularly traded (as defined by applicable Treasury Regulations) on an established securities market, and such non-U.S. holder owned, actually and constructively, 5% or less of our common stock throughout the shorter of the five-year period ending on the date of the sale or other taxable disposition or the non-U.S. holders holding period. Prospective investors are encouraged to consult their own tax advisors regarding the possible consequences to them if we are, or were to become, a USRPHC.
Gain described in the first bullet point above generally will be subject to U.S. federal income tax on a net income basis at the regular U.S. federal income tax rates in the same manner as if such holder were a resident of the United States. A non-U.S. holder that is a foreign corporation also may be subject to an additional branch profits tax equal to 30% (or such lower rate specified by an applicable income tax treaty) of its effectively connected earnings and profits for the taxable year, as adjusted for certain items. Gain described in the second bullet point above will be subject to U.S. federal income tax at a flat 30% rate (or such lower rate specified by an applicable income tax treaty), but may be offset by certain U.S.-source capital losses (even though the individual is not considered a resident of the United States), provided that the non-U.S. holder has timely filed U.S. federal income tax returns with respect to such losses. Non-U.S. holders should consult their tax advisors regarding any applicable income tax treaties that may provide for different rules.
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Information Reporting and Backup Withholding
Annual reports are required to be filed with the IRS and provided to each non-U.S. holder indicating the amount of distributions on our common stock paid to such holder and the amount of any tax withheld with respect to those distributions. These information reporting requirements apply regardless of whether such distributions constitute dividends and even if no withholding was required. This information also may be made available under a specific treaty or agreement with the tax authorities in the country in which the non-U.S. holder resides or is established. Backup withholding, currently at a 24% rate, generally will not apply to payments to a non-U.S. holder of dividends on or the gross proceeds of a disposition of our common stock provided the non-U.S. holder furnishes the required certification for its non-U.S. status, such as by providing a valid IRS Form W-8BEN, IRS Form W-8BEN-E or IRS Form W-8ECI, or certain other requirements are met. Backup withholding may apply if the payor has actual knowledge, or reason to know, that the holder is a U.S. person who is not an exempt recipient.
Backup withholding is not an additional tax. If any amount is withheld under the backup withholding rules, the non-U.S. holder should consult with a U.S. tax advisor regarding the possibility of and procedure for obtaining a refund or a credit against the non-U.S. holders U.S. federal income tax liability, if any.
FATCA
FATCA imposes a U.S. federal withholding tax of 30% on certain payments made to a foreign financial institution (as specially defined under these rules) unless such institution enters into an agreement with the U.S. government to withhold on certain payments and to collect and provide to the U.S. tax authorities substantial information regarding certain U.S. account holders of such institution (which includes certain equity and debt holders of such institution, as well as certain account holders that are foreign entities with U.S. owners) or an exemption applies. FATCA also generally will impose a U.S. federal withholding tax of 30% on certain payments made to a non-financial foreign entity unless such entity provides the withholding agent a certification identifying certain direct and indirect U.S. owners of the entity or an exemption applies. An intergovernmental agreement between the United States and an applicable foreign country may modify these requirements. Under certain circumstances, a non-U.S. holder might be eligible for refunds or credits of such taxes. FATCA currently applies to dividends paid on our common stock. Under applicable Treasury Regulations and administrative guidance, withholding under FATCA would have applied to payments of gross proceeds from the sale or other disposition of stock, but under proposed regulations (the preamble to which specifies that taxpayers are permitted to rely on such proposed regulations pending finalization), no withholding would apply with respect to such payments of gross proceeds.
Prospective investors are encouraged to consult with their own tax advisors regarding the possible implications of this legislation on their investment in our common stock.
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We are offering the shares of common stock described in this prospectus through a number of underwriters. J.P. Morgan Securities LLC and BofA Securities, Inc. are acting as joint book-running managers of the offering and as representatives of the underwriters. We and the selling stockholders have entered into an underwriting agreement with the underwriters. Subject to the terms and conditions of the underwriting agreement, we and the selling stockholders have agreed to sell to the underwriters, and each underwriter has severally agreed to purchase, at the public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus, the number of shares of common stock listed next to its name in the following table:
Name | Number of Shares |
|||
J.P. Morgan Securities LLC |
||||
BofA Securities, Inc. |
||||
Citigroup Global Markets, Inc. |
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Jefferies LLC |
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Canaccord Genuity LLC |
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Cowen and Company, LLC |
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Needham & Company, LLC |
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Stifel, Nicolaus & Company, Incorporated |
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Loop Capital Markets LLC |
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|
|
|||
Total |
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|
|
The underwriters are committed to purchase all the shares of common stock offered by us if they purchase any shares. The underwriting agreement also provides that if an underwriter defaults, the purchase commitments of non-defaulting underwriters may also be increased or the offering may be terminated.
The underwriters propose to offer the shares of common stock directly to the public at the initial public offering price set forth on the cover page of this prospectus and to certain dealers at that price less a concession not in excess of $ per share. Any such dealers may resell shares to certain other brokers or dealers at a discount of up to $ per share from the initial public offering price. After the initial offering of the shares to the public, if all of the shares of common stock are not sold at the initial public offering price, the underwriters may change the offering price and the other selling terms. Sales of any shares made outside of the United States may be made by affiliates of the underwriters.
The underwriters have an option to buy up to additional shares of common stock from the selling stockholders to cover sales of shares by the underwriters which exceed the number of shares specified in the table above. The underwriters have 30 days from the date of this prospectus to exercise this option to purchase additional shares. If any shares are purchased with this option to purchase additional shares, the underwriters will purchase shares in approximately the same proportion as shown in the table above. If any additional shares of common stock are purchased, the underwriters will offer the additional shares on the same terms as those on which the shares are being offered.
At our request, the underwriters have reserved up to % of the shares of common stock for sale at the initial public offering price to persons who are directors, officers, employees, or who are otherwise associated with us through a directed share program. The number of shares of common stock available for sale to the general public will be reduced by the number of directed shares purchased by participants in the program. Any directed shares not purchased will be offered by the underwriters to the general public on the same basis as all other shares of common stock offered. We have agreed to indemnify the underwriters and their affiliates against certain liabilities and expenses, including liabilities under the Securities Act, in connection with the sale of the shares reserved for the directed share program. The directed share program will be arranged through .
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The underwriting fee is equal to the public offering price per share of common stock less the amount paid by the underwriters to us per share of common stock. The underwriting fee is $ per share. The following table shows the per share and total underwriting discounts and commissions to be paid to the underwriters assuming both no exercise and full exercise of the underwriters option to purchase additional shares.
Without Option to Purchase Additional Shares Exercise |
With Full Option to Purchase Additional Shares Exercise |
|||||||
Per Share |
$ | $ | ||||||
|
|
|
|
|||||
Total |
$ | $ |
We estimate that the total expenses of this offering, including registration, filing and listing fees, printing fees and legal and accounting expenses, but excluding the underwriting discounts and commissions, will be approximately $ . We have also agreed to reimburse the underwriters for certain FINRA-related expenses incurred by them in connection with the offering in an amount up to $ and expenses incurred in connection with the directed share program.
A prospectus in electronic format may be made available on the web sites maintained by one or more underwriters, or selling group members, if any, participating in the offering. The underwriters may agree to allocate a number of shares to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the representatives to underwriters and selling group members that may make Internet distributions on the same basis as other allocations.
We and our officers, directors and holders of substantially all of our common stock, including the selling stockholders, have agreed with the underwriters, subject to certain exceptions, not to dispose of or hedge any of their common stock or securities convertible into or exchangeable for shares of common stock for a period of days after the date of this prospectus, except with the prior written consent of J.P. Morgan Securities LLC and BofA Securities, Inc. The lock-up agreements are subject to specified exceptions.
We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933.
We will apply to have our common stock approved for listing on the under the symbol LAW.
In connection with this offering, the underwriters may engage in stabilizing transactions, which involves making bids for, purchasing and selling shares of common stock in the open market for the purpose of preventing or retarding a decline in the market price of the common stock while this offering is in progress. These stabilizing transactions may include making short sales of common stock, which involves the sale by the underwriters of a greater number of shares of common stock than they are required to purchase in this offering, and purchasing shares of common stock on the open market to cover positions created by short sales. Short sales may be covered shorts, which are short positions in an amount not greater than the underwriters option to purchase additional shares referred to above, or may be naked shorts, which are short positions in excess of that amount. The underwriters may close out any covered short position either by exercising their option to purchase additional shares, in whole or in part, or by purchasing shares in the open market. In making this determination, the underwriters will consider, among other things, the price of shares available for purchase in the open market compared to the price at which the underwriters may purchase shares through the option to purchase additional shares. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market that could adversely affect investors who purchase in this offering. To the extent that the underwriters create a naked short position, they will purchase shares in the open market to cover the position.
171
The underwriters have advised us that, pursuant to Regulation M of the Securities Act of 1933, they may also engage in other activities that stabilize, maintain or otherwise affect the price of the common stock, including the imposition of penalty bids. This means that if the representatives of the underwriters purchase common stock in the open market in stabilizing transactions or to cover short sales, the representatives can require the underwriters that sold those shares as part of this offering to repay the underwriting discount received by them.
These activities may have the effect of raising or maintaining the market price of the common stock or preventing or retarding a decline in the market price of the common stock, and, as a result, the price of the common stock may be higher than the price that otherwise might exist in the open market. If the underwriters commence these activities, they may discontinue them at any time. The underwriters may carry out these transactions on the , in the over-the-counter market or otherwise.
Prior to this offering, there has been no public market for our common stock. The initial public offering price will be determined by negotiations between us and the representatives of the underwriters. In determining the initial public offering price, we and the representatives of the underwriters expect to consider a number of factors including:
| the information set forth in this prospectus and otherwise available to the representatives; |
| our prospects and the history and prospects for the industry in which we compete; |
| an assessment of our management; |
| our prospects for future earnings; |
| the general condition of the securities markets at the time of this offering; |
| the recent market prices of, and demand for, publicly traded common stock of generally comparable companies; and |
| other factors deemed relevant by the underwriters and us. |
Neither we nor the underwriters can assure investors that an active trading market will develop for our shares of common stock, or that the shares will trade in the public market at or above the initial public offering price.
Certain of the underwriters and their affiliates have provided in the past to us and our affiliates and may provide from time to time in the future certain commercial banking, financial advisory, investment banking and other services for us and such affiliates in the ordinary course of their business, for which they have received and may continue to receive customary fees and commissions. In addition, from time to time, certain of the underwriters and their affiliates may effect transactions for their own account or the account of customers, and hold on behalf of themselves or their customers, long or short positions in our debt or equity securities or loans, and may do so in the future.
Other than in the United States, no action has been taken by us or the underwriters that would permit a public offering of the securities offered by this prospectus in any jurisdiction where action for that purpose is required. The securities offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such securities be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.
172
Selling Restrictions
Notice to Prospective Investors in Canada
The shares may be sold only to purchasers purchasing or deemed to be purchasing, as principal that are accredited investors, as defined in National Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), and are permitted clients, as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Any resale of the shares must be made in accordance with an exemption from, or in a transaction not subject to, the prospectus requirements of applicable securities laws.
Securities legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this prospectus (including any amendment thereto) contains a misrepresentation, provided that the remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchasers province or territory. The purchaser should refer to any applicable provisions of the securities legislation of the purchasers province or territory for particulars of these rights or consult with a legal advisor.
Pursuant to section 3A.3 of National Instrument 33-105 Underwriting Conflicts (NI 33-105), the underwriters are not required to comply with the disclosure requirements of NI 33-105 regarding underwriter conflicts of interest in connection with this offering.
Notice to Prospective Investors in the European Economic Area
In relation to each Member State of the European Economic Area (each a Relevant State), no shares have been offered or will be offered pursuant to the offering to the public in that Relevant State prior to the publication of a prospectus in relation to the shares which has been approved by the competent authority in that Relevant State or, where appropriate, approved in another Relevant State and notified to the competent authority in that Relevant State, all in accordance with the Prospectus Regulation, except that offers of shares may be made to the public in that Relevant State at any time under the following exemptions under the Prospectus Regulation:
(a) to any legal entity which is a qualified investor as defined under the Prospectus Regulation;
(b) to fewer than 150 natural or legal persons (other than qualified investors as defined under the Prospectus Regulation), subject to obtaining the prior consent of the underwriters; or
(c) in any other circumstances falling within Article 1(4) of the Prospectus Regulation,
provided that no such offer of shares shall require us or any underwriter to publish a prospectus pursuant to Article 3 of the Prospectus Regulation or supplement a prospectus pursuant to Article 23 of the Prospectus Regulation and each person who initially acquires any shares or to whom any offer is made will be deemed to have represented, acknowledged and agreed to and with each of the underwriters and our company that it is a qualified investor within the meaning of Article 2(e) of the Prospectus Regulation. In the case of any shares being offered to a financial intermediary as that term is used in the Prospectus Regulation, each such financial intermediary will be deemed to have represented, acknowledged and agreed that the shares acquired by it in the offer have not been acquired on a nondiscretionary basis on behalf of, nor have they been acquired with a view to their offer or resale to, persons in circumstances which may give rise to an offer of any shares to the public other than their offer or resale in a Relevant State to qualified investors as so defined or in circumstances in which the prior consent of the underwriters have been obtained to each such proposed offer or resale.
For the purposes of this provision, the expression an offer to the public in relation to shares in any Relevant State means the communication in any form and by any means of sufficient information on the terms of the offer and any shares to be offered so as to enable an investor to decide to purchase or subscribe for any shares, and the expression Prospectus Regulation means Regulation (EU) 2017/1129.
173
We have not authorized and do not authorize the making of any offer of shares through any financial intermediary on their behalf, other than offers made by the underwriters with a view to the final placement of the shares in this document. Accordingly, no purchaser of the shares, other than the underwriters, is authorized to make any further offer of the shares on behalf of us or the underwriters.
Notice to Prospective Investors in the United Kingdom
In relation to the United Kingdom, no shares of common stock have been offered or will be offered pursuant to this offering to the public in the United Kingdom prior to the publication of a prospectus in relation to the shares that either (i) has been approved by the Financial Conduct Authority or (ii) is to be treated as if it had been approved by the Financial Conduct Authority in accordance with the transitional provision in Regulation 74 of the Prospectus (Amendment etc.) (EU Exit) Regulations 2019, except that offers of shares may be made to the public in the United Kingdom at any time under the following exemptions under the UK Prospectus Regulation:
| to any legal entity which is a qualified investor as defined in Article 2 of the UK Prospectus Regulation; |
| to fewer than 150 natural or legal persons (other than qualified investors as defined in Article 2 of the UK Prospectus Regulation); or |
| in any other circumstances falling within section 86 of the Financial Services and Markets Act 2000 (FSMA), |
provided that no such offer of shares shall require the Issuer or any representative to publish a prospectus pursuant to section 85 of the FSMA or supplement a prospectus pursuant to Article 23 of the UK Prospectus Regulation.
For the purposes of this provision, the expression an offer to the public in relation to any shares in any relevant state means the communication in any form and by any means of sufficient information on the terms of the offer and any shares to be offered so as to enable an investor to decide to purchase or subscribe for any shares, and the expression UK Prospectus Regulation means Regulation (EU) 2017/1129 as it forms part of domestic law by virtue of the European Union (Withdrawal) Act 2018.
We have not authorized and do not authorize the making of any offer of shares through any financial intermediary on their behalf, other than offers made by the underwriters with a view to the final placement of the shares as contemplated in this prospectus. Accordingly, no purchaser of the shares, other than the underwriters, is authorized to make any further offer of the shares on behalf of us or the underwriters.
In addition, in the United Kingdom, this document is being distributed only to, and is directed only at, and any offer subsequently made may only be directed at persons who are qualified investors (as defined in Article 2 of the UK Prospectus Regulation) (i) who have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended, or the Order, and/or (ii) who are high net worth companies (or persons to whom it may otherwise be lawfully communicated) falling within Article 49(2)(a) to (d) of the Order (all such persons together being referred to as relevant persons) or otherwise in circumstances which have not resulted and will not result in an offer to the public of the shares in the United Kingdom within the meaning of the FSMA.
Any person in the United Kingdom that is not a relevant person should not act or rely on the information included in this document or use it as basis for taking any action. In the United Kingdom, any investment or investment activity that this document relates to may be made or taken exclusively by relevant persons.
174
The validity of our common stock offered by this prospectus will be passed upon for us by Cooley LLP, New York, New York. Certain legal matters in connection with this offering will be passed upon for the underwriters by Morgan, Lewis & Bockius LLP.
The consolidated financial statements of CS Disco, Inc. at December 31, 2019 and 2020, and for the years then ended, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock offered by this prospectus. This prospectus, which constitutes a part of the registration statement, does not contain all the information set forth in the registration statement, some of which is contained in exhibits to the registration statement as permitted by the rules and regulations of the SEC. For further information with respect to us and our common stock, we refer you to the registration statement, including the exhibits filed as a part of the registration statement. Statements contained in this prospectus concerning the contents of any contract or any other document are not necessarily complete. If a contract or document has been filed as an exhibit to the registration statement, please see the copy of the contract or document that has been filed. Each statement in this prospectus relating to a contract or document filed as an exhibit is qualified in all respects by the filed exhibit. The SEC maintains an internet website that contains reports and other information about issuers, like us, that file electronically with the SEC. The address of that website is www.sec.gov.
Upon the completion of this offering, we will be subject to the information reporting requirements of the Exchange Act and we will file reports, proxy statements and other information with the SEC. These reports, proxy statements and other information will be available at www.sec.gov.
We also maintain a website at www.csdisco.com. Information contained in, or accessible through, our website is not a part of this prospectus, and the inclusion of our website address in this prospectus is only as an inactive textual reference.
175
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-2 | ||||
F-3 | ||||
Consolidated Statements of Operations and Comprehensive Loss |
F-4 | |||
F-5 | ||||
F-6 | ||||
F-7 |
F-1
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of CS Disco, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of CS Disco, Inc. (the Company) as of December 31, 2019 and 2020, the related consolidated statements of operations and comprehensive loss, changes in redeemable convertible preferred stock and stockholders deficit, and cash flows for the years then ended, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2020, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
Adoption of ASU No. 2016-02
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for leases in 2020 due to the adoption of Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842).
Basis for Opinion
These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on the Companys financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Companys auditor since 2018.
Austin, Texas
May 7, 2021
F-2
Consolidated Balance Sheets
(in thousands, except par value amounts)
December 31, | March 31, 2021 |
|||||||||||
2019 | 2020 | |||||||||||
(unaudited) | ||||||||||||
Assets |
||||||||||||
Current assets: |
||||||||||||
Cash and cash equivalents |
$ | 23,224 | $ | 58,569 | $ | 53,632 | ||||||
Accounts receivable, net |
7,362 | 12,912 | 14,952 | |||||||||
Other current assets |
1,341 | 1,364 | 1,439 | |||||||||
|
|
|
|
|
|
|||||||
Total current assets |
31,927 | 72,845 | 70,023 | |||||||||
|
|
|
|
|
|
|||||||
Property and equipment, net |
3,589 | 3,873 | 4,022 | |||||||||
Operating lease right-of-use assets |
| 1,850 | 1,608 | |||||||||
Other assets |
382 | 539 | 535 | |||||||||
|
|
|
|
|
|
|||||||
Total assets |
$ | 35,898 | $ | 79,107 | $ | 76,188 | ||||||
|
|
|
|
|
|
|||||||
Liabilities, redeemable convertible preferred stock, and stockholders deficit |
||||||||||||
Current liabilities: |
||||||||||||
Accounts payable |
$ | 3,986 | $ | 3,588 | $ | 4,267 | ||||||
Accrued expenses |
1,080 | 641 | 771 | |||||||||
Accrued salary and benefits |
2,723 | 5,240 | 2,945 | |||||||||
Deferred revenue |
1,418 | 1,642 | 2,752 | |||||||||
Operating leases |
| 1,018 | 1,031 | |||||||||
Finance lease |
| 112 | 114 | |||||||||
|
|
|
|
|
|
|||||||
Total current liabilities |
9,207 | 12,241 | 11,880 | |||||||||
Operating lease, noncurrent |
| 890 | 627 | |||||||||
Finance lease, noncurrent |
| 99 | 70 | |||||||||
Other liabilities |
270 | | | |||||||||
|
|
|
|
|
|
|||||||
Total liabilities |
9,477 | 13,230 | 12,577 | |||||||||
|
|
|
|
|
|
|||||||
Commitments and contingencies (Note 8) |
||||||||||||
Redeemable convertible preferred stock $0.001 par value, issuable in Series A-F 158,774, 178,967, and 178,967 shares authorized as of December 31, 2019 and 2020 and March 31, 2021 (unaudited), respectively; issued and outstanding shares 158,774, 178,967, and 178,967 as of December 31, 2019 and 2020 and March 31, 2021 (unaudited), respectively; aggregate liquidation preference of 101,133, 161,134, and 161,134, respectively |
100,774 | 160,800 | 160,826 | |||||||||
Stockholders deficit |
||||||||||||
Common stock $0.001 par value. 256,177, 277,406, and 277,406 shares authorized as of December 31, 2019 and 2020 and March 31, 2021 (unaudited), issued and outstanding 66,661, 67,663, and 67,927 shares as of December 31, 2019 and 2020 and March 31, 2021 (unaudited), respectively |
67 | 68 | 68 | |||||||||
Additional paid-in capital |
5,827 | 8,129 | 8,765 | |||||||||
Accumulated deficit |
(80,247 | ) | (103,120 | ) | (106,048 | ) | ||||||
|
|
|
|
|
|
|||||||
Total stockholders deficit |
(74,353 | ) | (94,923 | ) | (97,215 | ) | ||||||
|
|
|
|
|
|
|||||||
Total liabilities, redeemable convertible preferred stock, and stockholders deficit |
$ |
35,898 |
|
$ | 79,107 | $ | 76,188 | |||||
|
|
|
|
|
|
F-3
Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except per share amounts)
Year Ended December 31, |
Three Months Ended March 31, |
|||||||||||||||
2019 | 2020 | 2020 | 2021 | |||||||||||||
(unaudited) | ||||||||||||||||
Revenue |
$ | 48,556 | $ | 68,444 | $ | 15,668 | $ | 21,131 | ||||||||
Cost of revenue |
14,457 | 20,449 | 5,071 | 5,788 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Gross profit |
34,099 | 47,995 | 10,597 | 15,343 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating expenses: |
||||||||||||||||
Research and development |
25,352 | 26,599 | 8,203 | 6,262 | ||||||||||||
Sales and marketing |
26,122 | 31,061 | 9,322 | 7,876 | ||||||||||||
General and administrative |
12,975 | 13,893 | 4,258 | 4,053 | ||||||||||||
Refund of sales and use taxes |
| (1,057 | ) | | | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total operating expenses |
64,449 | 70,496 | 21,783 | 18,191 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Loss from operations |
(30,350 | ) | (22,501 | ) | (11,186 | ) | (2,848 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Other income (expense) |
||||||||||||||||
Interest and other income |
652 | 155 | 63 | 13 | ||||||||||||
Interest and other expense |
(124 | ) | (456 | ) | (88 | ) | (57 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Loss from operations before income taxes |
(29,822 | ) | (22,802 | ) | (11,211 | ) | (2,892 | ) | ||||||||
Income tax provision |
(10 | ) | (71 | ) | (25 | ) | (36 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net loss |
$ | (29,832 | ) | $ | (22,873 | ) | $ | (11,236 | ) | $ | (2,928 | ) | ||||
|
|
|
|
|
|
|
|
|||||||||
Less accretion of redeemable convertible preferred stock |
$ | (86 | ) | $ | (92 | ) | (23 | ) | (26 | ) | ||||||
|
|
|
|
|
|
|
|
|||||||||
Net loss attributable to common stockholders |
$ | (29,918 | ) | $ | (22,965 | ) | $ | (11,259 | ) | $ | (2,954 | ) | ||||
|
|
|
|
|
|
|
|
|||||||||
Net loss per share attributable to common stockholders, basic and diluted |
$ | (0.46 | ) | $ | (0.35 | ) | $ | (0.17 | ) | $ | (0.04 | ) | ||||
|
|
|
|
|
|
|
|
|||||||||
Weighted-average shares used in computing net loss per share attributable to common stockholders, basic and diluted |
64,601 | 65,856 | 65,496 | 66,940 | ||||||||||||
|
|
|
|
|
|
|
|
F-4
Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders Deficit
For the Years Ended December 31, 2019 and 2020 and Three Months Ended March 31, 2021 (unaudited)
and March 31, 2020 (unaudited)
(in thousands)
Redeemable convertible preferred stock |
Common stock | Additional paid-in capital |
Accumulated deficit |
Total | ||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||
Balance at December 31, 2018 |
133,863 | $ | 50,923 | 64,751 | $ | 65 | $ | 1,672 | $ | (50,415 | ) | $ | (48,678 | ) | ||||||||||||||
Issuance of Series E redeemable convertible preferred stock, net of issuance costs |
24,911 | 49,765 | | | | | | |||||||||||||||||||||
Accretion to redemption value |
| 86 | | | (86 | ) | | (86 | ) | |||||||||||||||||||
Exercise of stock options |
| | 910 | 1 | 122 | | 123 | |||||||||||||||||||||
Issuance of restricted stock awards |
| | 1,000 | 1 | (1 | ) | | | ||||||||||||||||||||
Stock compensation expense |
| | | | 4,120 | | 4,120 | |||||||||||||||||||||
Net loss |
| | | | | (29,832 | ) | (29,832 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Balance at December 31, 2019, |
158,774 | 100,774 | 66,661 | 67 | 5,827 | (80,247 | ) | (74,353 | ) | |||||||||||||||||||
Issuance of Series F redeemable convertible preferred stock, net of issuance costs |
20,193 | 59,934 | | | | | | |||||||||||||||||||||
Issuance of warrant |
| | | | 84 | | 84 | |||||||||||||||||||||
Accretion to redemption value |
| 92 | | | (92 | ) | | (92 | ) | |||||||||||||||||||
Exercise of stock options |
| | 1,075 | 1 | 446 | | 447 | |||||||||||||||||||||
Repurchase of common stock related to net share settlement |
| | (73 | ) | | (138 | ) | | (138 | ) | ||||||||||||||||||
Stock compensation expense |
| | | | 2,002 | | 2,002 | |||||||||||||||||||||
Net loss |
| | | | | (22,873 | ) | (22,873 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Balance at December 31, 2020 |
178,967 | $ | 160,800 | 67,663 | $ | 68 | $ | 8,129 | $ | (103,120 | ) | $ | (94,923 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Accretion to redemption value |
| 26 | | | (26 | ) | | (26 | ) | |||||||||||||||||||
Exercise of stock options |
| | 280 | | 222 | | 222 | |||||||||||||||||||||
Repurchase of common stock related to net share settlement |
| | (17 | ) | | (50 | ) | | (50 | ) | ||||||||||||||||||
Stock compensation expense |
| | | | 490 | | 490 | |||||||||||||||||||||
Net loss |
| | | | | (2,928 | ) | (2,928 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Balance at March 31, 2021 |
178,967 | $ | 160,826 | 67,926 | $ | 68 | $ | 8,765 | $ | (106,048 | ) | $ | (97,215 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable Convertible Preferred stock |
Common Stock | Additional paid-in capital |
Accumulated Deficit |
Total | ||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||
Balance at December 31, 2019 |
158,774 | $ | 100,774 | 66,661 | $ | 67 | $ | 5,827 | $ | (80,247 | ) | $ | (74,353 | ) | ||||||||||||||
Accretion to redemption value |
| 23 | | | (23 | ) | | (23 | ) | |||||||||||||||||||
Exercise of stock options |
| | 45 | | 8 | | 8 | |||||||||||||||||||||
Repurchase of common stock related to net share settlement |
| | (18 | ) | | (31 | ) | | (31 | ) | ||||||||||||||||||
Stock compensation expense |
| | | | 489 | | 489 | |||||||||||||||||||||
Net loss |
| | | | | (11,236 | ) | (11,236 | ) | |||||||||||||||||||
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Balance at March 31, 2020 |
158,774 | $ | 100,797 | 66,688 | $ | 67 | $ | 6,270 | $ | (91,483 | ) | $ | (85,146 | ) | ||||||||||||||
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F-5
Consolidated Statements of Cash Flows
(in thousands)
Year Ended December 31, |
Three Months Ended March 31, |
|||||||||||||||
2019 | 2020 | 2020 | 2021 | |||||||||||||
(unaudited) | ||||||||||||||||
Cash flow from operating activities: |
||||||||||||||||
Net loss |
$ | (29,832 | ) | $ | (22,873 | ) | $ | (11,236 | ) | $ | (2,928 | ) | ||||
Adjustments to reconcile net loss to cash used in operations: |
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Depreciation and amortization |
803 | 1,624 | 378 | 424 | ||||||||||||
Stock-based compensation |
4,120 | 1,993 | 488 | 488 | ||||||||||||
Charge to allowance for credit losses |
356 | 451 | 135 | 130 | ||||||||||||
Loss on disposal of long-lived assets |
12 | 6 | | | ||||||||||||
Non-cash operating lease costs |
| 1,337 | 374 | 242 | ||||||||||||
Non-cash interest |
38 | 70 | 9 | 21 | ||||||||||||
Changes in operating assets and liabilities: |
||||||||||||||||
Accounts receivable |
(4,564 | ) | (6,001 | ) | (888 | ) | (2,171 | ) | ||||||||
Other current assets |
(218 | ) | (24 | ) | 223 | (75 | ) | |||||||||
Other long-term assets |
(85 | ) | 31 | (5 | ) | | ||||||||||
Accounts payable |
2,278 | (397 | ) | 184 | 679 | |||||||||||
Accrued expenses and other |
(794 | ) | 2,263 | 499 | (2,167 | ) | ||||||||||
Deferred revenue |
587 | 224 | 119 | 1,110 | ||||||||||||
Operating lease liabilities |
| (1,416 | ) | (394 | ) | (249 | ) | |||||||||
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Net cash used in operating activities |
(27,299 | ) | (22,712 | ) | (10,114 | ) | (4,496 | ) | ||||||||
Cash flow from investing activities: |
||||||||||||||||
Purchases of property, equipment and capitalized internal-use software development costs |
(3,325 | ) | (1,904 | ) | (663 | ) | (586 | ) | ||||||||
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|
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|
|
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Net cash used in investing activities |
(3,325 | ) | (1,904 | ) | (663 | ) | (586 | ) | ||||||||
Cash flow from financing activities: |
||||||||||||||||
Debt issuance costs |
| (176 | ) | | | |||||||||||
Proceeds from debt |
| 23,302 | 17,000 | | ||||||||||||
Repayment of debt |
(5,784 | ) | (23,302 | ) | | | ||||||||||
Proceeds from exercise of stock options |
123 | 447 | 8 | 222 | ||||||||||||
Net proceeds from issuance of redeemable convertible preferred stock |
49,765 | 59,934 | | | ||||||||||||
Repurchase of common stock related to net share settlement |
| (138 | ) | (31 | ) | (50 | ) | |||||||||
Principal payments on finance lease obligations |
| (106 | ) | (26 | ) | (27 | ) | |||||||||
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|
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Net cash provided by financing activities |
44,104 | 59,961 | 16,951 | 145 | ||||||||||||
Increase in cash: |
13,480 | 35,345 | 6,174 | (4,937 | ) | |||||||||||
Cash & cash equivalents at beginning of period |
9,744 | 23,224 | 23,224 | 58,569 | ||||||||||||
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Cash & cash equivalents at end of period |
$ | 23,224 | $ | 58,569 | $ | 29,398 | $ | 53,632 | ||||||||
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Supplemental disclosure: |
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Cash paid for interest |
$ | 85 | $ | 365 | $ | 12 | $ | 12 | ||||||||
Cash paid for taxes |
36 | 87 | 21 | 16 | ||||||||||||
Non-cash investing and financing activities: |
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Accretion of preferred stock to redemption value |
$ | 86 | $ | 92 | $ | 23 | $ | 26 |
F-6
1. Organization and Nature of Operations
CS Disco, Inc., and wholly owned subsidiary CS Disco Ltd. (the Company, DISCO), has built a cloud-native, AI-powered software platform that enterprises, law firms, legal services providers, and governments use for ediscovery, legal document review, and case management in a wide variety of legal matters, ranging from litigation to investigations to compliance to diligence. The Company incorporated as a Delaware corporation on December 2, 2013, and registered CS Disco, Ltd. in the United Kingdom on October 24, 2018. The Companys headquarters are located in Austin, Texas.
2. Summary of Significant Accounting Policies
Emerging Growth Company Status
The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the JOBS Act). As described in Recently Adopted Accounting Pronouncements below, the Company early adopted multiple accounting standards, as the JOBS Act does not preclude an emerging growth company from adopting a new or revised accounting standard earlier than the time that such standard applies to private companies. The Company expects to use the extended transition period for any other new or revised accounting standards during the period in which it remains an emerging growth company.
Basis of Presentation and Consolidation
The accompanying consolidated financial statements have been prepared in accordance with U. S. generally accepted accounting principles (GAAP) and include the accounts of the Company. All significant intercompany balances and transactions have been eliminated. There are no differences between the net loss and comprehensive loss.
Unaudited Interim Consolidated Financial Statements
The accompanying interim consolidated balance sheet as of March 31, 2021, the interim consolidated statements of operations and comprehensive loss, of cash flows, and of changes in redeemable convertible preferred stock and stockholders deficit for the three months ended March 31, 2020 and 2021, and the related notes to such interim consolidated financial statements are unaudited. These unaudited interim consolidated financial statements are presented in accordance with the rules and regulations of the U.S. Securities and Exchange Commission and do not include all disclosures normally required in annual consolidated financial statements prepared in accordance with U.S. GAAP. In managements opinion, the unaudited interim consolidated financial statements have been prepared on a basis consistent with the annual consolidated financial statements and reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Companys financial position as of March 31, 2021 and its results of operations and cash flows for the three months ended March 31, 2020 and 2021. The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results to be expected for the full year or any other future interim or annual period.
Risks and Uncertainties
The ongoing global COVID-19 pandemic has impacted many operational aspects of the Companys business and may continue to do so in the future. The Company assessed the impact that COVID-19 had on its results of operations, including, but not limited to an assessment of its allowance for credit losses, the carrying value of other long-lived assets, and the impact to revenue recognition and cost of revenues. In addition, in March 2020 the Company executed a reduction in workforce in response to the COVID-19 pandemic. This reduction in force resulted in a total impact of $0.7 million of charges related to severance. While the COVID-19 pandemic has not had a material adverse impact on the Companys financial operations to date, the future impacts of the pandemic and any resulting economic impact are largely unknown and rapidly evolving. The Company will continue to actively monitor the impact that COVID-19 has on the results of the Companys
F-7
business operations, and may make decisions required by federal, state or local authorities, or that are determined to be in the best interests of the Companys employees, customers, partners, and suppliers. As a result, the Companys estimates and judgments may change materially as new events occur or additional information becomes available to them.
Use of Estimates
The preparation of these consolidated financial statements in conformity with GAAP requires the Company to make certain estimates, judgments, and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses during the reporting period. There is complexity and judgment required in the Companys process in determining the nature and timing of the satisfaction of performance obligations which affect the amounts of revenue, unbilled receivables, and deferred revenue. Estimates are also used for, but not limited to, current expected credit losses, capitalization and useful life of the Companys capitalized internal-use software development costs, useful lives of assets, income taxes and deferred tax asset valuation, and valuation of the Companys stock and stock options. Numerous internal and external factors can affect estimates. Actual results could differ from those estimates and such differences could be material to the Companys consolidated financial position and results of operations.
Net Loss Per Share Attributable to Common Stockholders
Basic and diluted net loss per share attributable to common stockholders is presented in conformity with the two-class method required for participating securities. All series of the Companys redeemable convertible preferred stock are considered to be participating securities because all holders are entitled to receive a non-cumulative dividend on a pari passu basis in the event that a dividend is paid on the common stock. The holders of the redeemable convertible preferred stock do not have a contractual obligation to share in the Companys losses. As such, the Companys net losses for the years ended December 31, 2019, 2020 and the three months ended March 31, 2020 and 2021 (unaudited) were not allocated to these participating securities.
Under the two-class method, basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period.
Diluted earnings per share attributable to common stockholders adjusts basic earnings per share for the potentially dilutive impact of stock options, restricted stock awards, stock warrants and redeemable convertible preferred stock. As the Company has reported losses for all periods presented, all potentially dilutive securities are anti-dilutive, and accordingly, basic net loss per share equaled diluted net loss per share.
Cash and Cash Equivalents
The Company considers all highly liquid investments acquired with an original maturity of three months or less at the date of purchase to be cash equivalents. Cash equivalents, which include the Companys money market account, are measured at fair value on a recurring basis.
Accounts Receivable
Accounts receivable are recorded and carried at the original invoiced amount less an allowance for credit losses. The Company determines its trade accounts receivable allowances in line with (Topic 326): Measurement of Credit Losses on Financial Instruments (Topic 326), based upon the assessment of various factors, such as: historical experience, credit quality of its customers, geographic related risks, economic conditions, and other factors that may affect a customers ability to pay. The Company adopted Topic 326 as of January 1, 2020 using the modified retrospective method, and there was no material impact of the adoption date. Increases and decreases in the allowance for credit losses are included as a component of general and administrative expense in the Consolidated Statements of Operations and Comprehensive Loss. The Company does not have any off-balance sheet credit exposure related to its customers.
F-8
Activity related to the Companys allowance for credit losses was as follows (in thousands):
Year Ended December 31, | Three Months Ended March 31, |
|||||||||||
2019 | 2020 | 2021 | ||||||||||
(unaudited) | ||||||||||||
Beginning balance |
$ | 420 | $ | 532 | $ | 1,245 | ||||||
Additions to the allowance |
795 | 1,495 | 505 | |||||||||
Write-offs/adjustments |
(273 | ) | (187 | ) | (10 | ) | ||||||
Recoveries |
(410 | ) | (595 | ) | (117 | ) | ||||||
|
|
|
|
|
|
|||||||
Ending balance |
$ | 532 | $ | 1,245 | $ | 1,623 | ||||||
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|
|
|
|
|
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents and trade accounts receivable. The Company maintains its cash and cash equivalent balances in highly rated financial institutions, which at times may exceed federally insured limits or be held in foreign jurisdictions. The Company has not experienced any loss relating to cash and cash equivalents in these accounts. The Company performs periodic credit evaluations of its customers financial condition and generally does not require collateral.
To reduce risk, the Company routinely assesses the financial strength of its customers. No customer represented more than 10% of total revenue in 2019, 2020 or in the three months ended March 31, 2020 and 2021 (unaudited) or more than 10% of accounts receivable as of December 31, 2019, December 31, 2020, and March 31, 2021 (unaudited).
Fair Value of Financial Instruments
The Company groups its assets and liabilities measured at fair value in a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets, with valuations obtained from readily available pricing sources for market transactions involving identical assets or liabilities; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
The level of the fair value hierarchy in which the fair value measurement falls is determined by the lowest level input that is significant to the fair value measurement.
The Companys financial instruments consist principally of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, and debt. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses are considered to approximate their respective fair values due to the short-term nature of such financial instruments. Cash equivalents, primarily consisting of investments in money market funds, are measured at fair value on a recurring basis, and are categorized as Level 1 based on quoted prices in active markets. The carrying value approximates the fair value for these assets and liabilities at December 31, 2019 and 2020 and March 31, 2021 (unaudited).
F-9
The Company recognizes transfers between levels at the end of the reporting period as if the transfers occurred on the last day of the reporting period. There were no transfers during 2019, 2020 and the three months ended March 31, 2021 (unaudited).
Property and Equipment, Net
Property and equipment are recorded at cost, less accumulated depreciation. Maintenance, repairs and minor replacements are charged to expense as incurred. Significant renewals and betterments are capitalized. Depreciation on property and equipment, with the exception of leasehold improvements, is recorded using the straight-line method over the estimated useful lives of the assets. Depreciation on leasehold improvements is recorded using the shorter of the lease term or useful life. The estimated useful life of each asset category is as follows:
Furniture and fixtures |
5 years | |
Leasehold improvements |
Shorter of lease term or 5 years | |
Computer equipment |
2 years |
The Company periodically reviews the estimated useful lives of property and equipment and any changes to the estimated useful lives are recorded prospectively from the date of the change.
When property is retired or disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gains or losses are reflected in the Consolidated Statements of Operations and Comprehensive Loss in the period of disposal.
Capitalized Internal-Use Software Development Costs
Costs related to software acquired, developed, or modified solely to meet our internal requirements, with no plans to market such software at the time of development, are capitalized. Costs incurred during the preliminary planning and evaluation stage of the project and during post implementation operational stage are expensed as incurred. The Company capitalizes qualifying internal-use software development costs that are incurred during the application development stage. Capitalization of costs begins when two criteria are met: (i) the preliminary project stage is completed and (ii) it is probable that the software will be completed and used for its intended function. Capitalization ceases when the software is substantially complete and ready for its intended use, including the completion of all significant testing. The Company also capitalizes costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality. Costs incurred for maintenance, minor upgrades and enhancements are expensed. Costs related to preliminary project activities and post-implementation operating activities are expensed as incurred.
Capitalized costs are included in property and equipment on the Consolidated Balance Sheets. These costs are amortized over the estimated useful life of the software, generally four years, on a straight-line basis. Management evaluates the useful life of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. The amortization of costs related to the platform applications is included in cost of revenue.
Debt Issuance Costs
The Company records underwriting, legal, and other direct costs incurred related to the issuance of revolving line of credit within other current assets and amortizes these costs to interest expense over the term of the related debt on a straight-line basis, which approximates the effective interest rate method. Amortization of deferred financing costs was nominal for the years ended December 31, 2019 and 2020 and for the three months ended March 31, 2020 and 2021 (unaudited). Upon the extinguishment of the related debt, any unamortized capitalized deferred financing costs are recorded to interest expense.
F-10
Leases
The Company adopted Accounting Standards Update (ASU) 2016-02 Leases (Topic 842) and applicable updates effective January 1, 2020 using the modified retrospective approach and the optional transition method. The most significant change requires lessees to record the present value of operating lease payments as right-of-use assets and lease liabilities on the balance sheet. The new guidance continues to require lessees to classify leases between operating and finance leases (formerly capital leases).
In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification related to agreements entered prior to adoption. The Company elected the: (i) short-term lease recognition exemption for all leases that qualify, whereby the Company will not recognize right-of-use (assets or lease liabilities for existing short-term leases of those assets in transition; (ii) practical expedient to not separate lease and non-lease components for all leases; and (iii) use hindsight in determining the lease term, assessing the likelihood that a lease purchase option will be exercised and in assessing the impairment of right-of-use assets.
The Company determines if an arrangement is or contains a lease at contract inception. The Company presents the operating leases in long-term assets and current and long-term liabilities. Finance lease assets are included in property and equipment, net, and finance lease liabilities are presented in current and long-term liabilities in the accompanying Consolidated Balance Sheets.
Right of use assets represent the Companys right to use an underlying asset over the lease term and lease liabilities represent the Companys obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. The Company includes any anticipated lease incentives in the determination of lease liability.
The Company uses its estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments. The Company gives consideration to its recent debt issuances as well as publicly available data for instruments with similar characteristics when determining its incremental borrowing rates.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever an event or change in circumstances indicates that the carrying amount of an asset or group of assets may not be recoverable. The impairment review includes comparison of future cash flows expected to be generated by the asset or group of assets with the associated assets carrying value. If the carrying value of the asset or group of assets exceeds its expected future cash flows (undiscounted and without interest charges), an impairment loss is recognized to the extent that the carrying amount of the asset exceeds its fair value. The Company did not identify any impairment indicators and recorded no impairment charges in the year ended December 31, 2019 and 2020 and the three months ended March 31, 2020 and 2021 (unaudited).
Segment Information
The Companys Chief Executive Officer is the chief operating decision maker, who reviews the Companys financial information presented on a consolidated basis for purposes of allocating resources and evaluating the Companys financial performance. Accordingly, the Company has determined that it operates in a single reporting segment.
Revenue Recognition
Refer to Note 3, Revenue in the Notes to Consolidated Financial Statements for our Revenue Recognition policy.
F-11
Advertising
The Company expenses advertising costs as incurred. Advertising expenses were $0.2 million for the year ended December 31, 2019. Advertising expenses were nominal for the year ended December 31, 2020 and for the three months ended March 31, 2020 and 2021 (unaudited). These costs are included in sales and marketing expenses in the Consolidated Statements of Operations and Comprehensive Loss.
Cost of Revenue
Cost of revenue consists primarily of third-party cloud infrastructure expenses incurred in connection with our customers use of our solutions. Cost of revenue also includes outsourced staffing costs, amortization of internal-use software and personnel costs from employees involved in the delivery of our solutions. Personnel costs include salaries, benefits, bonuses, and stock-based compensation and allocated overhead costs.
Research and Development
Research and development expenses consist primarily of personnel-related costs for our development team, including salaries, benefits, bonuses, stock-based compensation expenses, and allocated overhead costs. Research and development expenses also include contractor or professional services fees, third-party cloud infrastructure expenses incurred in developing our solution, and software services dedicated for use by our research and development organization.
Sales and Marketing
Sales and marketing expenses consist primarily of personnel-related costs directly associated with our sales and marketing staff, including salaries, benefits, bonuses, commissions, stock-based compensation, and allocated overhead costs. Sales and marketing expenses also include advertising costs and other expenses associated with our marketing and business development programs. In addition, sales and marketing expenses are comprised of travel-related expenses, software services dedicated for use by our sales and marketing organizations, and outside services contracted for sales and marketing purposes.
General and Administrative
General and administrative expenses consist of personnel-related costs associated with our finance, legal, human resources, and administrative personnel, including salaries, benefits, bonuses, stock-based compensation and allocated overhead costs. General and administrative expenses also include external legal, accounting, professional services fees, software services dedicated for use by our general and administrative functions, insurance, and other corporate expenses.
Stock-Based Compensation
The Company measures and recognizes compensation expense for all stock-based awards (collectively referred to as stock-based compensation expense), including stock options and restricted stock awards granted to employees, directors, and non-employees, based on the estimated fair value of the awards on the date of grant in accordance with ASC Topic 718 Compensation - Stock Compensation (Topic 718). The fair value of each stock option granted is estimated using the Black-Scholes option-pricing model. The Black-Scholes pricing model requires the Company to make assumptions and judgments about the inputs used in the calculation, including the expected term, the volatility of the Companys common stock, risk-free interest rate, and expected dividend yield. The assumptions used to determine the fair value of the option awards represent managements best estimates. These estimates involve inherent uncertainties and the application of managements judgment. Stock-based compensation is recognized on a straight-line basis over the requisite service period. Forfeitures are accounted for in the period in which they occur.
F-12
Sales Taxes
The Company recognizes sales and other taxes collected from customers and subsequently remits to government authorities. The Company relieves the sales tax payable balances from the Consolidated Balance Sheets as cash is collected from the customer and the taxes are remitted to the appropriate tax authority.
In September 2020, the Company received a $1.1 million refund of sales and use taxes from the state of Texas related to overpayments of sales taxes made between 2016 and 2019.
Income Taxes
The Company accounts for income taxes in accordance with the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates that are expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be realized or settled. Valuation allowances are established when necessary, to reduce deferred tax assets to the amounts expected to be realized. All deferred tax assets and liabilities are classified as noncurrent within the accompanying Consolidated Balance Sheets.
The Company recognizes the tax benefit from an uncertain tax position only if it meets the more likely than not threshold that the position will be sustained upon examination by the taxing authority, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. The Company includes interest and penalties related to its uncertain tax positions, if any, as part of income tax expense within the accompanying Consolidated Statements of Operations and Comprehensive Loss.
The Companys policy is to recognize interest and penalties related to unrecognized tax benefits outside of income tax expense within general and administrative expenses. No such interest or penalties were recognized during the periods presented. The Company had no accruals for interest and penalties as of December 31, 2019 and 2020 and as of March 31, 2020 and 2021 (unaudited).
Recently Adopted Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (Topic 326), in order to improve financial reporting of expected credit losses on financial instruments and other commitments to extend credit. Topic 326 requires that an entity measure and recognize expected credit losses for financial assets held at amortized cost and replaces the incurred loss impairment methodology in current GAAP with a methodology that requires consideration of a broader range of information to estimate credit losses. The Company adopted Topic 326 effective January 1, 2020 using the modified retrospective method and there was no material impact on the Companys consolidated financial statements as of the adoption date. As of December 31, 2020, the Company has recorded an allowance for credit losses related to trade receivables of $1.2 million.
In February 2016, the FASB issued new guidance, ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02), which establishes the principles to report transparent and economically neutral information about the assets and liabilities that arise from leases. Accordingly, this new standard introduces a lessee model that brings most operating leases on the Consolidated Balance Sheets. The Company adopted the standard effective January 1, 2020, using the modified retrospective approach and has elected to use the optional transition method which allows the Company to apply the guidance of ASC 840, including disclosure requirements, in the comparative periods presented.
F-13
In August 2018, the FASB issued ASU No. 2018-15, IntangiblesGoodwill and OtherInternal use Software (Subtopic 350-40): Customers Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal use software (and hosting arrangements that include an internal-use software license). The Company adopted this guidance effective January 1, 2020. The adoption of this guidance did not have a material impact on the Companys consolidated financial statements.
Recently Adopted Accounting Pronouncements (Unaudited)
In December 2019, the Financial Accounting Standards Board (FASB) issued ASU 2019-12, Simplifying the Accounting for Income Taxes which simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in Topic 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill and allocating consolidated income taxes to separate financial statements of entities not subject to income tax. The standard is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. The Company adopted this guidance as of January 1, 2021, and the adoption did not have a material impact on its consolidated financial statements.
3. Revenue Recognition
Revenue is recognized, in an amount that reflects the consideration the Company expects to be entitled to over the term of the agreement, when control of the Companys solutions are transferred to customers.
The Company recognizes revenue through the following five-step framework in accordance with ASC Topic 606, Revenue from Contracts with Customers:
Identification of the contract, or contracts with the customer;
Identification of performance obligations in the contract;
Determination of the transaction price;
Allocation of the transaction price to the performance obligations in the contract;
Recognition of revenue when, or as, the Company satisfies a performance obligation.
A performance obligation is a promise in a contract to transfer a distinct solution to the customer. The Company identifies performance obligations in its contracts with customers, which primarily include usage-based and subscription solutions. Usage-based solutions include fees based on usage of the Companys platform or professional services, incurred on a time and materials basis, while subscription solutions represent the purchase of a committed data volume on the Companys platform over a period of time. The transaction price is determined based on the amount which the Company expects to be entitled to in exchange for providing the promised services to the customer. For contracts that include multiple performance obligations, the transaction price in the contract is allocated to each distinct performance obligation on a relative standalone selling price basis. Revenue is recognized over time as performance obligations are satisfied. Variable consideration is evaluated on a contract-by-contract basis, and a constraint is applied using the facts and circumstances of the contract when applicable. On a limited basis, the Company enters into contracts whereby the consideration payable is contingent upon the conclusion of the legal matter. The Company does not recognize the revenue related to these contracts until the legal matter is resolved. Such amounts recognized have been immaterial to date.
F-14
The Companys software contracts do not allow the customer to take possession of the software supporting the cloud-based solution. Customers are not entitled to any refunds. The Company generally invoices its customers monthly, quarterly, or annually in advance and recognizes revenue ratably over the life of the contract.
The Companys arrangements do not contain general rights of return. However, credits may be issued on a case-by-case basis. Amounts that have been invoiced are recorded in accounts receivable and in revenue or deferred revenue depending on whether the revenue recognition criteria have been met.
Nature of Solutions
The Companys revenue-generating activities directly relate to the sale and support of its legal solution within a single operating segment. The Company disaggregates revenue from contracts with customers based on how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. The Company has two primary types of contractual arrangements: usage-based and subscription solutions. Usage-based revenue is generated from solutions that are billed on a monthly basis and can be canceled with one months notice or are incurred on a time and materials basis. Subscription revenue is derived from contracts where customers are contractually committed to a fixed data volume over a period of time. Usage amounts above the fixed data volume are considered usage-based revenue. Subscription arrangements are typically billed on a monthly, quarterly or annual basis.
In the years ended December 31, 2019 and 2020 and three months ended March 31, 2020 and 2021 (unaudited), usage-based revenue represented 88%, 86%, 87%, and 87% of our total revenue, respectively. In the years ended December 31, 2019 and 2020 and three months ended March 31, 2020 and 2021 (unaudited), subscription revenue fees represented 12%, 14%, 13%, and 13% of total revenue, respectively.
No significant judgments are required in determining whether services are considered distinct performance obligations and should be accounted for separately versus together, or to determine the stand-alone selling price (SSP).
Deferred Revenue
Deferred revenue is recorded when a non-cancellable contractual right to bill exists or when cash payments are received in advance of future usage on non-cancelable contracts. Of the $0.8 million and $1.4 million of deferred revenue balance as of December 31, 2018 and 2019 respectively, the Company recognized $0.8 million and $1.4 million as revenue during the years ended December 31, 2019 and 2020. Of the $1.4 million and $1.6 million of deferred revenue balance as of December 31, 2019 and 2020 respectively, the Company recognized $0.9 million and $1.0 million as revenue during the three months ended March 31, 2020 and 2021 (unaudited), respectively.
Contract Assets
Contract assets represent revenue recognized for contracts that have not yet been invoiced to customers, but are billed in arrears and for which the Company has an unconditional right to payment. Total contract assets were $0.8 million, $1.5 million and $1.9 million as of December 31, 2019, December 31, 2020 and March 31, 2021 (unaudited), respectively, and were included within accounts receivable on the Consolidated Balance Sheets.
Remaining Performance Obligations
Remaining performance obligations (RPO) represent the amount of contracted future revenue that has not yet been recognized, including both deferred revenue and non-cancelable contracted amounts that will be invoiced and recognized as revenue in future periods. RPO exclude performance obligations from certain time and materials contracts that are billed in arrears. RPO are not necessarily indicative of future product revenue growth because they do not account for consumption in excess of contracted capacity.
F-15
As of December 31, 2020 and March 31, 2021 (unaudited), the Company expects to recognize approximately $12.9 million and $11.6 million of revenue from remaining performance obligations, respectively. The Company expects to recognize revenue of approximately $8.7 million and $7.9 million as of December 31, 2020 and March 31, 2021 (unaudited), respectively, from remaining performance obligations over the next 12 months, with the balance recognized thereafter.
Incremental Contract Costs
Incremental costs to obtain or fulfill a contract are recognized as an asset if the expected benefit is expected to be longer than one year. These assets are amortized over the expected period of benefit. For the year-ended December 31, 2019 and 2020 and the three months ended March 31, 2020 and 2021 (unaudited) the Company identified no material incremental costs to obtain or fulfill a contract, primarily based on the nature and terms of the Companys contracts, as well as the expected period of benefit.
4. Property and Equipment
Property and equipment consist of the following (in thousands):
December 31, | March 31, 2021 |
|||||||||||
2019 | 2020 | |||||||||||
(unaudited) | ||||||||||||
Computer equipment |
$ | 1,830 | $ | 2,261 | $ | 2,468 | ||||||
Capitalized internal-use software |
1,885 | 3,259 | 3,618 | |||||||||
Leasehold improvements |
330 | 111 | 111 | |||||||||
Furniture |
656 | 648 | 648 | |||||||||
|
|
|
|
|
|
|||||||
Total property and equipment |
4,701 | 6,279 | 6,845 | |||||||||
Less: accumulated depreciation and amortization |
(1,112 | ) | (2,406 | ) | (2,823 | ) | ||||||
|
|
|
|
|
|
|||||||
Property and equipment, net |
$ | 3,589 | $ | 3,873 | $ | 4,022 | ||||||
|
|
|
|
|
|
Depreciation and amortization expense relating to the Companys property and equipment was $0.8 million, $1.6 million, $0.4 million and $0.4 million for the year ended December 31, 2019 and 2020, and for the three months ended March 31, 2020 and 2021 (unaudited), respectively. There was no amortization expense allocated to cost of revenue for capitalized internal-use software costs for the year ended December 31, 2019. Amortization expense relating to the cost of revenue for capitalized internal-use software was $0.5 million, $0.1 million and $0.2 million for the year ended December 31, 2020 and the three months ended March 31, 2020 and 2021 (unaudited), respectively.
The Company capitalized $1.9 million, $1.4 million, $0.4 million and $0.4 million in internal-use software development costs in the the years ended December 31, 2019 and 2020 and three months ended March 31, 2020 and 2021 (unaudited), respectively. As of December 31, 2019 and 2020 and March 31, 2020 and 2021 (unaudited) the unamortized balance of capitalized internal-use software costs on our Consolidated Balance Sheets was approximately $1.9 million, $2.8 million, $2.2 million and $3.0 million, respectively. No impairment indicators were identified when the capitalized development costs were assessed for impairment for the years ended December 31, 2019 and 2020 and three months ended March 31, 2020 and 2021 (unaudited).
5. Leases
As of December 31, 2020 the Company had one leased property with a remaining lease term of 1.8 years, and one leased property that was classified as a short-term lease. In accordance with Topic 842, leases with a term of 12 months or less are not recorded on the Companys consolidated balance sheet. For the office facilities, the Company recognizes a right-of-use-asset and lease liability in accordance with Topic 842. The liability and asset are then amortized as payments are made. Adoption of Topic 842 resulted in the recording of a right-of-use asset and lease liabilities of approximately $3.2 million and $3.3 million, respectively, as of January 1, 2020.
F-16
The cost of leases recorded in the accompanying Consolidated Statements of Operations and Comprehensive Loss were as follows (in thousands):
Year Ended December 31, |
||||
2020 | ||||
Operating lease cost |
$ | 1,300 | ||
Finance lease cost |
||||
Depreciation expense |
76 | |||
Interest on lease liability |
16 | |||
Short-term lease cost |
||||
Lease expense |
55 | |||
|
|
|||
Total lease cost |
$ | 1,447 | ||
|
|
Total operating lease cost was $0.4 million and $0.3 million for the three months ended March 31, 2020 and 2021 (unaudited), respectively. Costs associated with the Companys finance lease and short-term lease were nominal for the three months March 31, 2020 and 2021 (unaudited).
The Companys operating and finance right-of-use assets and lease liabilities are as follows (in thousands):
Leases |
Classification |
December 31, 2020 |
||||
Assets |
||||||
Operating lease assets |
Operating right-of-use asset, net of accumulated amortization | $ | 1,850 | |||
Finance leases assets |
Property and equipment, net of accumulated depreciation | 252 | ||||
|
|
|||||
Total leased assets |
$ | 2,102 | ||||
|
|
|||||
Liabilities |
||||||
Current |
||||||
Operating leases |
Operating lease liability, current | $ | 1,018 | |||
Finance leases |
Financing lease liability, current | 112 | ||||
Noncurrent |
||||||
Operating leases |
Operating lease liability, noncurrent | 890 | ||||
Finance leases |
Finance lease liability, noncurrent | 99 | ||||
|
|
|||||
Total lease liabilities |
$ | 2,119 | ||||
|
|
The weighted average remaining lease term and discount rate as of December 31, 2020 are as follows:
Weighted Average Remaining Lease Term |
||||
Operating leases |
22 Months | |||
Weighted Average Discount Rate |
||||
Operating leases |
5.25% | |||
Finance leases |
5.88% |
F-17
Future minimum payments required under operating leases, by year and in aggregate, that have initial or remaining non-cancellable lease terms in excess of one year, are as follows (in thousands):
As of December 31, 2020 |
||||||||
Operating leases |
Finance leases |
|||||||
2021 |
$ | 1,094 | $ | 122 | ||||
2022 |
911 | 101 | ||||||
Thereafter |
| | ||||||
|
|
|
|
|||||
$ | 2,005 | $ | 223 | |||||
|
|
|
|
Future minimum lease payments under operating leases and finance leases, prior to the Companys adoption of the new lease standard, were as follows (in thousands):
As of December 31, 2019 |
||||||||
Operating leases |
Finance leases |
|||||||
2020 |
$ | 1,539 | $ | 122 | ||||
2021 |
1,094 | 122 | ||||||
2022 |
911 | 101 | ||||||
Thereafter |
| | ||||||
|
|
|
|
|||||
$ | 3,544 | $ | 345 | |||||
|
|
|
|
Under ASC 840, the previous lease standard, total rent expense under operating leases for fiscal 2019 was $1.5 million.
6. Operating Segment and Geographic Information
The Companys Chief Executive Officer is the chief operating decision maker, who reviews the Companys financial information presented on a consolidated basis for purposes of allocating resources and evaluating the Companys financial performance. Accordingly, the Company has determined that it operates in a single reporting segment.
The Company determines the location of revenue using the billing address of each customer. The following table sets forth revenue by geographic area (in thousands):
Year Ended December 31, |
Three Months Ended March 31, |
|||||||||||||||
2019 | 2020 | 2020 | 2021 | |||||||||||||
(unaudited) | ||||||||||||||||
United States |
$ | 47,108 | $ | 66,718 | $ | 15,351 | $ | 20,275 | ||||||||
All other countries |
1,448 | 1,726 | 317 | 856 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenue |
$ | 48,556 | $ | 68,444 | $ | 15,668 | $ | 21,131 | ||||||||
|
|
|
|
|
|
|
|
Long-lived assets outside of the United States are not significant.
7. Debt and Related Warrants
In July 2015, the Company entered into a revolving debt facility (Loan and Security Agreement). The Loan and Security Agreement was subsequently amended and restated, the First Amended and Restated Loan and Security Agreement, in November 2018 to increase the available borrowings to $18.0 million and extend the maturity date to April 2021.
F-18
In December 2020, the Company entered into the Second Amended and Restated Loan and Security Agreement, which provided a $40.0 million revolving credit facility with a maturity date of November 30, 2023. The Companys obligations under the agreement contain certain customary covenants, including, but not limited to, those relating to additional indebtedness, liens, asset divestitures, and affiliate transactions. The agreement also contains a liquidity covenant equal to the greater of (i) $5.0 million or (ii) total 6-month adjusted EBITDA burn when the sum of the outstanding principal amounts are equal or in excess of $18.0 million. The revolving credit facility bears interest on outstanding borrowings as the sum of the Daily Adjusting LIBOR Rate for such day plus 2.50% plus an applicable margin of 0.25% per annum. The Company did not have an outstanding balance under the Loan and Security Agreement as of December 31, 2019 and 2020 and March 31, 2021 (unaudited).
Additionally, the revolving debt facility includes an unused facility fee equal to 0.25% per annum of the difference between the total revolving credit facility and the average outstanding principal balance of the obligations under the revolving credit facility during each quarter.
In connection with its amended and restated loan and security agreements, at various times, the Company granted warrants to purchase 0.2 million shares of the Companys common stock at exercise prices ranging from $0.105 per share to $2.16 per share. The warrants are exercisable for 10 years. At the time of issuance, the Company determined the estimated fair value of the warrants. As the warrants represent a freestanding equity instrument, the Company recorded the fair value of the warrants in additional paid in capital. All warrants remain outstanding at March 31, 2021 (unaudited).
Substantially all the Companys assets are pledged as collateral for these loans. The Company is required to meet certain nonfinancial covenants.
In March 2020, the Company borrowed $17.0 million on its revolving debt facility. The Company repaid the $17.0 million outstanding balance on the revolving debt facility in October 2020. Additionally, the Company applied for and received a loan under the Paycheck Protection Program PPP in April 2020 totaling $6.3 million. The Company subsequently repaid the outstanding balance of $6.3 million in April 2020.
The Company incurred nominal aggregate debt issuance costs in connection with its loan and security agreements. These costs are being amortized to non-cash interest expense over the terms of the related indebtedness using the straight-line method which approximates the effective interest method.
8. Commitments and Contingencies
Leases and Other Commitments
The Company leases office facilities under a non-cancellable operating lease with a remaining term of 1.8 years as well as furniture under a non-cancellable finance lease. See Note 5 to these consolidated financial statements for additional detail on the Companys operating and finance lease commitments.
Additionally, the Company has contractual commitments that are noncancellable and expire within one to three years after December 31, 2020. These commitments, which relate mainly to hosting agreements as well as computer software licenses used to facilitate company operations, are as follows (in thousands):
Purchase obligations |
As of December 31, 2020 |
|||
2021 |
$ | 7,208 | ||
2022 |
3,855 | |||
2023 |
624 | |||
Thereafter |
| |||
|
|
|||
$ | 11,687 | |||
|
|
F-19
During the three months ended March 31, 2021 (unaudited) there were no material changes outside the ordinary course of business to the Companys contractual obligations and commitments.
Litigation
From time to time, we are involved in various legal proceedings arising from the normal course of business activities. We are not presently a party to any litigation the outcome of which, we believe, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, cash flows, or financial condition.
9. Redeemable Convertible Preferred Stock
Series E Preferred Stock
In January 2019, the Company issued 24,911,563 shares of Series E Redeemable Convertible Preferred Stock at $2.0071 per share for total cash proceeds of $49.8 million, net of issuance cost of $0.2 million.
Series F Preferred Stock
In September through October 2020, the Company issued 20,193,371 shares of Series F Preferred Stock at $2.9713 per share for total cash proceeds of $59.9 million, net of issuance cost of $0.1 million.
The balances of redeemable convertible preferred stock are as follows (in thousands, except for shares):
As of December 31, 2019 | ||||||||||||
Shares | ||||||||||||
Authorized and outstanding |
Liquidation Amount |
Carrying Value | ||||||||||
Series A redeemable convertible preferred stock |
20,000,000 | $ | 2,000 | $ | 1,982 | |||||||
Series B redeemable convertible preferred stock |
31,666,660 | 10,450 | 10,408 | |||||||||
Series C redeemable convertible preferred stock |
48,914,230 | 18,575 | 18,530 | |||||||||
Series D redeemable convertible preferred stock |
33,281,620 | 20,109 | 20,045 | |||||||||
Series E redeemable convertible preferred stock |
24,911,563 | 50,000 | 49,809 |
As of December 31, 2020 | ||||||||||||
Shares | ||||||||||||
Authorized and outstanding |
Liquidation Amount |
Carrying Value | ||||||||||
Series A redeemable convertible preferred stock |
20,000,000 | $ | 2,000 | $ | 1,986 | |||||||
Series B redeemable convertible preferred stock |
31,666,660 | 10,450 | 10,418 | |||||||||
Series C redeemable convertible preferred stock |
48,914,230 | 18,575 | 18,541 | |||||||||
Series D redeemable convertible preferred stock |
33,281,620 | 20,109 | 20,061 | |||||||||
Series E redeemable convertible preferred stock |
24,911,563 | 50,000 | 49,856 | |||||||||
Series F redeemable convertible preferred stock |
20,193,371 | 60,000 | 59,937 |
As of March 31, 2021 (unaudited) | ||||||||||||
Shares | ||||||||||||
Authorized and outstanding |
Liquidation Amount |
Carrying Value | ||||||||||
Series A redeemable convertible preferred stock |
20,000,000 | $ | 2,000 | $ | 1,987 | |||||||
Series B redeemable convertible preferred stock |
31,666,660 | 10,450 | 10,421 | |||||||||
Series C redeemable convertible preferred stock |
48,914,230 | 18,575 | 18,544 | |||||||||
Series D redeemable convertible preferred stock |
33,281,620 | 20,109 | 20,065 | |||||||||
Series E redeemable convertible preferred stock |
24,911,563 | 50,000 | 49,867 | |||||||||
Series F redeemable convertible preferred stock |
20,193,371 | 60,000 | 59,942 |
F-20
A general summary of the rights with respect to the Series A-F redeemable convertible preferred stock is provided below.
Dividends
The holders of the outstanding shares of the preferred stock shall be entitled to receive dividends from time to time out of any assets legally available for payment of dividends, when, as, and if declared by the Board of Directors, on a pro rata, pari passu basis. Dividends on preferred stock are in preference to and prior to any payment of any dividend on common stock. No dividends have been declared by the Board of Directors.
Liquidation Preference
The Preferred Stock has liquidation preferences that entitle these stockholders to receive, prior and in preference to both holders of the Companys Common Stock or any other capital stock of the Company, an amount equal to (i) in the case of Series A Preferred Stock, $0.10 per share plus an additional amount equal to all dividends accrued or declared but unpaid on each such share, (ii) in the case of Series B Preferred Stock, $0.33 per share plus an additional amount equal to all dividends accrued or declared but unpaid on each such share, (iii) in the case of Series C Preferred Stock, $0.3797 per share plus an additional amount equal to all dividends accrued or declared but unpaid on each such share, (iv) in the case of Series D Preferred Stock, $0.6042 per share plus an additional amount equal to all dividends accrued or declared but unpaid on each such share, (v) in the case of Series E Preferred Stock, $2.0071 per share plus an additional amount equal to all dividends accrued or declared but unpaid on each such share, and (vi) in the case of Series F Preferred Stock, $2.9713 per share plus an additional amount equal to all dividends accrued or declared but unpaid on each such share. If upon liquidation, the assets and funds distributed are insufficient to permit the payment to each holder of Preferred Stock the full preferential amount, the entire assets and funds legally available for distribution shall be distributed ratably among the holders of the Preferred Stock based upon the aggregate liquidation preferences of the shares of the preferred stock held by each such holder.
Conversion
Each share of each series of Preferred Stock is convertible, at the option of the holder, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the applicable original issue price by the applicable conversion price for such series of Preferred Stock. The initial conversion price for each share of Preferred Stock shall be its original issue price. The conversion price will be subject to adjustment as provided in the anti-dilution protection, meaning that if equity securities are subsequently issued at a price per share less than the conversion price then in effect, the conversion price of each series of Preferred Stock will be adjusted using a broad based, weighted average adjustment formula. All outstanding shares of Preferred Stock shall automatically convert into fully paid and nonassessable shares of Common Stock on the earlier of (a) the closing of a qualified public offering, (b) the conversion of a majority of the shares of preferred stock, or (c) the date and time, or the occurrence of an event, specified by the vote or written consent of the holders of a majority of the then outstanding shares of the preferred stock, voting together as a single class on an as-converted basis.
Voting
Holders of the Preferred Stock have the right to one vote for each whole share of Common Stock into which such holders share of Preferred Stock could then be converted. The holders of Common Stock shall have one vote for each share held on all matters except for a vote on any amendment to the Certificate of Incorporation that relates solely to the terms of one or more outstanding series of Preferred Stock if the holders of such affected series are entitled to vote pursuant to the Certificate of Incorporation.
Redemption
At any time on or after September 28, 2025, the holders of a majority of the then outstanding shares of Preferred Stock may require the Company to redeem the Preferred Stock in three equal annual installments at a
F-21
price equal to the greater of (i) the liquidation preference or (ii) the fair market value of a single share of such series of Preferred Stock as of the date of the redemption request. On each Redemption Date the Company shall redeem, on a pro rata basis, the aggregate number of shares of Preferred stock outstanding immediately prior to the Redemption Date divided by the number of remaining Redemption Dates (including the Redemption Date to which such calculation applies).
10. Stock-Based Compensation
Stock Options
On December 17, 2013, the Company adopted the Long-Term Incentive Plan (Incentive Plan). The Incentive Plan provides for the issuance of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units, bonus stock, dividend equivalents, other stock-based awards, performance awards, annual incentive awards or any combination of the foregoing to employees, officers, directors, and consultants of the Company. The Board of Directors governs the maximum number of shares of common stock that may be issued over the term of the Incentive Plan at the time of grant. Options under the plan are granted at the estimated fair value of the shares on the date of grant. The maximum term of options granted under the plan is ten years from the date of grant. Options normally vest according to a four-year vesting schedule, with 25% of the shares vesting on the one-year anniversary and equal monthly vesting installments thereafter. As of December 31, 2020 and March 31, 2021 (unaudited), 24.8 million shares were of common stock were allocated for issuance under the plan, of which 1.3 and 1.9 million shares remained available for future issuance, respectively.
The following table summarizes the stock option activity under the Incentive Plan (in thousands except for per share amounts and years):
Number of shares |
Weighted- average exercise price per share |
Weighted- average remaining contractual life (years) |
Aggregate intrinsic value |
|||||||||||||
Options outstanding as of December 31, 2018 |
13,218 | $ | 0.21 | 8.29 | 1,122 | |||||||||||
Granted |
6,037 | 1.69 | ||||||||||||||
Exercised |
(910 | ) | 0.14 | |||||||||||||
Forfeited and cancelled |
(914 | ) | 0.88 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Options outstanding as of December 31, 2019 |
17,431 | 0.69 | 8.07 | 18,568 | ||||||||||||
Granted |
1,812 | 1.81 | ||||||||||||||
Exercised |
(1,075 | ) | 0.42 | |||||||||||||
Forfeited and cancelled |
(1,641 | ) | 1.34 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Options outstanding as of December 31, 2020 |
16,527 | $ | 0.77 | 7.21 | 22,952 | |||||||||||
Granted (Unaudited) |
| | ||||||||||||||
Exercised (Unaudited) |
(280 | ) | 0.79 | |||||||||||||
Forfeited and cancelled (Unaudited) |
(571 | ) | 0.65 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Options outstanding as of March 31, 2021 (Unaudited) |
15,676 | $ | 0.78 | 6.96 | 46,447 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Options vested and exercisable at December 31, 2020 |
10,904 | $ | 0.51 | 6.65 | 17,952 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Options vested and exercisable at March 31, 2021 (Unaudited) |
11,050 | $ | 0.54 | 6.46 | 35,353 | |||||||||||
|
|
|
|
|
|
|
|
Aggregate intrinsic value represents the difference between the Companys estimated fair value of its common stock and the exercise price of outstanding options. The aggregate intrinsic value of stock options exercised was $1.5 million, $1.9 million, $0.1 million, and $0.6 million during the years ended December 31, 2019 and 2020 and for the three months ended March 31, 2020 and 2021 (unaudited), respectively. The Company
F-22
recognized total stock-based compensation cost related to equity incentive awards of $1.6 million, $2.0 million, $0.5 million, and $0.5 million for the years ended December 31, 2019 and 2020 and for the three months ended March 31, 2020 and 2021 (unaudited), respectively.
As of the years ended December 31, 2019 and 2020 and for the three months ended March 31, 2020 and 2021 (unaudited), unrecognized stock-based compensation cost related to outstanding unvested stock options that are expected to vest was $4.7 million, $3.7 million, $4.6 million, and $3.2 million, which is expected to be recognized over a weighted-average period of 2.95, 2.26, 2.78, and 2.02 years, respectively.
Restricted Stock Awards
The fair value of restricted stock awards (RSAs) are determined using the fair value of the Companys common stock on the date of grant. During the year December 31, 2019 the Company granted 1.0 million RSAs. No RSAs were granted for the year ended December 31, 2020 or for the three months ended March 31, 2021 (unaudited). During the years ended December 31, 2019 and 2020 and the three months ended March 31, 2021 (unaudited), 187,500, 250,000, and 62,500 RSAs vested and were released from the Companys right to repurchase, respectively, and no RSAs were cancelled.
The weighted average estimated fair value of RSAs granted for the year ended December 31, 2019 was $1.67 per share. For the years ended December 31, 2019 and 2020 and for the three months ended March 31, 2020 and 2021 (unaudited), the Company had $1.3 million, $0.9 million, $1.2 and $0.8 million of unrecognized stock-based compensation related to RSAs, respectively. The weighted average remaining requisite service period was 3.15 years, 2.15 years, 2.91 years and 1.91 years, respectively.
Series E Secondary Transaction
In connection with the Series E Redeemable Convertible Preferred Stock issuance in January 2019, an investor purchased 7.5 million shares of common stock from current and former employees for a total purchase price of $15.0 million. The Company recognized $2.5 million in stock-based compensation expense during the year ended December 31, 2019 related to the secondary transaction for the difference between the purchase price and the fair value of the Companys common stock at the time of purchase.
Valuation Assumptions
The Company grants stock options with an exercise price equal to the stocks fair value at the date of grant. The fair value of a stock option is estimated on the grant date using the Black-Scholes option-pricing model. Stock-based compensation expense is recognized, net of forfeitures, over the requisite service periods of the awards. Stock option awards generally have 10-year terms and vest and become exercisable at a rate of 25% on the first anniversary of the vesting commencement date and 1/48th each month thereafter.
The Black-Scholes assumptions used to value the employee options at the grant dates are as follows:
Year Ended December 31, | Three Months Ended March 31, |
|||||||||||||||
2019 | 2020 | 2020 | 2021 | |||||||||||||
(Unaudited) | ||||||||||||||||
Stock options: |
||||||||||||||||
Risk-free interest rate |
1.6%2.5% | 0.4%1.7% | 1.7% | | ||||||||||||
Weighted-average expected term of the options |
6.25 years | 6.25 years | 6.25 years | | ||||||||||||
Expected dividend rate |
% | % | | | ||||||||||||
Expected volatility |
50%53% | 49%52% | 49% | |
F-23
These assumptions and estimates were determined as follows:
| Fair Value of Common Stock. The Companys board of directors determined the fair value of its common stock using various valuation methodologies, including external valuation analyses. |
| Risk-Free Interest Rate. The risk-free interest rate for the expected term of the options was based on the U.S. Treasury yield curve in effect at the time of the grant. |
| Weighted-Average Expected Term. The expected term was estimated using the simplified approach, in which the expected term of an award is presumed to be the mid-point between the vesting date and the expiration date of the award, as the Company does not have sufficient historical data relating to stock-option exercises. |
| Expected Dividend Yield. The Company has never declared or paid any cash dividends and does not presently plan to pay cash dividends in the foreseeable future. As a result, an expected dividend yield of zero was used. |
| Expected Volatility. As there was no public market for the Companys common stock, the Company has limited information on the volatility of its common stock. Accordingly, the expected volatility for the Company was estimated by taking the average historic price volatility for industry peers, consisting of several public companies in the Companys industry which are either similar in size, stage of life cycle, or financial leverage, over a period equivalent to the expected term of the awards. |
11. Income Taxes
The U.S. and non-U.S. components of loss before income taxes consisted of the following:
Year Ended December 31 |
Three Months Ended March 31, |
|||||||||||||||
2019 | 2020 | 2020 | 2021 | |||||||||||||
(unaudited) | ||||||||||||||||
U.S |
$ | (29,894 | ) | $ | (22,952 | ) | $ | (11,234 | ) | $ | (3,018 | ) | ||||
Non-U.S. |
72 | 150 | 23 | 126 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Loss before income taxes |
$ | (29,822 | ) | $ | (22,802 | ) | $ | (11,211 | ) | $ | (2,892 | ) |
The components of the provision for income taxes are as follows (in thousands):
Year Ended December 31 |
Three Months Ended March 31, |
|||||||||||||||
2019 | 2020 | 2020 | 2021 | |||||||||||||
(unaudited) | ||||||||||||||||
Current |
||||||||||||||||
Federal |
$ | | $ | | $ | | $ | | ||||||||
State |
(4 | ) | 42 | 20 | 12 | |||||||||||
Foreign |
15 | 47 | 5 | 24 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total current |
11 | 89 | 25 | 36 | ||||||||||||
Deferred |
||||||||||||||||
Federal |
| | | | ||||||||||||
State |
| | | | ||||||||||||
Foreign |
(1 | ) | (18 | ) | | | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total deferred |
(1 | ) | (18 | ) | | | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Provision for income taxes |
$ | 10 | $ | 71 | $ | 25 | $ | 36 | ||||||||
|
|
|
|
|
|
|
|
Deferred income taxes reflect 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. Deferred tax
F-24
assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. Significant components of the Companys deferred tax liabilities and assets are as follows (in thousands):
Year Ended December 31, |
||||||||
2019 | 2020 | |||||||
Deferred tax assets |
||||||||
Net operating loss carryforwards |
$ | 18,576 | $ | 23,433 | ||||
Deferred expenses |
838 | 1,519 | ||||||
Lease liability |
| 542 | ||||||
Stock compensation |
212 | 393 | ||||||
Interest expense carryforwards |
| 71 | ||||||
Depreciation and amortization |
35 | 117 | ||||||
|
|
|
|
|||||
Total deferred tax assets |
19,661 | 26,075 | ||||||
|
|
|
|
|||||
Deferred tax liabilities |
||||||||
Capitalized service costs |
(513 | ) | (732 | ) | ||||
Right-of-use asset |
| (474 | ) | |||||
|
|
|
|
|||||
Total deferred tax liabilities |
(513 | ) | (1,206 | ) | ||||
|
|
|
|
|||||
Net deferred tax asset before valuation allowance |
19,148 | 24,869 | ||||||
Less: valuation allowance |
(19,147 | ) | (24,850 | ) | ||||
|
|
|
|
|||||
Net deferred tax asset |
$ | 1 | $ | 19 | ||||
|
|
|
|
The Company has established a valuation allowance due to uncertainties regarding the realization of deferred tax assets based on the Companys lack of earnings history. During 2020, the valuation allowance increased by approximately $5.7 million due to continuing operations.
As of December 31, 2019 and 2020, the Company had federal net operating loss carryforward of approximately $74.0 million and $93.2 million, respectively, and state net operating loss carryforwards of approximately $46.1 million and $60.7 million, respectively, that will begin to expire in 2033, if not utilized prior to that time. Approximately $42.9 million of the U.S. federal net operating losses arose in tax years beginning after December 31, 2017 and have an indefinite carryforward period. Utilization of the net operating loss carryforwards may be subject to substantial annual limitation due to the change in ownership provisions of the Internal Revenue Code of 1986. The annual limitation may result in the expiration of net operating losses and tax credit carryforwards before utilization.
The Companys provision for income taxes attributable to continuing operations differs from the expected tax expense amount computed by applying the statutory federal income tax rate of 21% to loss before income taxes due to the following:
Year Ended December 31, |
||||||||
2019 | 2020 | |||||||
Income tax at U.S. statutory rate |
21.0 | % | 21.0 | % | ||||
Effect of: |
||||||||
Change in valuation allowance |
(23.5 | ) | (25.2 | ) | ||||
State taxes, net of federal benefit |
4.4 | 4.4 | ||||||
Permanent items and other |
(1.9 | ) | (0.5 | ) | ||||
|
|
|
|
|||||
Income tax provision effective rate |
0.0 | % | (0.3 | )% | ||||
|
|
|
|
F-25
The Company files income tax returns in the U.S. federal jurisdiction, various state jurisdictions, and in the United Kingdom. The Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years before 2017. Operating losses generated remain open to adjustment until the statute of limitations closes for the tax year in which the operating losses are utilized. The Company is not currently under examination by any tax jurisdiction, but tax years 2017 through 2020 remain open to examination.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. As of December 31, 2019 and 2020, the Company has recorded no unrecognized tax benefits.
The Companys practice is to recognize interest and penalties related to unrecognized tax benefits outside of income tax expense. During the years ended December 31, 2019 and 2020, the Company did not recognize any interest or penalties related to unrecognized tax benefits.
A U.S. shareholder is subject to tax on Global Intangible Low-Taxed Income, or GILTI, earned by certain foreign subsidiaries. Under GAAP, an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense. The Company has elected to account for GILTI as a period cost in the year the tax is incurred.
12. Defined Contribution Plan
The Company sponsors a defined contribution retirement plan qualifying under Section 401(k) of the Internal Revenue Code of 1986. The Company did not make any employer contributions to the plan during the year ended December 31, 2019 and 2020 and quarters ended March 31, 2020 and 2021 (unaudited).
In conjunction with the Companys expansion into the United Kingdom, the Company has a deferred compensation plan qualifying under the Pensions Act 2008. The Company contributes 3% of eligible U.K. employees salaries. As of December 31, 2019, December 31, 2020, and March 31, 2021 (unaudited) the liability under this plan was immaterial.
13. Net Loss Per Share Attributable to Common Stockholders
The following tables present calculations for basic and diluted net loss per share (in thousands, except per share amounts):
Year Ended December 31, |
Three Months Ended March 31, |
|||||||||||||||
2019 | 2020 | 2020 | 2021 | |||||||||||||
(unaudited) | ||||||||||||||||
Net loss |
$ | (29,832 | ) | $ | (22,873 | ) | $ | (11,236 | ) | $ | (2,928 | ) | ||||
Less accretion of redeemable convertible preferred stock |
(86 | ) | (92 | ) | (23 | ) | (26 | ) | ||||||||
Loss applicable to common stockholders basic and diluted |
$ | (29,918 | ) | $ | (22,965 | ) | (11,259 | ) | (2,954 | ) | ||||||
|
|
|
|
|
|
|
|
|||||||||
Weighted-average shares used in computing net loss per share attributable to common shareholders, basic and diluted |
64,601 | 65,856 | 65,496 | 66,940 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net loss per share attributable to ordinary shareholders, basic and diluted |
$ | (0.46 | ) | $ | (0.35 | ) | $ | (0.17 | ) | $ | (0.04 | ) | ||||
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|
|
|
|
|
|
|
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The following outstanding shares of common stock equivalents (in thousands) as of the periods presented were excluded from the computation of diluted net loss per share for the periods presented because the impact of including them would have been anti-dilutive (in thousands):
As of December 31, | As of March 31, | |||||||||||||||
2019 | 2020 | 2020 | 2021 | |||||||||||||
(unaudited) | ||||||||||||||||
Convertible preferred stock |
158,774 | 178,967 | 158,774 | 178,967 | ||||||||||||
Stock options |
17,854 | 16,792 | 17,831 | 15,901 | ||||||||||||
Nonvested restricted stock awards |
813 | 563 | 751 | 501 | ||||||||||||
Common stock warrants |
211 | 249 | 211 | 249 | ||||||||||||
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|
|
|
|
|
|
|
|||||||||
Total |
177,652 | 196,571 | 177,567 | 195,618 | ||||||||||||
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|
|
|
|
|
|
|
14. Related-Party Transactions
In October 2018, the Company loaned an officer of the Company $0.2 million, bearing interest at 2.83% per annum for the purpose of exercising stock options. The outstanding amount due under the note was $0.2 million at December 31, 2019, December 31, 2020, and March 31, 2021 (unaudited).
15. Subsequent Events
Subsequent events have been evaluated through May 7, 2021, which represents the date the audited financial statements were available to be issued.
On April 29, 2021, the Board of Directors approved increasing the option pool by 5.3 million shares.
On May 2, 2021, the Company granted 2.7 million options to purchase shares of common stock to employees with vesting based on service and 1.0 million restricted stock awards with vesting based on service.
16. Subsequent Events (Unaudited)
The Company has evaluated subsequent events through June 11, 2021, which is the date the unaudited interim consolidated financial statements were available to be issued.
For purposes of this filing, the Company has evaluated the effects of subsequent events through June 25, 2021. In June 2021, the outstanding balance of the loan described in Note 14 was repaid.
F-27
shares
Common stock
J.P. Morgan | BofA Securities | |||||||||
Citigroup |
Jefferies | |||||||||
Canaccord Genuity | Cowen | Needham & Company | Stifel | Loop Capital Markets |
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth all expenses to be paid by us, other than underwriting discounts and commissions, in connection with this offering. All amounts shown are estimates except for the Securities and Exchange Commission, or the SEC, registration fee, the Financial Industry Regulatory Authority, Inc., or FINRA, filing fee and the exchange listing fee.
Amount to be paid |
||||
SEC registration fee |
$ | 10,910 | ||
FINRA filing fee |
15,500 | |||
Exchange listing fee |
* | |||
Printing and engraving expenses |
* | |||
Legal fees and expenses |
* | |||
Accounting fees and expenses |
* | |||
Transfer agent and registrar fees |
* | |||
Miscellaneous expenses |
* | |||
|
|
|||
Total |
$ | * | ||
|
|
* | To be filed by amendment. |
Item 14. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law authorizes a court to award, or a corporations board of directors to grant, indemnity to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities, including reimbursement for expenses incurred, arising under the Securities Act. Our amended and restated certificate of incorporation that will be in effect upon the completion of this offering permits indemnification of our directors, officers, employees and other agents to the maximum extent permitted by the Delaware General Corporation Law and our amended and restated bylaws that will be in effect upon the completion of this offering provide that we will indemnify our directors and officers and permit us to indemnify our employees and other agents, in each case to the maximum extent permitted by the Delaware General Corporation Law.
We have entered into indemnification agreements with our directors and officers, whereby we have agreed to indemnify our directors and officers to the fullest extent permitted by law, including indemnification against expenses and liabilities incurred in legal proceedings to which the director or officer was, or is threatened to be made, a party by reason of the fact that such director or officer is or was a director, officer, employee or agent of CS Disco, Inc., provided that such director or officer acted in good faith and in a manner that the director or officer reasonably believed to be in, or not opposed to, the best interest of CS Disco, Inc. At present, there is no pending litigation or proceeding involving a director or officer of CS Disco, Inc. regarding which indemnification is sought, nor is the registrant aware of any threatened litigation that may result in claims for indemnification.
We maintain insurance policies that indemnify our directors and officers against various liabilities arising under the Securities Act and the Securities Exchange Act of 1934, as amended, that might be incurred by any director or officer in his capacity as such.
The underwriters are obligated, under certain circumstances, under the underwriting agreement to be filed as Exhibit 1.1 hereto, to indemnify us and our officers and directors against liabilities under the Securities Act.
II-1
Item 15. Recent Sales of Unregistered Securities.
The following sets forth information regarding all unregistered securities sold since January 1, 2018:
(1) | We have granted under our 2013 Long-Term Incentive Plan, or 2013 Plan, options to purchase an aggregate of 18,076,353 shares of our common stock to a total of 578 employees, consultants and directors, having exercise prices ranging from $0.30 to $3.74 per share. 7,445,323 of the options granted under our 2013 Plan have been exercised at a weighted-average exercise price of $0.25 per share. |
(2) | We have granted under our 2013 Plan restricted stock awards representing an aggregate of 2,006,684 shares of our common stock to three employees and consultants. |
(3) | In January 2018 and April 2018, we issued and sold an aggregate of 5,972,783 shares of our Series D redeemable convertible preferred stock to three accredited investors at a price per share of $0.6042, for an aggregate purchase price of $3.6 million. |
(4) | In January 2019, we issued and sold an aggregate of 24,911,563 shares of our Series E redeemable convertible preferred stock to seven accredited investors at a price per share of $2.0071, for an aggregate purchase price of $50.0 million. |
(5) | In September and October 2020, we issued and sold an aggregate of 20,193,371 shares of our Series F redeemable convertible preferred stock to eight accredited investors at a price per share of $2.9713, for an aggregate purchase price of $60.0 million. |
(6) | In November 2018 and December 2020, we issued warrants to purchase an aggregate of 62,895 shares of our common stock to one accredited investor, having exercise prices ranging from $1.67 to $2.16 per share. |
None of the foregoing transactions involved any underwriters, underwriting discounts or commissions, or any public offering. The registrant believes the offers, sales and issuances of the above securities were exempt from registration under the Securities Act by virtue of Section 4(a)(2) of the Securities Act (or Regulation D or Regulation S promulgated thereunder) because the issuance of securities to the recipients did not involve a public offering, or in reliance on Rule 701 because the transactions were pursuant to compensatory benefit plans or contracts relating to compensation as provided under such rule. The recipients of the securities in each of these transactions represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were placed upon the stock certificates issued in these transactions. All recipients had adequate access, through their relationships with us, to information about us. The sales of these securities were made without any general solicitation or advertising.
II-2
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits.
The following exhibits are included herein or incorporated herein by reference:
* | To be filed by amendment. |
+ | Indicates management contract or compensatory plan. |
# | Certain portions of this exhibit (indicated by asterisks) have been redacted in accordance with Regulation S-K, Item 601(b)(10). |
| Certain schedules and exhibits to this exhibit have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished to the SEC upon request. |
Item 17. Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant under the foregoing provisions or otherwise, the registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the
II-3
Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance on Rule 430A and contained in a form of prospectus filed by the registrant under Rule 424(b)(1) or (4) or 497(h) under the Securities Act will be deemed to be part of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus will be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time will be deemed to be the initial bona fide offering thereof.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in Austin, Texas, on June 25, 2021.
CS DISCO, INC. | ||
By: | /s/ Kiwi Camara | |
Name: | Kiwi Camara | |
Title: | Chief Executive Officer |
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Kiwi Camara and Michael Lafair, and each of them, as his true and lawful attorney-in-fact and agent with full power of substitution, for him in any and all capacities, to sign any and all amendments to this registration statement (including post-effective amendments or any abbreviated registration statement and any amendments thereto filed pursuant to Rule 462(b) under the Securities Act of 1933 increasing the number of securities for which registration is sought), and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact, proxy, and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully for all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact, proxy and agent, or his substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration statement on Form S-1 has been signed by the following persons in the capacities and on the dates indicated.
Signature |
Title |
Date | ||
/s/ Kiwi Camara |
Chief Executive Officer and Director | June 25, 2021 | ||
Kiwi Camara | (Principal Executive Officer) | |||
/s/ Michael Lafair |
Chief Financial Officer | June 25, 2021 | ||
Michael Lafair | (Principal Financial and Accounting Officer) | |||
/s/ Krishna Srinivasan |
Chair of the Board of Directors and | June 25, 2021 | ||
Krishna Srinivasan | Director | |||
/s/ Tyson Baber |
Director | June 25, 2021 | ||
Tyson Baber | ||||
/s/ Susan L. Blount |
Director | June 25, 2021 | ||
Susan L. Blount | ||||
/s/ Colette Pierce Burnette |
Director | June 25, 2021 | ||
Colette Pierce Burnette | ||||
/s/ Aaron Clark |
Director | June 25, 2021 | ||
Aaron Clark | ||||
/s/ Robert P. Goodman |
Director | June 25, 2021 | ||
Robert P. Goodman | ||||
/s/ Scott Hill |
Director | June 25, 2021 | ||
Scott Hill | ||||
/s/ James Offerdahl |
Director | June 25, 2021 | ||
James Offerdahl |
Exhibit 3.1
SIXTH AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
CS DISCO, INC.
(a Delaware corporation)
(Pursuant to Sections 228, 242 and 245 of the
General Corporation Law of the State of Delaware)
CS Disco, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (the DGCL), hereby certifies as follows:
1. That the name of the corporation is CS Disco, Inc. (the Corporation) and that the Corporation was originally incorporated pursuant to the DGCL on December 2, 2013.
2. This Sixth Amended and Restated Certificate of Incorporation was duly adopted in accordance with Sections 242 and 245 of the DGCL and has been duly approved by the written consent of the stockholders of the Corporation in accordance with Section 228 of the DGCL.
3. The text of the Certificate of Incorporation of the corporation is hereby restated in its entirety to read as follows:
ARTICLE ONE
The name of the corporation is CS Disco, Inc.
ARTICLE TWO
The address of the registered office of the Corporation in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle, Delaware 19801. The name of its registered agent at such address is The Corporation Trust Company.
ARTICLE THREE
The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may now or hereafter be organized under the DGCL.
ARTICLE FOUR
Section 1. AUTHORIZED CAPITAL STOCK. The total number of shares of capital stock that the Corporation shall have authority to issue is 456,373,875, consisting of 277,406,431 shares of common stock, par value $0.001 per share (the Common Stock), and 178,967,444 shares of preferred stock, par value $0.001 per share (the Preferred Stock).
1
Each share of the Preferred Stock within an individual series shall be identical in all respects with the other shares of such series, except as to the date, if any, from which dividends on such share shall, if applicable, accumulate and other details that, because of the passage of time, are required to be made in order for the substantive rights of the holders of the shares of such series to be identical.
Except as may be otherwise specifically set forth in the designations for a series of the Preferred Stock, the number of authorized shares of any class or series of stock of the Corporation may be increased or decreased (but not below the number of shares of such class or series then outstanding) by an amendment to this Certificate of Incorporation approved by the affirmative vote of the holders of a majority of the stock of the Corporation entitled to vote on such amendment voting together as a single class, and no such class or series of stock shall be entitled to vote on such amendment as a separate class.
Section 2. DESIGNATION OF PREFERRED STOCK. The Preferred Stock shall be comprised of six series, designated as follows: 20,000,000 shares of Preferred Stock are designated as the Corporations Series A Convertible Preferred Stock (the Series A Preferred Stock), 31,666,660 shares of Preferred Stock are designated as the Corporations Series B Convertible Preferred Stock (the Series B Preferred Stock), 48,914,230 shares of Preferred Stock are designated as the Corporations Series C Convertible Preferred Stock (the Series C Preferred Stock), 33,281,620 shares of Preferred Stock are designated as the Corporations Series D Convertible Preferred Stock (the Series D Preferred Stock), 24,911,563 shares of Preferred Stock are designated as the Corporations Series E Convertible Preferred Stock (the Series E Preferred Stock) and 20,193,371 shares of Preferred Stock are designated as the Corporations Series F Convertible Preferred Stock (the Series F Preferred Stock). The voting powers, preferences and relative participation, optional or other special rights and privileges and qualifications, limitations or restrictions of the Preferred Stock are as set forth below:
2.1 Dividends.
(a) Preferred Stock. The holders of the outstanding shares of the Preferred Stock shall be entitled to receive dividends from time to time out of any assets legally available for payment of dividends, when, as and if declared by the board of directors of the Corporation (the Board), on a pro rata, pari passu basis.
(b) Priority on Dividends; Participation. The Corporation shall not declare, pay or set aside any dividends on shares of any other class or series of capital stock of the Corporation (other than dividends on shares of Common Stock payable in shares of Common Stock) unless (in addition to obtaining any consents required elsewhere in this Certificate of Incorporation) the holders of the Preferred Stock then outstanding shall first receive, or simultaneously receive, a dividend on each outstanding share of Preferred Stock in an amount at least equal to (i) in the case of a dividend on Common Stock or any class or series that is convertible into Common Stock, that dividend per share of Preferred Stock as would equal the product of (A) the dividend payable on each share of such class or series determined, if applicable, as if all shares of such class or series had been converted into Common Stock and (B) the number of shares of Common Stock issuable upon conversion of a share of Preferred
2
Stock, in each case calculated as of the record date for determination of holders entitled to receive such dividend or (ii) in the case of a dividend on any class or series that is not convertible into Common Stock, at a rate per share of Preferred Stock determined by (A) dividing the amount of the dividend payable on each share of such class or series of capital stock by the original issuance price of such class or series of capital stock (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to such class or series) and (B) multiplying such fraction by an amount equal to the applicable Original Issue Price (as defined below); provided, that if the Corporation declares, pays or sets aside, on the same date, a dividend on shares of more than one class or series of capital stock of the Corporation, the dividend payable to the holders of Preferred Stock pursuant to this Section 2.1(b) of Article Four shall be calculated based upon the dividend on the class or series of capital stock that would result in the highest Preferred Stock dividend. Notwithstanding the foregoing sentence, the restriction in the foregoing sentence shall not apply to (x) the repurchase of shares of capital stock pursuant to the Stockholders Agreement; (y) the redemption of shares of Preferred Stock pursuant to the terms of this Certificate of Incorporation or the payment of dividends or the redemption of any other Equity Securities ranking senior to or on parity with the Preferred Stock with respect to the payment of dividends or redemption, as applicable, pursuant to the terms of such Equity Securities; or (z) the repurchase of shares of Common Stock from directors, employees or consultants of the Corporation or a Subsidiary pursuant to agreements under which the Corporation has the option to repurchase such shares upon the occurrence of certain events, such as the termination of service to the Corporation or a Subsidiary. The Original Issue Price shall mean (i) with respect to the Series A Preferred Stock, $0.10 per share, (ii) with respect to the Series B Preferred Stock, $0.33 per share, (iii) with respect to the Series C Preferred Stock, $0.3797 per share, (iv) with respect to the Series D Preferred Stock, $0.6042 per share, (v) with respect to the Series E Preferred Stock, $2.0071 per share and (vi) with respect to the Series F Preferred Stock, $2.9713 per share, each as adjusted for any stock splits, stock dividends, recapitalizations, combinations or similar transactions with respect to such shares after the filing date of this Certificate of Incorporation.
(c) Non-Cash Dividends. Whenever a dividend provided for in this Section 2.1 of Article Four shall be payable in property other than cash, the amount or value of such dividend shall be deemed to be the Fair Market Value of such property.
2.2 Liquidation Preference.
(a) Preferred Stock. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation or Deemed Liquidation Event, the holders of shares of the Preferred Stock then outstanding shall be entitled to receive, prior and in preference to any payment or distribution and setting apart for payment or distribution of any of the assets or surplus funds of the Corporation to the holders of the Common Stock and to the holders of any other Equity Securities ranking junior to the Preferred Stock with respect to liquidation, an amount (the Liquidation Preference) for each share of the Preferred Stock then held by them equal to the greater of (i) the Original Issue Price plus all declared but unpaid dividends thereon to and including the date of payment of such Liquidation Preference and (ii) the amount such holder would have received if all shares of the Preferred Stock had been converted into shares of the Common Stock immediately prior to such liquidation, dissolution or winding up of the Corporation or Deemed Liquidation Event. If, upon the occurrence of such
3
event, the assets and funds legally available for distribution among the holders of shares of the Preferred Stock shall be insufficient to permit the payment to such holders of their full preferential amounts (including the full Liquidation Preference), then the entire assets and funds of the Corporation legally available for distribution to such holders shall be distributed ratably among the holders of the Preferred Stock based upon the aggregate Liquidation Preferences of the shares of the Preferred Stock held by each such holder. Subject to Section 2.2(f) of Article Four, shares of Preferred Stock shall not be entitled to participate in any payments or distributions as shares of Common Stock pursuant to subsection (ii) above to the extent that they participate in the payments or distributions as shares of Preferred Stock pursuant to subsection (i) above.
(b) Payments to Holders of Common Stock. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation or Deemed Liquidation Event, after the payment of all preferential amounts required to be paid to the holders of the Preferred Stock, any remaining assets and funds of the Corporation available for distribution to the Corporations stockholders shall be distributed among the holders of the Common Stock pro rata based on the number of shares held by each such holder.
(c) Deemed Liquidation Events. For purposes of this Section 2.2 of Article Four, unless each of (i) the holders of a majority of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock (collectively, the Series A -D Preferred Stock) (voting together as a single class on an as-converted basis), (ii) the holders of a majority of the shares of Series E Preferred Stock then outstanding and (iii) the holders of a majority of the shares of Series F Preferred Stock then outstanding, elect otherwise by written notice to the Corporation at least 10 days prior to the effective date of such event (a Liquidation Preference Waiver), a liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, which events shall be deemed to include, (A) the acquisition of the Corporation by means of any transaction or series of related transactions to which the Corporation is a party (including, without limitation, any stock purchase transaction, merger, consolidation or other form of reorganization) in which outstanding shares of the Corporation are exchanged for securities or other consideration issued, or caused to be issued, by the acquiring entity or its subsidiary, but excluding (1) any transaction effected for the purpose of changing the Corporations jurisdiction of incorporation, (2) the sale by the Corporation of shares of its capital stock to investors in bona fide equity financing transactions or in a sale of shares of the Corporations capital stock in a firm commitment unwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, or (3) any transaction in which the Corporations stockholders of record immediately prior to such event shall (by virtue of the securities issued as a part of such transaction) hold, directly or indirectly and in substantially the same proportion, with substantially the same relative rights, more than 50% of the voting power of the surviving or acquiring Person immediately following such transaction; or (B) the sale, lease or transfer, in a single transaction or series of related transactions, by the Corporation or any Subsidiary of all or substantially all of the assets of the Corporation and its Subsidiaries taken as a whole; or (C) the exclusive licensing, in a single transaction or series of related transactions, by the Corporation or any Subsidiary of all or substantially all of the intellectual property of the Corporation and its Subsidiaries taken as a whole, other than to one or more wholly owned Subsidiaries of the Corporation, shall constitute a Deemed Liquidation Event, and the holders of Preferred Stock shall be entitled to receive in cash, securities or other property (valued at Fair Market Value) in the amounts as specified in Section 2.2(a) above in connection therewith.
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(d) Liquidation Notice. The Corporation shall give written notice of any liquidation, dissolution or winding up, either voluntary or involuntary, (or any transaction that might reasonably be expected to constitute or be deemed to be a Deemed Liquidation Event) to each holder of the Preferred Stock not less than 20 days prior to such liquidation, dissolution, winding up or transaction. Each holder of the Preferred Stock may convert all or any portion of the Preferred Stock into Common Stock at any time on or prior to the date on which such holders right to convert such shares to the Common Stock terminates pursuant to Section 2.5 of this Article Four.
(e) Contractual Enforcement of Deemed Liquidation Events. The Corporation shall not have the power to effect a Deemed Liquidation Event unless, in the case of a merger, consolidation or other corporate reorganization pursuant to Section 2.2(c)(A) of this Article Four, the agreement or plan of merger or consolidation provides that the consideration payable to the stockholders of the Corporation shall be allocated among the holders of capital stock of the Corporation in accordance with this Section 2.2 of this Article Four. In the event of a Deemed Liquidation Event pursuant to Sections 2.2(c)(B) or (C) of this Article Four, if the Corporation does not effect a dissolution of the Corporation under the DGCL within 30 days after such Deemed Liquidation Event, then (i) the Corporation shall deliver a written notice to each holder of Preferred Stock not later than 30 days after the Deemed Liquidation Event advising such holder of his, her or its right (and the requirements to be met to secure such right) pursuant to the terms of the following subpart (ii) to require the redemption of such shares of the Preferred Stock and (ii) to the extent any such holder of Preferred Stock exercises his, her or its right to require redemption of his, her or its shares of the Preferred Stock, the Corporation shall use the consideration received by the Corporation for such Deemed Liquidation Event (net of any retained liabilities associated with the assets sold or technology licensed, as determined in good faith by the Board) (the Net Proceeds) to redeem, to the extent legally available therefor, on the 45th day after such Deemed Liquidation Event (the Liquidation Redemption Date), all shares of the Preferred Stock of such holder of the Preferred Stock exercising his, her or its right to require redemption thereof pursuant hereto, at a price per share equal to the aggregate amounts that would have been payable to the holders of the Preferred Stock in accordance with this Section 2.2 of Article Four if such dissolution had been effected immediately following such Deemed Liquidation Event. In the event of a redemption pursuant to the preceding sentence, if the Net Proceeds are not sufficient to redeem all such shares of the Preferred Stock, or if the Corporation does not have sufficient lawfully available funds to effect such redemption, the Corporation shall redeem a pro rata portion of shares of the Preferred Stock of each holder exercising his, her or its right to require redemption pursuant hereto to the fullest extent of such Net Proceeds or such legally available funds, as the case may be, and, where such redemption is limited by the amount of legally available funds, the Corporation shall redeem the remaining shares to have been redeemed as soon as practicable after the Corporation has funds legally available therefor. The provisions of Section 2.3 of this Article Four shall apply, with such necessary changes in the details thereof as are necessitated by the context, to the redemption of the Preferred Stock pursuant to this section. Prior to the distribution or redemption provided for in this section, the Corporation shall not expend or dissipate the consideration received for such Deemed Liquidation Event, except to discharge retained liabilities and expenses incurred in the ordinary course of business.
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(f) Allocation of Escrow; Earn-outs and Contingent Payments. In the event of a Deemed Liquidation Event, if any portion of the consideration payable to the stockholders of the Corporation is placed into escrow and/or is payable to the stockholders of the Corporation subject to contingencies, the relevant transaction agreement shall provide that (i) the portion of such consideration that is not placed in escrow and not subject to any contingencies (including, for the avoidance of doubt, earn-outs, milestones, and other consideration similarly subject to conditions) (the Initial Consideration) shall be allocated among the holders of capital stock of the Corporation in accordance with this Section 2.2 of Article Four as if the Initial Consideration were the only consideration payable in connection with such transaction and (ii) any additional consideration that becomes payable to the stockholders of the Corporation upon release from escrow or satisfaction of contingencies shall be allocated among the holders of capital stock of the Corporation in accordance with this Section 2.2 of Article Four after taking into account the previous payment of the Initial Consideration as part of the same transaction.
(g) Amount Deemed Paid or Distributed. The amount deemed paid or distributed to the holders of capital stock of the Corporation upon any such merger, consolidation, sale, transfer, exclusive license, other disposition or redemption shall be the cash or the value of the property, rights or securities paid or distributed to such holders by the Corporation or the acquiring person, firm or other entity. The value of such property, rights or securities shall be its Fair Market Value.
2.3 Redemption.
(a) Right of Redemption. Unless prohibited by Delaware law governing distributions to stockholders, shares of the Preferred Stock shall be redeemed by the Corporation at a price equal to the greater of (i) the Liquidation Preference and (ii) the Fair Market Value (determined in the manner set forth below), in each case, of a single share of such series of Preferred Stock as of the date of the Corporations receipt of the Redemption Request, (the Redemption Price), payable in three annual installments, with the first of such installments being paid not more than 60 days after receipt by the Corporation at any time on or after the fifth anniversary of the filing date of this Certificate of Incorporation from the holders of a majority of the then outstanding shares of the Preferred Stock, voting together as a single class and on an as-converted basis, of written notice requesting redemption of all shares of the Preferred Stock (the Redemption Request). Upon receipt of a Redemption Request, the Corporation shall apply all of its assets to any such redemption, and to no other corporate purpose other than as required to meet applicable debt service requirements or as necessary for the payment of outstanding creditor claims when due incurred prior to receipt of such Redemption Request, in each case, as reasonably determined by the Board, except to the extent prohibited by Delaware law governing distributions to stockholders. For purposes of this Section 2.3(a) of Article Four, the Fair Market Value of a single share of the Preferred Stock shall be the value of a single share of such series of Preferred Stock, as of the date of the Corporations receipt of the Redemption Request, as mutually agreed upon by the Corporation and the holders of a majority of the shares of the Preferred Stock then outstanding, and, in the event that they
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are unable to reach agreement, by a third-party appraiser agreed to by the Corporation and the holders of a majority of the shares of the Preferred Stock then outstanding. The date of each installment of the Redemption Price shall be referred to as a Redemption Date. On each Redemption Date, the Corporation shall redeem, on a pro rata basis in accordance with the number of shares of the Preferred Stock owned by each holder, that number of outstanding shares of the Preferred Stock determined by dividing (i) the total number of shares of the Preferred Stock outstanding immediately prior to such Redemption Date by (ii) the number of remaining Redemption Dates (including the Redemption Date to which such calculation applies). If, on any Redemption Date, Delaware law governing distributions to stockholders prevents the Corporation from redeeming all shares of the Preferred Stock to be redeemed, the Corporation shall ratably redeem the maximum number of shares that it may redeem consistent with such law, and shall redeem the remaining shares as soon as it may lawfully do so under such law. If the funds of the Corporation legally available for redemption of the Preferred Stock on any Redemption Date are insufficient to redeem the total number of shares of the Preferred Stock to be redeemed on such date, those funds that are legally available shall be used to redeem the maximum possible number of shares of the Preferred Stock, ratably among the holders of the shares of the Preferred Stock to be redeemed based upon the aggregate Redemption Price of such shares held by each such holder. At any time after such Redemption Date when additional funds of the Corporation are legally available for the redemption of shares of the Preferred Stock, such funds shall immediately be used to redeem the balance of the shares that the Corporation has become obligated to redeem on any Redemption Date but has not redeemed, ratably among the holders of such shares of the Preferred Stock, as set forth in the preceding sentence, and such funds shall not be used for any other purpose other than those stated above, including to redeem any shares of the Preferred Stock that the Corporation is obligated to redeem on any subsequent Redemption Date. The obligation of the Corporation to redeem shares of Preferred Stock that are not redeemed on any Redemption Date shall be discharged if the Founders, or any of them, (i) unconditionally and irrevocably agree in writing to purchase on such Redemption Date all of the remaining outstanding shares of Preferred Stock (including, in addition to the shares that are not redeemed on such Redemption Date, shares of Preferred Stock that the Corporation is obligated to redeem on any subsequent Redemption Date) for cash equal to the aggregate Redemption Price of such shares and (ii) deposit, on or before such Redemption Date, immediately available funds in an amount equal to the aggregate Redemption Price of all of the remaining outstanding shares of Preferred Stock with a bank or trust company having aggregate capital and surplus in excess of $100,000,000 as a trust fund for the benefit of the respective holders of such shares, with irrevocable instructions and authority to such bank or trust company to pay an amount equal to the aggregate Redemption Price for such shares to each holder of such shares on or after such Redemption Date upon receipt of notification from the Corporation that such holder has surrendered its share certificates to the Corporation for transfer to the Founder or Founders who agreed to purchase such shares. Founders may exercise their right and option to purchase shares of Preferred Stock pursuant to this Section 2.3(a) of Article Four by giving written notice, on or before such Redemption Date, to each holder of such shares and to the Corporation setting forth (i) the unconditional and irrevocable agreement of such Founders to purchase all (but not less than all) of the remaining outstanding shares of Preferred Stock, (ii) the irrevocable instructions and authority given to such bank or trust company to pay an amount equal to the aggregate Redemption Price for such shares and (iii) confirmation that immediately available funds in an amount equal to the aggregate Redemption Price for such shares has been sent by wire transfer to the trust fund established for the benefit the holders of such shares. The shares of the Preferred Stock not redeemed or purchased by the Founders as provided above shall remain outstanding and entitled to all the rights and preferences provided in this Certificate of Incorporation.
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(b) Redemption Notice. Not less than 15, nor more than 30, days prior to a Redemption Date, the Corporation shall give written notice to each holder of record (as of the close of business on the business day next preceding the day on which notice is given) of the Preferred Stock of the redemption to be effected, specifying (i) the number of shares to be redeemed from such holder on such Redemption Date, (ii) the Redemption Date, (iii) the Redemption Price, (iv) the date on which such holders right to convert such shares to the Common Stock terminates and (v) the place at which payment may be obtained, and calling upon such holder to surrender to the Corporation, in the manner and at the place designated, his, her or its certificate or certificates representing the shares of the Preferred Stock to be redeemed on such Redemption Date (or, if such holder alleges that such certificate has been lost, stolen or destroyed, a lost certificate affidavit and agreement reasonably acceptable to the Corporation to indemnify the Corporation against any claim that may be made against the Corporation on account of the alleged loss, theft or destruction of such certificate) (the Redemption Notice).
(c) Excluded Shares. If the Corporation receives, on or prior to the 20th day after the date of delivery of the Redemption Notice to a holder of Preferred Stock, written notice from such holder that such holder elects to be excluded from the redemption provided in this Section 2.3, then the shares of Preferred Stock registered on the books of the Corporation in the name of such holder at the time of the Corporations receipt of such notice shall thereafter be Excluded Shares. Excluded Shares shall not be redeemed or redeemable pursuant to this Section 2.3, whether on such Redemption Date or thereafter.
(d) Certificates, etc. If fewer than the total number of shares of the Preferred Stock represented by any certificate are redeemed, a new certificate representing the number of unredeemed shares of such series of the Preferred Stock shall be issued to the holder of such shares without cost to such holder within a reasonable time after surrender of the certificate representing the redeemed shares.
(e) Default in Redemption of Preferred Stock. If the Corporation fails to redeem the total number of shares of the Preferred Stock to be redeemed on any Redemption Date, or if the funds of the Corporation legally available for redemption of the Preferred Stock on any Redemption Date are insufficient to redeem the total number of shares of the Preferred Stock to be redeemed on such date, and, in either case, if one or more Founders have not purchased all of the remaining outstanding shares of Preferred Stock, as provided in Section 2.3(a) of this Article Four (each, a Redemption Default), then the number of directors constituting the Board shall, at the request of the holders of a majority of the shares of the Preferred Stock then outstanding, voting as a separate class, be increased by four members, and (i) the holders of shares of Series A Preferred Stock will, together, have the special right, voting as a separate series (with each share being entitled to one vote), and to the exclusion of all other classes or series of the Corporations voting stock, to elect an individual to fill one of such newly created directorships, to fill any vacancy of such directorship and to remove any individual elected to such directorship, (ii) the holders of shares of Series B Preferred Stock will, together,
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have the special right, voting as a separate series (with each share being entitled to one vote), and to the exclusion of all other classes or series of the Corporations voting stock, to elect an individual to fill another of such newly created directorships, to fill any vacancy of such directorship and to remove any individual elected to such directorship, (iii) the holders of shares of Series C Preferred Stock will, together, have the special right, voting as a separate series (with each share being entitled to one vote), and to the exclusion of all other classes or series of the Corporations voting stock, to elect an individual to fill another of such newly created directorships, to fill any vacancy of such directorship and to remove any individual elected to such directorship and (iv) the holders of shares of Series E Preferred Stock will, together, have the special right, voting as a separate series (with each share being entitled to one vote), and to the exclusion of all other classes or series of the Corporations voting stock, to elect an individual to fill the other of such newly created directorships, to fill any vacancy of such directorship and to remove any individual elected to such directorship. The newly created directorships will constitute a separate class of directors and the directors elected to such directorships shall each have one vote on each matter considered by the Board. This special right of the holders of the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock and the Series E Preferred Stock to elect such directors may be exercised at a special meeting called pursuant to this Section 2.3(e) of Article Four, at any annual or special meeting of stockholders and, to the extent and in the manner permitted by applicable law, pursuant to a written consent in lieu of a meeting of stockholders. At any time when this special right has vested in the holders of shares of the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock and the Series E Preferred Stock, the President or the Secretary of the Corporation will, upon the written request of the holders of a majority of the shares of the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock or the Series E Preferred Stock, as applicable, then outstanding, in each case, voting together as a separate class, addressed to the Secretary of the Corporation, call a special meeting of the holders of the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock or the Series E Preferred Stock, as applicable, for the purpose of electing any such directors. Such meeting will be held at the earliest legally permissible date at the principal office of the Corporation. If such meeting has not been called by a proper officer of the Corporation within 10 days after personal service of such written request upon the Secretary of the Corporation or within 20 days after mailing the same to the Secretary of the Corporation at its principal office, then the holders of a majority of the shares of the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock or the Series E Preferred Stock, as applicable, then outstanding, in each case, voting together as a separate class, may designate in writing one of their number to call such meeting at the expense of the Corporation, and such meeting may be called by such person so designated upon the notice required for annual meetings of stockholders and will be held at the corporations principal office. Any holder of shares of the series of Preferred Stock so designated will be given access to the stock record books of the Corporation for the purpose of causing a meeting of the holders of such series of the Preferred Stock to be called pursuant to this Section. At any meeting or at any adjournment thereof at which the holders of shares of the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock or the Series E Preferred Stock each have the special right to elect a director pursuant to this Section 2.3(e) of Article Four, the presence, in person or by proxy, of the holders of a majority of the shares of the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock or the Series E Preferred Stock, as applicable, then outstanding will be required to constitute a quorum for the election or removal of such director by the holders of the shares of the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock or the Series E Preferred Stock exercising such special right. The vote of a majority of such quorum will be required to elect or remove any such director.
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(f) Redeemed or Otherwise Acquired Shares. Any shares of the Preferred Stock that are redeemed or otherwise acquired by the Corporation or any of its subsidiaries shall be automatically and immediately canceled and retired and shall not be reissued, sold or transferred. Neither the Corporation nor any of its subsidiaries may exercise any voting or other rights granted to the holders of the Preferred Stock following redemption or other acquisition.
2.4 Voting Rights.
(a) General. On any matters presented to the stockholders of the Corporation for their action or consideration at any meeting of stockholders (or by written consent of stockholders in lieu of a meeting), each holder of outstanding shares of the Preferred Stock shall be entitled to cast the number of votes equal to the largest number of whole shares of the Common Stock into which all shares of the Preferred Stock held of record by such holder could then be converted pursuant to Section 2.5 of this Article Four at the record date for the determination of the stockholders entitled to vote on such matters or, if no such record date is established, at the date such vote is taken or any written consent of stockholders is first executed. The holders of shares of the Preferred Stock shall be entitled to notice of any stockholders meeting in accordance with the bylaws of the Corporation (the Bylaws). Except as provided by law or by the provisions of Section 2.4(b) or 2.4(c) of this Article Four, the holders of shares of the Preferred Stock shall vote together with the holders of the Common Stock on an as-converted basis, and not as separate classes or series.
(b) Directors. In addition to the directors entitled to be elected by the holders of shares of the Common Stock pursuant to Section 3.3 of this Article Four, and subject to Section 2.3(e) of Article Four, the Board shall be elected as follows:
(i) Series A Director. For as long as at least 5,000,000 shares of Series A Preferred Stock or shares of Common Stock issued upon conversion of shares of Series A Preferred Stock (as adjusted for any stock dividend, stock split, combination, reorganization, recapitalization, reclassification or other similar event with respect to such shares) are outstanding, the holders of shares of Series A Preferred Stock, voting as a separate series, shall be entitled to elect one director of the Corporation (the Series A Director).
(ii) Series B Director. For as long as at least 5,000,000 shares of. Series B Preferred Stock or shares of Common Stock issued upon conversion of shares of Series B Preferred Stock (as adjusted for any stock dividend, stock split, combination, reorganization, recapitalization, reclassification or other similar event with respect to such shares) are outstanding, the holders of shares of Series B Preferred Stock, voting as a separate series, shall be entitled to elect one director of the Corporation (the Series B Director).
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(iii) Series C Director. For as long as at least 5,000,000 shares of Series C Preferred Stock or shares of Common Stock issued upon conversion of shares of Series C Preferred Stock (as adjusted for any stock dividend, stock split, combination, reorganization, recapitalization, reclassification or other similar event with respect to such shares) are outstanding, the holders of shares of Series C Preferred Stock, voting as a separate series, shall be entitled to elect one director of the Corporation (the Series C Director).
(iv) Series E Director. For as long as at least 2,491,156 shares of Series E Preferred Stock or shares of Common Stock issued upon conversion of shares of Series E Preferred Stock (as adjusted for any stock dividend, stock split, combination, reorganization, recapitalization, reclassification or other similar event with respect to such shares) are outstanding, the holders of shares of Series E Preferred Stock, voting as a separate series, shall be entitled to elect one director of the Corporation (the Series E Director and, together with the Series A Director, the Series B Director and the Series C Director, the Preferred Directors).
(v) Independent Director. The holders of record of shares of the Common Stock and the Preferred Stock, voting together on an as-converted basis and not as separate classes or series, shall be entitled to elect one director of the Corporation.
(vi) Removal; Vacancies. Any director elected as provided in Section 2.4(b) or 3.3 of this Article Four may be removed with or without cause by, and only by, the affirmative vote of a majority of the holders of record of shares of the class or series of stock entitled to elect such director or directors given either at a special meeting of such stockholders duly called for that purpose or pursuant to a written consent of a majority of such stockholders, voting together and not as separate classes or series. If the holders of shares of the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series E Preferred Stock or the Common Stock, as the case may be, fail to elect a sufficient number of directors to fill all directorships for which they are entitled to elect directors, voting as a separate class or series, pursuant to Section 2.4(b)(i), 2.4(b)(ii), 2.4(b)(iii) or 2.4(b)(iv) or 3.3 of this Article Four, then any directorship not so filled shall remain vacant until such time as the holders of the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series E Preferred Stock or the Common Stock entitled to elect such director, as the case may be, elect a person to fill such directorship by vote or written consent in lieu of a meeting; and no such directorship may be filled by stockholders of the Corporation other than by the stockholders of the Corporation that are entitled to elect a person to fill such directorship, voting as a separate class or series. At any meeting at which one or more directors are to be elected, the presence in person or by proxy of the holders of a majority of the outstanding shares of the class or series entitled to elect such director shall constitute a quorum for the purpose of electing such director. A vacancy in any directorship filled by the holders of any class or series shall be filled only by vote or written consent in lieu of a meeting of the holders of such class or series.
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(c) Preferred Stock Protective Provisions. At any time when any shares of the Preferred Stock are outstanding, the Corporation shall not, either directly or by amendment, merger, consolidation or otherwise, without (in addition to any other vote required by law or this Certificate of incorporation) the written consent or affirmative vote of the holders of a majority of the outstanding shares of the Preferred Stock, consenting or voting as a single class and on an as-converted basis, do any of the following, and any such act or transaction entered into without such consent or vote shall be null and void, ab initio, and of no force or effect:
(i) amend, alter or repeal any provision of this Certificate of Incorporation or the Corporations By laws if such amendment, alteration or repeal would adversely affect the rights, powers, preferences or privileges of the Preferred Stock, or any other amendment or change of the rights, preferences, privileges or powers of, or the restrictions provided for the benefit of, the Preferred Stock if such amendment or change would adversely affect the rights, powers, preferences or privileges of any series of the Preferred Stock;
(ii) create, authorize, issue or obligate itself to issue (or reclassify or convert or exchange any existing Equity Securities into or for) any class or series of Equity Securities (other than the Common Stock and the Preferred Stock) ranking senior to or on a parity with any series of Preferred Stock with respect to dividend or redemption rights, liquidation preferences, conversion rights, voting rights or otherwise or increase the authorized number of shares of any such class or series of Equity Securities;
(iii) (A) reclassify, alter or amend any existing security of the Corporation that is pari passu with any series of Preferred Stock in respect of the distribution of assets on the liquidation, dissolution or winding up of the Corporation, the payment of dividends or rights of redemption, if such reclassification, alteration or amendment would render such other security senior to such series Preferred Stock in respect of any such right, preference or privilege, or (B) reclassify, alter or amend any existing security of the Corporation that is junior to any series of Preferred Stock in respect of the distribution of assets on the liquidation, dissolution or winding up of the Corporation, the payment of dividends or rights of redemption, if such reclassification, alteration or amendment would render such other security senior to or pari passu with such series of Preferred Stock in respect of any such right, preference or privilege;
(iv) authorize, issue or obligate itself to issue any additional shares of the Preferred Stock, or increase or decrease (other than by redemption or conversion) the total number of authorized shares of the Preferred Stock;
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(v) increase or decrease the authorized number of directors constituting the Board to other than seven members, other than an increase by four members pursuant to Section 2.3(e) of Article Four;
(vi) other than issuances of stock options, stock appreciation rights, restricted stock, restricted stock units, bonus stock, dividend equivalents or other awards available for issuance under an Approved Plan in existence as of the date hereof, authorize or issue, or obligate itself to issue, any Equity Securities of the Corporation to any employee, director or consultant of the Corporation or any Subsidiary, or authorize or create, or reserve Equity Securities (including increasing the number of Equity Securities reserved) with respect to any stock option plan, stock incentive plan, stock appreciation right, restricted stock, restricted stock unit or other plan or arrangement;
(vii) liquidate, dissolve or wind-up the business and affairs of the Corporation, effect any Deemed Liquidation Event or become obligated to do so;
(viii) liquidate, merge, consolidate, dissolve or wind-up the business and affairs of any Subsidiary or permit any Subsidiary to effect any Deemed Liquidation Event or, unless the obligations of the Subsidiary under each applicable agreement are expressly conditioned upon the requisite approval of the holders of the Preferred Stock, permit a Subsidiary to become obligated to do so;
(ix) declare or pay any cash or other dividend or make any other distribution of any kind on shares of Common Stock or other Equity Security other than a divided payable solely in shares of Common Stock;
(x) redeem or repurchase any shares of the capital stock of the Corporation other than (A) as set forth in Section 2.3 of this Article Four or (B) repurchases of the unvested shares of capital stock held by former service providers at the lesser of the original purchase price of such shares and the then current Fair Market Value of such shares;
(xi) incur, create, assume, guaranty, become or be liable in any manner with respect to, or permit to exist, any indebtedness of the Corporation or any Subsidiary for borrowed money (including, without limitation, capitalized leases) or for the deferred purchase price for the acquisition of property in excess of $1,000,000 in the aggregate, unless otherwise approved by the Board, including the affirmative approval of a majority of the then-serving Preferred Directors;
(xii) hire, terminate or change the compensation of the executive officers, including approving any option grants or stock awards to executive officers, unless otherwise approved by the Board, including the affirmative approval of a majority of the then-serving Preferred Directors;
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(xiii) (A) change, or permit any Subsidiary to change, the principal business of the Corporation or such Subsidiary, as applicable, (B) enter, or permit any Subsidiary to enter, new lines of business or (C) exit, or permit any Subsidiary to exit, the current line of business, in each case, unless otherwise approved by the Board, including the affirmative approval of a majority of the then-serving Preferred Directors;
(xiv) sell, assign, license, pledge or encumber, or permit any Subsidiary to sell, assign, license, pledge or encumber, material technology or intellectual property, other than licenses granted in the ordinary course of business;
(xv) create or hold Equity Securities of any Subsidiary other than a wholly owned Subsidiary, transfer, exclusively license or otherwise dispose of any assets of the Corporation or any Subsidiary to any Subsidiary other than a wholly owned Subsidiary, or directly or indirectly transfer or otherwise dispose of Equity Securities of a Subsidiary or permit any Subsidiary to issue Equity Securities, in each case, to any person other than the Corporation or a wholly owned Subsidiary; make any loan or advance to, or own any stock or other securities of, or guarantee, directly or indirectly, any indebtedness of, any Subsidiary or other Person other than a wholly owned Subsidiary provided that such action does not otherwise violate subsection (xi) above;
(xvi) except as otherwise permitted herein, make any loan or advance to any Person, including any employee or director, except advances and similar expenditures in the ordinary course of business or under the terms of an Approved Plan; or
(xvii) authorize, issue or obligate itself to issue any Equity Securities for consideration other than cash consideration, other than pursuant to an Approved Plan or as otherwise approved by the Board, including the affirmative approval of a majority of the then-serving Preferred Directors;
(xviii) cause or permit any of its subsidiaries to, without the approval of the Board, including the affirmative approval of a majority of the then-serving Preferred Directors, sell, issue, sponsor, create or distribute any digital tokens, cryptocurrency or other blockchain-based assets (collectively, Tokens), including through a pre-sale, initial coin offering, token distribution event or crowdfunding, or through the issuance of any instrument convertible into or exchangeable for Tokens; or
(xix) commit or agree, or allow any Subsidiary to consummate, commit or agree, take any action, authorize or approve or enter into any binding agreement with respect to or otherwise contract, to do any of the foregoing.
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(d) Series E Preferred Stock Protective Provisions. At any time when any shares of the Series E Preferred Stock are outstanding, the Corporation shall not, either directly or by amendment, merger, consolidation or otherwise, without (in addition to any other vote required by law or this Certificate of Incorporation) the written consent or affirmative vote of the holders of a majority of the outstanding shares of the Series E Preferred Stock, consenting or voting as a single class and on an as-converted basis, do any of the following, and any such act or transaction entered into without such consent or vote shall be null and void, ab initio, and of no force or effect:
(i) amend, alter or repeal any provision of this Certificate of Incorporation or the Corporations By laws if such amendment, alteration or repeal would (A) adversely and disproportionately affect the rights, powers, preferences or privileges of the Series E Preferred Stock as compared to the other series of Preferred Stock or (B) permit, or provide or allow for, the conversion of the Series E Preferred Stock of any holder thereof without the consent of such holder in a manner other than as set forth in Section 2.5(h) of this Article Four; or
(ii) increase or decrease (other than by redemption or conversion) the total number of authorized shares of the Series E Preferred Stock.
(e) Series F Preferred Stock Protective Provisions. At any time when any shares of the Series F Preferred Stock are outstanding, the Corporation shall not, either directly or by amendment, merger, consolidation or otherwise, without (in addition to any other vote required by law or this Certificate of Incorporation) the written consent or affirmative vote of the holders of a majority of the outstanding shares of the Series F Preferred Stock, consenting or voting as a single class and on an as-converted basis, do any of the following, and any such act or transaction entered into without such consent or vote shall be null and void, ab initio, and of no force or effect:
(i) amend, alter or repeal any provision of this Certificate of Incorporation or the Corporations Bylaws if such amendment, alteration or repeal would (A) adversely and disproportionately affect the rights, powers, preferences or privileges of the Series F Preferred Stock as compared to the other series of Preferred Stock or (B) permit, or provide or allow for, the conversion of the Series F Preferred Stock of any holder thereof without the consent of such holder in a manner other than as set forth in Section 2.5(h) of this Article Four; or
(ii) increase or decrease (other than by redemption or conversion) the total number of authorized shares of the Series F Preferred Stock.
2.5 Conversion.
(a) Conversion Procedure.
(i) Any holder of shares of the Preferred Stock may, at any time or from time to time, without the payment of additional consideration by the holder thereof, convert all or any portion of the shares of the Preferred Stock (including any fraction of a share) held by such holder into a number of shares of the Common Stock computed by multiplying the number of shares of the Preferred Stock to be converted by the Original Issue Price for such series of Preferred Stock, and dividing the result by the Conversion Price (as defined below) then in effect.
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(ii) In the event of a Redemption Notice of any shares of the Preferred Stock pursuant to Section 2.3(b) of this Article Four, the conversion rights of the shares designated for redemption shall terminate at the close of business on the last full day preceding the date fixed for redemption, unless the redemption price is not fully paid on such redemption date, in which case the conversion rights for such shares shall continue until such price is paid in full. In the event of a liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, or a Deemed Liquidation Event, the conversion rights shall terminate at the close of business on the last full day preceding the date fixed for the payment of any such amounts distributable on such event to the holders of the Preferred Stock.
(iii) In order for a holder of shares of the Preferred Stock to convert shares of the Preferred Stock into shares of the Common Stock, such holder shall surrender the certificate or certificates for such shares of the Preferred Stock (or, if such registered holder claims that such certificate has been lost, stolen or destroyed, an affidavit of loss and an agreement reasonably acceptable to the Corporation to indemnify the Corporation against any claim that may be made against the Corporation on account of the presentment of such certificate to the Corporation), at the office of the transfer agent for the Preferred Stock (or at the principal office of the Corporation if the Corporation serves as its own transfer agent), together with written notice that such holder elects to convert all or any number of the shares of the Preferred Stock represented by such certificate or certificates and, if applicable, any event on which such conversion is contingent. Such notice shall state such holders name or the names of the nominees in which such holder wishes the certificate or certificates for shares of the Common Stock to be issued. If required by the Corporation, certificates surrendered for conversion sha 1 be endorsed or accompanied by a written instrument or instruments of transfer, in form satisfactory to the Corporation, duly executed by the registered holder or his, her or its attorney duly authorized in writing. The close of business on the date of receipt by the transfer agent (or by the Corporation if the Corporation serves as its own transfer agent) of such certificate or certificates (or lost certificate affidavit and agreement) and notice (or the later occurrence of any event on which such conversion is contingent, if applicable) shall be the time of conversion, and the shares of the Common Stock issuable upon conversion of the shares represented by such certificate or certificates shall be deemed to be outstanding of record as of such date.
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(iv) As soon as possible after the later of any conversion of shares of the Preferred Stock or the delivery and surrender of the certificate or certificates for such converted shares of the Preferred Stock (but in any event within three business days), the Corporation shall deliver to the converting holder:
(A) a certificate or certificates representing the number of shares of the Common Stock issuable by reason of such conversion in such name or names and such denomination or denominations as the converting holder has specified;
(B) a certificate representing any shares of the Preferred Stock that were represented by the certificate or certificates delivered to the Corporation in connection with such conversion but which were not converted; and
(C) cash in lieu of any fractional share as provided in Section 2.5(a)(vi) of this Article Four; and
(D) cash or a certificate or certificates representing shares of Common Stock in payment of all declared but unpaid dividends as provided in Section 2.5(a)(vii) of this Article Four.
(v) The issuance of certificates for shares of the Common Stock upon conversion of shares of the Preferred Stock shall be made without charge to the holders of such shares of the Preferred Stock for any issuance tax in respect of such issuance or other cost incurred by the Corporation in connection with such conversion and the related issuance of shares of the Common Stock, other than any transfer taxes resulting from the transfer of converted shares to a Person or Persons other than the converting holder. Upon conversion of each share of the Preferred Stock, the Corporation shall take all such actions as are necessary in order to ensure that the Common Stock issuable with respect to such conversion shall be validly issued, fully paid and nonassessable.
(vi) If any fractional interest in a share of the Common Stock would, except for the provisions of this Section 2.5(a)(vi), be deliverable upon any conversion of shares of the Preferred Stock, the Corporation, in lieu of delivering such fractional share, shall pay an amount to the holder of such fractional interest equal to the Fair Market Value of such fractional interest as of the date of conversion. All shares issuable to a holder on any date shall be aggregated for purposes of determining whether a fractional interest shall result from any conversion on such date.
(vii) All declared but unpaid dividends on shares of the Preferred Stock to be converted shall be payable upon conversion of such shares in cash or, at the option of the Corporation, in shares of the Common Stock having a Fair Market Value as of the date of conversion equal to the amount of such declared but unpaid dividends.
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(viii) The Corporation shall, at all times when shares of the Preferred Stock are outstanding, reserve and keep available out of its authorized but unissued stock, for the purpose of effecting the conversion of the Preferred Stock, such number of its duly authorized shares of the Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Preferred Stock; and if at any time the number of authorized but unissued shares of the Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Preferred Stock, the Corporation shall take such corporate action as may be necessary to increase its authorized but unissued shares of the Common Stock to such number of shares as shall be sufficient for such purposes, including, without limitation, engaging in best efforts to obtain the requisite stockholder approval of any necessary amendment to this Certificate of Incorporation. Before taking any action that would cause an adjustment reducing the Conversion Price below the then par value of the shares of the Common Stock issuable upon conversion of the Preferred Stock, the Corporation will take any corporate action that may, in the opinion of its counsel, be necessary in order that the Corporation may validly and legally issue fully paid and nonassessable shares of the Common Stock at such adjusted Conversion Price.
(ix) Any shares of the Preferred Stock that are converted pursuant to any provision of this Section 2.5 of Article Four shall be retired and canceled and may not be reissued as shares of such series, and the Corporation may thereafter take such appropriate action (without the need for stockholder action) as may be necessary to reduce the authorized number of shares of the Preferred Stock accordingly.
(x) Upon any conversion effected pursuant to any provision of this Section 2.5 of Article Four, no adjustment to the Conversion Price (as defined below) shall be made for any declared but unpaid dividends on the Preferred Stock surrendered for conversion or on the Common Stock delivered upon conversion.
(xi) The Corporation shall pay any and all issue and other similar taxes that may be payable in respect of any issuance or delivery of shares of the Common Stock upon conversion of shares of the Preferred Stock pursuant to this Section 2.5 of Article Four. The Corporation shall not, however, be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of shares of the Common Stock in a name other than that in which the shares of the Preferred Stock so converted were registered, and no such issuance or delivery shall be made unless and until the person or entity requesting such issuance has paid to the Corporation the amount of any such tax or has established, to the satisfaction of the Corporation, that such tax has been paid.
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(b) Conversion Price.
(i) The initial Conversion Price shall be, with respect to each share of Preferred Stock, the Original Issue Price for such share of Preferred Stock. In order to prevent dilution of the conversion rights granted under this subdivision, the Conversion Price also shall be subject to adjustment from time to time pursuant to this Section 2.5(b) of Article Four.
(ii) If and whenever, on or after the Series F Original Issue Date, the Corporation issues or sells, or is deemed to have issued or sold, any shares of its Common Stock for consideration per share less than the Conversion Price for any share of Preferred Stock in effect immediately prior to the time of such issue or sale, or deemed issue or sale, then immediately prior to such issue or sale, or deemed issue or sale, the Conversion Price of such share of the Preferred Stock shall be reduced, concurrently with such issue, to the .12rice (calculated to the nearest one-hundredth of a cent) determined by multiplying the Conversion Price by a fraction:
(A) the numerator of which shall be (x) the number of shares of the Common Stock outstanding immediately prior to such issue or sale or deemed issue or sale (assuming the exercise or conversion of all Options (as defined below) and Convertible Securities (as defined below) that are then issued and outstanding), plus (y) the number of shares of the Common Stock that the aggregate consideration received by the Corporation for the total number of additional shares of the Common Stock so issued or sold, or deemed issued or sold, would purchase at such Conversion Price; and
(B) the denominator of which shall be (x) the number of shares of the Common Stock outstanding immediately prior to such issue or sale oi: deemed issue or sale (assuming the exercise or conversion of all Options and Convertible Securities that are then issued and outstanding), plus (y) the number of additional shares of the Common Stock so issued or sold, or deemed issued or sold.
For example, if, after the Series F Original Issue Date, the Corporation issues 1,000,000 shares of Common Stock for consideration per share of $0.05, and, assuming that at such time no dividends have been declared and that there are 9,000,000 outstanding shares of Common Stock and 1,000,000 shares of Common Stock issuable upon exercise and conversion of currently exercisable or convertible Options and Convertible Securities, the Conversion Price of the Series A Preferred Stock immediately would be reduced to the price determined by multiplying $0.10, the Conversion Price of the Series A Preferred Stock then in effect, by the following fraction:
10,000,000 | + | $ 50,000 | ||||||||
$ 0.10 | ||||||||||
|
||||||||||
10,000,000 | + | 1,000,000 | ||||||||
10,000,000 | + | 500,000 | ||||||||
|
||||||||||
11,000,000 | ||||||||||
= | 10,500,000 | |||||||||
11,000,000 | ||||||||||
= | 0.9545 |
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resulting in an adjusted Conversion Price of the Series A Preferred Stock of $0.09545 ($0.10 x 0.9545), and the Conversion Price of the other series of Preferred Stock would be adjusted in a similar manner.
(iii) Notwithstanding the foregoing, the Corporation shall not be required to make any adjustment to the Conversion Price of any series of Preferred Stock by reason of the issuance or deemed issuance of the Common Stock when such issuance is (A) upon conversion of shares of the Preferred Stock; (B) as a dividend or distribution on the Preferred Stock; (C) by reason of a subdivision (by any stock split, stock dividend, combination, recapitalization or otherwise) of the Common Stock or any other capital reorganization of the Common Stock that is covered by Sections 2.5(d) and (e) of this Article Four; (D) pursuant to any Approved Plan, provided that issuances under such Approved Plan are approved by the Board, including a majority of the then-serving Preferred Directors; (E) to banks, equipment lessors or other financial institutions, or to real property lessors, pursuant to a debt financing, equipment leasing or real property leasing transaction approved by the Board, including a majority of the then-serving Preferred Directors; (F) in connection with sponsored research, collaboration, technology license, development, OEM, marketing or other similar agreements or strategic partnerships approved by the Board, including a majority of the then-serving Preferred Directors; (G) pursuant to a bona fide acquisition of or by the Corporation of another Person by merger, purchase of substantially all of the assets or other business combination or reorganization or to a joint venture agreement, provided, that such acquisition is approved by the Board, including a majority of the then-serving Preferred Directors; (H) in connection with an initial public offering of Equity Securities; or (I) upon the exercise of Options or Convertible Securities that are outstanding as of the Series F Original Issue Date.
(c) Effect on Conversion Price of Certain Events. For purposes of determining the adjusted Conversion Price under Section 2.5 of this Article Four, the following shall be applicable:
(i) If the Corporation in any manner issues or grants any options, warrants or similar rights (Options) to subscribe for, purchase or acquire the Common Stock or Equity Securities directly or indirectly convertible or exchangeable, with or without consideration, into or for the Common Stock (Convertible Securities) and the price per share for which the Common Stock is issuable upon the exercise of such Options or upon conversion or exchange of such Convertible Securities is less than the Conversion Price in effect
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immediately prior to the time of the granting of such Options, then the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon conversion or exchange of the total maximum amount of such Convertible Securities issuable upon the exercise of such Options (in each case, as set forth in the instrument relating thereto, assuming the satisfaction of any conditions to exercise, conversion or exchange but without regard to any provision for a subsequent adjustment of such number that is not able to be calculated at the time of issuance or grant) shall be deemed to be outstanding and to have been issued and sold by the Corporation for such price per share for which the Common Stock is issuable. For purposes of this Section 2.5(c)(i) of Article Four, the price per share for which the Common Stock is issuable shall be determined by dividing (A) the total amount, if any, received or receivable by the Corporation as consideration for the granting of such Options, plus the minimum aggregate amount of additional consideration payable to the Corporation upon exercise of all such Options, plus, in the case of such Options that relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the issuance or sale of such Convertible Securities and the conversion or exchange of such Convertible Securities by (B) the number of shares of the Common Stock deemed to have been issued and sold by the Corporation pursuant to such Options or Convertible Securities. No further adjustment of the Conversion Price shall be made when Convertible Securities are actually issued upon the exercise of such Options or when the Common Stock is actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities.
(ii) If the Corporation in any manner issues or sells any Convertible Securities, and the price per share for which the Common Stock is issuable upon such conversion or exchange is less than the Conversion Price in effect immediately prior to the time of such issue or sale, then the maximum number of shares of the Common Stock issuable upon conversion or exchange of such Convertible Securities (in each case, as set forth in the instrument relating thereto, assuming the satisfaction of any conditions to exercise, conversion or exchange but without regard to any provision for a subsequent adjustment of such number that is not able to be calculated at the time of issuance or grant) shall be deemed to be outstanding and to have been issued and sold by the Corporation for such price per share for which the Common Stock is issuable. For the purposes of this Section, the price per share for which the Common Stock is issuable shall be determined by dividing (A) the total amount received or receivable by the Corporation as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the conversion or exchange of such Convertible Securities by (B) the number of shares of the Common Stock deemed to have been issued and sold by the Corporation pursuant to such Convertible Securities. No further adjustment of the Conversion Price shall be made when the Common Stock is actually issued upon the conversion or exchange of such Convertible Securities, and, if any such issue or sale of such Convertible Securities is made upon exercise of any Options for which adjustments of the Conversion Price had been or are to be made pursuant to other provisions of this Section 2.5 of Article Four, no further adjustment of the Conversion Price shall be made by reason of such issue or sale.
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(iii) If the purchase price provided for in any Options, the consideration, if any, payable upon the conversion or exchange of any Convertible Securities, the number of shares of the Common Stock or Convertible Securities issuable upon the exercise of any Options or the rate at which any Convertible Securities are convertible into or exchangeable for the Common Stock changes at any time, the Conversion Price in effect at the time of such change shall be readjusted to the Conversion Price that would have been in effect at such time had such Options or Convertible Securities then outstanding provided for such changed purchase price, additional consideration, changed number of shares or changed conversion rate, as the case may be, at the time initially granted, issued or sold.
(iv) Upon the expiration of any Option or the termination of any right to convert or exchange any Convertible Security without the exercise of any such Option or right, the Conversion Price then in effect under this Certificate of Incorporation shall be adjusted to the Conversion Price that would have been in effect at the time of such expiration or termination had such Option or Convertible Security, to the extent outstanding and not exercised, converted or exchanged immediately prior to such expiration or termination, never been issued.
(v) No adjustment pursuant to Sections 2.5(c)(iii) or (iv) of this Article Four shall have the effect of increasing the Conversion Price to an amount that exceeds the lower of (A) the Conversion Price on the original adjustment date or (B) the Conversion Price that would have resulted from any issuances or sales, or deemed issuances or sales, of the Common Stock between the original adjustment date and such readjustment date.
(vi) If any Common Stock, Option or Convertible Security is issued or sold or deemed to have been issued or sold for cash, the consideration received for such Common Stock, Option or Convertible Security shall be deemed to be the net amount received by the Corporation for such Common Stock, Option or Convertible Security. If any Common Stock, Options or Convertible Securities are issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Corporation shall be the Fair Market Value of such Common Stock, Options or Convertible Securities as of the date of receipt. If any Common Stock, Option or Convertible Security is issued in connection with any merger in which the Corporation is the surviving corporation, the amount of consideration for such Common Stock, Option or Convertible Security shall be deemed to be the Fair Market Value of such portion of the net assets and business of the non-surviving corporation as is attributable to such Common Stock, Option or Convertible Security, as the case may be.
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(vii) In case any Option is issued in connection with the issue or sale of other securities of the Corporation, together comprising one integrated transaction in which no specific consideration is allocated to such Option by the parties to such transaction, the Option shall be deemed to have been issued for a consideration of $0.001.
(viii) The number of shares of the Common Stock outstanding at any given time does not include shares owned or held by or for the account of the Corporation or any Subsidiary, and the disposition of any shares so owned or held shall be considered an issue or sale of the Common Stock.
(ix) If the Corporation takes a record of the holders of the Common Stock for the purpose of entitling them (A) to receive a dividend or other distribution payable in the Common Stock, Options or Convertible Securities or (B) to subscribe for or purchase the Common Stock, Options or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of the Common Stock deemed to have been issued or sold upon the declaration of such dividend or upon the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be.
(x) If the Corporation issues or sells, or is deemed to issue or sell, on more than one date, shares of the Common Stock that are a part of one transaction or a series of related transactions and that would result in an adjustment to the Conversion Price then, upon the final such issuance or sale, or deemed issuance or sale, the Conversion Price shall be readjusted to give effect to all such issuances and sales, or deemed issuances and sales, as if they occurred on the date of the first such issuance or sale, or deemed issuance or sale (and without giving effect to any additional adjustments as a result of any subsequent issuances or deemed issuances within such period).
(d) Subdivision or Combination of Common Stock. If the Corporation at any time subdivides (by any stock split, stock dividend, recapitalization or otherwise) its outstanding shares of the Common Stock into a greater number of shares, the Conversion Price in effect immediately prior to such subdivision shall be proportionately reduced, and, if the Corporation at any time combines (by reverse stock split or otherwise) its outstanding shares of the Common Stock into a smaller number of shares, the Conversion Price in effect immediately prior to such combination shall be proportionately increased.
(e) Reorganization, Mergers, Consolidations or Sales of Assets. Subject to Section 2.2(c) of this Article Four, if at any time or from time to time there shall be a capital reorganization of the Common Stock (other than a subdivision, combination, reclassification or exchange of shares provided for elsewhere in this Section 2.5 of this Article Four) or a merger or consolidation of the Corporation with or into another corporation, or the sale of all or substantially all of the Corporations properties and assets to any other person, then, as a part of such reorganization, merger, consolidation or sale, provision shall be made so that the holders of the Preferred Stock shall, after such reorganization, merger, consolidation or
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sale, be entitled to receive upon conversion of the Preferred Stock, the number of shares of stock or other securities or property of the Corporation (including cash), or of the successor corporation resulting from such merger or consolidation or sale, to which a holder of the Common Stock deliverable upon conversion would have been entitled on such capital reorganization, merger, consolidation or sale. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 2.5 of this Article Four with respect to the rights of the holders of the Preferred Stock after the reorganization, merger, consolidation or sale to the effect that the provisions of this Section 2.5 of this Article Four (including adjustment of the applicable Conversion Price and the number of shares purchasable upon conversion of the Preferred Stock) shall be applicable after that event as nearly equivalent as may be practicable.
(f) Certain Events; No Impairment. If any event occurs of the type contemplated by the provisions of this Section 2.5 of this Article Four but not expressly provided for by such provisions, then the Board shall make an appropriate adjustment in the Conversion Price so as to protect the rights of the holders of shares of the Preferred Stock; provided, that no such adjustment shall increase the Conversion Price as otherwise determined pursuant to this Section 2.5 of Article Four or decrease the number of shares of the Common Stock issuable upon conversion of each share of the Preferred Stock.
(g) Notices. Promptly following any adjustment of the Conversion Price, the Corporation shall give written notice of such adjustment to all holders of shares of the Preferred Stock. The Corporation shall give written notice to all holders of shares of the Preferred Stock at least 10 days prior to the date on which the Corporation closes its books or takes a record (i) with respect to any dividend or distribution upon the Common Stock; (ii) with respect to any pro rata subscription offer to holders of the Common Stock; or (iii) for determining rights to vote with respect to any matter referred to in Section 2.4(c) of this Article Four.
(h) Automatic Conversion. All of the outstanding shares of the Preferred Stock shall be automatically converted into the Common Stock at the Conversion Price then in effect without any further action on the part of the Corporation or any holder of the Preferred Stock, upon (i) the closing of a Qualified Public Offering, (ii) (A) with respect to shares of Series A - D Preferred Stock, the conversion of a majority of the shares of Series A - D Preferred Stock, (B) with respect to shares of Series E Preferred Stock, the conversion of a majority of the shares of Series E Preferred Stock or (C) with respect to shares of Series F Preferred Stock, the conversion of a majority of the shares of Series F Preferred Stock or (iii) the date and time, or the occurrence of an event, specified by the vote or written consent of (A) with respect to shares of Series A - D Preferred Stock, the holders of a majority of the then outstanding shares of Series A - D Preferred Stock, voting together as a single class on an as-converted basis, (B) with respect to shares of Series E Preferred Stock, the holders of a majority of the then outstanding shares of Series E Preferred Stock, voting together as a separate class or (C) with respect to shares of Series F Preferred Stock, the holders of a majority of the then outstanding shares of Series F Preferred Stock, voting together as a separate class. All holders of record of shares of the applicable series of Preferred Stock shall be given written notice of any automatic conversion and the place designated for automatic conversion of all such shares of such series of the Preferred Stock pursuant to this Section 2.5 of this Article Four.
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Such notice need not be given in advance. Upon receipt of such notice, each holder of shares of such series of the Preferred Stock shall surrender his, her or its certificate or certificates for all such shares to the Corporation at the place designated in such notice. On the date of any such automatic conversion, all outstanding shares of the applicable series of Preferred Stock shall be deemed to have been converted into shares of the Common Stock, which shall be deemed to be outstanding and held of record by the holders of the shares of such series of the Preferred Stock so converted. All rights of the holders of the shares of such series of the Preferred Stock so converted, including the rights, if any, to receive notices and vote (other than as a holder of the Common Stock), will terminate, except only the rights of such holders, upon surrender of their certificate or certificates therefor, to receive the certificates and other items set forth in Section 2.5(a)(iii) of this Article Four. If so required by the Corporation, certificates surrendered for conversion shall be endorsed or accompanied by written instrument or instruments of transfer, in form satisfactory to the Corporation, duly executed by the registered holder or by his, her or its attorney duly authorized in writing.
2.6 Registration of Transfer. The Corporation shall keep at its principal office a register for the registration of shares of the Preferred Stock. Upon the surrender of any certificate representing shares of the Preferred Stock at such place, the Corporation shall, at the request of the record holder of such certificate, execute and deliver (at the Corporations expense) a new certificate or certificates in exchange for such surrendered certificate representing in the aggregate the number of shares of the Preferred Stock represented by the surrendered certificate. Each such new certificate shall be registered in such name and shall represent such number of shares of the Preferred Stock as is requested by the holder of the surrendered certificate and shall be substantially identical in form to the surrendered certificate.
2.7 Replacement. Upon receipt of evidence reasonably satisfactory to the Corporation (an affidavit without bond of the registered holder shall be satisfactory) of the ownership and the loss, theft, destruction or mutilation of any certificate evidencing shares of the Preferred Stock and, in the case of any such loss, theft or destruction, upon receipt of indemnity reasonably satisfactory to the Corporation or, in the case of any mutilation, upon surrender of such certificate, the Corporation shall (at its expense) execute and deliver in lieu of such certificate a new certificate of like kind representing the number of shares of the Preferred Stock represented by such lost, stolen, destroyed or mutilated certificate.
2.8 Definitions.
Affiliate means with respect to any Person, a Person that directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with such Person and, in the case of an individual, includes any relative or spouse of such Person, or any relative of such spouse, who has the same home as such Person. The term control means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. With respect to any holder of shares of the Preferred Stock, the term Affiliate shall also include any entity of which the holder is a partner or member, any partner, officer, director or member of such holder and any venture capital, private equity or other investment fund now or hereafter existing of which the holder is a partner or member that is controlled by or under common control with one or more general partners of such holder or shares the same management company with such holder.
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Approved Plan means the CS Disco, Inc. Long Term Incentive Plan, any other written stock option, stock purchase, stock incentive, stock appreciation right, restricted stock, restricted stock unit or other plan or arrangement and any increase in the number of shares of Equity Securities available for awards that may be granted pursuant to any of the foregoing: provided, that such plan, arrangement or increase is approved by a majority of the Board and by the holders of the Preferred Stock pursuant to Section 2.4(c) of this Article Four.
Board has the meaning given such term in Section 1 of this Article.
Bylaws has the meaning given such term in Section 2.4(a) of this Article Four.
Common Director has the meaning given such term in Section 3.3 of this Article Four.
Common Stock has the meaning given such term in Section 1 of this Article Four.
Conversion Price has the meaning given such term in Section 2.5(b)(i) of this Article Four.
Convertible Securities has the meaning given such term in Section 2.5(c)(i) of this Article Four.
Corporation has the meaning given such term in Article One.
Covered Persons has the meaning given such term in Article Eleven.
Deemed Liquidation Event has the meaning given such term in Section 2.2(c) of this Article Four.
DGCL has the meaning given such term in the Preamble.
Equity Security means any stock or similar security, including, without limitation, securities containing equity features and securities containing profit participation features, or any security convertible or exchangeable, with or without consideration, into or for any stock or similar security, or any security carrying any warrant or right to subscribe for or purchase any stock or similar security, or any such warrant or right.
Excluded Opportunity has the meaning given such term in Article Eleven.
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Fair Market Value means the fair market value as determined in good faith by a majority of the entire Board (including a majority of the then-serving Preferred Directors), except as otherwise provided in Section 2.3(a) of this Article Four.
Founder and Founders have the meanings given such terms in the Purchase Agreement.
Initial Consideration has the meaning given such term in Section 2.2(e) of this Article Four.
Investors Rights Agreement means the Fifth Amended and Restated Investors Rights Agreement, dated on or about the Series F Original Issue Date, by and among the Corporation and certain of its stockholders, as such agreement may from time to time be amended in accordance with its terms.
Liquidation Preference has the meaning given such term in Section 2.2(a) of this Article Four.
Liquidation Redemption Date has the meaning given such term m Section (e) of this Article Four.
Net Proceeds has the meaning given such term in Section (e) of this Article Four.
Options has the meaning given such term in Section 2.5(c)(i) of this Article Four.
Original Issue Price has the meaning given such term in Section 2.1(b) of this Article Four.
Person means an individual, a partnership, a corporation, an association, a joint stock company, a trust, a joint venture, an unincorporated organization or other entity or a governmental entity or any department, agency or political subdivision of any such entity.
Preferred Directors has the meaning given such term in Section 2.4(b)(iii) of this Article Four.
Preferred Stock has the meaning given such term in Section 1 of this Article Four.
Purchase Agreement means the Series F Preferred Stock Purchase Agreement, dated on or about the Series F Original Issue Date, by and among the Corporation, and the Investors listed on Exhibit A thereto, as such agreement may from time to time be amended in accordance with its terms.
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Qualified Public Offering means any underwritten offering by the Corporation of shares of Common Stock to the public pursuant to an effective registration statement under the Securities Act of 1933, as then in effect, or any comparable statement under any similar federal statute then in force, in which the aggregate cash proceeds to be received by the Corporation from such offering (net of underwriting discounts, expenses and commissions) are at least $40,000,000.
Redemption Date has the meaning given such term in Section 2.3(a) of this Article Four.
Redemption Notice has the meaning given such term in Section 2.3(b) of this Article Four.
Redemption Price has the meaning given such term in Section 2.3(a) of this Article Four.
Redemption Request has the meaning given such term in Section 2.3(a) of this Article Four.
Series A Director has the meaning given such term in Section 2.4(b)(i) of this Article Four.
Series A Preferred Stock has the meaning given such term in Section 2 of this Article Four.
Series B Director has the meaning given such term in Section 2.4(b)(ii) of this Article Four.
Series B Preferred Stock has the meaning given such term in Section 2 of this Article Four.
Series C Director has the meaning given such term in Section 2.4(b)(iii) of this Article Four.
Series C Preferred Stock has the meaning given such term in Section 2 of this Article Four.
Series D Preferred Stock has the meaning given such term in Section 2 of this Article Four.
Series E Director has the meaning given such term in Section 2.4(b)(iv) of this Article Four.
Series E Preferred Stock has the meaning given such term in Section 2 of this Article Four.
Series F Original Issue Date means the date on which the first share of the Series F Preferred Stock is issued.
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Series F Preferred Stock has the meaning given such term in Section 2 of this Article Four.
Stockholders Agreement means the Fifth Amended and Restated Stockholders Agreement, dated on or about the Series F Original Issue Date, by and among the Corporation and certain stockholders of the Corporation, as such agreement may from time to time be amended in accordance with its terms.
Subsidiary means any corporation more than 50% of the outstanding voting securities of which are owned by the Corporation or any Subsidiary, directly or indirectly, or a partnership or limited liability company in which the Corporation or any Subsidiary is a general partner or manager or holds interests entitling it to receive more than 50% of the profits or losses of the partnership or limited liability company. A Subsidiary is a wholly owned Subsidiary if all of the outstanding voting securities of the Subsidiary are owned by the Corporation, directly or indirectly, or if the Corporation is the sole general partner or managing member of the Subsidiary and holds interests in the Subsidiary entitling it to receive 100% of the profits and losses of the Subsidiary.
2.9 Waiver. Any of the rights, powers or preferences of the holders of the Preferred Stock set forth herein may be waived on behalf of all of the holders of the Preferred Stock by the affirmative consent or vote of the holders of a majority of the shares of the Preferred Stock then outstanding; provided, that if any such waiver is to a provision in this Certificate of incorporation that requires a specific. vote (such as requiring the vote of a specified percentage of a particular class of voting securities) to take an action under such provision or to take an action with respect to the matters described in such provision, such waiver shall not be binding or effective unless such specific vote is obtained; provided, further, that none of the rights, powers or preferences set forth in Section 2.5 of this Article Four may be waived with respect to any series of the Preferred Stock without the affirmative vote of the holders of a majority of the outstanding shares of such series of the Preferred Stock.
2.10 Notices. Any notice required or permitted by the provisions of this Article Four to be given to a holder of shares of the Preferred Stock shall be mailed, postage prepaid, to the post office address last shown on the records of the Corporation, or given by electronic communication in compliance with the provisions of the DGCL, and shall be deemed sent upon such mailing or electronic transmission.
Section 3. COMMON STOCK.
3.1 General. The voting, dividend and liquidation rights of the holders of the Common Stock are expressly made subject to and qualified by the rights, powers and preferences of the holders of the Preferred Stock set forth herein.
3.2 Voting. Except as otherwise required by law or this Certificate of Incorporation, (a) each holder of the Common Stock shall have one vote for each share of Common Stock held by such stockholder of record on the books of the Corporation for the election of directors and on all matters submitted to a vote of the stockholders of the Corporation and (b) the Common Stock shall vote together with all other classes and series of stock of the
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Corporation (including any series of the Preferred Stock) on an as-converted basis on all actions to be taken by the stockholders of the Corporation; provided, however, that, except as otherwise required by law, holders of the Common Stock, as such, shall not be entitled to vote on any amendment to this Certificate of Incorporation (including any Certificate of Designations relating to any series of the Preferred Stock) that relates solely to the terms of one or more outstanding series of the Preferred Stock if the holders of such affected series are entitled, either separately or together with the holders of one or more other such series, to vote thereon pursuant to this Certificate of Incorporation or pursuant to the DGCL. Subject to Section 2.4(c) of this Article Four, the number of authorized shares of the Common Stock may be increased or decreased (but not below the number of shares of the Common Stock then outstanding or reserved for the exercise of options or warrants or conversion of the Preferred Stock) by the affirmative vote of the holders of shares of capital stock representing a majority of the votes represented by all outstanding shares of capital stock of the Corporation entitled to vote, irrespective of the provisions of Section 242(b)(2) of the DGCL.
3.3 Common Directors. In addition to the directors entitled to be elected by the holders of shares of the Preferred Stock and Common Stock pursuant to Section 2.4(b) of this Article Four, the holders of the shares of the Common Stock, voting as a separate class, shall be entitled to elect two directors of the Corporation (each, a Common Director); provided, that, if there is only one Common Director serving on the Board, such Common Director shall be entitled to cast two votes on any action of the Board, whether by vote at a meeting of the Board or by written consent.
3.4 Dividends. Subject to the preferential rights of any series of Preferred Stock, the holders of shares of Common Stock shall be entitled to receive, when, as and if declared by the Board, out of the assets of the Corporation that are by law available for payment of dividends, dividends payable either in cash, in property or in shares of capital stock.
ARTICLE FIVE
The business and affairs of the Corporation shall be managed by and under the direction of the Board. Except as otherwise provided in this Certificate of Incorporation, the exact number of directors of the Corporation shall be fixed by or in the manner provided in the Bylaws.
ARTICLE SIX
Except as otherwise provided in this Certificate of Incorporation, in furtherance and not in limitation of the powers conferred by statute, the Board is expressly authorized to make, adopt, alter, amend, rescind or repeal in any respect any or all of the Bylaws.
ARTICLE SEVEN
Elections of directors need not be by written ballot unless the Bylaws shall so provide.
ARTICLE EIGHT
Meetings of stockholders of the Corporation may be held within or without the State of Delaware, as the Bylaws may provide. The books of the Corporation may be kept (subject to any provision of applicable law) outside the State of Delaware at such place or places as may be designated from time to time by the Board or in the Bylaws.
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ARTICLE NINE
To the fullest extent permitted by the DGCL, a director of this Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except that this provision shall not eliminate or limit the liability of a director (a) for any breach of the directors duty of loyalty to the Corporation or its stockholders; (b) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; (c) under Section 174 of the DGCL; or (d) for any transaction from which the director derived an improper personal benefit. If the DGCL is amended to authorize the further elimination or limitation of the liability of directors, then the liability of a director of the Corporation, in addition to the limitation on personal liability provided in this Certificate of Incorporation, shall be eliminated or limited to the fullest extent permitted by the DGCL as so amended. No amendment to or repeal of this Article Nine shall apply to or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal.
ARTICLE TEN
To the fullest extent permitted by applicable law, the Corporation is authorized to provide indemnification of (and advancement of expenses to) its agents (and any other persons to which Delaware law permits the Corporation to provide indemnification) through Bylaw provisions, agreements with such agents or other persons, vote of stockholders or disinterested directors or otherwise in excess of the indemnification and advancement otherwise permitted by Section 145 of the DGCL. Any repeal or modification of any of the foregoing provisions of this Article Ten shall not adversely affect any right or protection of a director, officer, agent or other person existing at the time of, or increase the liability of any director of this Corporation with respect to any acts or omissions of such director, officer or agent occurring prior to, such repeal or modification.
ARTICLE ELEVEN
Holders of the Preferred Stock or Equity Securities issued upon conversion of or in exchange for the Preferred Stock shall have no duty to refrain from engaging or participating directly or indirectly in activities or lines of business that are the same as or similar or complementary to activities or lines of business engaged in by the Corporation or from investing directly or indirectly in entities that engage or participate in such activities, and such holders and their Affiliates may pursue or acquire any such opportunities for themselves or may direct such opportunities to any other person or entity. Without limiting the foregoing, to the fullest extent permitted by law, the Corporation renounces any interest or expectancy in, or in being offered an opportunity to participate in, any Excluded Opportunity. An Excluded Opportunity is any matter, transaction or interest that is presented to, or acquired, created or developed by, or which otherwise comes into the possession of, (a) any director of the Corporation who is not an employee of the Corporation or any of its Subsidiaries or (b) any holder of the Preferred Stock or any partner, member, director, stockholder, employee or agent of any such holder, other
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than someone who is an employee of the Corporation or any of its Subsidiaries (collectively, Covered Persons), unless such matter, transaction or interest is presented to, or acquired, created or developed by, or otherwise comes into the possession of, a Covered Person expressly and solely in such Covered Persons capacity as a director of the Corporation.
ARTICLE TWELVE
Subject to Section 2.4(c) and Section 2.4(c) of Article Four, the Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by applicable laws, and all rights conferred upon stockholders in this Certificate of Incorporation are granted subject to this reservation.
ARTICLE THIRTEEN
Unless the Corporation consents in writing to the selection of an alternative forum, the sole and exclusive forum for (a) any derivative action or proceeding brought on behalf of the Corporation, (b) any action asserting a claim of breach of a fiduciary duty owed by any director or officer or other employee of the Corporation to the Corporation or the Corporations stockholders, (c) any action asserting a claim against the Corporation or any director or officer or other employee of the Corporation arising pursuant to any provision of the DGCL or this Certificate of Incorporation or the Bylaws (as either may be amended from time to time) or (d) any action asserting a claim against the Corporation or any director or officer or other employee of the Corporation governed by the internal affairs doctrine shall be the Court of Chancery of the State of Delaware or, if the Court of Chancery does not have jurisdiction, a state court located within the State of Delaware or the federal district court for the District of Delaware.
[Signature Page Follows]
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The undersigned, being the duly elected President of the Corporation, for the purpose of amending and restating the Certificate of Incorporation of the Corporation, does make this Certificate of Incorporation, hereby declaring and certifying that this is the act and deed of the Corporation and the facts stated in this Certificate of Incorporation are true, and accordingly has hereunto executed this Sixth Amended and Restated Certificate of Incorporation as a duly authorized officer of the Corporation on September 28, 2020.
/s/ Kiwi Alejandro Danao Camara |
Kiwi Alejandro Danao Camara, President |
SIGNATURE PAGE TO
SIXTH AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF
CS DISCO, INC.
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
CS DISCO, INC.
CS DISCO, INC., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the Corporation), does hereby certify:
FIRST: That the Board of Directors of the Corporation duly adopted resolutions declaring advisable an amendment to the Corporations Certificate of Incorporation filed with the Office of the Secretary of State of the State of Delaware and submitted the same to the stockholders of the Corporation for approval.
The resolution setting forth the proposed amendments are as follows:
RESOLVED, that Section 2.4(b)(v) of Article FOURTH of the Corporations Certificate of Incorporation be amended and restated in its entirety to read as follows:
(v) At-Large Directors. The holders of record of shares of the Common Stock and the Preferred Stock, voting together on an as-converted basis and not as separate classes or series, shall be entitled to elect the balance of the total number of directors of the Corporation.
RESOLVED, that Section 2.4(c)(v) of Article FOURTH of the Corporations Certificate of Incorporation be amended and restated in its entirety to read as follows:
(v) increase or decrease the authorized number of directors constituting the Board to other than eleven members, other than an increase by four members pursuant to Section 2.3(e) of Article Four;
SECOND: That the stockholders of the Corporation have duly approved the foregoing amendment in accordance with the provisions of Sections 228 and 242 of the General Corporation Law of the State of Delaware.
[SIGNATURE PAGE FOLLOWS]
This Certificate of Amendment to Certificate of Incorporation has been executed by a duly authorized officer of the Company on May 3, 2021.
CS DISCO, INC. | ||
By: | /s/ Kiwi Alejandro Danao Camara | |
Kiwi Alejandro Danao Camara | ||
President |
Exhibit 3.2
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
CS DISCO, INC.
CS Disco, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the DGCL), does hereby certify that:
ONE: The name of this corporation is CS Disco, Inc. The date of filing of the original certificate of incorporation of this corporation with the Secretary of State of the State of Delaware was December 2, 2013.
TWO: This Amended and Restated Certificate of Incorporation, which restates and integrates and also further amends the provisions of the corporations certificate of incorporation, was duly adopted in accordance with the provisions of Sections 242 and 245 of the DGCL. Stockholder approval of the adoption of this Amended and Restated Certificate of Incorporation of the Corporation was effected by written consent in accordance with Section 228 of the DGCL.
THREE: Pursuant to Sections 242 and 245 of the DGCL, the certificate of incorporation of this corporation, as heretofore amended, is hereby amended, integrated and restated to read in its entirety as follows:
I.
The name of this corporation is CS Disco, Inc. (the Corporation).
II.
The address of the registered office of the Corporation in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle, Delaware 19801, and the name of the registered agent of the Corporation in the State of Delaware at such address is The Corporation Trust Company.
III.
The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of the State of Delaware (the DGCL).
IV.
A. The Corporation is authorized to issue two classes of stock to be designated, respectively, Common Stock and Preferred Stock. The total number of shares that the Corporation is authorized to issue is 1,100,000,000 shares, consisting of 1,000,000,000 shares of Common Stock, par value $0.001 per share (Common Stock), and 100,000,000 shares of Preferred Stock, par value $0.001 per share (Preferred Stock).
B. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors of the Corporation (the Board of Directors) is hereby expressly authorized to provide for the issue of all or any of the shares of the Preferred Stock, in one or more series, and to fix the number of shares for each such series and to determine or alter for each such series, such voting powers, full or limited, or no voting powers, and such designation, preferences, and relative, participating, optional, or other rights and such qualifications, limitations, or restrictions thereof, as shall be stated and expressed in the resolution or resolutions adopted by the Board of Directors and filed in accordance with the DGCL.
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C. The number of authorized shares of Common Stock or Preferred Stock, or any series thereof, may be increased or decreased (but not below the number of shares thereof then outstanding plus, if applicable, the number of shares of such class or series reserved for issuance) by the affirmative vote of the holders of a majority of the voting power of all of the outstanding shares of stock of the Corporation entitled to vote thereon, without a separate vote of the holders of the Common Stock or Preferred Stock, or of any series thereof, unless a vote of any such holders is required pursuant to the terms of any certificate of designation filed with respect to any series of Preferred Stock.
D. Each outstanding share of Common Stock shall entitle the holder thereof to one vote on each matter properly submitted to the stockholders of the Corporation for their vote; provided, however, that, except as otherwise required by applicable law, holders of Common Stock shall not be entitled to vote on any amendment to this Amended and Restated Certificate of Incorporation (as amended from time to time, the Certificate of Incorporation) (including any certificate of designation filed with respect to any series of Preferred Stock) that relates solely to the terms of one or more outstanding series of Preferred Stock if the holders of such affected series are entitled, either separately or together as a class with the holders of one or more other such series, to vote thereon pursuant to law or the Certificate of Incorporation (including any certificate of designation filed with respect to any series of Preferred Stock).
II.
For the management of the business and for the conduct of the affairs of the Corporation, and in further definition, limitation and regulation of the powers of the Corporation, of its directors and stockholders, or any class thereof, as the case may be, it is further provided that:
A. Management of the Business. The management of the business and the conduct of the affairs of the Corporation shall be vested in its Board of Directors. Subject to any rights of the holders of shares of any series of Preferred Stock then outstanding to elect additional directors under specified circumstances, the number of directors which shall constitute the Board of Directors shall be fixed exclusively by resolutions adopted by a majority of the authorized number of directors constituting the Board of Directors.
B. Board of Directors.
1. Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, following the closing of the initial public offering of Common Stock to the public (the Initial Public Offering) pursuant to an effective registration statement under the Securities Act of 1933, as amended (the 1933 Act), the directors shall be divided into three classes designated as Class I, Class II and Class III, respectively. Each class shall consist, as nearly as possible, of a number of directors equal to one-third of the number of members of the Board of Directors authorized as provided in Section A of this Article V. The Board of Directors is authorized to assign members of the Board of Directors already in office to such classes at the time the classification becomes effective. At the first annual meeting of stockholders following the closing of the Initial Public Offering, the initial term of office of the Class I directors shall expire and Class I directors shall be elected for a full term of three years. At the second annual meeting of stockholders following the closing of the Initial Public Offering, the initial term of office of the Class II directors shall expire and Class II directors shall be elected for a full term of three years. At the third annual meeting of stockholders following the closing of the Initial Public Offering, the initial term of office of the Class III directors shall expire and Class III directors shall be elected for a full term of three years. At each succeeding annual meeting of stockholders, directors shall be elected for a full term of three years to succeed the directors of the class whose terms expire at such annual meeting.
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2. Notwithstanding the foregoing provisions of this section, each director shall serve until his or her successor is duly elected and qualified or until his or her earlier death, resignation or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director.
C. Removal of Directors.
1. Subject to the rights of any series of Preferred Stock to remove directors elected by such series of Preferred Stock, following the closing of the Initial Public Offering, neither the entire Board of Directors nor any individual director may be removed from office without cause.
2. Subject to any limitations imposed by applicable law and the rights of any series of Preferred Stock to remove directors elected by such series of Preferred Stock, any individual director or the entire Board of Directors may be removed from office with cause by the affirmative vote of the holders of at least 662/3% of the voting power of all the then-outstanding shares of the capital stock of the Corporation entitled to vote generally at an election of directors.
D. Vacancies. Subject to any limitations imposed by applicable law and subject to the rights of the holders of any series of Preferred Stock to elect additional directors or fill vacancies in respect of such directors, any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other causes and any newly created directorships resulting from any increase in the number of directors, shall, unless the Board of Directors determines by resolution that any such vacancies or newly created directorships shall be filled by the stockholders, be filled only by the affirmative vote of a majority of the directors then in office, even though less than a quorum of the Board of Directors or by the sole remaining director, and not by the stockholders. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the director for which the vacancy was created or occurred and until such directors successor shall have been elected and qualified or such directors earlier death, resignation or removal.
E. Bylaw Amendments. The Board of Directors is expressly authorized and empowered to adopt, amend or repeal any provisions of the Bylaws of the Corporation (as amended from time to time, the Bylaws). Any adoption, amendment or repeal of the Bylaws by the Board of Directors shall require the approval of a majority of the authorized number of directors. The stockholders shall also have power to adopt, amend or repeal the Bylaws; provided, however, that, in addition to any vote of the holders of any class or series of stock of the Corporation required by law or by the Certificate of Incorporation, such action by stockholders shall require the affirmative vote of the holders of at least 662/3% of the voting power of all of the then-outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class.
F. STOCKHOLDER ACTIONS.
1. The directors of the Corporation need not be elected by written ballot unless the Bylaws so provide.
2. No action shall be taken by the stockholders of the Corporation except at an annual or special meeting of stockholders called in accordance with the Bylaws and no action shall be taken by the stockholders by written consent.
3. Advance notice of stockholder nominations for the election of directors and of business to be brought by stockholders before any meeting of the stockholders of the Corporation shall be given in the manner provided in the Bylaws.
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III.
A. The liability of the directors for monetary damages shall be eliminated to the fullest extent permitted under applicable law. In furtherance thereof, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent such exemption from liability or limitation thereof is not permitted under the DGCL as the same exists or may hereafter be amended. Any repeal or modification of the foregoing two sentences shall not adversely affect any right or protection of a director of the Corporation existing hereunder with respect to any act or omission occurring prior to such repeal or modification. If applicable law is amended after approval by the stockholders of this Article VI to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director to the Corporation shall be eliminated or limited to the fullest extent permitted by applicable law as so amended.
B. To the fullest extent permitted by applicable law, the Corporation is authorized to provide indemnification of (and advancement of expenses to) directors, officers, employees and agents of the Corporation (and any other persons to which applicable law permits the Corporation to provide indemnification) through Bylaw provisions, agreements with such agents or other persons, vote of stockholders or disinterested directors or otherwise.
C. Any repeal or modification of this Article VI shall only be prospective and shall not adversely affect the rights or protections or increase the liability of any person under this Article VI as in effect at the time of the alleged occurrence of any act or omission to act giving rise to liability or indemnification.
IV.
A. Unless the Corporation consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware (or, if and only if the Court of Chancery of the State of Delaware lacks subject matter jurisdiction, any state court located within the State of Delaware or, if and only if all such state courts lack subject matter jurisdiction, the federal district court for the District of Delaware) and any appellate court therefrom shall be the sole and exclusive forum for the following claims or causes of action under Delaware statutory or common law: (A) any derivative claim or cause of action brought on behalf of the Corporation; (B) any claim or cause of action for breach of a fiduciary duty owed by any current or former director, officer or other employee of the Corporation, to the Corporation or the Corporations stockholders; (C) any claim or cause of action against the Corporation or any current or former director, officer or other employee of the Corporation, arising out of or pursuant to any provision of the DGCL, the Certificate of Incorporation or the Bylaws; (D) any claim or cause of action seeking to interpret, apply, enforce or determine the validity of the Certificate of Incorporation or the Bylaws (including any right, obligation, or remedy thereunder); (E) any claim or cause of action as to which the DGCL confers jurisdiction on the Court of Chancery of the State of Delaware; and (F) any claim or cause of action against the Corporation or any current or former director, officer or other employee of the Corporation, governed by the internal-affairs doctrine or otherwise related to the Corporations internal affairs, in all cases to the fullest extent permitted by law and subject to the court having personal jurisdiction over the indispensable parties named as defendants. This Section A of Article VII shall not apply to claims or causes of action brought to enforce a duty or liability created by the Securities Act of 1933, as amended (the 1933 Act), or the Securities Exchange Act of 1934, as amended, or any other claim for which the federal courts have exclusive jurisdiction.
B. Unless the Corporation consents in writing to the selection of an alternative forum, to the fullest extent permitted by law, the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the 1933 Act, including
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all causes of action asserted against any defendant named in such complaint. For the avoidance of doubt, this provision is intended to benefit and may be enforced by the Corporation, its officers and directors, the underwriters for any offering giving rise to such complaint, and any other professional entity whose profession gives authority to a statement made by that person or entity and who has prepared or certified any part of the documents underlying the offering.
V.
A. Any person or entity holding, owning, or otherwise acquiring any interest in any security of the Corporation shall be deemed to have notice of and consented to the provisions of the Certificate of Incorporation.
B. The Corporation reserves the right to amend, alter, change or repeal, at any time and from time to time, any provision contained in the Certificate of Incorporation, in the manner now or hereafter prescribed by statute, except as provided in paragraph C. of this Article VIII, and all rights, preferences and privileges of whatsoever nature conferred upon the stockholders, directors or any other persons whomsoever by and pursuant to the Certificate of Incorporation are granted subject to this reservation.
C. Notwithstanding any other provisions of the Certificate of Incorporation or any provision of law that might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of capital stock of the Corporation required by law or by the Certificate of Incorporation or any certificate of designation filed with respect to a series of Preferred Stock, the affirmative vote of the holders of at least 662/3% of the voting power of all of the then outstanding shares of capital stock of the Corporation entitled to vote in the election of directors, voting together as a single class, shall be required to alter, amend or repeal (whether by merger, consolidation or otherwise), or adopt any provision inconsistent with, Articles V, VI, VII and VIII.
The Corporation has caused this Amended and Restated Certificate of Incorporation to be signed by a duly authorized officer of the Corporation on this [●] day of [●], 2021.
CS DISCO, INC. | ||
By: |
| |
Name: | Kiwi Alejandro Danao Camara | |
Title: | Chief Executive Officer |
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Exhibit 3.3
CS DISCO, INC.
(a Delaware corporation)
AMENDED AND RESTATED BYLAWS
ARTICLE 1
OFFICES
Section 1.1 Registered Office. The registered office shall be in the City of Wilmington, County of New Castle, State of Delaware.
Section 1.2 Other Offices. The Corporation may also have offices at such other places, either within or without the State of Delaware, as the board of directors may from time to time to determine or as the business of the Corporation may require.
ARTICLE 2
MEETINGS OF STOCKHOLDERS
Section 2.1 Place of Meetings. All meetings of the stockholders shall be held at the office of the Corporation or at such other places as may be fixed from time to time by the board of directors, either within or without the State of Delaware, and stated in the notice of the meeting or in a duly executed waiver of notice of the meeting, or the board of directors, may in its sole discretion, determine that the meeting shall not be held at any place, but may instead be held solely by means of remote communication.
Section 2.2 Annual Meetings. Annual meetings of stockholders, commencing with the year 2014, shall be held at the time and place, if any, to be selected by the board of directors. If the day is a legal holiday, then the meeting shall be held on the next following business day. At the meeting, the stockholders shall elect a board of directors and transact such other business as may properly be brought before the meeting. Each election of directors shall be by written ballot, unless otherwise provided in the Certificate of Incorporation. If authorized by the board of directors, such requirement of a written ballot shall be satisfied by a ballot submitted by electronic transmission, provided that any such electronic transmission must either set forth or be submitted with information from which it can be determined that the electronic transmission was authorized by the stockholder or proxyholder.
Section 2.3 Notice of Annual Meeting. Notice of the annual meeting stating the place, if any, date, and hour of the meeting shall be given in accordance with Section 2.4 of this ARTICLE 2 to each stockholder entitled to vote at such meeting not less than 10 nor more than 60 days before the date of the meeting.
Section 2.4 Manner of Giving Notice; Affidavit of Notice. If mailed, notice to stockholders shall be deemed given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the Corporation. Without limiting the manner by which notice may otherwise be given effectively to stockholders, any notice to stockholders may be given by electronic transmission in the manner provided in Section 232 of the Delaware General Corporation Law. An affidavit of the secretary or an assistant secretary or of the transfer agent of the Corporation that the notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated in such affidavit.
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Section 2.5 Voting List. The officer who has charge of the stock ledger of the Corporation shall prepare and make, at least 10 days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during the whole time of the meeting as in the manner provided by law.
Section 2.6 Special Meetings. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the Certificate of Incorporation, may be called by the chairperson of the board, the chief executive officer or the president and shall be called by the chief executive officer, the president or secretary at the request in writing of a majority of the board of directors, or by the holders of 10% or more of the outstanding shares of stock of the Corporation. Such request shall state the purpose or purposes of the proposed meeting.
Section 2.7 Notice of Special Meetings. Notice of a special meeting stating the place, if any, date, and hour of the meeting and the purpose or purposes for which the meeting is called, shall be given in accordance with Section 2.4 of this ARTICLE 2 not less than 10 nor more than 60 days before the date of the meeting, to each stockholder entitled to vote at such meeting. Business transacted at any special meeting of the stockholders shall be limited to the purposes stated in the notice.
Section 2.8 Quorum. The holders of a majority of the stock issued and outstanding and entitled to vote at meetings of the stockholders, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business, except as otherwise provided by statute or by the Certificate of Incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote at such meeting, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting.
Section 2.9 Order of Business. At each meeting of the stockholders, one of the following persons, in the order in which they are listed (and in the absence of the first, the next, and so on), shall serve as chairperson of the meeting: chairperson of the board, chief executive officer, president, vice presidents (in the order of their seniority if more than one), and secretary. The order of business at each such meeting shall be as determined by the chairperson of the meeting. The chairperson of the meeting shall have the right and authority to prescribe such rules, regulations, and procedures and to do all such acts and things as are necessary or desirable for the proper conduct of the meeting, including, without limitation, the establishment of procedures for the maintenance of order and safety, limitations on the time allotted to questions or comments on the affairs of the Corporation, restrictions on entry to such meeting after the time prescribed for the commencement thereof, and the opening and closing of the voting polls.
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Section 2.10 Vote Required. Unless otherwise required by law or provided in the Certificate of Incorporation or these Bylaws, in all matters to come before the stockholders at any meeting other than the election of directors, the affirmative vote of the majority of shares present in person or represented by proxy at the meeting and entitled to vote on the subject matter shall be the act of the stockholders. Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors.
Section 2.11 Method of Voting. Unless otherwise provided in the Certificate of Incorporation, each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the capital stock having voting power held by such stockholder, but no proxy shall be voted on after three years from its date, unless the proxy provides for a longer period.
Section 2.12 Action by Stockholders Without Meeting. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any annual or special meeting of the stockholders may be taken without a meeting, without notice and without a prior vote, if a consent or consents in writing or in accordance with Section 228 of the Delaware General Corporation Law, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the Corporation by delivery to its registered office in Delaware, its principal place of business or an officer or agent of the Corporation or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to a Corporations registered office shall be by hand or by certified or registered mail, return receipt requested.
Section 2.13 Presence at Meetings. If authorized by the board of directors in its sole discretion, and subject to such guidelines and procedures as the board of directors may adopt, stockholders and proxyholders not physically present at the meeting of stockholders may by means of remote communication (a) participate in a meeting of stockholders and (b) be deemed present in person and vote at a meeting of stockholders whether such meeting is to be held at a designated place or solely by means of remote communication, provided that (i) the Corporation shall implement reasonable measures to verify that each person deemed present and permitted to vote at the meeting by means of remote communication is a stockholder or proxyholder, (ii) the Corporation shall implement reasonable measures to provide such stockholders and proxyholders a reasonable opportunity to participate in the meeting and to vote on matters submitted to the stockholders, including an opportunity to read or hear the proceedings of the meeting substantially concurrently with such proceedings, and (iii) if any stockholder or proxyholder votes or takes other action at the meeting by means of remote communication, a record of such vote or other action shall be maintained by the Corporation.
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ARTICLE 3
DIRECTORS
Section 3.1 General Powers. The business and affairs of the Corporation shall be managed by or under the direction of the board of directors, which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by law or by the Certificate of Incorporation of the Corporation or by these Bylaws directed or required to be exercised or done by the stockholders.
Section 3.2 Number of Directors. The number of directors constituting the board shall be such number as shall be from time to time specified by resolution of the board of directors; provided that no directors term shall be shortened by reason of a resolution reducing the number of directors; and further provided that the number of directors constituting the initial board of directors shall be one and shall remain such number unless and until changed by resolution of the board of directors aforesaid.
Section 3.3 Election, Qualification, and Term of Office of Directors. Directors shall be elected at each annual meeting of stockholders to hold office until the next annual meeting. Directors need not be stockholders unless so required by the Certificate of Incorporation or these Bylaws, which may prescribe other qualifications for directors. Each director, including a director elected to fill a vacancy, shall hold office until his successor is elected and qualified or until his earlier resignation or removal.
Section 3.4 Notification of Nominations. Subject to the rights of the holders of any class or series of stock having a preference over the common stock as to dividends or upon liquidation, nominations for the election of directors may be made by the board of directors or by any stockholder entitled to vote for the election of directors.
Section 3.5 Regular Meetings. Regular meetings of the board of directors may be held without notice at such times and at such places as shall from time to time be determined by the board.
Section 3.6 Special Meetings. Special meetings of the board may be called by the chairperson of the board, the chief executive officer or the president, and shall be called by the chief executive officer, the president or the secretary on the written request of two directors unless the board of directors consists of only one director, in which case special meetings shall be called by the chief executive officer, the president or the secretary on the written request of the sole director.
Section 3.7 Quorum, Majority Vote. At all meetings of the board, the presence of directors holding a majority of the voting power of the entire board of directors shall constitute a quorum for the transaction of business and the act of the directors holding a majority of the voting power present at any meeting at which there is a quorum shall be the act of the board of directors, except as may be otherwise specifically provided by statute or by the Certificate of Incorporation. If a quorum shall not be present at any meeting of the board of directors, the directors present at such meeting may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present.
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Section 3.8 Action Without Meeting. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the board of directors or of any committee of the board of directors may be taken without a meeting, if all members of the board or committee, as the case may be, consent to such action in writing, or by electronic transmission and the writing or writings or electronic transmission or transmissions are filed with the minutes of the proceedings of the board or committee. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form. Such consent shall have the same force and effect as a unanimous vote at a meeting, and may be stated as such in any document or instrument filed with the Secretary of State of Delaware.
Section 3.9 Telephone and Other Meetings. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, members of the board of directors, or any committee designated by the board of directors, may participate in a meeting of the board of directors, or any committee, by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting.
Section 3.10 Notice of Meetings. Notice of regular meetings of the board of directors or of any adjourned meeting of the board of directors need not be given. Notice of each special meeting of the board shall be mailed to each director, addressed to such director at such directors residence or usual place of business, at least two days before the day on which the meeting is to be held or shall be sent to such director at such place by telegraph or be given personally or by telephone, not later than the day before the meeting is to be held, but notice need not be given to any director who shall, either before or after the meeting, submit a signed waiver of such notice or who shall attend such meeting without protesting, prior to or at its commencement, the lack of notice to such director. Every such notice shall state the time and place but need not state the purpose of the meeting, unless otherwise provided by these Bylaws.
Section 3.11 Rules and Regulations. The board of directors may adopt such rules and regulations not inconsistent with the provisions of law, the Certificate of Incorporation of the Corporation, or these Bylaws for the conduct of its meetings and management of the affairs of the Corporation as the board may deem proper.
Section 3.12 Resignations. Any director of the Corporation may at any time resign by giving notice in writing or by electronic transmission to the board of directors, the chairperson of the board, the chief executive officer, the president, or the secretary of the Corporation. Such resignation shall take effect at the time specified in such notice or, if the time be not specified, upon receipt of such notice; and, unless otherwise specified in such notice, the acceptance of such resignation shall not be necessary to make it effective.
Section 3.13 Removal of Directors. Unless otherwise restricted by statute, by the Certificate of Incorporation, or by these Bylaws, any director or the entire board of directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors.
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Section 3.14 Vacancies. Subject to the rights of the holders of any class or series of stock having a preference over the common stock of the Corporation as to dividends or upon liquidation, any vacancies on the board of directors resulting from death, resignation, removal, or other cause shall only be filled by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the board of directors, or by a sole remaining director, and newly created directorships resulting from any increase in the number of directors shall be filled by the board of directors, or if not so filled, by the stockholders at the next annual meeting of the stockholders or at a special meeting called for that purpose in accordance with Section 2.6 of Article 2 of these Bylaws. Any director elected in accordance with the preceding sentence of this Section shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such successor shall have been elected and qualified.
Section 3.15 Compensation of Directors. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, the board of directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the board of directors and may be paid a fixed sum for attendance at each meeting of the board of directors or a stated salary as director. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation for such service. Members of special or standing committees may be allowed like compensation for attending committee meetings.
ARTICLE 4
EXECUTIVE AND OTHER COMMITTEES
Section 4.1 Executive Committee. The board of directors may, by resolution adopted by a majority of the entire board, designate annually one or more of its members to constitute members or alternate members of an executive committee, which committee shall have and may exercise, between meetings of the board, all the powers and authority of the board in the management of the business and affairs of the Corporation, including, if such committee is so empowered and authorized by resolution adopted by a majority of the entire board, the power and authority to declare a dividend and to authorize the issuance of stock, and may authorize the seal of the Corporation to be affixed to all papers which may require it, except that the executive committee shall not have such power or authority with reference to:
(a) amending the Certificate of Incorporation;
(b) adopting an agreement of merger or consolidation involving the Corporation;
(c) recommending to the stockholders the sale, lease or exchange of all or substantially all of the property and assets of the Corporation;
(d) recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution;
(e) adopting, amending, or repealing any Bylaw;
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(f) filling vacancies on the board or on any committee of the board, including the executive committee;
(g) fixing the compensation of directors for serving on the board or on any committee of the board, including the executive committee; or
(h) amending or repealing any resolution of the board which by its terms may be amended or repealed only by the board of directors.
Section 4.2 Other Committees. The board of directors may, by resolution adopted by a majority of the entire board, designate from among its members one or more other committees, each of which shall, except as otherwise prescribed by law, have such authority of the board as may be specified in the resolution of the board designating such committee. A majority of all the members of such committee may determine its action and fix the time and place of its meetings, unless the board shall otherwise provide. The board shall have the power at any time to change the membership of, to increase or decrease the membership of, to fill all vacancies in, and to discharge any such committee, or any member of any such committee, either with or without cause.
Section 4.3 Procedure; Meetings; Quorum. Regular meetings of the executive committee or any other committee of the board of directors, of which no notice shall be necessary, may be held at such times and places as shall be fixed by resolution adopted by a majority of the members of such committee. Special meetings of the executive committee or any other committee of the board shall be called at the request of any member of such committee. Notice of each special meeting of the executive committee or any other committee of the board shall be sent by mail, telegraph, or telephone, or be delivered personally to each member of such committee not later than the day before the day on which the meeting is to be held, but notice need not be given to any member who shall, either before or after the meeting, submit a signed waiver of such notice or who shall attend such meeting without protesting, prior to or at its commencement, the lack of such notice to such member. Any special meeting of the executive committee or any other committee of the board shall be a legal meeting without any notice of such meeting having been given, if all the members of such committee shall be present at such meeting. Notice of any adjourned meeting of any committee of the board need not be given. The executive committee or any other committee of the board may adopt such rules and regulations not inconsistent with the provisions of law, the Certificate of Incorporation, or these Bylaws for the conduct of its meetings as the executive committee or any other committee of the board may deem proper. A majority of the executive committee or any other committee of the board shall constitute a quorum for the transaction of business at any meeting, and the vote of a majority of the members of such committee present at any meeting at which a quorum is present shall be the act of such committee. In the absence or disqualification of a member, the remaining members, whether or not a quorum, may fill a vacancy. The executive committee or any other committee of the board of directors shall keep written minutes of its proceedings, a copy of which is to be filed with the secretary of the Corporation, and shall report on such proceedings to the board.
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ARTICLE 5
NOTICES
Section 5.1 Method. Whenever, under the provisions of the statutes or of the Certificate of Incorporation or of these Bylaws, notice is required to be given to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, electronic mail, overnight delivery, facsimile or any other manner provided in Section 232 of the Delaware General Corporation Law, addressed to such director or stockholder, at his mailing address, electronic mail address, or facsimile number as it appears on the records of the Corporation, with postage on such notice prepaid (as applicable), and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail if sent by mail or when received if sent by electronic mail, overnight delivery, or facsimile. Notice to directors may also be given by telegram.
Section 5.2 Waiver. Whenever any notice is required to be given under the provisions of the statutes or of the Certificate of Incorporation or of these Bylaws, a written waiver of such notice, signed by the person or persons entitled to said notice or waiver by electronic transmission by such person, whether before or after the time stated in such waiver, shall be deemed equivalent to notice.
ARTICLE 6
OFFICERS
Section 6.1 Election, Qualification. The officers of the Corporation shall be chosen by the board of directors and shall be a president and a secretary. The board of directors may also choose a chairperson of the board, a chief executive officer, a chief operating officer, a chief financial officer, one or more vice presidents, a treasurer, one or more assistant secretaries and assistant treasurers and such other officers and agents as it shall deem necessary. Any number of offices may be held by the same person, unless the Certificate of Incorporation or these Bylaws otherwise provide.
Section 6.2 Salary. The salaries of all officers and agents of the Corporation shall be fixed by the board of directors.
Section 6.3 Term, Removal. Each officer shall hold office until such officers successor is elected and qualified or until such officers earlier resignation or removal. Any officer elected or appointed by the board of directors may be removed at any time by the affirmative vote of a majority of the board of directors. Any vacancy occurring in any office of the Corporation shall be filled by the board of directors.
Section 6.4 Resignation. Subject at all times to the right of removal as provided in Section 6.3 of this ARTICLE 6 and to the provisions of any employment agreement, any officer may resign at any time by giving notice to the board of directors, the chief executive officer, the president, or the secretary of the Corporation. Any such resignation shall take effect at the date of receipt of such notice or at any later date specified provided that the chief executive officer or
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president or, in the event of the resignation of the chief executive officer or the president, the board of directors may designate an effective date for such resignation which is earlier than the date specified in such notice but which is not earlier than the date of receipt of such notice; and, unless otherwise specified in such notice, the acceptance of such resignation shall not be necessary to make it effective.
Section 6.5 Vacancies. A vacancy in any office because of death, resignation, removal, or any other cause may be filled for the unexpired portion of the term in the manner prescribed in these Bylaws for election to such office.
Section 6.6 Chairperson of the Board. The chairperson of the board, if there be such an officer, shall preside at all meetings of the stockholders and the board of directors and shall perform all duties incident to the office of chairperson of the board and as from time to time may be assigned to him or her by the board of directors. Except as otherwise provided by resolution of the board of directors, the chairperson of the board shall be, ex-officio, a member of all committees of the board of directors. In the absence of the chief executive officer, the chairperson of the board shall be the chief executive officer of the Corporation.
Section 6.7 Chief Executive Officer. The chief executive officer, if there be such an officer, shall, subject to the provisions of these Bylaws and to the direction and supervision of the board of directors, (a) have general and active management of the affairs of the Corporation and have general supervision of its officers, agents and employees; (b) in the absence of the chairperson of the board, preside at all meetings of the stockholders and the board of directors; (c) have primary responsibility for the implementation of the policies adopted from time to time by the board of directors; and (d) perform those other duties incident to the office of chief executive officer and as from time to time may be assigned to him or her by the board of directors.
Section 6.8 President. The president shall, subject to the provisions of these Bylaws and to the direction and supervision of the board of directors, perform all duties incident to the office of president and as from time to time may be assigned to him or her by the board of directors. At the request of the chief executive officer or in the absence of the chief executive officer and the chairperson of the board, in the event of their inability or refusal to act, the president shall perform the duties of the chief executive officer, and when so acting shall have all the powers and be subject to all restrictions of the chief executive officer.
Section 6.9 Chief Operating Officer. The chief operating officer, if there be such an officer, shall, subject to the provisions of these Bylaws and to the direction and supervision of the board of directors and the chief executive officer, supervise the day to day operations of the Corporation and perform those other duties incident to the office of chief operating officer and as from time to time may be assigned to him or her by the board of directors or the chief executive officer.
Section 6.10 Chief Financial Officer. The chief financial officer, if there be such an officer, shall, subject to the provisions of these Bylaws and to the direction and supervision of the board of directors and the chief executive officer, manage the financial affairs of the Corporation and perform those other duties incident to the office of chief financial officer and as from time to time may be assigned to him or her by the board of directors or the chief executive officer. If there is no chief financial officer, these duties shall be performed by the treasurer or such other person designated by the board of directors to perform such duties.
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Section 6.11 Vice Presidents. The vice president, if there be such an officer (or if there is more than one, then each vice president), shall perform such duties as from time to time may be assigned to him or her by the board of directors, the chief executive officer or the president. In the absence of the chief executive officer, the president and the chairperson of the board or, in the event of their inability or refusal to act, the vice president, if there be such an officer (or in the event there be more than one vice president, the vice presidents in the order designated by the directors, or, in the absence of any designation, then in the order of their election), shall perform the duties of the president and, when so acting, shall have all the powers of and be subject to all the restrictions upon the president. The vice presidents shall perform such other duties and have such other powers as the board of directors may from time to time prescribe.
Section 6.12 Secretary. The secretary shall attend all meetings of the board of directors and all meetings of the stockholders and record all the proceedings of the meetings of the Corporation and of the board of directors in a book to be kept for that purpose and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the board of directors, and shall perform such other duties as may be prescribed by the board of directors or president, under whose supervision he shall be. He shall have custody of the corporate seal of the Corporation and he, or an assistant secretary, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by his signature or by the signature of such assistant secretary. The board of directors may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing by his signature.
Section 6.13 Assistant Secretary. The assistant secretary, or if there be more than one, the assistant secretaries in the order determined by the board of directors (or if there be no such determination, then in the order of their election) shall, in the absence of the secretary or in the event of his inability or refusal to act, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as the board of directors may from time to time prescribe.
Section 6.14 Treasurer. The treasurer, if there be such an officer, shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the board of directors. He shall disburse the funds of the Corporation as may be ordered by the board of directors, taking proper vouchers for such disbursements, and shall render to the president and the board of directors, at its regular meetings, or when the board of directors so requires, an account of all his transactions as treasurer and of the financial condition of the Corporation. If required by the board of directors, he shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the board of directors for the faithful performance of the duties of his office and for the restoration to the Corporation, in case of his death, resignation, retirement, or removal from office, of all books, papers, vouchers, money, and other property of whatever kind in his possession or under his control belonging to the Corporation. If there is not a treasurer of the Corporation, then the duties set forth above shall be discharged by the President or such other officer as shall be designated by the board of directors.
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Section 6.15 Assistant Treasurer. The assistant treasurer, or if there shall be more than one, the assistant treasurers in the order determined by the board of directors (or if there be no such determination, then in the order of their election), shall, in the absence of the treasurer or in the event of his inability or refusal to act, perform the duties and exercise the powers of the treasurer and shall perform such other duties and have such other powers as the board of directors may from time to time prescribe.
ARTICLE 7
INDEMNIFICATION OF DIRECTORS,
OFFICERS, EMPLOYEES, AND AGENTS
Section 7.1. Third-Party Actions. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative (other than an action by or in the right of the Corporation) by reason of the fact that such person is or was a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, trust, or other enterprise, against all expenses (including attorneys fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit, or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The termination of any action, suit, or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, that such person had reasonable cause to believe that his or her conduct was unlawful.
The Corporation may indemnify any employee or agent of the Corporation, or any employee or agent serving at the request of the Corporation as an employee or agent of another corporation, partnership, joint venture, trust, or other enterprise, in the manner and to the extent that it shall indemnify any director or officer under this Section.
Section 7.1 Derivative Actions. The Corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that such person is or was a director, officer, employee, or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against all expenses (including attorneys fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation, except that no indemnification shall be made with respect to any claim, issue or matter as to which such person
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shall have been adjudged to be liable for negligence or misconduct in the performance of such persons duty to the Corporation unless and only to the extent that the Court of Chancery of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery of Delaware or such other court shall deem proper.
Section 7.2 Determination of Indemnification. Any indemnification under Section 7.1 or Section 7.2 of this Article 7 (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee, or agent is proper in the circumstances because such person has met the applicable standard of conduct set forth in Section 7.1 or Section 7.2 of this Article 7. Such determination shall be made (a) by the board of directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit, or proceeding, or (b) if such a quorum is not obtainable, or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (c) by the stockholders.
Section 7.3 Right to Indemnification. Notwithstanding the other provisions of this Article, to the extent that a director, officer, employee, or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit, or proceeding referred to in Section 7.1 or Section 7.2 of this Article 7, or in defense of any claim, issue, or matter in any such claim or issue, such person shall be indemnified against expenses (including attorneys fees) actually and reasonably incurred by such person in connection with such defense.
Section 7.4 Advance of Expenses. Expenses incurred in defending a civil or criminal action, suit, or proceeding may be paid by the Corporation on behalf of a director, officer, employee, or agent in advance of the final disposition of such action, suit, or proceeding as authorized by the board of directors in the specific case upon receipt of an undertaking by or on behalf of the director, officer, employee, or agent to repay such amount unless it shall ultimately be determined that such person is entitled to be indemnified by the Corporation as authorized in this Article 7.
Section 7.5 Indemnification Not Exclusive. The indemnification provided by this Article 7 shall not be deemed exclusive of any other rights to which any person seeking indemnification may be entitled under any law, agreement, vote of stockholders or disinterested directors, or otherwise, both as to action in such persons official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person.
Section 7.6 Insurance. The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee, or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such persons status as such, whether or not the Corporation would have the power to indemnify such person against liability under the provisions of this Article 7.
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Section 7.7 Definitions of Certain Terms. For purposes of this Article 7, references to the Corporation shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees, or agents, so that any person who is or was a director, officer, employee, or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, shall stand in the same position under the provisions of this Article 7 with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued.
For purposes of this Article 7, references to other enterprises shall include employee benefit plans; references to fines shall include any excise taxes assessed on a person with respect to an employee benefit plan; references to serving at the request of the Corporation shall include any service as a director, officer, employee, or agent of the Corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner such person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner not opposed to the best interests of the Corporation as referred to in this Article 7.
Section 7.8 Liability of Directors. Notwithstanding any provision of the Certificate of Incorporation or any other provision in these Bylaws, no director shall be personally liable to the Corporation or any stockholder for monetary damages for breach of fiduciary duty as a director, except for any matter in respect of which such director shall be liable under Section 174 of Title 8 of the Delaware Code (relating to the Delaware General Corporation Law) or any amendment or successor provision to such provision or shall be liable by reason that, in addition to any and all other requirements for such liability, he (a) shall have breached his duty of loyalty to the Corporation or its stockholders, (b) shall not have acted in good faith, (c) shall have acted in a manner involving intentional misconduct or a knowing violation of law or, in failing to act, shall have acted in a manner involving intentional misconduct or a knowing violation of law or (d) shall have derived an improper personal benefit.
ARTICLE 8
CERTIFICATES OF STOCK
Section 8.1 Certificates. Every holder of stock in the Corporation shall be entitled to have a certificate, signed by, or in the name of the Corporation by, the chairperson or vice chairperson of the board of directors, or the president or a vice president and the treasurer or an assistant treasurer, or the secretary or an assistant secretary of the Corporation, certifying the number of shares owned by him in the Corporation.
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Section 8.2 Facsimile Signatures. Any of or all the signatures on the certificate may be facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent, or registrar at the date of issue.
Section 8.3 Lost Certificates. The board of directors may direct a new certificate or certificates to be issued in place of any certificate or certificates previously issued by the Corporation alleged to have been lost, stolen, or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen, or destroyed. When authorizing such issue of a new certificate or certificates, the board of directors may, in its discretion and as a condition precedent to the issuance of such new certificate or certificates, require the owner of such lost, stolen, or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen, or destroyed.
Section 8.4 Transfers of Stock. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment, or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled to such certificate, cancel the old certificate and record the transaction upon its books.
Section 8.5 Fixing Record Date. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment of any meeting of stockholders, or to express consent to corporate action in writing without a meeting, or to receive payment of any dividend or other distribution or allotment of any rights, or to exercise any rights in respect of any change, conversion, or exchange of stock or for the purpose of any other lawful action, the board of directors may fix, in advance, a record date, which shall not be more than 60 nor less than 10 days before the date of such meeting, nor more than 60 days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided that the board of directors may fix a new record date for the adjourned meeting.
Section 8.6 Registered Stockholders. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice of such claim or interest, except as otherwise provided by the laws of Delaware.
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ARTICLE 9
AFFILIATED TRANSACTIONS
Section 9.1 Validity. Except as otherwise provided for in the Certificate of Incorporation and except as otherwise provided in these Bylaws, if Section 9.2 is satisfied, no contract or transaction between the Corporation and any of its directors, officers, or security holders, or any corporation, partnership, association, or other organization in which any of such directors, officers, or security holders are directly or indirectly financially interested, shall be void or voidable solely because of this relationship, or solely because of the presence of the director, officer, or security holder at the meeting authorizing the contract or transaction, or solely because of his or their participation in the authorization of such contract or transaction or vote at the meeting for authorization of such contract or transaction, whether or not such participation or vote was necessary for the authorization of such contract or transaction.
Section 9.2 Disclosure, Approval; Fairness. Section 9.1 shall apply only if:
(a) the material facts as to the relationship or interest and as to the contract or transaction are disclosed or are known:
(i) to the board of directors (or committee of the board of directors) and it nevertheless in good faith authorizes or ratifies the contract or transaction by a majority of the directors present, each such interested director to be counted in determining whether a quorum is present but not in calculating the majority necessary to carry the vote; or (ii) to the stockholders and they nevertheless authorize or ratify the contract or transaction by a majority of the shares present at a meeting considering such contract or transaction, each such interested person (stockholder) to be counted in determining whether a quorum is present and for voting purposes; or
(b) the contract or transaction is fair to the Corporation as of the time it is authorized or ratified by the board of directors (or committee of the board of directors) or the stockholders.
Section 9.3 Nonexclusive. This provision shall not be construed to invalidate a contract or transaction which would be valid in the absence of this provision.
ARTICLE 10
GENERAL PROVISIONS
Section 10.1 Dividends. Dividends upon the capital stock of the Corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the board of directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation.
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Section 10.2 Reserves. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose as the directors shall think conducive to the interest of the Corporation, and the directors may modify or abolish any such reserve in the manner in which it was created.
Section 10.3 Checks. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the board of directors may from time to time designate.
Section 10.4 Fiscal Year. The fiscal year of the Corporation shall be fixed by resolution of the board of directors.
Section 10.5 Seal. The board of directors may adopt a corporate seal having inscribed on such seal the name of the Corporation, the year of its organization, and the words Corporate Seal, Delaware. The seal may be used by causing it or a facsimile of it to be impressed or affixed or reproduced or otherwise.
ARTICLE 11
AMENDMENTS
Section 11.1 Amendments. These Bylaws may be altered, amended, or repealed or new Bylaws may be adopted by a majority of the entire board of directors, at any meeting of the board of directors if notice of such alteration, amendment, repeal, or adoption of new Bylaws be contained in the notice of such meeting, or at any meeting of the stockholders by the affirmative vote of the holders of a majority of the shares of stock issued and outstanding and entitled to vote thereat, provided that notice of the general nature of the proposed change in the Bylaws shall have been given in the notice of any such meeting of the stockholders.
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AMENDMENT NO. 1
TO AMENDED AND RESTATED BYLAWS
OF
CS DISCO, INC.
1. The Amended and Restated Bylaws of CS Disco, Inc. (the Company) are hereby amended by deleting Article 8 in its entirety and inserting the following in lieu thereof:
ARTICLE 8
CERTIFICATES OF STOCK; RESTRICTIONS ON TRANSFERS OF STOCK
Section 8.1. Certificates. Every holder of stock in the Corporation shall be entitled to have a certificate, signed by, or in the name of the Corporation by, the chairperson or vice chairperson of the board of directors, or the president or a vice president and the treasurer or an assistant treasurer, or the secretary or an assistant secretary of the Corporation, certifying the number of shares owned by him in the Corporation.
Section 8.2. Facsimile Signatures on Certificates. Any of or all the signatures on the certificate may be facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent, or registrar at the date of issue.
Section 8.3. Lost Certificates. The board of directors may direct a new certificate or certificates to be issued in place of any certificate or certificates previously issued by the Corporation alleged to have been lost, stolen, or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen, or destroyed. When authorizing such issue of a new certificate or certificates, the board of directors may, in its discretion and as a condition precedent to the issuance of such new certificate or certificates, require the owner of such lost, stolen, or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen, or destroyed.
Section 8.4. Transferred Certificates. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment, or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled to such certificate, cancel the old certificate and record the transaction upon its books.
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Section 8.5. Fixing Record Date. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment of any meeting of stockholders, or to express consent to corporate action in writing without a meeting, or to receive payment of any dividend or other distribution or allotment of any rights, or to exercise any rights in respect of any change, conversion, or exchange of stock or for the purpose of any other lawful action, the board of directors may fix, in advance, a record date, which shall not be more than 60 nor less than 10 days before the date of such meeting, nor more than 60 days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided that the board of directors may fix a new record date for the adjourned meeting.
Section 8.6. Registered Stockholders. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice of such claim or interest, except as otherwise provided by the laws of Delaware.
Section 8.7. Restrictions on Transfers of Stock.
(a) If a holder of any shares of stock of the Corporation (a Holder) proposes to sell, assign, transfer, pledge, hypothecate or otherwise dispose of, by operation of law or otherwise (collectively Transfer) any such shares pursuant to a bona fide offer acceptable to such Holder, then Holder shall first give written notice of the proposed Transfer (the Transfer Notice) to the Corporation. The Transfer Notice shall state the name of the proposed transferee, the number of shares Holder proposes to transfer (the Offered Shares), whether the Offered Shares are vested or unvested shares, the price per share and all other material terms and conditions of the transfer, including any available exemption from the restrictions set forth in paragraph (b) below and shall include a confirmation from the Holder that the proposed transferee is an accredited investor as defined in Rule 501(a) of Regulation D promulgated under the Securities Act of 1933, as amended (the Securities Act).
(b) Following receipt of the Transfer Notice, the prior written consent of the Corporation (upon duly authorized action of its Board of Directors) shall be required, which approval may be granted or withheld in the Board of Directors sole and absolute discretion; provided, however, that with respect to any Transfer by a Founder, such consent may not be unreasonably withheld, and in any event may only be withheld if such transfer (a) would be to an individual, company or
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any other form of entity identified by the Corporation as a potential competitor or considered by the Corporation to be unfriendly; (b) increases the risk of the Corporation having a class of equity security (other than an exempted security) held of record by either (i) 2,000 or more persons, provided, however, that such restriction shall only apply after the Corporation has a class of equity security (other than an exempted security) held of record by more than 1,000 persons or (ii) 500 or more persons who are not accredited investors, as described in Section 12(g) of the Securities and Exchange Act of 1934 (the 1934 Act), and Rule 12g5-1 promulgated thereunder, or otherwise requiring the Corporation to register any class of securities under the 1934 Act; (c) would result in the loss of any federal or state securities law exemption relied upon by the Corporation in connection with the initial issuance of such shares or the issuance of any other securities; (d) is facilitated in any manner by any public posting, message board, trading portal, internet site or similar method of communication, including without limitation any trading portal or internet site intended to facilitate secondary transfers of securities; (e) is to be effected in a brokered transaction; or (f) is determined by the Corporations Board of Directors to require such consent for any legitimate corporate purpose. The Corporation shall notify Holder within 30 days of receipt of the Transfer Notice indicating whether the proposed transfer requires such consent and if so, whether such consent has been provided (a Transfer Approval) or withheld (a Transfer Denial and together with Transfer Approval, the Transfer Determination). For purposes of clarity, a Holder shall not be entitled to transfer any shares if such proposed Transfer results in a Transfer Denial. For purposes of this Section 8.7(b), a Founder is any stockholder that entered into a Stock Restriction Agreement with the Corporation, dated as of December 18, 2013.
(c) The foregoing Transfer restrictions set forth in this Section 8.7 shall not apply to (a) any Transfer of shares of the Corporations Preferred Stock or shares of Common Stock issued upon conversion of the Corporations Preferred Stock or (b) any transfer of the Corporations Common Stock constituting an Exempt Transfer for purposes of Section 6.1 of the Second Amended and Restated Stockholders Agreement, dated as of July 21, 2016 (as the same may be amended from time to time).
(d) Certificates representing, and in the case of uncertificated securities, notices of issuance with respect to, shares of stock of the Corporation shall have impressed on, printed on, written on or otherwise affixed to them the following legend:
THE TRANSFER OF SECURITIES REFERENCED HEREIN IS SUBJECT TO RESTRICTIONS REQUIRING APPROVAL OF THE COMPANY PURSUANT TO AND IN ACCORDANCE WITH THE COMPANYS BYLAWS, COPIES OF WHICH MAY BE OBTAINED UPON WRITTEN REQUEST TO THE COMPANY AT ITS PRINCIPAL PLACE OF BUSINESS. THE COMPANY SHALL NOT REGISTER OR OTHERWISE RECOGNIZE OR
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GIVE EFFECT TO ANY PURPORTED TRANSFER OF SHARES OF STOCK THAT DOES NOT COMPLY WITH THE COMPANYS BYLAWS.
The Corporation shall take all such actions as are practicable to cause the certificates representing, and notices of issuance with respect to, shares that are subject to the restrictions on transfer set forth in this Section 8.7 to contain the foregoing legend.
* * *
Except as set forth in this Amendment No. 1 to the Amended and Restated Bylaws of CS Disco, Inc., the Amended and Restated Bylaws of CS Disco, Inc. remain in full force and effect.
This Amendment No. 1 to the Amended and Restated Bylaws of CS Disco, Inc. was approved and adopted by the Board of Directors of the Company on July 21, 2016 and the stockholders of the Company on July 21, 2016.
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Exhibit 3.4
AMENDED AND RESTATED
BYLAWS
OF
CS DISCO, INC.
(A DELAWARE CORPORATION)
[ ], 2021
1
AMENDED AND RESTATED BYLAWS
OF
CS DISCO, INC.
(A DELAWARE CORPORATION)
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office of the corporation in the State of Delaware shall be as set forth in the Amended and Restated Certificate of Incorporation of the corporation, as the same may be amended or restated from time to time (the Certificate of Incorporation).
Section 2. Other Offices. The corporation may also have and maintain an office or principal place of business at such place as may be fixed by the Board of Directors of the corporation (the Board of Directors), and may also have offices at such other places, both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require.
ARTICLE II
CORPORATE SEAL
Section 1. Corporate Seal. The Board of Directors may adopt a corporate seal. If adopted, the corporate seal shall consist of a die bearing the name of the corporation and the inscription, Corporate Seal-Delaware. Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise.
ARTICLE III
STOCKHOLDERS MEETINGS
Section 1. Place of Meetings. Meetings of the stockholders of the corporation may be held at such place, if any, either within or without the State of Delaware, as may be determined from time to time by the Board of Directors. The Board of Directors may, in its sole discretion, determine that the meeting shall not be held at any place, but may instead be held solely by means of remote communication as provided under the General Corporation Law of the State of Delaware (the DGCL) and Section 14 below.
Section 2. Annual Meetings.
(a) The annual meeting of the stockholders of the corporation, for the purpose of election of directors and for such other business as may properly come before it, shall be held on such date and at such time as may be designated from time to time by the Board of Directors. The corporation may postpone, reschedule or cancel any annual meeting of stockholders previously scheduled by the Board of Directors. Nominations of persons for election to the Board of Directors and proposals of business to be considered by the stockholders may be made at an annual meeting of stockholders: (i) pursuant to the corporations notice of meeting of stockholders; (ii) by or at the direction of the Board of Directors or a duly authorized committee thereof; or (iii) by any stockholder of the corporation who was a stockholder of record (and, with respect to any beneficial owner, if different, on whose behalf such business is proposed or such nomination or
nominations are made, only if such beneficial owner was the beneficial owner of shares of the corporation) at the time of giving the stockholders notice provided for in Section 5(b) below, who is entitled to vote at the meeting and who complied with the notice procedures set forth in this Section 5. For the avoidance of doubt, clause (iii) above shall be the exclusive means for a stockholder to make nominations and submit other business (other than matters properly included in the corporations notice of meeting of stockholders and proxy statement under Rule 14a-8 under the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder (the 1934 Act)) before an annual meeting of stockholders.
(b) At an annual meeting of the stockholders, only such business shall be conducted as is a proper matter for stockholder action under Delaware law, the Certificate of Incorporation and these Amended and Restated Bylaws of the corporation, as the same may be amended or restated from time to time (the Bylaws), and only such nominations shall be made and such business shall be conducted as shall have been properly brought before the meeting in accordance with the procedures below.
(i) For nominations for the election to the Board of Directors to be properly brought before an annual meeting by a stockholder pursuant to clause (iii) of Section 5(a), the stockholder must deliver written notice to the Secretary at the principal executive offices of the corporation on a timely basis as set forth in Section 5(b)(iii) and must update and supplement such written notice on a timely basis as set forth in Section 5(c). Such stockholders notice shall set forth: (A) as to each nominee such stockholder proposes to nominate at the meeting: (1) the name, age, business address and residence address of such nominee, (2) the principal occupation or employment of such nominee, (3) the class or series and number of shares of each class or series of capital stock of the corporation that are owned of record and beneficially by such nominee, (4) the date or dates on which such shares were acquired and the investment intent of such acquisition, (5) all other information concerning such nominee as would be required to be disclosed in a proxy statement soliciting proxies for the election of such nominee as a director in an election contest (even if an election contest is not involved and whether or not proxies are being or will be solicited), or that is otherwise required to be disclosed pursuant to Section 14 of the 1934 Act and the rules and regulations promulgated thereunder (including such persons written consent to being named in the corporations proxy statement and associated proxy card as a nominee of the stockholder and to serving as a director if elected); and (B) all of the information required by Section 5(b)(iv). The corporation may require any proposed nominee to furnish such other information as it may reasonably require to determine the eligibility of such proposed nominee to serve as an independent director of the corporation (as such term is used in any applicable stock exchange listing requirements or applicable law) or on any committee or sub-committee of the Board of Directors under any applicable stock exchange listing requirements or applicable law, or that could be material to a reasonable stockholders understanding of the independence, or lack thereof, of such proposed nominee.
(ii) Other than proposals sought to be included in the corporations proxy materials pursuant to Rule 14a-8 under the 1934 Act, for business other than nominations for the election to the Board of Directors to be properly brought before an annual meeting by a stockholder pursuant to clause (iii) of Section 5(a), the stockholder must deliver written notice to the Secretary at the principal executive offices of the corporation on a timely basis as set forth in Section 5(b)(iii), and must update and supplement such written notice on a timely basis as set forth in Section 5(c). Such stockholders notice shall set forth: (A) as to each matter such stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the text of the proposal or business (including the text of any resolutions proposed for consideration and in the event that such business includes a proposal to amend the Bylaws, the language of the proposed amendment), the reasons for conducting such business at the meeting, and any material interest (including any anticipated benefit of such business to any Proponent (as defined below) other than solely as a result of its ownership of the corporations capital stock, that is material to any Proponent individually, or to the Proponents in the aggregate) in such business of any Proponent; and (B) the information required by Section 5(b)(iv).
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(iii) To be timely, the written notice required by Section 5(b)(i) or 5(b)(ii) must be received by the Secretary at the principal executive offices of the corporation not later than the close of business on the 90th day, nor earlier than the close of business on the 120th day, prior to the first anniversary of the immediately preceding years annual meeting (or, in the case of the Corporations annual meeting of stockholders in 2022, not later than the close of business on the 90th day prior to June 1, 2022 nor earlier than the close of business on the 120th day prior to June 1, 2022); provided, however, that, subject to the last sentence of this Section 5(b)(iii), in the event that (A) the date of the annual meeting is advanced more than 30 days prior to or delayed by more than 30 days after the anniversary of the preceding years annual meeting (or, in the case of the Corporations annual meeting of stockholders in 2022, the date of such meeting is advanced by more than 30 days prior to or delayed by more than 30 days after June 1, 2021), notice by the stockholder to be timely must be so received not earlier than the close of business on the 120th day prior to such annual meeting and not later than the close of business on the later of the 90th day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made by the corporation or (B) the corporation did not have an annual meeting in the preceding year, notice by the stockholder to be timely must be so received not later than the tenth day following the day on which public announcement of the date of such meeting is first made. In no event shall an adjournment or postponement of an annual meeting for which notice has been given, or the public announcement thereof has been made, commence a new time period (or extend any time period) for the giving of a stockholders notice as described above.
(iv) The written notice required by Sections 5(b)(i) or 5(b)(ii) shall also set forth, as of the date of the notice and as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (each, a Proponent and collectively, the Proponents): (A) the name and address of each Proponent, including, if applicable, such name and address as they appear on the corporations books and records; (B) the class, series and number of shares of each class or series of the capital stock of the corporation that are, directly or indirectly, owned of record or beneficially (within the meaning of Rule 13d-3 under the 1934 Act) by each Proponent (provided, that for purposes of this Section 5(b)(iv), such Proponent shall in all events be deemed to beneficially own all shares of any class or series of capital stock of the corporation as to which such Proponent has a right to acquire beneficial ownership at any time in the future); (C) a description of any agreement, arrangement or understanding (whether oral or in writing) with respect to such nomination or proposal (and/or the voting of shares of any class or series of capital stock of the corporation) between or among any Proponent and any of its affiliates or associates, and any others (including their names) acting in concert, or otherwise under the agreement, arrangement or understanding, with any of the foregoing; (D) a representation that the Proponents are holders of record or beneficial owners, as the case may be, of shares of the corporation at the time of giving notice, will be entitled to vote at the meeting, and intend to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice (with respect to a notice under Section 5(b)(i)) or to propose the business that is specified in the notice (with respect to a notice under Section 5(b)(ii)); (E) a representation as to whether the Proponents intend to deliver a proxy statement and form of proxy to holders of a sufficient number of the corporations voting shares to elect such nominee or nominees (with respect to a notice under Section 5(b)(i)) or to carry such proposal (with respect to a notice under Section 5(b)(ii)); (F) to the extent known by any Proponent, the name and address of any other stockholder supporting the proposal on the date of such stockholders notice; and (G) a description of all Derivative Transactions (as defined below) by each Proponent during the previous 12-month period, including the date of the transactions and the class, series and number of securities involved in, and the material economic terms of, such Derivative Transactions.
(c) A stockholder providing the written notice required by Section 5(b)(i) or (ii) shall update and supplement such notice in writing, if necessary, so that the information provided or required to be provided in such notice is true and correct in all material respects as of (i) the record date for the determination of stockholders entitled to notice of the meeting and (ii) the date that is five Business Days (as defined below)
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prior to the meeting and, in the event of any adjournment or postponement thereof, five Business Days prior to such adjourned or postponed meeting. In the case of an update and supplement pursuant to clause (i) of this Section 5(c), such update and supplement shall be received by the Secretary at the principal executive offices of the corporation not later than five Business Days after the later of the record date for the determination of stockholders entitled to notice of the meeting or the public announcement of such record date. In the case of an update and supplement pursuant to clause (ii) of this Section 5(c), such update and supplement shall be received by the Secretary at the principal executive offices of the corporation not later than two Business Days prior to the date for the meeting, and, in the event of any adjournment or postponement thereof, two Business Days prior to such adjourned or postponed meeting.
(d) Notwithstanding anything in Section 5(b)(iii) to the contrary, in the event that the number of directors in an Expiring Class (as defined below) to be elected to the Board of Directors at the next annual meeting is increased effective after the time period for which nominations would otherwise be due under Section 5(b)(iii) and there is no public announcement by the corporation naming all of the nominees for the Expiring Class or specifying the size of the increased Expiring Class at least 100 days before the first anniversary of the preceding years annual meeting, a stockholders notice required by this Section 5 and that complies with the requirements in Section 5(b)(i), other than the timing requirements in Section 5(b)(iii), shall also be considered timely, but only with respect to nominees for any new positions in such Expiring Class created by such increase, if it shall be received by the Secretary at the principal executive offices of the corporation not later than the close of business on the tenth day following the day on which such public announcement is first made by the corporation. For purposes of this section, an Expiring Class shall mean a class of directors whose term shall expire at the next annual meeting of stockholders.
(e) A person shall not be eligible for election or re-election as a director at an annual meeting, unless the person is nominated in accordance with either clause (ii) or (iii) of Section 5(a) and in accordance with the procedures set forth in Section 5(b), Section 5(c), and Section 5(d), as applicable. Only such business shall be conducted at any annual meeting of the stockholders of the corporation as shall have been brought before the meeting in accordance with clauses (i), (ii), or (iii) of Section 5(a) and in accordance with the procedures set forth in Section 5(b) and Section 5(c), as applicable. Except as otherwise required by applicable law, the chairperson of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made, or proposed, as the case may be, in accordance with the procedures set forth in the Bylaws and, if any proposed nomination or business is not in compliance with the Bylaws, or the Proponent does not act in accordance with the representations in Sections 5(b)(iv)(D) and 5(b)(iv)(E), to declare that such proposal or nomination shall not be presented for stockholder action at the meeting and shall be disregarded, or that such business shall not be transacted, notwithstanding that proxies in respect of such nomination or such business may have been solicited or received.
(f) Notwithstanding the foregoing provisions of this Section 5, in order to include information with respect to a stockholder proposal in the proxy statement and form of proxy for a stockholders meeting, a stockholder must also comply with all applicable requirements of the 1934 Act and the rules and regulations thereunder. Nothing in the Bylaws shall be deemed to affect any rights of stockholders to request inclusion of proposals in the corporations proxy statement pursuant to Rule 14a-8 under the 1934 Act; provided, however, that any references in the Bylaws to the 1934 Act or the rules and regulations thereunder are not intended to and shall not limit the requirements applicable to proposals and/or nominations to be considered pursuant to Section 5(a)(iii). Nothing in the Bylaws shall be deemed to affect any rights of holders of any class or series of preferred stock to nominate and elect directors pursuant to and to the extent provided in any applicable provision of the Certificate of Incorporation.
(g) For purposes of Sections 5 and 6,
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(i) affiliates and associates shall have the meanings set forth in Rule 405 under the Securities Act of 1933, as amended (the 1933 Act);
(ii) Business Day means any day other than Saturday, Sunday or a day on which banks are closed in New York City, New York;
(iii) close of business means 6:00 p.m. local time at the principal executive offices of the corporation on any calendar day, whether or not the day is a Business Day;
(iv) Derivative Transaction means any agreement, arrangement, interest or understanding entered into by, or on behalf or for the benefit of, any Proponent or any of its affiliates or associates, whether record or beneficial:
(A) the value of which is derived in whole or in part from the value of any class or series of shares or other securities of the corporation;
(B) that otherwise provides any direct or indirect opportunity to gain or share in any gain derived from a change in the value of securities of the corporation;
(C) the effect or intent of which is to mitigate loss, manage risk or benefit from changes in value or price with respect to any securities of the corporation; or
(D) that provides the right to vote or increase or decrease the voting power of, such Proponent, or any of its affiliates or associates, directly or indirectly, with respect to any securities of the corporation,
which agreement, arrangement, interest or understanding may include, without limitation, any option, warrant, debt position, note, bond, convertible security, swap, stock appreciation or similar right, short position, profit interest, hedge, right to dividends, voting agreement, performance-related fee or arrangement to borrow or lend shares (whether or not subject to payment, settlement, exercise or conversion in any such class or series), and any proportionate interest of such Proponent in the securities of the corporation held by any general or limited partnership, or any limited liability company, of which such Proponent is, directly or indirectly, a general partner or managing member; and
(v) public announcement shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press, Business Wire, GlobeNewswire or comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the 1934 Act or by such other means reasonably designed to inform the public or security holders in general of such information, including, without limitation, posting on the corporations investor relations website.
Section 3. Special Meetings.
(a) Special meetings of the stockholders of the corporation may be called, for any purpose as is a proper matter for stockholder action under Delaware law, by (i) the Chairperson of the Board of Directors, (ii) the Chief Executive Officer, or (iii) the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board of Directors for adoption). The corporation may postpone, reschedule or cancel any special meeting of stockholders previously scheduled by the Board of Directors.
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(b) The Board of Directors shall determine the time and place, if any, of such special meeting. Upon determination of the time and place, if any, of the meeting, the Secretary shall cause a notice of meeting to be given to the stockholders entitled to vote, in accordance with the provisions of Section 7. No business may be transacted at such special meeting otherwise than specified in the notice of meeting.
(c) Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected (i) by or at the direction of the Board of Directors or a duly authorized committee thereof or (ii) by any stockholder of the corporation who is a stockholder of record (and, with respect to any beneficial owner, if different, on whose behalf such nomination or nominations are made, only if such beneficial owner was the beneficial owner of shares of the corporation) at the time of giving notice provided for in this paragraph, who is entitled to vote at the meeting and who delivers written notice to the Secretary of the corporation setting forth the information required by Sections 5(b)(i) and 5(b)(iv). In the event the corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder of record may nominate a person or persons (as the case may be), for election to such position(s) as specified in the corporations notice of meeting, if written notice setting forth the information required by Sections 5(b)(i) and 5(b)(iv) shall be received by the Secretary at the principal executive offices of the corporation not earlier than 120 days prior to such special meeting and not later than the close of business on the later of the 90th day prior to such meeting or the tenth day following the day on which the corporation first makes a public announcement of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. The stockholder shall also update and supplement such information as required under Section 5(c). In no event shall an adjournment or a postponement of a special meeting for which notice has been given, or the public announcement thereof has been made, commence a new time period (or extend any time period) for the giving of a stockholders notice as described above.
A person shall not be eligible for election or re-election as a director at the special meeting unless the person is nominated either in accordance with clause (i) or clause (ii) of this Section 6(c). Except as otherwise required by applicable law, the chairperson of the meeting shall have the power and duty to determine whether a nomination was made in accordance with the procedures set forth in the Bylaws and, if any proposed nomination or business is not in compliance with the Bylaws, or if the Proponent does not act in accordance with the representations in Sections 5(b)(iv)(D) and 5(b)(iv)(E), to declare that such nomination shall not be presented for stockholder action at the meeting and shall be disregarded, notwithstanding that proxies in respect of such nomination may have been solicited or received.
(d) Notwithstanding the foregoing provisions of this Section 6, a stockholder must also comply with all applicable requirements of the 1934 Act and the rules and regulations thereunder with respect to matters set forth in this Section 6. Nothing in the Bylaws shall be deemed to affect any rights of stockholders to request inclusion of proposals in the corporations proxy statement pursuant to Rule 14a-8 under the 1934 Act; provided, however, that any references in the Bylaws to the 1934 Act or the rules and regulations thereunder are not intended to and shall not limit the requirements applicable to nominations for the election to the Board of Directors to be considered pursuant to Section 6(c).
Section 4. Notice of Meetings. Except as otherwise provided by applicable law, notice, given in writing or by electronic transmission, of each meeting of stockholders shall be given not less than ten nor more than 60 days before the date of the meeting to each stockholder entitled to vote at such meeting. Such notice shall specify the place, if any, date and hour, in the case of special meetings, the purpose or purposes of the meeting, the record date for determining stockholders entitled to vote at the meeting, if such record date is different from the record date for determining stockholders entitled to notice of the meeting, and the means of remote communications, if any, by which stockholders and proxyholders may be deemed to be present in person and vote at any such meeting. Such notice may be given by personal delivery, mail, or with the consent of the stockholder entitled to receive notice, by facsimile or electronic transmission. If
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mailed, notice is given when deposited in the United States mail, postage prepaid, directed to the stockholder at such stockholders address as it appears on the records of the corporation. If sent via electronic transmission, notice is given when directed to such stockholders electronic mail address appearing in the records of the corporation. Notice of the time, place, if any, and purpose of any meeting of stockholders (to the extent required) may be waived in writing, signed by the person entitled to notice thereof, or by electronic transmission by such person, either before or after such meeting, and will be waived by any stockholder by his or her attendance thereat in person, by remote communication, if applicable, or by proxy, except when the stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Any stockholder so waiving notice of such meeting shall be bound by the proceedings of any such meeting in all respects as if due notice thereof had been given.
Section 5. Quorum and Vote Required. At all meetings of stockholders, except where otherwise provided by statute or by the Certificate of Incorporation, or by the Bylaws, the presence, in person, by remote communication, if applicable, or by proxy, of the holders of a majority of the voting power of the outstanding shares of stock entitled to vote at the meeting shall constitute a quorum for the transaction of business. In the absence of a quorum, any meeting of stockholders may be adjourned, from time to time, either by the chairperson of the meeting or by vote of the holders of a majority of the voting power of the shares represented thereat and entitled to vote thereon, but no other business shall be transacted at such meeting. The stockholders present at a duly called or convened meeting, at which a quorum is present, may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum.
Except as otherwise provided by statute or by applicable stock exchange rules, or by the Certificate of Incorporation or the Bylaws, in all matters other than the election of directors, the affirmative vote of the holders of a majority of the voting power of the shares present in person, by remote communication, if applicable, or represented by proxy at the meeting and voting affirmatively or negatively (excluding abstentions and broker non-votes) on such matter shall be the act of the stockholders. Except as otherwise provided by statute, the Certificate of Incorporation or the Bylaws, directors shall be elected by a plurality of the votes of the shares present in person, by remote communication, if applicable, or represented by proxy at the meeting and entitled to vote generally on the election of directors. Where a separate vote by a class or classes or series is required, except where otherwise provided by statute or by the Certificate of Incorporation or the Bylaws or any applicable stock exchange rules, a majority of the voting power of the outstanding shares of such class or classes or series, present in person, by remote communication, if applicable, or represented by proxy, shall constitute a quorum entitled to take action with respect to that vote on that matter. Except where otherwise provided by statute or by the Certificate of Incorporation or the Bylaws or any applicable stock exchange rules, the affirmative vote of the holders of a majority (plurality, in the case of the election of directors) of the voting power of the shares of such class or classes or series present in person, by remote communication, if applicable, or represented by proxy at the meeting and voting affirmatively or negatively (excluding abstention and broker non-votes) on such matter shall be the act of such class or classes or series.
Section 6. Adjournment and Notice of Adjourned Meetings. Any meeting of stockholders, whether annual or special, may be adjourned from time to time either by the chairperson of the meeting or by the vote of the holders of a majority of the voting power of the shares present in person, by remote communication, if applicable, or represented by proxy at the meeting and entitled to vote thereon. When a meeting is adjourned to another time or place, if any, notice need not be given of the adjourned meeting if the time and place, if any, thereof and the means of remote communication, if any, by which stockholders and proxyholders may be deemed present in person and may vote at such meeting are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the corporation may transact any business that might have been transacted at the original meeting. If the adjournment is for more than 30
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days or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. If after the adjournment a new record date for determination of stockholders entitled to vote is fixed for the adjourned meeting, the Board of Directors shall fix as the record date for determining stockholders entitled to notice of such adjourned meeting the same or an earlier date as that fixed for determination of stockholders entitled to vote at the adjourned meeting, and shall give notice of the adjourned meeting to each stockholder of record as of the record date so fixed for notice of such adjourned meeting.
Section 7. Voting Rights. For the purpose of determining those stockholders entitled to vote at any meeting of the stockholders or adjournment thereof, except as otherwise provided by applicable law, only persons in whose names shares stand on the stock records of the corporation on the record date shall be entitled to vote at any meeting of stockholders. Every person entitled to vote shall have the right to do so either in person, by remote communication, if applicable, or by an agent or agents authorized by a proxy granted in accordance with Delaware law. An agent so appointed need not be a stockholder. No proxy shall be voted after three years from its date of creation unless the proxy provides for a longer period. A proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A stockholder may revoke any proxy that is not irrevocable by attending the meeting and voting in person or by delivering to the Secretary of the corporation a revocation of the proxy or a new proxy bearing a later date. Voting at meetings of stockholders need not be by written ballot.
Section 8. Joint Owners of Stock. If shares or other securities having voting power stand of record in the names of two or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, tenants by the entirety, or otherwise, or if two or more persons have the same fiduciary relationship respecting the same shares, unless the Secretary is given written notice to the contrary and is furnished with a copy of the instrument or order appointing them or creating the relationship wherein it is so provided, their acts with respect to voting shall have the following effect: (a) if only one votes, his or her act binds all; (b) if more than one votes, the act of the majority so voting binds all; (c) if more than one votes, but the vote is evenly split on any particular matter, each faction may vote the securities in question proportionally, or may apply to the Delaware Court of Chancery for relief as provided in Section 217(b) of the DGCL. If the instrument filed with the Secretary shows that any such tenancy is held in unequal interests, a majority or even-split for the purpose of subsection (c) shall be a majority or even-split in interest.
Section 9. List of Stockholders. The corporation shall prepare, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at said meeting, arranged in alphabetical order, showing the address of each stockholder and the number and class of shares registered in the name of each stockholder; provided, however, if the record date for determining the stockholders entitled to vote is less than ten days before the meeting date, the list shall reflect all of the stockholders entitled to vote as of the tenth day before the meeting date. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, (a) on a reasonably accessible electronic network, provided that the information required to gain access to such list is provided with the notice of the meeting, or (b) during ordinary business hours, at the principal place of business of the corporation. In the event that the corporation determines to make the list available on an electronic network, the corporation may take reasonable steps to ensure that such information is available only to stockholders of the corporation. The list shall be open to examination of any stockholder during the time of the meeting as provided by applicable law.
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Section 10. Action without Meeting.
No action shall be taken by the stockholders of the corporation except at an annual or special meeting of stockholders duly called in accordance with the Bylaws, and no action shall be taken by the stockholders by written consent.
Section 11. Remote Communication. For the purposes of the Bylaws, if authorized by the Board of Directors in its sole discretion, and subject to such guidelines and procedures as the Board of Directors may adopt, stockholders and proxyholders may, by means of remote communication:
(a) participate in a meeting of stockholders; and
(b) be deemed present in person and vote at a meeting of stockholders whether such meeting is to be held at a designated place or solely by means of remote communication, provided that (i) the corporation shall implement reasonable measures to verify that each person deemed present and permitted to vote at the meeting by means of remote communication is a stockholder or proxyholder, (ii) the corporation shall implement reasonable measures to provide such stockholders and proxyholders a reasonable opportunity to participate in the meeting and to vote on matters submitted to the stockholders, including an opportunity to read or hear the proceedings of the meeting substantially concurrently with such proceedings, and (iii) if any stockholder or proxyholder votes or takes other action at the meeting by means of remote communication, a record of such vote or other action shall be maintained by the corporation.
Section 12. Organization.
(a) At every meeting of stockholders, the Chairperson of the Board of Directors, or, if a Chairperson has not been appointed, is absent or refuses to act, the Chief Executive Officer, or if no Chief Executive Officer is then serving or the Chief Executive Officer is absent or refuses to act, the President, or, if the President is absent or refuses to act, a chairperson of the meeting designated by the Board of Directors, or, if the Board of Directors does not designate such chairperson, a chairperson of the meeting chosen by a majority of the voting power of the stockholders entitled to vote, present in person or by proxy, shall act as chairperson of the meeting of stockholders. The Chairperson of the Board of Directors may appoint the Chief Executive Officer as chairperson of the meeting. The Secretary, or, in his or her absence, an Assistant Secretary or other officer or other person directed to do so by the chairperson of the meeting, shall act as secretary of the meeting.
(b) The Board of Directors shall be entitled to make such rules or regulations for the conduct of meetings of stockholders as it shall deem necessary, appropriate or convenient. Subject to such rules and regulations of the Board of Directors, if any, the chairperson of the meeting shall have the right and authority to convene and (for any or no reason) to recess and/or adjourn the meeting, to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairperson, are necessary, appropriate or convenient for the proper conduct of the meeting, including, without limitation, establishing an agenda or order of business for the meeting, rules and procedures for maintaining order at the meeting and the safety of those present, limitations on participation in such meeting to stockholders of record of the corporation and their duly authorized and constituted proxies and such other persons as the chairperson shall permit, restrictions on entry to the meeting after the time fixed for the commencement thereof, limitations on the time allotted to questions or comments by participants and regulation of the opening and closing of the polls for balloting on matters that are to be voted on by ballot. The date and time of the opening and closing of the polls for each matter upon which the stockholders will vote at the meeting shall be announced at the meeting. Unless and to the extent determined by the Board of Directors or the chairperson of the meeting, meetings of stockholders shall not be required to be held in accordance with rules of parliamentary procedure.
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ARTICLE IV
DIRECTORS
Section 1. Number and Term of Office. The authorized number of directors of the corporation shall be fixed in accordance with the Certificate of Incorporation. Directors need not be stockholders unless so required by the Certificate of Incorporation. If for any cause, the directors shall not have been elected at an annual meeting, they may be elected as soon thereafter as convenient at a special meeting of the stockholders called for that purpose in the manner provided in the Bylaws.
Section 2. Powers. The business and affairs of the corporation shall be managed by or under the direction of the Board of Directors, except as may be otherwise provided by the Certificate of Incorporation or the DGCL.
Section 3. Classes of Directors. The directors shall be divided into classes as and to the extent provided in the Certificate of Incorporation, except as otherwise required by applicable law.
Section 4. Vacancies. Vacancies on the Board of Directors shall be filled as provided in the Certificate of Incorporation, except as otherwise required by applicable law.
Section 5. Resignation. Any director may resign at any time by delivering his or her notice in writing or by electronic transmission to the Board of Directors or the Secretary. Such resignation shall take effect at the time of delivery of the notice or at any later time specified therein. Acceptance of such resignation shall not be necessary to make it effective. When one or more directors shall resign from the Board of Directors, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office for the unexpired portion of the term of the director whose place shall be vacated and until his or her successor shall have been duly elected and qualified or until his or her earlier death, resignation or removal.
Section 6. Removal. Subject to the rights of holders of any series of preferred stock to elect additional directors under specified circumstances, the Board of Directors or any individual director may be removed only in the manner specified in the Certificate of Incorporation, except as otherwise required by applicable law.
Section 7. Meetings.
(a) Regular Meetings. Unless otherwise restricted by the Certificate of Incorporation, regular meetings of the Board of Directors may be held at any time or date and at any place within or without the State of Delaware, or virtually, that has been designated by the Board of Directors and publicized among all directors, either orally or in writing, by telephone, including a voice-messaging system or other system designed to record and communicate messages, or by electronic mail or other electronic means. No further notice shall be required for regular meetings of the Board of Directors.
(b) Special Meetings. Unless otherwise restricted by the Certificate of Incorporation, special meetings of the Board of Directors may be held at any time and place within or without the State of Delaware, or virtually, as designated and called by the Chairperson of the Board of Directors, the Chief Executive Officer or the Board of Directors.
(c) Meetings by Electronic Communications Equipment. Any member of the Board of Directors, or of any committee thereof, may participate in a meeting by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting by such means shall constitute presence in person at such meeting.
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(d) Notice of Special Meetings. Notice of the time and place, if any, of all special meetings of the Board of Directors shall be transmitted orally or in writing, by telephone, including a voice messaging system or other system or technology designed to record and communicate messages, or by electronic mail or other electronic means, during normal business hours, at least 24 hours before the date and time of the meeting. If notice is sent by U.S. mail, it shall be sent by first class mail, postage prepaid, at least three days before the date of the meeting.
(e) Waiver of Notice. Notice of any meeting of the Board of Directors may be waived in writing, or by electronic transmission, at any time before or after the meeting and will be waived by any director by attendance thereat, except when the director attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. The transaction of all business at any meeting of the Board of Directors, or any committee thereof, however called or noticed, or wherever held, shall be as valid as though it had been transacted at a meeting duly held after regular call and notice, if a quorum be present and if, either before or after the meeting, each of the directors not present who did not receive notice shall sign a written waiver of notice or shall waive notice by electronic transmission. All such waivers shall be filed with the corporate records or made a part of the minutes of the meeting.
Section 8. Quorum and Voting.
(a) Unless the Certificate of Incorporation requires a greater number, and except with respect to questions related to indemnification arising under Section 46 for which a quorum shall be one-third of the exact number of directors fixed from time to time by the Board of Directors in accordance with the Certificate of Incorporation, a quorum of the Board of Directors shall consist of a majority of the total number of directors then serving on the Board of Directors or, if greater, one-third of the exact number of directors fixed from time to time by the Board of Directors in accordance with the Certificate of Incorporation. At any meeting whether a quorum be present or otherwise, a majority of the directors present may adjourn from time to time until the time fixed for the next regular meeting of the Board of Directors, without notice other than by announcement at the meeting.
(b) At each meeting of the Board of Directors at which a quorum is present, all questions and business shall be determined by the affirmative vote of a majority of the directors present, unless a different vote be required by applicable law, the Certificate of Incorporation or the Bylaws.
Section 9. Action without Meeting. Unless otherwise restricted by the Certificate of Incorporation or the Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board of Directors or committee, as the case may be, consent thereto in writing or by electronic transmission. Such consent or consents shall be filed with the minutes of proceedings of the Board of Directors or committee. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form.
(a) Fees and Compensation. Directors shall be entitled to such compensation for their services as may be approved by the Board of Directors, or a committee thereof to which the Board of Directors has delegated such responsibility and authority, including, if so approved, by resolution of the Board of Directors or a committee thereof to which the Board of Directors has delegated such responsibility and authority, a fixed sum and reimbursement of expenses incurred, if any, for attendance at each regular or special meeting of the Board of Directors and at any meeting of a committee of the Board of Directors, as well as
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reimbursement for other reasonable expenses incurred with respect to duties as a member of the Board of Directors or any committee thereof. Nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee, or otherwise and receiving compensation therefor.
Section 10. Committees.
(a) Executive Committee. The Board of Directors may appoint an Executive Committee to consist of one or more members of the Board of Directors. The Executive Committee, to the extent permitted by applicable law and provided in the resolution of the Board of Directors shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority in reference to (i) approving or adopting, or recommending to the stockholders, any action or matter (other than the election or removal of directors) expressly required by the DGCL to be submitted to stockholders for approval, or (ii) adopting, amending or repealing any Bylaw of the corporation.
(b) Other Committees. The Board of Directors may, from time to time, appoint such other committees as may be permitted by applicable law. Such other committees appointed by the Board of Directors shall consist of one or more members of the Board of Directors and shall have such powers and perform such duties as may be prescribed by the resolution or resolutions creating such committees, but in no event shall any such committee have the powers denied to the Executive Committee in the Bylaws.
(c) Term. The Board of Directors, subject to any requirements of any outstanding series of preferred stock and the provisions of subsections (a) or (b) of this Section 25, may at any time increase or decrease the number of members of a committee or terminate the existence of a committee. The membership of a committee member shall terminate on the date of his or her death or voluntary resignation from the committee or from the Board of Directors. The Board of Directors may at any time for any reason remove any individual committee member and the Board of Directors may fill any committee vacancy created by death, resignation, removal or increase in the number of members of the committee. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee, and, in addition, in the absence or disqualification of any member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member.
(d) Meetings. Unless the Board of Directors shall otherwise provide, regular meetings of the Executive Committee or any other committee appointed pursuant to this Section 26 shall be held at such times and places, if any, as are determined by the Board of Directors, or by any such committee, and when notice thereof has been given to each member of such committee, no further notice of such regular meetings need be given thereafter. Special meetings of any such committee may be held at such place, if any, that has been determined from time to time by such committee, and may be called by any director who is a member of such committee, upon notice to the members of such committee of the time and place, if any, of such special meeting given in the manner provided for the giving of notice to members of the Board of Directors of the time and place, if any, of special meetings of the Board of Directors. Notice of any meeting of any committee may be waived in writing or by electronic transmission at any time before or after the meeting and will be waived by any director by attendance thereat, except when the director attends such meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Unless otherwise provided by the Board of Directors in the resolutions authorizing the creation of the committee, a majority of the authorized number of members of any such committee shall constitute a quorum for the transaction of business, and the act of a majority of those present at any meeting at which a quorum is present shall be the act of such committee.
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Section 11. Duties of Chairperson of the Board of Directors. The Chairperson of the Board of Directors, when present, shall preside at all meetings of the stockholders and the Board of Directors. The Chairperson of the Board of Directors shall perform such other duties customarily associated with the office and shall also perform such other duties and have such other powers, as the Board of Directors shall designate from time to time.
Section 12. Lead Independent Director. The Chairperson of the Board of Directors, or if the Chairperson is not an independent director, one of the independent directors, may be designated by the Board of Directors as lead independent director to serve until replaced by the Board of Directors (Lead Independent Director). The Lead Independent Director will preside over meetings of the independent directors and perform such other duties as may be established or delegated by the Board of Directors and perform such other duties as may be established or delegated by the Chairperson of the Board of Directors.
Section 13. Organization. At every meeting of the directors, the Chairperson of the Board of Directors, or, if a Chairperson has not been appointed or is absent, the Lead Independent Director, or if the Lead Independent Director has not been appointed or is absent, the Chief Executive Officer (if a director), or, if a Chief Executive Officer is absent, the President (if a director), or if the President is absent, the most senior Vice President (if a director), or, in the absence of any such person, a chairperson of the meeting chosen by a majority of the directors present, shall preside over the meeting. The Secretary, or in his or her absence, any Assistant Secretary or other officer, director or other person directed to do so by the person presiding over the meeting, shall act as secretary of the meeting.
ARTICLE V
OFFICERS
Section 1. Officers Designated. The officers of the corporation shall include, if and when designated by the Board of Directors, the Chief Executive Officer, the President, one or more Vice Presidents, the Secretary, the Chief Financial Officer and the Treasurer. The Board of Directors may also appoint one or more Assistant Secretaries and Assistant Treasurers and such other officers and agents with such powers and duties as it shall deem appropriate or necessary. The Board of Directors may assign such additional titles to one or more of the officers as it shall deem appropriate. Any one person may hold any number of offices of the corporation at any one time unless specifically prohibited therefrom by applicable law, the Certificate of Incorporation or the Bylaws. The salaries and other compensation of the officers of the corporation shall be fixed by or in the manner designated by the Board of Directors or by a committee thereof to which the Board of Directors has delegated such responsibility.
Section 2. Tenure and Duties of Officers.
(a) General. All officers shall hold office at the pleasure of the Board of Directors and until their successors shall have been duly elected and qualified, unless sooner removed. If the office of any officer becomes vacant for any reason, the vacancy may be filled by the Board of Directors or by a committee thereof to which the Board of Directors has delegated such responsibility or, if so authorized by the Board of Directors, by the Chief Executive Officer or another officer of the corporation.
(b) Duties of Chief Executive Officer. The Chief Executive Officer shall preside at all meetings of the stockholders and, if a director, at all meetings of the Board of Directors, unless a Chairperson of the Board of Directors or Lead Independent Director has been appointed and is present. The Chief Executive
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Officer shall be the chief executive officer of the corporation and, subject to the supervision, direction and control of the Board of Directors, shall have the general powers and duties of supervision, direction, management and control of the business and officers of the corporation as are customarily associated with the position of Chief Executive Officer. To the extent that a Chief Executive Officer has been appointed and no President has been appointed, all references in the Bylaws to the President shall be deemed references to the Chief Executive Officer. The Chief Executive Officer shall perform other duties customarily associated with the office and shall also perform such other duties and have such other powers, as the Board of Directors shall designate from time to time.
(c) Duties of President. The President shall preside at all meetings of the stockholders and, if a director, at all meetings of the Board of Directors, unless a Chairperson of the Board of Directors, Lead Independent Director, or Chief Executive Officer has been appointed and is present. Unless another officer has been appointed Chief Executive Officer of the corporation, the President shall be the chief executive officer of the corporation and, subject to the supervision, direction and control of the Board of Directors, shall have the general powers and duties of supervision, direction, management and control of the business and officers of the corporation as are customarily associated with the position of President. The President shall perform other duties customarily associated with the office and shall also perform such other duties and have such other powers, as the Board of Directors (or the Chief Executive Officer, if the Chief Executive Officer and President are not the same person and the Board of Directors has delegated the designation of the Presidents duties to the Chief Executive Officer) shall designate from time to time.
(d) Duties of Vice Presidents. A Vice President may assume and perform the duties of the President in the absence or disability of the President or whenever the office of President is vacant (unless the duties of the President are being filled by the Chief Executive Officer). A Vice President shall perform other duties customarily associated with the office and shall also perform such other duties and have such other powers as the Board of Directors or the Chief Executive Officer, or, if the Chief Executive Officer has not been appointed or is absent, the President shall designate from time to time.
(e) Duties of Secretary and Assistant Secretary. The Secretary shall attend all meetings of the stockholders and of the Board of Directors and shall record all acts, votes and proceedings thereof in the minute books of the corporation. The Secretary shall give notice in conformity with the Bylaws of all meetings of the stockholders and of all meetings of the Board of Directors and any committee thereof requiring notice. The Secretary shall perform all other duties provided for in the Bylaws and other duties customarily associated with the office and shall also perform such other duties and have such other powers, as the Board of Directors or the Chief Executive Officer, or if no Chief Executive Officer is then serving, the President shall designate from time to time. The Chief Executive Officer, or if no Chief Executive Officer is then serving, the President may direct any Assistant Secretary or other officer to assume and perform the duties of the Secretary in the absence or disability of the Secretary, and each Assistant Secretary shall perform other duties customarily associated with the office and shall also perform such other duties and have such other powers as the Board of Directors or the Chief Executive Officer, or if no Chief Executive Officer is then serving, the President shall designate from time to time.
(f) Duties of Chief Financial Officer. The Chief Financial Officer shall keep or cause to be kept the books of account of the corporation in a thorough and proper manner and shall render statements of the financial affairs of the corporation in such form and as often as required by the Board of Directors, the Chief Executive Officer, or the President. The Chief Financial Officer, subject to the order of the Board of Directors, shall have the custody of all funds and securities of the corporation. The Chief Financial Officer shall perform other duties customarily associated with the office and shall also perform such other duties and have such other powers as the Board of Directors or the Chief Executive Officer, or if no Chief Executive Officer is then serving, the President shall designate from time to time. To the extent that a Chief Financial Officer has been appointed and no Treasurer has been appointed, all references in the Bylaws to
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the Treasurer shall be deemed references to the Chief Financial Officer. The President may direct the Treasurer, if any, or any Assistant Treasurer to assume and perform the duties of the Chief Financial Officer in the absence or disability of the Chief Financial Officer.
(g) Duties of Treasurer and Assistant Treasurer. Unless another officer has been appointed Chief Financial Officer of the corporation, the Treasurer shall be the chief financial officer of the corporation, shall keep or cause to be kept the books of account of the corporation in a thorough and proper manner and shall render statements of the financial affairs of the corporation in such form and as often as required by the Board of Directors, the Chief Executive Officer or the President. Unless another officer has been appointed Chief Financial Officer of the corporation, the Treasurer, subject to the order of the Board of Directors, shall have the custody of all funds and securities of the corporation. The Treasurer shall perform other duties customarily associated with the office and shall also perform such other duties and have such other powers as the Board of Directors or the Chief Executive Officer, or if no Chief Executive Officer is then serving, the President shall designate from time to time. The Chief Executive Officer, or if no Chief Executive Officer is then serving, the President may direct any Assistant Treasurer or other officer to assume and perform the duties of the Treasurer in the absence or disability of the Treasurer, and each Assistant Treasurer shall perform other duties commonly incident to the office and shall also perform such other duties and have such other powers as the Board of Directors or the Chief Executive Officer, or if no Chief Executive Officer is then serving, the President shall designate from time to time.
Section 3. Delegation of Authority. The Board of Directors may from time to time delegate the powers or duties of any officer to any other officer or agent, notwithstanding any provision hereof.
Section 4. Resignations. Any officer may resign at any time by giving notice in writing or by electronic transmission to the Board of Directors, the Chairperson of the Board of Directors, the Chief Executive Officer, the President or the Secretary. Any such resignation shall be effective when received by the person or persons to whom such notice is given, unless a later time is specified therein, in which event the resignation shall become effective at such later time. Unless otherwise specified in such notice, the acceptance of any such resignation shall not be necessary to make it effective. Any resignation shall be without prejudice to the rights, if any, of the corporation under any contract with the resigning officer.
Section 5. Removal. Any officer may be removed from office at any time, either with or without cause, by the Board of Directors, or by any committee thereof or any superior officer upon whom such power of removal may have been conferred by the Board of Directors.
ARTICLE VI
EXECUTION OF CORPORATE INSTRUMENTS AND VOTING OF SECURITIES OWNED BY THE CORPORATION
Section 1. Execution of Corporate Instruments. The Board of Directors may, in its discretion, determine the method and designate the signatory officer or officers, or other person or persons, to execute, sign or endorse on behalf of the corporation any corporate instrument or document, or to sign on behalf of the corporation the corporate name without limitation, or to enter into contracts on behalf of the corporation, except where otherwise provided by applicable law or the Bylaws, and such execution or signature shall be binding upon the corporation.
All checks and drafts drawn on banks or other depositaries on funds to the credit of the corporation or in special accounts of the corporation shall be signed by the Chief Financial Officer or such person or persons as the Chief Financial Officer or the Board of Directors shall from time to time authorize so to do.
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Unless otherwise specifically determined by the Board of Directors or otherwise required by applicable law, the execution, signing or endorsement of any corporate instrument or document may be effected manually, by facsimile or (to the extent permitted by applicable law and subject to such policies and procedures as the corporation may have in effect from time to time) by electronic signature.
Unless authorized or ratified by the Board of Directors, in accordance with a policy or other express authorization of the corporation approved by the Chief Executive Officer (or a designee of the Chief Executive Officer), or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount.
Section 2. Voting of Securities Owned by the Corporation. All stock and other securities of or interests in other corporations or entities owned or held by the corporation for itself, or for other parties in any capacity, shall be voted, and all proxies with respect thereto shall be executed, by the person authorized so to do by resolution of the Board of Directors, or, in the absence of such authorization, by the Chairperson of the Board of Directors, the Chief Executive Officer, the President, or any Vice President.
ARTICLE VII
SHARES OF STOCK
Section 1. Form and Execution of Certificates. The shares of the corporation shall be represented by certificates, or shall be uncertificated if so provided by resolution or resolutions of the Board of Directors. Certificates for the shares of stock, if any, shall be in such form as is consistent with the Certificate of Incorporation and applicable law. Every holder of stock in the corporation represented by certificates shall be entitled to have a certificate signed by or in the name of the corporation by any two authorized officers of the corporation, certifying the number, and the class or series, of shares owned by such holder in the corporation. Any or all of the signatures on the certificate may be facsimiles. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued with the same effect as if he were such officer, transfer agent, or registrar at the date of issue.
Section 2. Lost Certificates. A new certificate or certificates shall be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen, or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen, or destroyed. The corporation may require, as a condition precedent to the issuance of a new certificate or certificates, the owner of such lost, stolen, or destroyed certificate or certificates, or the owners legal representative, to agree to indemnify the corporation in such manner as it shall require or to give the corporation a surety bond in such form and amount as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen, or destroyed.
Section 3. Transfers.
(a) Transfers of record of shares of stock of the corporation shall be made only upon its books by the holders thereof, in person or by attorney duly authorized, and, in the case of stock represented by certificate, upon the surrender of a properly endorsed certificate or certificates for a like number of shares.
(b) The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes or series of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes or series owned by such stockholders in any manner not prohibited by the DGCL.
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Section 4. Fixing Record Dates.
(a) In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders
or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall, subject to
applicable law, not be more than 60 nor less than ten days before the date of such meeting. If the Board of Directors so fixes a record date for determining the stockholders entitled to notice of any meeting of stockholders, such date shall also be
the record date for determining the stockholders entitled to vote at such meeting, unless the Board of Directors determines, at the time it fixes the record date for determining the stockholders entitled to notice of such meeting, that a later date
on or before the date of the meeting shall be the record date for determining the stockholders entitled to vote at such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of
or to vote at a meeting of stockholders shall be at the close of business on the day immediately preceding the day on which notice is given, or if notice is waived, at the close of business on the day immediately preceding the day on which the
meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date
for the adjourned meeting in accordance with the provisions of this
Section 39(a).
(b) In order that the corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than 60 days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto.
Section 5. Registered Stockholders. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware.
Section 6. Additional Powers of the Board. In addition to, and without limiting, the powers set forth in the Bylaws, the Board of Directors shall have power and authority to make all such rules and regulations as it shall deem expedient concerning the issue, transfer, and registration of certificates for shares of stock of the corporation, including the use of uncertificated shares of stock, subject to the provisions of the DGCL, other applicable law, the Certificate of Incorporation and the Bylaws. The Board of Directors may appoint and remove transfer agents and registrars of transfers, and may require all stock certificates to bear the signature of any such transfer agent and/or any such registrar of transfers.
ARTICLE VIII
OTHER SECURITIES OF THE CORPORATION
Section 1. Execution of Other Securities. All bonds, debentures and other corporate securities of the corporation, other than stock certificates (covered in Section 36), may be signed by the Chairperson of the
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Board of Directors, the Chief Executive Officer, the President or any Vice President, or such other person as may be authorized by the Board of Directors; provided, however, that where any such bond, debenture or other corporate security shall be authenticated by the manual signature, or where permissible facsimile signature, of a trustee under an indenture pursuant to which such bond, debenture or other corporate security shall be issued, the signatures of the persons signing and attesting the corporate seal on such bond, debenture or other corporate security may be the imprinted facsimile of the signatures of such persons. Interest coupons appertaining to any such bond, debenture or other corporate security, authenticated by a trustee as aforesaid, shall be signed by the Treasurer or an Assistant Treasurer of the corporation or such other person as may be authorized by the Board of Directors, or bear imprinted thereon the facsimile signature of such person. In case any officer who shall have signed or attested any bond, debenture or other corporate security, or whose facsimile signature shall appear thereon or on any such interest coupon, shall have ceased to be such officer before the bond, debenture or other corporate security so signed or attested shall have been delivered, such bond, debenture or other corporate security nevertheless may be adopted by the corporation and issued and delivered as though the person who signed the same or whose facsimile signature shall have been used thereon had not ceased to be such officer of the corporation.
ARTICLE IX
DIVIDENDS
Section 1. Declaration of Dividends. Dividends upon the capital stock of the corporation, subject to the provisions of the Certificate of Incorporation and applicable law, if any, may be declared by the Board of Directors. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation and applicable law.
Section 2. Dividend Reserve. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the Board of Directors from time to time, in its absolute discretion, determines proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose or purposes as the Board of Directors shall determine to be conducive to the interests of the corporation, and the Board of Directors may modify or abolish any such reserve in the manner in which it was created.
ARTICLE X
FISCAL YEAR
Section 1. Fiscal Year. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors.
ARTICLE XI
INDEMNIFICATION
Section 1. Indemnification of Directors, Executive Officers, Employees and Other Agents.
(a) Directors and Executive Officers. The corporation shall indemnify to the full extent permitted under and in any manner permitted under the DGCL or any other applicable law, any person who is made or threatened to be made a party to or is otherwise involved (as a witness or otherwise) in any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative (hereinafter, a Proceeding), by reason of the fact that such person is or was a director or executive officer
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(for the purposes of this Article XI, executive officers shall be those persons designated by the corporation as (a) executive officers for purposes of the disclosures required in the corporations proxy and periodic reports or (b) officers for purposes of Section 16 of the 1934 Act) of the corporation, or while serving as a director or executive officer of the corporation, is or was serving at the request of the corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, including service with respect to an employee benefit plan (collectively, Another Enterprise), against expenses (including attorneys fees), judgments, fines (including ERISA excise taxes or penalties) and amounts paid in settlement actually and reasonably incurred by him or her in connection with such Proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful; provided, however, that the corporation may modify the extent of such indemnification by individual contracts with its directors and executive officers; and, provided, further, that the corporation shall not be required to indemnify any director or executive officer in connection with any proceeding (or part thereof) initiated by such person unless (i) such indemnification is expressly required to be made by applicable law, (ii) the proceeding was authorized by the Board of Directors, (iii) such indemnification is provided by the corporation, in its sole discretion, pursuant to the powers vested in the corporation under the DGCL or any other applicable law or (iv) such indemnification is required to be made under subsection (d) of this Section 46.
(b) Other Officers, Employees and Other Agents. The corporation shall have power to indemnify (including the power to advance expenses in a manner consistent with subsection (c) of this Section 46) its other officers, employees and other agents as set forth in the DGCL or any other applicable law. The Board of Directors shall have the power to delegate the determination of whether indemnification shall be given to any such person except executive officers to such officers or other persons as the Board of Directors shall determine.
(c) Expenses. The corporation shall advance to any person who was or is a party or is threatened to be made a party to any threatened, pending or completed Proceeding, by reason of the fact that such person is or was a director or executive officer, of the corporation, or is or was serving at the request of the corporation as a director or executive officer of Another Enterprise, prior to the final disposition of the Proceeding, promptly following request therefor, all expenses (including attorneys fees) incurred by any director or executive officer in connection with such Proceeding provided, however, that if the DGCL requires, an advancement of expenses incurred by a director or executive officer in his or her capacity as a director or executive officer (and not in any other capacity in which service was or is rendered by such indemnitee, including, without limitation, service to an employee benefit plan) shall be made only upon delivery to the corporation of an undertaking (hereinafter an undertaking), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (hereinafter a final adjudication) that such indemnitee is not entitled to be indemnified for such expenses under this Section 46 or otherwise.
Notwithstanding the foregoing, unless otherwise determined pursuant to paragraph (d) of this Section 46, no advance shall be made by the corporation to an executive officer of the corporation (except by reason of the fact that such executive officer is or was a director of the corporation in which event this paragraph shall not apply) in any Proceeding, if a determination is reasonably and promptly made (i) by a majority vote of directors who were not parties to the Proceeding, even if not a quorum, or (ii) by a committee of such directors designated by a majority vote of such directors, even though less than a quorum, or (iii) if there are no such directors, or such directors so direct, by independent legal counsel in a written opinion, that the facts known to the decision-making party at the time such determination is made demonstrate clearly and convincingly that such person acted in bad faith or in a manner that such person did not believe to be in or not opposed to the best interests of the corporation.
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(d) Enforcement. Without the necessity of entering into an express contract, all rights to indemnification and advances to directors and executive officers under this Section 46 shall be deemed to be contractual rights, shall vest when the person becomes a director or executive officer of the corporation, shall continue as vested contract rights even if such person ceases to be a director or executive officer of the corporation, and shall be effective to the same extent and as if provided for in a contract between the corporation and the director or executive officer. Any right to indemnification or advances granted by this Section 46 to a director or executive officer shall be enforceable by or on behalf of the person holding such right in any court of competent jurisdiction if (i) the claim for indemnification or advances is denied, in whole or in part, or (ii) no disposition of such claim is made within 90 days of request therefor. To the fullest extent permitted by applicable law, the claimant in such enforcement action, if successful in whole or in part, shall be entitled to be paid also the expense of prosecuting the claim. In connection with any claim for indemnification, the corporation shall be entitled to raise as a defense to any such action that the claimant has not met the standards of conduct that make it permissible under the DGCL or any other applicable law for the corporation to indemnify the claimant for the amount claimed. In connection with any claim by an executive officer of the corporation (except in any Proceeding, by reason of the fact that such executive officer is or was a director of the corporation) for advances, the corporation shall be entitled to raise a defense as to any such action clear and convincing evidence that such person acted in bad faith or in a manner that such person did not believe to be in or not opposed to the best interests of the corporation, or with respect to any criminal action or proceeding that such person acted without reasonable cause to believe that his or her conduct was lawful. Neither the failure of the corporation (including its Board of Directors, independent legal counsel or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the DGCL or any other applicable law, nor an actual determination by the corporation (including its Board of Directors, independent legal counsel or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that claimant has not met the applicable standard of conduct. In any suit brought by a director or executive officer to enforce a right to indemnification or to an advancement of expenses hereunder, the burden of proving that the director or executive officer is not entitled to be indemnified, or to such advancement of expenses, under this Section 46 or otherwise shall be on the corporation.
(e) Non-Exclusivity of Rights. The rights conferred on any person by this Section 46 shall not be exclusive of any other right that such person may have or hereafter acquire under any applicable statute, provision of the Certificate of Incorporation, Bylaws, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding office. The corporation is specifically authorized to enter into individual contracts with any or all of its directors, officers, employees or agents respecting indemnification and advances, to the fullest extent not prohibited by the DGCL, or by any other applicable law.
(f) Survival of Rights. The rights conferred on any person by this Bylaw shall continue as to a person who has ceased to be a director or executive officer or officer, employee or other agent and shall inure to the benefit of the heirs, executors and administrators of such a person.
(g) Insurance. To the fullest extent permitted by the DGCL or any other applicable law, the corporation, upon approval by the Board of Directors, may purchase and maintain insurance on behalf of any person required or permitted to be indemnified pursuant to this Section 46.
(h) Amendments. Any repeal or modification of this Section 46 shall only be prospective and shall not affect the rights under this Section 46 as in effect at the time of the alleged occurrence of any action or omission to act that is the cause of any Proceeding against any agent of the corporation.
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(i) Saving Clause. If this Article XI or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the corporation shall nevertheless indemnify each director and executive officer to the full extent not prohibited by any applicable portion of this Article XI that shall not have been invalidated, or by any other applicable law. If this Article XI shall be invalid due to the application of the indemnification provisions of another jurisdiction, then the corporation shall indemnify each director and executive officer to the full extent under any other applicable law.
(j) Certain Definitions and Construction of Terms. For the purposes of Article XI of the Bylaws, the following definitions and rules of construction shall apply:
(i) The term Proceeding shall be broadly construed and shall include, without limitation, the investigation, preparation, prosecution, defense, settlement, arbitration and appeal of, and the giving of testimony in, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative.
(ii) The term expenses shall be broadly construed and shall include, without limitation, court costs, attorneys fees, witness fees, fines, amounts paid in settlement or judgment and any other costs and expenses of any nature or kind incurred in connection with any Proceeding.
(iii) The term the corporation shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger that, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Section 46 with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued.
(iv) References to a director, executive officer, officer, employee, or agent of the corporation shall include, without limitation, situations where such person is serving at the request of the corporation as, respectively, a director, executive officer, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust or other enterprise.
(v) References to Another Enterprise shall include employee benefit plans; references to fines shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to serving at the request of the corporation shall include any service as a director, officer, employee or agent of the corporation that imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner such person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner not opposed to the best interests of the corporation as referred to in this Section 46.
ARTICLE XII
NOTICES
Section 1. Notices.
(a) Notice to Stockholders. Notice to stockholders of stockholder meetings shall be given as provided in Section 7. Without limiting the manner by which notice may otherwise be given effectively to
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stockholders under any agreement or contract with such stockholder, and except as otherwise required by applicable law, written notice to stockholders for purposes other than stockholder meetings may be sent by U.S. mail or nationally recognized overnight courier, or by electronic mail or other electronic means.
(b) Notice to Directors. Any notice required to be given to any director may be given by the method stated in subsection (a), as otherwise provided in the Bylaws (including by any of the means specified in Section 22(d)), or by overnight delivery service. Any notice sent by overnight delivery service or U.S. mail shall be sent to such address as such director shall have filed in writing with the Secretary, or, in the absence of such filing, to the last known post office address of such director.
(c) Affidavit of Mailing. An affidavit of mailing, executed by a duly authorized and competent employee of the corporation or its transfer agent appointed with respect to the class of stock affected, or other agent, specifying the name and address or the names and addresses of the stockholder or stockholders, or director or directors, to whom any such notice or notices was or were given, and the time and method of giving the same, shall in the absence of fraud, be prima facie evidence of the facts therein contained.
(d) Methods of Notice. It shall not be necessary that the same method of giving notice be employed in respect of all recipients of notice, but one permissible method may be employed in respect of any one or more, and any other permissible method or methods may be employed in respect of any other or others.
(e) Notice to Person with Whom Communication is Unlawful. Whenever notice is required to be given, under applicable law or any provision of the Certificate of Incorporation or Bylaws of the corporation, to any person with whom communication is unlawful, the giving of such notice to such person shall not be required and there shall be no duty to apply to any governmental authority or agency for a license or permit to give such notice to such person. Any action or meeting that shall be taken or held without notice to any such person with whom communication is unlawful shall have the same force and effect as if such notice had been duly given. In the event that the action taken by the corporation is such as to require the filing of a certificate under any provision of the DGCL, the certificate shall state, if such is the fact and if notice is required, that notice was given to all persons entitled to receive notice except such persons with whom communication is unlawful.
(f) Notice to Stockholders Sharing an Address. Except as otherwise prohibited under the DGCL, any notice given under the provisions of the DGCL, the Certificate of Incorporation or the Bylaws shall be effective if given by a single written notice to stockholders who share an address if consented to by the stockholders at that address to whom such notice is given. Such consent shall have been deemed to have been given if such stockholder fails to object in writing to the corporation within 60 days of having been given notice by the corporation of its intention to send the single notice. Any consent shall be revocable by the stockholder by written notice to the corporation.
ARTICLE XIII
AMENDMENTS
Section 1. Amendments. Subject to the limitations set forth in Section 46(h) or the provisions of the Certificate of Incorporation, the Board of Directors is expressly empowered to adopt, amend or repeal the Bylaws of the corporation. Any adoption, amendment or repeal of the Bylaws of the corporation by the Board of Directors shall require the approval of a majority of the authorized number of directors. The stockholders also shall have power to adopt, amend or repeal the Bylaws of the corporation; provided, however, that, in addition to any vote of the holders of any class or series of stock of the corporation required by applicable law or by the Certificate of Incorporation, such action by stockholders shall require the affirmative vote of the holders of at least 66-2/3% of the voting power of all of the then-outstanding shares of the capital stock of the corporation entitled to vote generally in the election of directors, voting together as a single class.
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ARTICLE XIV
LOANS TO OFFICERS
Section 1. Loans to Officers. Except as otherwise prohibited by applicable law, the corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiaries, including any officer or employee who is a director of the corporation or its subsidiaries, whenever, in the judgment of the Board of Directors, such loan, guarantee or assistance may reasonably be expected to benefit the corporation. The loan, guarantee or other assistance may be with or without interest and may be unsecured, or secured in such manner as the Board of Directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in the Bylaws shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute.
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Exhibit 10.1
FIFTH AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
This Fifth Amended and Restated Investors Rights Agreement (this Agreement) is made and entered into as of September 29, 2020 by and among CS Disco, Inc., a Delaware corporation (the Company), and the investors listed on Exhibit A attached to this Agreement (each, an Investor and, collectively, the Investors), certain of the Companys holders of Common Stock listed on Exhibit B hereto with respect to any shares of Common Stock held by such Persons (each, a Common Holder and, collectively, the Common Holders) and each person who becomes a party hereto as a Holder pursuant to Section 5.1.
RECITALS:
The Company and certain of the Investors are parties to the Series F Preferred Stock Purchase Agreement, dated as of the date of this Agreement (as amended or otherwise modified from time to time, the Purchase Agreement), pursuant to which the Company has agreed to sell, and such Investors have agreed to purchase, shares of Series F Convertible Preferred Stock of the Company, par value $0.001 per share (Series F Preferred Stock);
The parties obligations under the Purchase Agreement are conditioned upon the execution and delivery of this Agreement;
The Company and certain of the Investors and the Common Holders are parties to that certain Fourth Amended and Restated Investors Rights Agreement, dated January 15, 2019 (as amended, the Fourth Amended and Restated Agreement);
Pursuant to Section 5.3 of the Fourth Amended and Restated Agreement, any provision thereof may be amended only with the written consent of the Company and the holders of a majority of the Companys Series A Convertible Preferred Stock, par value $0.001 per share (Series A Preferred Stock), the Companys Series B Convertible Preferred Stock, par value $0.001 per share (Series B Preferred Stock), the Companys Series C Convertible Preferred Stock, par value $0.001 per share (Series C Preferred Stock), the Companys Series D Convertible Preferred Stock, par value $0.001 per share (Series D Preferred Stock), and the Companys Series E Convertible Preferred Stock, par value $0.001 per share (Series E Preferred Stock), then outstanding, voting together as a single class;
The parties to this Agreement hold at least the number of shares of capital stock of the Company necessary to amend the Fourth Amended and Restated Agreement and desire to amend and restate the Fourth Amended and Restated Agreement to set forth the rights of the parties hereto; and In accordance with the Fourth Amended and Restated Agreement, such amendment and restatement shall be binding on all parties to the Fourth Amended and Restated Agreement, even if they do not consent to such amendment and restatement;
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual promises set forth in this Agreement, the parties to this Agreement hereby amend and restate the Fourth Amended and Restated Agreement in its entirety and agree as follows:
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Section 1. REGISTRATION RIGHTS.
1.1 Definitions. Terms defined in the Purchase Agreement and not otherwise defined in this Agreement are used in this Agreement with the same meaning as defined in the Purchase Agreement. As used in this Agreement, the following terms shall have the meanings set forth below:
Agreement has the meaning set forth in the Preamble.
Bad Actor Disqualification means any bad actor disqualification described in Rule 506(d)(1)(i) through (viii) under the Securities Act.
BVP means Bessemer Venture Partners VIII L.P. and Bessemer Venture Partners VIII Institutional L.P.
Board means the Board of Directors of the Company.
Certificate means the Sixth Amended and Restated Certificate of Incorporation of the Company, as amended from time to time.
Code means the Internal Revenue Code of 1986, as amended.
Common Holder or Common Holders has the meaning set forth in the Preamble and includes any transferees of Registrable Securities of a Common Holder permitted by this Agreement.
Common Stock means the Companys common stock, par value $0.001 per share.
Company has the meaning set forth in the Preamble.
Damages means any loss, damage, claim or liability (joint or several) to which a party hereto may become subject under the Securities Act, the Exchange Act or other federal or state law insofar as such loss, damage, claim or liability (or any action in respect thereof) arises out of or is based upon (a) any untrue statement or alleged untrue statement of a material fact contained in any registration statement of the Company, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (b) an omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (c) any violation or alleged violation by the indemnifying party (or any of its agents or affiliates) of the Securities Act, the Exchange Act, any state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law.
Exchange Act means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.
Excluded Registration means (a) a registration relating either to the sale of securities to employees of the Company pursuant to a stock option, stock purchase, stock incentive or stock appreciation plan or arrangement, (b) a transaction pursuant to Rule 145 promulgated under the Securities Act; (c) a registration on any form that does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities; or (d) registration in which the only Common Stock being registered is Common Stock issuable upon conversion of debt securities that are also being registered.
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Final Prospectus has the meaning set forth in Section 1.9(d).
Form S-3 means such form under the Securities Act as is in effect on the date of this Agreement or any successor registration form under the Securities Act subsequently adopted by the SEC that permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC.
Fourth Amended and Restated Agreement has the meaning set forth in the Recitals.
Fully Diluted Common Stock shall mean, at any time, the then outstanding shares of Common Stock plus (without duplication) all shares of Common Stock issuable (at the time or upon passage of time or the occurrence of future events) upon the exercise, conversion or exchange of all then outstanding rights, warrants, options, convertible securities or other rights or securities convertible into, directly or indirectly, Common Stock, including all Common Stock issuable upon the conversion of the shares of Preferred Stock.
GAAP means generally accepted accounting principles consistently applied.
Georgian means Georgian Partners Growth Fund IV, LP, Georgian Partners Growth Fund (International) IV, LP and Georgian Council II ULC and their respective Affiliates.
Holder means any Person owning Registrable Securities or any assignee thereof in accordance with Section 5.1; provided, however, a Common Holder shall not be considered a Holder for the purposes of Section 1.2; provided further, that for purposes of this Agreement, a holder of shares of Preferred Stock shall be deemed to be the Holder of the number of shares of Common Stock issuable upon conversion of such shares of Preferred Stock. The Company shall not be obligated to register shares of Preferred Stock, and Holders of Registrable Securities shall not be required to convert their shares of Preferred Stock into Common Stock in order to exercise the registration rights granted under this Agreement until immediately before the closing of the offering to which the registration relates.
immediate family has the meaning set forth in Section 5.16.
Initiating Holders means any holder or holders of Preferred Stock who in the aggregate hold not less than a majority of the outstanding Registrable Securities held by all holders of Preferred Stock.
Investor or Investors has the meaning set forth in the Preamble.
IPO has the meaning set forth in Section 1.2(a).
LiveOak means LiveOak Venture Partners I, L.P., a Delaware limited partnership, LiveOak Venture Partners 1A, L.P., a Delaware limited partnership, and their respective affiliates.
New Securities has the meaning set forth in Section 2.2.
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Nonpurchasing Holder has the meaning set forth in Section 2.3.
Notice has the meaning set forth in Section 2.3.
Overallotment Notice has the meaning set forth in Section 2.3.
Person means an individual, a partnership, a corporation, an association, a joint stock company, a trust, a joint venture, an unincorporated organization or other entity or a governmental entity or any department, agency or political subdivision of any such entity.
Piggyback Notice has the meaning set forth in Section 1.4.
Piggyback Registration has the meaning set forth in Section 1.4.
Preferred Stock means the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock, the Series E Preferred Stock and the Series F Preferred Stock.
Purchase Agreement has the meaning set forth in the Recitals.
Purchasing Holder has the meaning set forth in Section 2.3.
The terms register, registration and registered refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Securities Act and the declaration or ordering of effectiveness of such registration statement or document.
Registrable Securities means (a) the Common Stock issued to the Common Holders; provided, however, that such shares of Common Stock shall not be deemed Registrable Securities for the purposes of Section 1.2, (b) all the shares of Common Stock issued or issuable upon the conversion of shares of Preferred Stock; (c) any Common Stock acquired by the Investors after the date hereof, including Common Stock issued or issuable upon conversion of any capital stock (or upon the conversion or exercise of any warrant, option, right or other security) of the Company; and (d) any shares of Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, option, right or other security that is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, all such shares of Preferred Stock or Common Stock described in clause (a), (b) or (c) above; excluding, in all cases, any securities sold by a person in a transaction in which rights under this Section 1 are not assigned in accordance with this Agreement or any securities sold in a registered public offering under the Securities Act or sold pursuant to Rule 144 promulgated under the Securities Act.
The number of shares of Registrable Securities then outstanding shall mean the number of shares of Fully Diluted Common Stock that are Registrable Securities and are then (a) issued and outstanding or (b) issuable pursuant to the exercise or conversion of then outstanding and then exercisable, warrants, options or convertible securities.
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Registration Expenses means all expenses incurred in effecting any registration pursuant to this Agreement, including, without limitation, all registration, qualification and filing fees, printing expenses, escrow fees, fees and disbursements of counsel for the Company, reasonable fees and expenses incurred by one counsel for all selling Holders not to exceed $50,000, blue sky fees and expenses and expenses of any regular or special audits incident to or required by any such registration, but shall not include underwriting discounts, selling commissions and stock transfer taxes applicable to the sale of Registrable Securities.
SEC means the U.S. Securities and Exchange Commission.
Securities Act means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
Series A Preferred Stock has the meaning set forth in the Recitals.
Series B Preferred Stock has the meaning set forth in the Recitals.
Series C Preferred Stock has the meaning set forth in the Recitals.
Series D Preferred Stock has the meaning set forth in the Recitals.
Series E Preferred Stock has the meaning set forth in the Recitals.
Series F Preferred Stock has the meaning set forth in the Recitals.
SG means SG-Disco, LLC.
Spin-out Entity has the meaning set forth in Section 2.5.
Stockholders Agreement means the Fifth Amended and Restated Stockholders Agreement, dated as of the date hereof, by and among the Company and the stockholders named therein.
Subsidiary means any corporation more than 50% of the outstanding voting securities of which are owned by the Company or any Subsidiary, directly or indirectly, or a partnership or limited liability company in which the Company or a Subsidiary is a general partner or managing member or holds interests entitling it to receive more than 50% of the profits or losses of the partnership or limited liability company.
Wholly Owned Subsidiary means a Subsidiary, all of the outstanding voting securities of which are owned by the Company, directly or indirectly, or of which the Company is the sole general partner or manager and in which the Company holds interests entitling it to receive 100% of the profits and losses of the Subsidiary.
1.2 Requested Registration.
(a) Requested Registration. Subject to the conditions of this Section 1.2, if the Company shall receive at any time after the earlier of (y) five years after the date of this Agreement or (z) 180 days after the effective date of the registration statement covering the Companys first underwritten public offering of its Common Stock under the Securities Act (the IPO), a written request from Initiating Holders that the Company effect a registration covering at least 25% of the Registrable Securities and having an anticipated aggregate price (net of underwriting discounts and commissions) to the public of not less than $40,000,000, the Company shall:
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(i) promptly give written notice of such requested registration to all other Holders; and
(ii) as soon as reasonably practicable, and in any event within 90 days after receipt of such request, file a registration statement covering all Registrable Securities as are specified in such request, together with all Registrable Securities specified in writing by the other Holders and received by the Company within 20 days after such written notice from the Company is mailed.
(b) The Company shall not be obligated to effect, or to take any action to effect, any such registration pursuant to this Section 1.2:
(i) after the Company has effected two such registrations pursuant to Section 1.2(a);
(ii) within 12 months after the effective date of the first registration made pursuant to this Section 1.2;
(iii) during the period commencing with the date 60 days prior to the Companys good faith estimate of the date of filing of, and ending on a date 180 days after the effective date of, a Company-initiated registration subject to Section 1.4; provided, that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective;
(iv) if the Initiating Holders propose to dispose of shares of Registrable Securities that may be immediately registered on Form S-3 pursuant to a request made under Section 1.3 of this Agreement;
(v) in any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification or compliance unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act;
(vi) if the Initiating Holders do not request that such offering be firmly underwritten by underwriters selected by the Initiating Holders (subject to the consent of the Company); or
(vii) if the Company and the Initiating Holders are unable to obtain the commitment of the underwriter described in clause (b)(vi) above to firmly underwrite the offering.
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(c) Right to Defer Registration. Notwithstanding the foregoing, if the Company shall furnish to the Holders a certificate signed by the president or chief executive officer of the Company stating that, in the good faith judgment of the Board, it would be materially detrimental to the Company and its stockholders for such registration to be effected at such time because such registration (i) would have a material adverse effect on any significant acquisition, merger, consolidation, tender offer or any other similar material transaction involving the Company; (ii) would require premature disclosure of material information that the Company has a bona fide business purpose for preserving as confidential; or (iii) would render the Company unable to comply with requirements under the Securities Act or Exchange Act, the Company shall have the right to defer the filing of the registration statement no more than once during any 12-month period for a period of not more than 90 days after receipt of the request of the Initiating Holders under this Section 1.2; provided, that the Company shall not register any securities for the account of itself or any other stockholder during such period other than an Excluded Registration.
(d) Underwriting.
(i) The Initiating Holders shall have the right to select one or more underwriters (reasonably acceptable to the Company) to manage the offering and registration as part of the request made pursuant to Section 1.2(a) and the Company shall include such information in the written notice sent to all other Holders. Unless otherwise agreed by such underwriters and a majority of the Initiating Holders, no person may participate in any registration under this Agreement that is underwritten unless such person (A) agrees to sell such persons securities on the basis provided in the proposed underwriting arrangements and (B) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements; provided, that no Holder shall be required to make any representations or warranties to the Company or the underwriters other than representations and warranties regarding such Holder and such Holders intended method of distribution. Notwithstanding any other provision of this Section 1.2, if the managing underwriter(s) advise(s) the Initiating Holders in writing that marketing factors require a limitation on the number of shares to be underwritten, the Initiating Holders shall so advise all Holders of Registrable Securities that would otherwise be underwritten pursuant to this Agreement, and the number of shares of Registrable Securities that may be included in the underwriting shall be allocated among all Holders in proportion (as nearly as practicable) to the number of Registrable Securities requested by such Holders to be included in the registration; provided, that the number of shares of Registrable Securities to be included in such underwriting shall not be reduced unless all other securities are first excluded entirely from the underwriting. Any Registrable Securities excluded or withdrawn from such underwriting shall be withdrawn from the registration.
(ii) For purposes of this Section 1.2, a registration shall not be counted as effected if, as a result of an exercise of the underwriters cutback provisions in Section 1.2(d)(i), fewer than 50% of the total number of Registrable Securities that Holders have requested to be included in such registration statement are actually included.
1.3 Form S-3 Registration. If, at any time when it is eligible to use a Form S-3 registration statement, the Company receives a written request or requests from the Initiating Holders that the Company effect a registration on Form S-3 with respect to all or a part of the Registrable Securities owned by such Holder or Holders, then the Company shall:
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(a) Promptly give written notice of the requested registration to all other Holders of Registrable Securities; and
(b) As soon as reasonably practicable, effect such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Holders or Holders Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any other Holder or Holders joining in such request in writing within 20 days after receipt of the written notice from the Company; provided, that the Company shall not be obligated to effect any such registration, qualification or compliance pursuant to this Section 1.3:
(i) if Form S-3 is not available for such offering by such Holders;
(ii) if the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) having an anticipated aggregate offering price (net of underwriting discounts and commissions) of less than $10,000,000;
(iii) if the Company shall furnish to the Holders requesting a registration pursuant to this Section 1.3 a certificate signed by the president or chief executive officer of the Company stating that, in the good faith judgment of the Board, it would be materially detrimental to the Company and its stockholders for such Form S-3 Registration to be effected at such time because such registration (A) would have a material adverse effect on any acquisition, merger, consolidation, tender offer or any other similar material transaction involving the Company; (B) would require premature disclosure of material information that the Company has a bona fide business purpose for preserving as confidential; or (C) would render the Company unable to comply with requirements under the Securities Act or Exchange Act, in which event the Company shall have the right to defer the filing of the Form S-3 registration statement no more than once during any 12-month period for a period of not more than 90 days after receipt of the request of the Initiating Holders under this Section 1.3; provided, that the Company shall not register any securities for the account of itself or any other stockholder during such period other than an Excluded Registration;
(iv) if the Company has, within the 12-month period preceding the date of such request, already effected two registrations on Form S-3 for the Holders pursuant to this Section 1.3; or
(v) during the period starting with the date 60 days prior to the Companys good faith estimate of the date of filing of, and ending on a date 180 days after the effective date of, a Company-initiated registration subject to Section 1.4; provided, that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective.
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(c) If the Initiating Holders intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as part of their request made pursuant to this Section 1.3, and the Company shall include such information in the written notice referred to in Section 1.3(a). The provisions of Section 1.2(d) shall be applicable to such request (with the substitution of Section 1.3 for references to Section 1.2).
(d) Subject to the foregoing, the Company shall file a registration statement covering the Registrable Securities and other securities so requested to be registered as soon as reasonably practicable after receipt of the request or requests of the Initiating Holders. Registrations effected pursuant to this Section 1.3 shall not be counted as requests for registrations effected pursuant to Section 1.2.
(e) At all times following the Companys IPO, the Company shall use its commercially reasonable efforts to become and remain eligible to use a Form S-3 registration statement.
1.4 Piggyback Registrations. If, at any time after its IPO, the Company proposes to register (including for this purpose a registration effected by the Company for stockholders, and with respect to the Common Holders any registrations pursuant to Sections 1.2, but excluding any registrations pursuant to Section 1.3) any of its securities under the Securities Act (other than pursuant to an Excluded Registration) and the registration form to be used may be used for the registration of Registrable Securities (a Piggyback Registration), the Company shall give prompt written notice to all Holders of Registrable Securities of its intention to effect such a registration (each, a Piggyback Notice). Subject to Sections 1.4(a) and 1.4(b) below, the Company shall include in such registration all shares of Registrable Securities that Holders request the Company to include in such registration by written notice given to the Company within 30 days after the date of sending of the Piggyback Notice. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 1.4 prior to the effectiveness of such registration whether or not any Holder has elected to include Registrable Securities in such registration.
(a) Priority on Primary Registrations. If a Piggyback Registration relates to an underwritten public offering of equity securities by the Company and the representative of the underwriters advises the Company in writing that in its opinion marketing factors require a limitation of the number of securities to be included in such registration, the Company shall include in such registration (i) first, the securities proposed to be sold by the Company; (ii) second, the number of shares of Registrable Securities requested to be included in such registration by the Holders (provided, that, except in connection with the Companys IPO, at least 25% of the Registrable Securities requested by the Investors to be included in such registration shall be included); and (iii) third, other securities requested to be included in such registration.
(b) Priority on Secondary Registrations. If a Piggyback Registration relates to an underwritten public offering of equity securities by holders of the Companys securities (other than pursuant to this Agreement) and the representative of the underwriters advises the Company in writing that in its opinion marketing factors require a limitation of the number of securities to be included in such registration, the Company shall include in such registration (i) first, the securities requested to be included in such registration by the holders requesting such registration (which, in the case of a registration pursuant to Section 1.2, shall be the Initiating Holders); (ii) second, the number of Registrable Securities requested to be included in such registration by the Holders; and (iii) third, any other securities.
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(c) Underwritten Piggyback Registrations. If a Piggyback Registration relates to an underwritten public offering of equity securities by the Company, the Company shall not be required to include any of the Holders securities in such registration unless they accept the terms of the underwriting as agreed upon between the Company and its underwriters; provided, that no Holders shall be required to make any representations or warranties to the Company or the underwriters other than representations and warranties regarding such Holder and such Holders intended method of distribution. For purposes of the allocation of shares of Registrable Securities to be included in a registration pursuant to Sections 1.4(a) and (b), for any Investor that is an investment fund, partnership, limited liability company or corporation, (i) the partners, members, retired partners, retired members, stockholders and affiliates of any Investor, or the estates and family members of any such partners, retired partners, members and retired members and any trusts for the benefit of any of the foregoing persons, shall be deemed to be a single Holder; (ii) any pro rata allocation with respect to such Holder shall be based upon the aggregate amount of shares of Registrable Securities owned by all entities and individuals included in such Holder, as defined in this sentence; and (iii) such Holder may allocate the Registrable Securities allowed to be included in such registration by such Holder to its related entities and individuals in its sole discretion.
1.5 Registration Procedures. Whenever required to effect the registration of any Registrable Securities under this Agreement, the Company shall, as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its commercially reasonable efforts to cause such registration statement to become effective and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for a period of up to 120 days or, if earlier, until the distribution contemplated in the registration statement has been completed; provided, however, that (i) such 120-day period shall be extended for a period of time equal to the period the Holder refrains, at the request of an underwriter of Common Stock (or other securities) of the Company, from selling any securities included in such registration, and (ii) in the case of any registration of Registrable Securities on Form S-3 that are intended to be offered on a continuous or delayed basis, subject to compliance with applicable SEC rules, such 120-day period shall be extended for up to 60 days, if necessary, to keep the registration statement effective until all such Registrable Securities are sold;
(b) Prepare and file with the SEC such amendments and supplements to such registration statement, and the prospectus used in connection with such registration statement, as may be necessary to comply with the Securities Act in order to enable the disposition of all securities covered by such registration statement;
(c) Furnish to the selling Holders such number of copies of a prospectus, including a preliminary prospectus, and each amendment and supplement to any such prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of the Registrable Securities owned by them that are included in such registration;
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(d) Register and qualify the securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions as shall be reasonably requested by the Initiating Holders; provided, that the Company shall not be required in connection with such registration and qualification or as a condition to such registration and qualification (i) to qualify to do business or to file a general consent to service of process in any such states or jurisdictions or (ii) to subject itself to taxation in any jurisdiction;
(e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter(s) of such offering;
(f) Notify each Holder of Registrable Securities covered by such registration statement, at any time when a prospectus relating to such registration statement is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated in such prospectus or necessary to make the statements in such prospectus not misleading in the light of the circumstances then existing;
(g) Furnish, at the request of any Holder requesting registration of Registrable Securities, on the date that such Registrable Securities are delivered to the underwriters for sale, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, (i) an opinion, dated as of such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering and reasonably satisfactory to the Initiating Holders, addressed to the underwriters, if any, and to the Initiating Holders and (ii) a comfort letter dated as of such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering and reasonably satisfactory to the Initiating Holders requesting registration, addressed to the underwriters, if any, and to the Initiating Holders;
(h) Use its commercially reasonable efforts to cause all such Registrable Securities registered pursuant to such registration statement to be listed on each securities exchange and trading system on which similar securities issued by the Company are then listed;
(i) Provide a transfer agent and registrar for all Registrable Securities registered pursuant to such registration statement and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration;
(j) Make available for inspection by any underwriter participating in any disposition pursuant to such registration statement, and any attorney, accountant or other agent retained by any such underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Companys officers, directors, employees and independent accountants to supply all information reasonably requested by any such underwriter, attorney, accountant or agent in connection with such registration statement;
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(k) In the event of the issuance of any stop order suspending the effectiveness of a registration statement, or of any order suspending or preventing the use of any related prospectus or suspending the qualification of any Registrable Securities included in such registration statement for sale in any jurisdiction, use its reasonable efforts promptly to obtain the withdrawal of such order;
(l) Otherwise use its commercially reasonable efforts to comply with all applicable rules and regulations of the SEC and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least 12 months, but not more than 18 months, beginning with the first month after the effective date of the Registration Statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act;
(m) If any such registration or comparable statement refers to any Holder by name or otherwise as the holder of any securities of the Company and if, in the sole and exclusive judgment of such Holder, such Holder is or might be deemed to be a controlling person of the Company, such Holder shall have the right to require (i) the inclusion in such registration statement of language, in form and substance reasonably satisfactory to such Holder, to the effect that the holding of such securities by such Holder is not to be construed as a recommendation by such Holder of the investment quality of the Companys securities covered by such registration statement and that such holding does not imply that such Holder shall assist in meeting any future financial requirements of the Company or (ii) in the event that such reference to such Holder by name or otherwise is not required by the Securities Act or any similar federal statute then in force, the deletion of the reference to such Holder; provided, that with respect to this clause (ii) such Holder shall furnish to the Company an opinion of counsel to such effect, which opinion of counsel shall be reasonably satisfactory to the Company;
(n) Notify each selling Holder, promptly after the Company receives notice thereof, of the time when such registration statement has been declared effective or a supplement to any prospectus forming a part of such registration statement has been filed;
(o) After such registration statement becomes effective, notify each selling Holder of any request by the SEC that the Company amend or supplement such registration statement or prospectus; and
(p) At all times after any registration statement covering a public offering of securities of the Company under the Securities Act shall have become effective, ensure that the Companys insider trading policy shall provide that the Companys directors may implement a trading program under Rule 10b5-1 of the Exchange Act.
1.6 Expenses of Registration. All Registration Expenses incurred in connection with any registration, qualification or compliance pursuant to Sections 1.2, 1.3 and 1.4 of this Agreement shall be borne by the Company; provided, that, if the Holders bear the Registration Expenses for any registration proceeding begun pursuant to Sections 1.2 or 1.3 and
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subsequently withdrawn by the Holders registering shares in such registration proceeding, such registration proceeding shall not be counted as a registration pursuant to Section 1.2 or 1.3, as applicable. All underwriting discounts, selling commissions and stock transfer taxes relating to securities so registered shall be borne by the Holders of such securities pro rata on the basis of the number of shares of securities so registered on their behalf, as shall any other expenses in connection with the registration required to be borne by the Holders of such securities.
1.7 Furnish Information. It shall be a condition precedent to the obligations of the Company to take any action pursuant to Sections 1.2, 1.3 or 1.4 that the selling Holders shall furnish to the Company such information regarding themselves, the Registrable Securities held by them and the intended method of disposition of such securities as shall be required to effect the timely registration of their Registrable Securities.
1.8 Delay of Registration. No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 1.
1.9 Indemnification. If any Registrable Securities are included in a registration statement under Sections 1.2, 1.3 or 1.4:
(a) By the Company. To the extent permitted by law, the Company shall indemnify and hold harmless each Holder, the owners, partners, officers, managers and directors of each Holder, any underwriter (as defined in the Securities Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Exchange Act, against any Damages to which they may become subject; and the Company shall reimburse each such Holder, owner, partner, officer, director, underwriter or controlling person for any legal or other expenses reasonably incurred by them, as incurred, in connection with investigating or defending any such loss, claim, damage, liability or action; provided, that the indemnity agreement contained in this Section 1.9(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable in any such case for any such Damages to the extent (and only to the extent) that it arises out of or is based upon actions or omissions that occur in reliance upon and in conformity with written information furnished by such Holder, or an owner, partner, officer, manager, director, underwriter or controlling person of such Holder, expressly for use in connection with such registration.
(b) By Selling Holders. To the extent permitted by law, each selling Holder shall indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the registration statement, each person, if any, who controls the Company within the meaning of the Securities Act, any underwriter and any other Holder selling securities under such registration statement or any of such other Holders owners, partners, directors, managers or officers or any person who controls such Holder within the meaning of the Securities Act or the Exchange Act, against any Damages to which the Company or any such director, manager, officer, controlling person, underwriter or other such Holder, owner, partner, director, manager, officer or controlling person of such other Holder may become subject, in each case to the extent (and only to the extent) that such action or omission occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and
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each such Holder shall reimburse any legal or other expenses reasonably incurred by the Company or any such director, manager, officer, controlling person, underwriter or other Holder, owner, partner, officer, manager, director or controlling person of such other Holder in connection with investigating or defending any such loss, claim, damage, liability or action; provided, that the indemnity agreement contained in this Section 1.9(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld, nor shall the total amounts payable in indemnity by a Holder under this Section 1.9(b) in respect of any action or omission exceed the proceeds from the offering received by such Holder except in the case of fraud or willful misconduct by such Holder.
(c) Notice. Promptly after receipt by an indemnified party under this Section 1.9 of notice of the commencement of any action (including any governmental action), such indemnified party shall, if a claim in respect of such action is to be made against any indemnifying party under this Section 1.9, deliver to the indemnifying party a written notice of the commencement of such action, and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense of such action with counsel mutually satisfactory to the parties; provided, that an indemnified party shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to an actual or potential conflict of interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to the indemnifying partys ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 1.9, but the omission so to deliver written notice to the indemnifying party shall not relieve the indemnifying party of any liability that it may have to any indemnified party otherwise than under this Section 1.9.
(d) Defect Eliminated in Final Prospectus. The foregoing indemnity agreements of the Company and Holders are subject to the condition that, insofar as they relate to any action or omission made in a preliminary prospectus but eliminated or remedied in the amended prospectus on file with the SEC at the time the registration statement in question becomes effective or the amended prospectus filed with the SEC pursuant to SEC Rule 424(b) (the Final Prospectus), such indemnity agreement shall not inure to the benefit of any person if a copy of the Final Prospectus was furnished to the indemnified party and was not furnished to the person asserting the loss, liability, claim or damage at or prior to the time such action is required by the Securities Act.
(e) Contribution. In order to provide for just and equitable contribution to joint liability under the Securities Act in any case in which either (i) any Holder exercising rights under this Agreement, or any controlling person of any such Holder, makes a claim for indemnification pursuant to this Section 1.9 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 1.9 provides for indemnification in such case or (ii) contribution under the Securities Act may be required on the part of any such selling Holder or
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any such controlling person in circumstances for which indemnification is provided under this Section 1.9, then, and in each such case, the Company and such Holder shall contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportion so that such Holder is responsible for the portion represented by the percentage that the public offering price of its Registrable Securities offered by and sold under the registration statement bears to the public offering price of all securities offered by and sold under such registration statement, and the Company and other selling Holders are responsible for the remaining portion; provided, that, in any such case, (A) no such Holder shall be required to contribute any amount in excess of the public offering price of all such Registrable Securities offered and sold by such Holder pursuant to such registration statement and (B) no person or entity guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person or entity who was not guilty of such fraudulent misrepresentation; and, provided, further, that in no event shall a Holders liability pursuant to this Section 1.9(e), when combined with the amounts paid or payable by such Holder pursuant to Section 1.9(b), exceed the proceeds from the offering received by such Holder (net of any expenses paid by such Holder), except in the case of willful misconduct or fraud by such Holder.
(f) Survival. Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with any underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control. Unless otherwise superseded by an underwriting agreement entered into in connection with any underwritten public offering, the obligations of the Company and Holders under this Section 1.9 shall survive the completion of any offering of Registrable Securities in a registration statement and shall survive until the conclusion of their applicable statute of limitations.
1.10 Market Stand-Off Agreement. Each Holder hereby agrees that it will not, without the prior written consent of the managing underwriter, during the period commencing on the date of the final prospectus relating to the Companys IPO and ending on the date specified by the Company and the managing underwriter (such period not to exceed l80 days, or such other period as may be requested by the Company or the managing underwriter to accommodate regulatory restrictions on (a) the publication or other distribution of research reports and (b) analyst recommendations and opinions, including, but not limited to, the restrictions contained in FINRA Rule 2711(f)(4) or NYSE Rule 472(f)(4), or any successor provisions or amendments thereto), (x) lend, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock held immediately prior to the effectiveness of the registration statement for the IPO or (y) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (x) or (y) above is to be settled by delivery of Common Stock or other securities, in cash or otherwise. The foregoing provisions of this Section 1.10 shall apply only to the IPO, shall not apply to the sale of any shares to an underwriter pursuant to an underwriting agreement and shall only be applicable to the Holders if all officers, directors and holders of more than 1% of the outstanding Common Stock (after giving effect to the conversion into Common Stock of all outstanding Preferred Stock) enter into similar agreements. The underwriters in connection with the IPO are intended third-party beneficiaries of this Section 1.10 and shall have the right, power and authority to enforce the provisions hereof as though they were a party hereto. Each Holder further agrees to execute such agreements as may be reasonably requested by the underwriters in the IPO that are consistent with this Section 1.10 or that are necessary to give further effect thereto.
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In order to enforce the foregoing covenant, the Company shall impose stop-transfer instructions with respect to the shares of Common Stock or Preferred Stock of each Holder (and transferees and assignees thereof) until the end of such restricted period.
Any discretionary waiver or termination of the restrictions of any or all of such agreements by the Company or the underwriters, including any such waiver or termination with respect to management and/or employees of the Company, shall apply pro rata to all Holders subject to such agreements, based on the number of shares subject to such agreements, except that, notwithstanding the foregoing, the Company and the underwriters may, in their sole discretion, waive or terminate these restrictions with respect to up to 1,000,000 shares of the Common Stock.
1.11 Limitations on Subsequent Registration Rights. From and after the date of this Agreement, the Company shall not, without the prior written consent of the holders of a majority of the outstanding shares of Preferred Stock, enter into any agreement with any holder or prospective holder of any securities of the Company that would allow such holder or prospective holder (a) to include securities in any registration unless such holder or prospective holder may include such securities only to the extent that the inclusion of such securities shall not reduce the number of Registrable Securities that are included or (b) to make a demand registration.
1.12 Rule 144 Reporting. With a view to making available the benefits of certain rules and regulations of the SEC that may at any time permit the sale of the Registrable Securities to the public without registration, the Company shall:
(a) make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act, at all times after the effective date of the first registration under the Securities Act filed by the Company for an offering of its securities to the general public;
(b) use diligent efforts to file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements); and
(c) so long as a Holder owns any Registrable Securities, to furnish to the Holder immediately upon request (i) a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 (at any time after 90 days after the effective date of the first registration statement filed by the Company for an offering of its securities to the general public) and of the Securities Act and the Exchange Act (at any time after it has become subject to the reporting requirements of the Exchange Act); (ii) a copy of the most recent annual or quarterly report of the Company; and (iii) such other reports and documents of the Company as a Holder may reasonably request in availing itself of any rule or regulation of the SEC allowing a Holder to sell any such securities without registration (at any time after the Company has become subject to the reporting requirements of the Exchange Act).
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1.13 Restrictions on Transfer.
(a) Each Holder agrees not to make any sale, assignment, transfer, pledge or other disposition of all or any portion of the Registrable Securities, or any beneficial interest therein, unless and until the transferee thereof has agreed in writing for the benefit of the Company to take and hold such Registrable Securities subject to, and to be bound by, the terms and conditions set forth in this Agreement, including, without limitation, this Section 1.13 and Section 1.10, and:
(i) There is then in effect a registration statement under the Securities Act covering such proposed disposition and the disposition is made in accordance with the registration statement; or
(ii) The Holder shall have given prior written notice to the Company of the Holders intention to make such disposition and shall have furnished the Company with a detailed description of the manner and circumstances of the proposed disposition, and the Holder shall have furnished the Company, at the Holders expense, with (A) an opinion of counsel, reasonably satisfactory to the Company, to the effect that such disposition will not require registration of such Registrable Securities under the Securities Act, (B) a no action letter from the SEC to the effect that the transfer of such securities without registration will not result in a recommendation by the staff of the SEC that action be taken with respect thereto or (C) any other evidence reasonably satisfactory to counsel to the Company to the effect that the proposed sale, pledge or transfer of the Registrable Securities may be effected without registration under the Securities Act, whereupon the holder of such Registrable Securities shall be entitled to transfer such Registrable Securities in accordance with the terms of the notice delivered by the Holder to the Company. The Company will not require such a legal opinion or no action letter (y) in any transaction in compliance with Rule 144 under the Securities Act or (z) in any transaction in which such Holder distributes Registrable Securities to an Affiliate of such Holder for no consideration; provided, that each transferee agrees in writing to be subject to the terms of this Section 1.13.
(b) Each Holder that is described in one of the categories of entities or persons specified in Rule 506(d)(1) of the Securities Act agrees not to make any sale, assignment, transfer, pledge or other disposition of any voting securities of the Company, or any beneficial interest therein, unless and until the proposed transferee confirms to the reasonable satisfaction of the Company that neither the proposed transferee nor any person that would be deemed a beneficial owner of those voting securities (in accordance with Rule 506(d) of the Securities Act) is subject to any Bad Actor Disqualification.
1.14 Termination of the Companys Obligations. The Company shall have no obligations pursuant to Sections 1.2, 1.3 or 1.4 with respect to: (a) any request or requests for registration made by any Holder on a date (i) following a Deemed Liquidation Event (as defined in the Certificate) or (ii) more than five years after the closing of a Qualified Public Offering (as defined in the Certificate) or (b) any Registrable Securities proposed to be sold by a Holder (together with any affiliate of such Holder with whom such Holder must aggregate its sales under Rule 144 promulgated under the Securities Act) in a registration pursuant to Sections 1.2, 1.3 or 1.4 if, in the opinion of counsel to the Company, all such Registrable Securities proposed to be sold by a Holder may be sold pursuant to Rule 144(b)(1) promulgated under the Securities Act.
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Section 2. RIGHTS ON SUBSEQUENT ISSUANCES.
2.1 General. Each Investor shall have the right to purchase such Investors Pro Rata Share of all or any part of any New Securities (as defined in Section 2.2) that the Company may from time to time issue or sell after the date of this Agreement. An Investors Pro Rata Share for purposes of this right of first offer is the ratio of (a) the number of shares of Fully Diluted Common Stock held by such Investor to (b) the total number of shares of Fully Diluted Common Stock of the Company. An Investor shall be entitled to apportion the right of first offer hereby granted to it, in such proportions as it deems appropriate, among itself and its Affiliates.
2.2 New Securities. New Securities shall mean any shares of Common Stock or preferred stock of the Company, whether or not now authorized, and rights, options or warrants to purchase such Common Stock or preferred stock, and securities of any type whatsoever that are, or may become, convertible or exchangeable into such Common Stock or preferred stock; provided, that the term New Securities does not include:
(a) shares of Series F Preferred Stock issued pursuant to the Purchase Agreement;
(b) shares of Common Stock issued or issuable upon conversion of outstanding shares of Preferred Stock, or as a dividend or distribution on outstanding shares of Preferred Stock;
(c) shares of Common Stock (or options or rights for Common Stock) granted pursuant to the CS Disco, Inc. Long Term Incentive Plan, any other written stock option, stock purchase, stock incentive or stock appreciation plan or arrangement, and any increase in the number of shares of Common Stock reserved for issuance pursuant to any of the foregoing; provided, that such plan or arrangement (i) has been approved by the Board prior to the date hereof, or (ii) is approved by a majority of the Board (including a majority of the then-serving Preferred Directors (as defined in the Certificate)) and by the holders of a majority of the Preferred Stock;
(d) shares of the Companys Common Stock or preferred stock (and/or options, rights or warrants for Common Stock or preferred stock) issued or issuable in connection with a real property or equipment lease transaction, bank loan or other debt financing transaction, sponsored research, collaboration, technology license, development, OEM, marketing or other similar arrangements, agreements or strategic partnerships that are not primarily for equity financing purposes, in each case, that is approved by the Board (including a majority of the then-serving Preferred Directors);
(e) shares of Common Stock or preferred stock issued in connection with any stock split, stock dividend or other subdivision (including any combination, recapitalization or otherwise) or any other capital reorganization of the Common Stock that is covered by Article Four, Sections 2.5(d) and (e) of the Certificate;
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(f) shares of Common Stock or preferred stock issued in connection with the exercise of Options (as defined in the Certificate) or the exchange or conversion of Convertible Securities (as defined in the Certificate), in each case, that are outstanding as of the date hereof;
(g) shares of Common Stock or preferred stock issued pursuant to a bona fide acquisition of or by the Company of another person or entity by merger, purchase of substantially all of the assets or other business combination or reorganization or to a joint venture agreement, provided, that such acquisition is approved by the Board, including a majority of the then-serving Preferred Directors; and
(h) securities offered by the Company to the public pursuant to its initial public offering.
2.3 Procedures. If the Company proposes to offer or sell New Securities, it shall give written notice to each Investor of its bona fide intention to offer or sell such New Securities (the Notice), describing the number or amount of New Securities and the price and terms upon which the Company proposes to offer or sell such New Securities. Each Investor shall have 15 business days from the date of such Notice to elect to purchase or acquire up to such Investors Pro Rata Share of such New Securities for the price and on the terms specified in the Notice by giving written notice to the Company and stating in such notice the number or amount of New Securities to be purchased or acquired (not to exceed such Investors Pro Rata Share). If any Investor fails to so agree in writing within such 15 business day period to purchase or acquire all or any portion of such Investors Pro Rata Share of an offering of New Securities (a Nonpurchasing Holder), then such Nonpurchasing Holder shall forfeit the right under this Agreement to purchase or acquire that part of its Pro Rata Share of such New Securities that such Nonpurchasing Holder did not so elect to purchase or acquire. Promptly after the expiration of such 15 business day period, the Company shall give each Investor who has timely elected to purchase or acquire its full Pro Rata Share of such New Securities (a Purchasing Holder) written notice of the number or amount of such New Securities that the Nonpurchasing Holders failed to elect to purchase or acquire (the Overallotment Notice). Each Purchasing Holder shall have the right to elect to purchase or acquire such Purchasing Holders Pro Rata Share (or any other share agreed to by each Purchasing Holder) of such New Securities at any time within five business days after receiving the Overallotment Notice.
2.4 Sales by Company. If all New Securities referred to in the Notice are not elected to be purchased or acquired as provided in Section 2.3, the Company may, during the 90-day period following the expiration of the periods set forth above, offer and sell all or any New Securities that were not elected to be purchased or acquired by the Investors, at a price not less than, and upon terms not materially more favorable to the purchasers of such New Securities than, specified in the Companys Notice. If the Company has not entered into an agreement for the sale of the New Securities within such period, or if such agreement has not been consummated within 30 days of the execution thereof, the Company shall not offer or sell any New Securities without re-offering such New Securities to the Investors pursuant to this Section 2.
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2.5 Spin-Out Preemptive Rights. If at any time any of the following should occur without the approval of the Board (including a majority of the then-severing Preferred Directors) (a) the Company creates a Subsidiary that is not a Wholly Owned Subsidiary; (b) any Wholly Owned Subsidiary sells or transfers any shares of capital stock to any entity that is not a Wholly Owned Subsidiary; (c) any Wholly Owned Subsidiary merges, consolidates or takes any other action that results in such Subsidiary not remaining a Wholly Owned Subsidiary; or (d) any Wholly Owned Subsidiary sells all or substantially all of its assets (in a transaction that is not a Deemed Liquidation Event (as defined in the Certificate)) to any person or entity that is not a Wholly Owned Subsidiary, then, unless otherwise elected by the holders of a majority of the outstanding shares of Preferred Stock, in each case the Company shall cause such Subsidiary (or the surviving or successor entity or purchaser of assets) (the Spin-out Entity) to (i) issue to each Investor shares of preferred stock of the Spin-out Entity having relative rights, privileges and preferences equivalent to the relative rights, privileges and preferences of the Preferred Stock and (ii) enter into agreements with each Investor having substantially the same rights as any agreements between such Investor and the Company. The number of shares of such preferred stock of the Spin-out Entity issued to each Investor shall be sufficient so that the Investor shall thereafter have an equity ownership interest in the Spin-out Entity equivalent to its equity ownership interest in the Company at such time on a Fully Diluted Common Stock basis.
2.6 Termination. The right of first offer under this Section 2 shall terminate (a) immediately prior to the closing of (i) a Qualified Public Offering (as defined in the Certificate) or (ii) the acquisition by a single purchaser of all of the issued and outstanding shares of Common Stock and Preferred Stock held by the Investors, (b) at any time indicated in the written agreement of the Company, the holders of a majority of all outstanding shares of Preferred Stock, voting as a single-class and on an as-converted basis, the holders of a majority of the outstanding shares of Series E Preferred Stock, voting as a separate series, and the holders of a majority of the outstanding shares of Series F Preferred Stock, voting as a separate series or (c) the effective time of any liquidation, winding up or dissolution of the Company, either voluntary or involuntary, or a Deemed Liquidation Event (as defined in the Certificate). In addition, the rights of Investors with respect to New Securities and the securities of any Spin-out Entity (Spin-out Shares) shall not be applicable to any Investor if (y) (A) at the time of the issuance of New Securities or Spin-out Shares, as applicable, such Investor is not an accredited investor within the meaning of Regulation D, Rule 501(a), promulgated by the SEC under the Securities Act or shall fail to submit to the Company such further assurances of such status as may be reasonably requested by the Company and (B) such issuance of New Securities or Spin-out Shares, as applicable, are otherwise being offered only to accredited investors or (z) the Investor or any person that would be deemed a beneficial owner of the securities of the Company held by the Investor (in accordance with Rule 506(d) of the Securities Act) is subject to any Bad Actor Disqualification under the Securities Act.
Section 3. INFORMATION RIGHTS.
3.1 Financial Information. Subject to Section 3.7, the Company shall furnish the following reports to each Investor:
(a) As soon as practicable (and in any event within 90 days) after the end of each fiscal year of the Company (i) a statement of stockholders equity and (ii) a consolidated balance sheet of the Company and its Subsidiaries, if any, as of the end of such fiscal year, and consolidated statements of income and cash flows of the Company and its Subsidiaries, if any, for such year, prepared in accordance with GAAP and setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail audited and certified by independent public accountants of nationally recognized standing selected by the Company.
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(b) As soon as practicable (and in any event within 45 days) after the end of the first, second and third quarterly accounting periods in each fiscal year of the Company (i) a statement of stockholders equity and (ii) an unaudited consolidated balance sheet of the Company and its Subsidiaries, if any, as of the end of each such quarterly period and consolidated statements of income and cash flows of the Company and its Subsidiaries, if any, for such period and for the current fiscal year to date, prepared in accordance with GAAP, subject to changes resulting from normal year-end audit adjustments, except that such financial statements need not contain the notes required by GAAP, and setting forth in comparative form the figures for the corresponding periods of the previous fiscal year and to the Companys operating budget then in effect, all in reasonable detail and certified by the principal financial or accounting officer of the Company.
(c) As soon as practicable (and in any event within 30 days) after the end of each calendar month, (i) a statement of stockholders equity and (ii) an unaudited consolidated balance sheet of the Company and its Subsidiaries, if any, as of the end of each such monthly period and unaudited consolidated statements of income and cash flows of the Company and its Subsidiaries, if any, for such period and for the current fiscal year to date, in each case prepared in accordance with GAAP and setting forth in comparative form the figures for the corresponding periods of the previous fiscal year.
(d) As soon as available, but in any event not later than 45 days prior to the beginning of each new fiscal year, an operating budget for such fiscal year approved by the Board.
(e) As soon as practicable (and in any event within 30 days) after the end of each quarter of each fiscal year, a current capitalization table of the Company certified by the principal financial or accounting officer of the Company.
(f) With reasonable promptness, such other notices, information and data with respect to the Company and its Subsidiaries, if any, as the Company delivers to the holders of Common Stock and such other financial and accounting information and data as an Investor may from time to time reasonably request.
If, for any period, the Company has any Subsidiary whose accounts are consolidated with those of the Company, then, in respect of such period, the financial statements delivered pursuant to the foregoing sections shall be the consolidated and consolidating financial statements of the Company and all such consolidated Subsidiaries.
3.2 Additional Information and Rights.
(a) Subject to Section 3.7, the Company shall permit any Investor (or its accountants and counsel) reasonable access to visit and inspect any of the properties of the Company, including its books of account and other records (and make copies of and take extracts from such books and records), and to discuss its affairs, finances and accounts with the Companys
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officers and its independent public accountants, all at such reasonable times during normal business hours and as often as any such person may reasonably request. Investors may exercise their rights under this Section 3.2(a) only for purposes reasonably related to their interests under this Agreement, related agreements or otherwise in connection with their investment in the Company.
(b) The provisions of Section 3 shall not be in limitation of any rights that any Investor may have with respect to the books and records of the Company and its Subsidiaries, or to inspect their properties or discuss their affairs, finances and accounts, under the laws of the jurisdictions in which they are incorporated.
(c) Each Investor who represents to the Company that it is a venture capital operating company for purposes of Department of Labor Regulation Section 2510.3-101 shall, in addition, have the right to consult with and advise the officers of the Company as to the management of the Company.
3.3 Material Changes and Litigation. The Company shall promptly notify each Investor of any material adverse change in the business, prospects, assets or condition, financial or otherwise, of the Company and of any litigation or governmental proceeding or investigation brought or, to the Companys knowledge, threatened against the Company, or against any officer, director, employee or stockholder of the Company that materially adversely affects or that, if adversely determined, could reasonably be expected to materially adversely affect its business, prospects, assets or condition, financial or otherwise.
3.4 Observer Rights. LiveOak, BVP, SG and Georgian may each designate one representative to attend all meetings of the Board in a nonvoting observer capacity, to receive notice of such meetings, and to receive the information provided by the Company to its directors at the same time and in the same manner as provided to such directors; provided, that the Company may require as a condition precedent to LiveOak, BVP, SG and Georgians rights under this Section 3.4 that the persons proposing to attend any meeting of the Board and the persons to have access to any of the information provided by the Company to the directors shall agree to hold in confidence and trust and to act in a fiduciary manner with respect to all information so received during such meetings or otherwise; and, provided, further, that the Company reserves the right not to provide information and to exclude such persons from any meeting or portion of such meeting if delivery of such information or attendance at such meeting by such persons would result in a waiver of the attorney-client privilege or the disclosure of trade secrets to LiveOak, BVP, SG and Georgian or their respective representatives.
3.5 Termination of Information Rights. The covenants set forth in this Section 3 shall terminate and be of no further force or effect (a) immediately before the consummation of the IPO, (b) upon the Company becoming subject to the reporting requirements of the Exchange Act or (c) upon a Deemed Liquidation Event (as defined in the Certificate), whichever event occurs first.
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3.6 Confidentiality. Each Investor agrees that such Investor will keep confidential and will not disclose, divulge or use for any purpose (other than to monitor its investment in the Company) any confidential information obtained from the Company (including notice of the Companys intention to file a registration statement), unless such confidential information (a) is known or becomes known to the public in general (other than as a result of a breach of this Section 3.6 by such Investor), (b) is or has been independently developed or conceived by the Investor without reference to or use of the Companys confidential information, or (c) is or has been made known or disclosed to the Investor by a third party without a breach of any obligation of confidentiality such third party may have to the Company; provided, however, that an Investor may disclose confidential information (i) to its attorneys, accountants, consultants and other professionals to the extent necessary to obtain their services in connection with monitoring its investment in the Company; (ii) to any prospective purchaser of any Registrable Securities from such Investor, if such prospective purchaser agrees to be bound by the provisions of this Section 3.6; (iii) to any existing or prospective affiliate, partner, member, stockholder or wholly owned subsidiary of such Investor in the ordinary course of business, provided, that such Investor informs such person that such information is confidential and directs such person to maintain the confidentiality of such information; or (iv) as may otherwise be required by law, provided, that the Investor promptly notifies the Company of such disclosure and takes reasonable steps to minimize the extent of any such required disclosure.
3.7 Limitations. Notwithstanding anything herein to the contrary, the Company shall not be required to provide any Investor with access to any information where the Company reasonably and in good faith determines (a) such information relates to the details of contracts with or work performed for specific customers and other business partners and to do so would violate confidentiality obligations to those parties, provided, however, that nothing in this clause (a) shall impair the right of the Investors to financial information regarding the Company as a whole that the Investor would otherwise be entitled to receive pursuant to the terms and conditions of this Section 3, (b) such information is highly confidential or constitutes trade secrets, (c) disclosure of such information would adversely affect the attorney-client privilege between the Company and its counsel or (d) such Investor is a competitor of the Company (provided, that none of LiveOak, BVP, SG or Georgian shall be deemed to be a competitor of the Company).
Section 4. ADDITIONAL COVENANTS.
4.1 Certain Affirmative Covenants. The Company shall at all times:
(a) maintain in full force and effect all leases, licenses, permits and other rights material to the operation of the business of the Company;
(b) maintain its corporate existence and its business and maintain all properties that are reasonably necessary for the conduct of its business, now or hereafter owned by it, in good repair, working order and condition, reasonable wear and tear excepted, and make any replacements of properties necessary for the successful operation of its business;
(c) comply in all material respects with all material contracts, permits or other agreements or instruments to which it is now or hereafter a party or by which it or any of its properties and assets are now or hereafter bound, unless and to the extent that the same are being contested in good faith and by appropriate proceedings and adequate reserves have been established on its books with respect to such contracts, permits or other agreements or instruments in accordance with GAAP;
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(d) pay and discharge when payable all taxes, assessments and governmental charges imposed upon its respective properties or upon the income or profits from its respective properties (in each case before the same become delinquent and before penalties accrue on such properties) and all claims for labor, materials or supplies that if unpaid might by law become a lien or other encumbrance upon any of its respective properties, unless and to the extent that the same are being contested in good faith and by appropriate proceedings and adequate reserves (as determined in accordance with GAAP) have been established on its respective books with respect to such taxes, assessments, governmental charges and claims for labor, materials or supplies;
(e) comply with all applicable laws, rules and regulations of all governmental authorities, the violation of which would reasonably be expected to have a material adverse effect on its financial condition, operating results or business prospects;
(f) maintain a standard system of accounting established and administered in accordance with GAAP consistently applied;
(g) maintain proper books of record and account that fairly represent its financial condition and results of operations and make provisions on its financial statements for all such proper reserves as in each case are required in accordance with GAAP; and
(h) use its commercially reasonable efforts to maintain on commercially reasonable terms sufficient legal rights to all Company Intellectual Property (as defined in the Purchase Agreement) without any known conflict with, or infringement of, the rights of others.
4.2 Employee Agreements. The Company will cause each person now or hereafter employed by it or by any Subsidiary (or engaged by the Company or any Subsidiary as a consultant or independent contractor) to enter into a nondisclosure and proprietary rights assignment agreement substantially in the form approved by the Board. In addition, the Company shall not amend, modify, terminate, waive or otherwise alter, in whole or in part, any of the above-referenced agreements or any restricted stock agreement between the Company and any employee, without the consent of a majority of the then-serving Preferred Directors. The Company shall not hire as an employee, or retain as a consultant, an Affiliate (as defined in the Stockholders Agreement), relative or other related party of any then current officer of the Company if the annual consideration payable under such engagement would exceed $50,000, unless such action is approved by a majority of the then-serving Preferred Directors.
4.3 Key Person Life Insurance. The Company has obtained, as of the date of this Agreement, or shall use its commercially reasonable efforts to obtain, within 90 days of the date of this Agreement, term life insurance on the life of Kiwi Alejandro Danao Camara in the amount of $2,000,000 from financially sound and reputable insurers, except as otherwise decided in accordance with policies unanimously adopted by the Board. The Company shall cause to be maintained the term life insurance required by this Section 4.3, except as otherwise decided in accordance with policies unanimously adopted by the Board. Such policies shall name the Company as loss payee and shall not be cancelable by the Company without prior approval of the Board.
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4.4 Casualty and Liability Insurance; Directors and Officers Liability Insurance.
(a) Casualty and Liability Insurance. The Company has obtained liability and casualty insurance coverage of the types and in the amounts satisfactory to the Board. The Company shall use its commercially reasonable efforts to maintain the insurance coverage required by this Section 4.4(a) in force, except as otherwise determined by the unanimous vote of the Board. Such policies of insurance shall name LiveOak, BVP, SG and Georgian as additional insureds and as loss payees and shall prohibit cancellation or substantial modification, termination or lapse in coverage by the insurer without at least 30 days prior written notice to LiveOak, BVP, SG and Georgian, except for non-payment of premium, in which case such policies shall provide for at least 10 days prior written notice to LiveOak, BVP, SG and Georgian. The Company shall furnish to LiveOak, BVP, SG and Georgian, upon request, evidence of the insurance required to be maintained by this Section 4.4(a) in form and substance reasonably satisfactory to LiveOak, BVP, SG and Georgian.
(b) Directors and Officers Liability Insurance. The Company has also obtained directors and officers liability insurance coverage of the types, including non-rescindable Side A coverage, and in the amounts satisfactory to the Board. The Company shall use its commercially reasonable efforts to maintain the insurance coverage required by this Section 4.4(b) in force, except as otherwise determined by the unanimous vote of the Board. The Company shall furnish to LiveOak, BVP, SG and Georgian, upon request, evidence of the insurance required to be maintained by this Section 4.4(b) in form and substance reasonably satisfactory to LiveOak, BVP, SG and Georgian.
4.5 Employee and Other Stock Arrangements. Unless otherwise approved by the Board, including a majority of the then-serving Preferred Directors, all future employees and consultants of the Company who purchase, receive options to purchase or receive awards of shares of the Companys capital stock after the date hereof shall be required to execute restricted stock or option agreements, as applicable, providing for (a) vesting of shares over a four-year period, with the first 25% of such shares vesting after 12 months of continued employment or service since the date of the grant and the remaining shares vesting in equal monthly installments over the following 36 months, and (b) a market stand-off provision substantially similar to that in Section 1.10. Any modification to or acceleration of the foregoing vesting structure shall be subject to approval of the Board, including a majority of the then-serving Preferred Directors. In addition, unless otherwise approved by the Board, including a majority of the then-serving Preferred Directors, the Company shall retain a right of first refusal on employee transfers until an IPO and shall have the right to repurchase unvested shares at cost upon termination of employment of a holder of restricted stock.
4.6 Board Matters. Unless otherwise determined by the vote of a majority of the directors then in office, the Board shall meet at least four times annually in accordance with an agreed-upon schedule. The Company shall cause to be established, as soon as practicable after such request, and will maintain, an audit and compensation committee, each of which shall consist solely of non-management directors. Each nonemployee director shall be entitled in such persons discretion to be a member of any Board committee. The Company shall give each director written notice at least three days (24 hours, in the case of a telephone meeting) in advance of all meetings of the Board and all meetings of committees of the Board.
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4.7 Reservation of Shares. The Company shall at all times reserve and keep available out of its authorized but unissued capital stock, for the purpose of effecting the conversion of the Preferred Stock, a sufficient number of duly authorized shares of Common Stock for issuance upon the conversion of all outstanding shares of Preferred Stock; and, if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of Preferred Stock, the Company shall take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes, including, without limitation, engaging in commercially reasonable efforts to obtain the requisite stockholder approval of any necessary amendment to the Certificate. Before taking any action that would cause an adjustment increasing the number of shares of Common Stock issuable upon conversion of the outstanding shares of Preferred Stock, the Company will take any corporate action necessary in order that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock.
4.8 Qualified Small Business Stock. To the extent any shares of Preferred Stock constitute qualified small business stock at the time of issuance of such shares, the Company shall use commercially reasonable efforts to cause such shares of Preferred Stock, as well as any shares into which such shares are converted, within the meaning of Section 1202(f) of the Code, to constitute qualified small business stock as defined in Section 1202(c) of the Code; provided, however, that such requirement shall not be applicable if the Board determines, in its good-faith business judgment, that such qualification is inconsistent with the best interests of the Company. The Company shall submit to its stockholders (including the Investors) and to the Internal Revenue Service any reports that may be required under Section 1202(d)(1)(C) of the Code and the regulations promulgated thereunder. In addition, within 20 business days after any Investors written request therefor, the Company shall, at its option, either (a) deliver to such Investor a written statement indicating whether (and what portion of) such Investors interest in the Company constitutes qualified small business stock as defined in Section 1202(c) of the Code or (b) deliver to such Investor such factual information in the Companys possession as is reasonably necessary to enable the Investor to determine whether (and what portion of) such Investors interest in the Company constitutes qualified small business stock as defined in Section 1202(c) of the Code.
4.9 Expenses. The Company shall reimburse all persons serving as directors for their actual and reasonable out-of-pocket expenses incurred (consistent with the Companys travel policy) in attending meetings of the Board and all committees of the Board and otherwise incurred in fulfilling their duties as directors. If the Series A Director, the Series B Director, the Series C Director or the Series E Director is not able to attend a Board meeting, the Company shall reimburse one person designated by LiveOak, BVP, SG or Georgian, as applicable, for actual and reasonable out-of-pocket expenses incurred in attending such meeting as an observer.
4.10 Indemnification Agreements. At the date of the Closing (as defined in the Purchase Agreement) and on each later date that a director is first elected or appointed to the Board, the Company shall enter into an indemnification agreement in substantially the form approved by the Board with each director of the Company who is elected or appointed to the Board on such date.
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4.11 Bad Actor Notification. Each party to this Agreement will promptly notify each other party to this Agreement in writing if it or, to its knowledge, any beneficial owner of the Companys voting equity securities (in accordance with Rule 506(d) of the Securities Act held by such party (but excluding any other party to this Agreement who may be deemed to beneficially own such securities by reason of such partys execution of this Agreement)) becomes subject to any Bad Actor Disqualification; provided, that notwithstanding anything to the contrary in this Agreement, no party makes any representation or covenant regarding any person or entity that may be deemed to be a beneficial owner of the Companys voting equity securities held by such party solely by virtue of that person or entity being or becoming a party to (a) this Agreement, or (b) any other contract or written agreement to which the Company and such party are parties regarding (1) the voting power, which includes the power to vote, or to direct the voting of, such security; and/or (2) the investment power, which includes the power to dispose, or to direct the disposition of, such security.
4.12 Termination of Certain Covenants. The covenants of the Company contained in Sections 4.1 through 4.10 shall terminate and be of no further force or effect at the time of and subject to the earlier of (a) the closing and funding of a Qualified Public Offering (as defined in the Certificate) or (b) the consummation of a Deemed Liquidation Event (as defined in the Certificate).
Section 5. MISCELLANEOUS PROVISIONS.
5.1 Successors and Assigns. The rights under this Agreement may be assigned (but only with all related obligations) by a Holder to a transferee of Registrable Securities that (a) is an affiliate of a Holder; (b) is a Holders immediate family member or trust for the benefit of an individual Holder or one or more of such Holders immediate family members; or (c) after such transfer, holds at least 5,000,000 shares of Registrable Securities (subject to appropriate adjustment for stock splits, stock dividends, combinations and other recapitalizations); provided, however, that (i) such assignment is in connection with a transfer of Registrable Securities in compliance with Section 1.13 and (ii) (A) in the case of an assignment by a Common Holder, such transferee shall be deemed a Common Holder for purposes of this Agreement with respect to the Registrable Securities so transferred and (B) in the case of an assignment by an Investor, such transferee shall be deemed an Investor for purposes of this Agreement with respect to the Registrable Securities so transferred. For the purposes of determining the number of shares of Registrable Securities held by a transferee, the holdings of a transferee (x) that is an affiliate or stockholder of a Holder; (y) who is a Holders immediate family member; or (z) that is a trust for the benefit of an individual Holder or such Holders immediate family member shall be aggregated together and with those of the transferring Holder; provided, further, that all transferees who would not qualify individually for assignment of rights shall have a single attorney in fact for the purpose of exercising any rights, receiving notices or taking any action under this Agreement. Subject to the foregoing and except as otherwise provided herein, the terms and conditions of this Agreement inure to the benefit of and are binding upon the respective successors and permitted assignees of the parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and permitted assignees any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided herein.
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5.2 Purchasers or Transferees. Any person who acquires Registrable Securities and to whom any rights under this Agreement are assigned shall be bound by all of the terms and conditions of this Agreement and deemed a Holder to the same extent as the transferor and, as a condition to the transfer of any such rights, such person shall execute and deliver a counterpart signature page hereto thereby agreeing to be bound by and subject to the terms of this Agreement.
5.3 Amendment; Waiver. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance, and either retroactively or prospectively) only with the written consent of the Company and the holders of a majority of the shares of Preferred Stock then outstanding; provided, that any provision hereof may be waived by any waiving party on such partys own behalf, without the consent of any other party. Notwithstanding the foregoing, this Agreement may not be amended or terminated and the observance of any term hereof may not be waived with respect to any Investor without the written consent of such Investor, unless such amendment, termination or waiver applies to all Investors in the same fashion it being agreed (a) that a waiver or amendment of the third sentence of Section 4.6 shall require the written consent of each of LiveOak, BVP, SG and Georgian, (b) that a waiver of the provisions of Section 2 with respect to a particular transaction shall be deemed to not apply to all Investors in the same fashion if any Investor, by agreement with the Company, purchases securities in such transaction and each other Investor is not offered the opportunity to participate on the same basis in proportion to their respective holdings of Fully Diluted Common Stock and (c) any amendment, termination or waiver of Sections 3.4, 4.4 or 4.9 with respect to LiveOak, BVP, SG or Georgian shall require the written consent of LiveOak, BVP, SG or Georgian, as applicable. The Company shall give prompt notice of any amendment or termination hereof or waiver hereunder to any party hereto that did not consent in writing to such amendment, termination or waiver. Any amendment, termination or waiver effected in accordance with this Section 5.3 shall be binding on all parties hereto, regardless of whether any such party has consented thereto. No waivers of or exceptions to any term, condition or provision of this Agreement, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such term, condition or provision.
5.4 Restrictive Legends. Each certificate representing any shares of Common Stock or Preferred Stock issued after the date hereof to any Investor shall be endorsed by the Company with a legend reading substantially as follows:
THE SHARES EVIDENCED HEREBY ARE SUBJECT TO AN INVESTORS RIGHTS AGREEMENT, AS MAY BE AMENDED FROM TIME TO TIME, (A COPY OF WHICH MAY BE OBTAINED UPON WRITTEN REQUEST FROM THE COMPANY), AND BY ACCEPTING ANY INTEREST IN SUCH SHARES THE PERSON ACCEPTING SUCH INTEREST SHALL BE DEEMED TO AGREE TO AND SHALL BECOME BOUND BY ALL THE PROVISIONS OF THAT INVESTORS RIGHTS AGREEMENT, INCLUDING CERTAIN RESTRICTIONS ON TRANSFER AND OWNERSHIP SET FORTH THEREIN.
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The Company, by its execution of this Agreement, agrees that it will cause the certificates evidencing shares of Common Stock or Preferred Stock issued after the date hereof to any Investor to bear the legend required by this Section 5.4, and it shall supply, free of charge, a copy of this Agreement to any holder of a certificate evidencing such shares upon written request from such holder to the Company at its principal office. The parties to this Agreement do hereby agree that the failure to cause the certificates evidencing such shares of Common Stock or Preferred Stock to bear the legend required by this Section 5.4 and/or the failure of the Company to supply, free of charge, a copy of this Agreement as provided hereunder shall not affect the validity or enforcement of this Agreement.
5.5 Third Parties. Nothing in this Agreement, express or implied, is intended to confer upon any person, other than the parties to this Agreement and their respective successors and assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement except as expressly provided in this Agreement.
5.6 Governing Law. This Agreement shall be governed by the internal law of the State of Delaware.
5.7 Jurisdiction. The parties (a) hereby irrevocably and unconditionally submit to the jurisdiction of the Delaware Court of Chancery and to the jurisdiction of the United States District Court for the District of Delaware for the purpose of any suit, action or other proceeding arising out of or based upon this Agreement; (b) agree not to commence any suit, action or other proceeding arising out of or based upon this Agreement except in the Delaware Court of Chancery or the United States District Court for the District of Delaware; and (c) hereby waive, and agree not to assert, by way of motion, as a defense, or otherwise, in any such suit, action or proceeding, any claim that it is not subject personally to the jurisdiction of the above-named courts, that the suit, action or proceeding is brought in an inconvenient forum, that the venue of the suit, action or proceeding is improper or that this Agreement or the subject matter hereof may not be enforced in or by such court.
5.8 Counterparts. This Agreement may be executed in multiple counterparts (including, without limitation, facsimile counterparts), each of which shall be deemed an original, but all of which together shall constitute one and the same agreement.
5.9 Headings. The headings and captions used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. All references in this Agreement to sections, paragraphs, exhibits and schedules shall, unless otherwise provided, refer to sections and paragraphs of this Agreement and exhibits and schedules attached to this Agreement, all of which exhibits and schedules are incorporated in this Agreement by this reference.
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5.10 Notices. All notices, requests, consents and other communications under this Agreement shall be in writing and shall be delivered personally or by facsimile or electronic transmission or by nationally recognized overnight delivery service or by first class, certified or registered mail, return receipt requested, postage prepaid:
If to the Company:
CS Disco, Inc.
3700 N. Capital of Texas Highway, Suite 150
Austin, TX 78746
Attention: Kiwi Alejandro Danao Camara
With a copy (which shall not constitute notice) to:
Vinson & Elkins L.L.P.
2801 Via Fortuna, Suite 100
Austin, Texas 78746
Attention: Paul R. Tobias
Telephone: (512) 542-8450
Facsimile: (512) 236-3266
Email: ptobias@velaw.com
or at such other address or addresses as may have been furnished by giving five days advance written notice to all other parties.
If to an Investor, at its address set forth on Exhibit A, or at such other address or addresses as may have been furnished to the Company by giving five days advance written notice.
If to a Common Holder, at his or her address set forth on Exhibit B, or at such other address or addresses as may have been furnished to the Company by giving five days advance written notice.
Notices provided in accordance with this Section 5.10 shall be deemed sent upon mailing or transmission.
5.11 Costs and Attorneys Fees. If any action, suit or other proceeding is instituted concerning or arising out of this Agreement or any transaction contemplated under this Agreement, the prevailing party shall recover all of such partys costs and attorneys fees incurred in each such action, suit or other proceeding, including any and all appeals or petitions from any such action, suit or other proceeding.
5.12 Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, then such provision(s) shall be excluded from this Agreement and the balance of this Agreement shall be interpreted as if such provision(s) were so excluded and shall be enforceable in accordance with its terms.
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5.13 Entire Agreement and Waiver. This Agreement, together with all exhibits and schedules to this Agreement, constitutes the entire agreement and understanding of the parties with respect to the subject matter of this Agreement and supersedes any and all prior negotiations, correspondence, agreements, understandings, duties or obligations (including, without limitation, under the Fourth Amended and Restated Agreement) between the parties with respect to the subject matter of this Agreement. By execution of this Agreement, each Investor, on behalf of itself, its affiliates and the other Investors, hereby waives any rights on subsequent issuances and notice rights it has or may have had under Section 2 of the Fourth Amended and Restated Agreement or otherwise, with respect to the Companys proposed offer and sale of Series F Preferred Stock pursuant to the Purchase Agreement and all shares of Common Stock issuable upon conversion of such shares of Series F Preferred Stock (as the same may be adjusted from time to time for stock splits, subdivisions and combinations, reclassifications and similar corporate actions with respect to such shares of Series F Preferred Stock and Common Stock).
5.14 Further Assurances. From and after the date of this Agreement, upon the request of the Investors or the Company, the Company and the Investors shall execute and deliver such instruments, documents or other writings as may be reasonably necessary or desirable to confirm and carry out and to effectuate fully the intent and purposes of this Agreement.
5.15 Adjustments for Stock Splits, etc. Wherever in this Agreement there is a reference to a specific number of shares of Common Stock or preferred stock of the Company of any class or series, or a price per share of such stock, then, upon the occurrence of any subdivision, combination or stock dividend of such class or series of stock, the specific number of shares or the price so referenced in this Agreement shall automatically be proportionally adjusted to reflect the effect on the outstanding shares of such class or series of stock by such subdivision, combination or stock dividend.
5.16 Aggregation of Shares. All shares of the Preferred Stock held or acquired by any Investor and its affiliates shall be aggregated together for the purpose of determining the availability of any rights under this Agreement. For purposes of the foregoing, the shares held by any Investor that (a) is a partnership or corporation shall be deemed to include shares held by affiliated partnerships or the partners, retired partners and stockholders of such holder or affiliated partnership, or members of the immediate family (as defined below) of any such partners, retired partners and stockholders, and any custodian or trustee for the benefit of any of the foregoing persons and (b) is an individual shall be deemed to include shares held by any members of the stockholders immediate family (immediate family shall include any spouse, father, mother, brother, sister, lineal descendant of spouse or lineal descendant) or to any custodian or trustee for the benefit of any of the foregoing persons.
5.17 Delays or Omissions. No delay or omission to exercise any right, power or remedy accruing to any Holder upon any breach or default of the Company under this Agreement shall impair any such right, power or remedy of such Holder nor shall it be construed to be a waiver of any such breach or default, or an acquiescence in any such breach or default or of or in any similar breach or default occurring after such breach or default; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default occurring before or after such breach or default. Any waiver, permit, consent or approval of any kind or character on the part of any Holder of any breach or default under this Agreement or any waiver on the part of any Holder of any provisions or conditions of this Agreement must be made in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any Holder, shall be cumulative and not alternative.
[Signature Pages Follow]
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IN WITNESS WHEREOF, the parties to this Agreement have executed this Agreement as of the date first written above.
CS DISCO, INC. | ||
Date: | /s/ Kiwi Alejandro Danao Camara | |
Name: | Kiwi Alejandro Danao Camara | |
Title: | President and Chief Executive Officer |
SIGNATURE PAGE TO
FIFTH AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT OF
CS DISCO, INC.
COMMON HOLDERS: |
/s/ Kiwi Alejandro Danao Camara |
Kiwi Alejandro Danao Camara |
SIGNATURE PAGE TO
FIFTH AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT OF
CS DISCO, INC.
COMMON HOLDERS: |
/s/ Kent Radford |
Kent Radford |
SIGNATURE PAGE TO
FIFTH AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT OF
CS DISCO, INC.
INVESTORS: | ||
LIVEOAK VENTURE PARTNERS I, L.P. | ||
By: LOVP GP I, L.P., | ||
Its General Partner | ||
By: LOVP Upper Tier GP I, L.L.C., | ||
Its General Partner | ||
By: | /s/ Krishna Srinivasan | |
Name: Krishna Srinivasan | ||
Title: Partner | ||
LIVEOAK VENTURE PARTNERS 1A, L.P. | ||
By: LOVP SBIC Management Services, L.L.C. | ||
Its General Partner | ||
By: | /s/ Krishna Srinivasan | |
Name: Krishna Srinivasan | ||
Title: Partner | ||
LIVEOAK I CO-INVEST L.P. | ||
LIVEOAK I CO-INVEST II LP | ||
By: LOVP TDA GP, LP, its General Partner | ||
By: LOVP Upper Tier GP I, LLC, its General Partner | ||
By: | /s/ Krishna Srinivasan | |
Name: Krishna Srinivasan | ||
Title: Partner | ||
LIVEOAK I CO-INVEST IV LP | ||
By: LiveOak Co-Invest GP, LLC, its General | ||
Partner | ||
By: | /s/ Krishna Srinivasan | |
Name: Krishna Srinivasan | ||
Title: Partner |
SIGNATURE PAGE TO
FIFTH AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT OF
CS DISCO, INC.
INVESTORS: | ||
BESSEMER VENTURE PARTNERS VIII L.P. BESSEMER VENTURE PARTNERS VIII INSTITUTIONAL L.P. | ||
By: Deer VIII & Co. L.P., their General Partner By: Deer VIII & Co. Ltd., its General Partner | ||
By: | /s/ Scott Ring | |
Scott Ring, General Counsel |
SIGNATURE PAGE TO
FIFTH AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT OF
CS DISCO, INC.
INVESTORS: | ||
SG-DISCO, LLC | ||
By: The Stephens Group, LLC its Manage | ||
By: | /s/ Aaron Clark | |
Name: Aaron Clark Title: Managing Director |
SIGNATURE PAGE TO
FIFTH AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT OF
CS DISCO, INC.
INVESTORS:
GEORGIAN PARTNERS GROWTH FUND IV, LP | ||
By: Georgian Partners IV GP, LP, its general partner By: Georgian Partners IV GP, Inc., its general partner | ||
By: | /s/ Tyson Baber | |
Name: Tyson Baber Title: Partner | ||
GEORGIAN PARTNERS GROWTH FUND (INTERNATIONAL) IV, LP | ||
By: Georgian Partners IV GP, LP, its general partner By: Georgian Partners IV GP, Inc., its general partner | ||
By: | /s/ Tyson Baber | |
Name: Tyson Baber Title: Partner | ||
GEORGIAN COUNCIL II ULC | ||
By: | /s/ Tyson Baber | |
Name: Tyson Baber Title: Partner |
SIGNATURE PAGE TO
FIFTH AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT OF
CS DISCO, INC.
INVESTORS:
BC/BL HOLDCO LLC | ||
By: | /s/ James W. Breyer | |
Name: James W. Breyer Title: Authorized Person |
SIGNATURE PAGE TO
FIFTH AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT OF
CS DISCO, INC.
EXHIBIT A
INVESTOR SCHEDULE
LiveOak Venture Partners I, L.P.
LiveOak Venture Partners 1A, L.P.
LiveOak I Co-Invest L.P.
LiveOak I Co-Invest II LP
LiveOak I Co-Invest III LP
Bessemer Venture Partners VIII L.P.
Venture Partners VIII Institutional L.P.
A-1
SG-Disco, LLC
Michael S. Lafair
Georgian Partners Growth Fund IV, LP
If notice is given to Georgian, a copy (which shall not constitute notice) shall also be sent to:
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP
Georgian Partners Growth Fund (International) IV, LP
If notice is given to Georgian, a copy (which shall not constitute notice) shall also be sent to:
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP
Georgian Council II ULC
A-2
If notice is given to Georgian, a copy (which shall not constitute notice) shall also be sent to:
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP
BC/BL Holdco LLC
A-3
EXHIBIT B
COMMON HOLDERS
Kiwi Alejandro Danao Camara
Kent Radford
Gabe Krambs
B-1
Exhibit 10.2
CS DISCO, INC.
LONG TERM INCENTIVE PLAN
1. Purpose. The purpose of the CS Disco, Inc. Long Term Incentive Plan (the Plan) is to provide a means through which CS Disco, Inc., a Delaware corporation, and its Subsidiaries (collectively, except where otherwise specified or where the context indicates reference only to CS Disco, Inc., the Company), may attract and retain able persons as employees, directors and consultants of the Company and to provide a means whereby those Persons upon whom the responsibilities of the successful administration and management of the Company rest, and whose present and potential contributions to the welfare of the Company are of importance, can acquire and maintain stock ownership, or awards the value of which is tied to the performance of the Company, thereby strengthening their concern for the welfare of the Company and their desire to remain employed. A further purpose of this Plan is to provide such employees, directors and consultants with additional incentive and reward opportunities designed to enhance the profitable growth of the Company. Accordingly, this Plan primarily provides for the granting of Incentive Stock Options, Nonstatutory Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Bonus Stock, Dividend Equivalents, Other Stock-Based Awards, Performance Awards, Annual Incentive Awards or any combination of the foregoing, as is best suited to the circumstances of the particular individual as provided herein.
2. Definitions. For purposes of this Plan, the following terms shall be defined as set forth below, in addition to such terms otherwise defined herein:
(a) Annual Incentive Award means a conditional right granted to an Eligible Person under Section 8 hereof to receive a cash payment, Stock or other Award, unless otherwise determined by the Committee, after the end of a specified year or other designated period.
(b) Award means any Option, SAR, Restricted Stock Award, Restricted Stock Unit, Bonus Stock, Dividend Equivalent, Other Stock-Based Award, Performance Award or Annual Incentive Award, together with any other right or interest granted to an Eligible Person under this Plan.
(c) Award Agreement means any written instrument that establishes the terms, conditions, restrictions and/or limitations applicable to an Award in addition to those established by this Plan and by the Committees exercise of its administrative powers. A form of Award Agreement for an Option is attached hereto as Exhibit A.
(d) Board means the Board of Directors of CS Disco, Inc.
(e) Bonus Stock means unrestricted shares of Stock granted as a bonus pursuant to Section 6(f).
(f) Change in Control means, except as otherwise provided in an Award Agreement, the occurrence of any of the following events:
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(i) The consummation of an agreement to acquire or a tender offer for beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act by any Person, of 50% or more of either (x) the then outstanding shares of Stock (the Outstanding Stock) or (y) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the Outstanding Company Voting Securities); provided, however, that for purposes of this subsection (i), the following acquisitions and transactions shall not constitute a Change in Control: (A) any acquisition directly from the Company, (B) any acquisition by the Company, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any entity controlled by the Company or (D) any acquisition by any entity pursuant to a transaction that complies with clauses (A), (B) and (C) of subsection (iii) below;
(ii) Individuals who constitute the Incumbent Board cease for any reason to constitute at least a majority of the Board;
(iii) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or an acquisition of assets of another entity (a Business Combination), in each case, unless, following such Business Combination, all the following are true: (A) the Outstanding Stock and Outstanding Company Voting Securities immediately prior to such Business Combination represent or are converted into or exchanged for securities which represent or are convertible into more than 50% of, respectively, the then outstanding shares of common stock or common equity interests and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors or other governing body, as the case may be, of the entity resulting from such Business Combination (including, without limitation, an entity which as a result of such transaction owns the Company, or all or substantially all of the Companys assets either directly or through one or more subsidiaries), (B) no Person (excluding any employee benefit plan (or related trust) of the Company or the entity resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock or common equity interests of the entity resulting from such Business Combination or the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors or other governing body of such entity to the extent that such ownership results solely from ownership of the Company that existed prior to the Business Combination, and (C) at least a majority of the members of the board of directors or similar governing body of the entity resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or
(iv) Approval by the stockholders of the Company of a complete liquidation or dissolution of the Company.
Notwithstanding the definition above, with respect to any Award subject to the Nonqualified Deferred Compensation Rules, a Change in Control for purposes of triggering the exercisability, settlement or other payment or distribution of such Award shall not occur unless a change in the ownership or effective control of a corporation, or a change in the ownership of a substantial portion of the assets of a corporation, as defined in section 1.409A-3(i)(5) of the Treasury Regulations, has also occurred.
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(g) Code means the Internal Revenue Code of 1986, as amended from time to time, including regulations thereunder and successor provisions and regulations thereto.
(h) Committee means a committee of two or more directors designated by the Board to administer this Plan or, if none is designated, the entire Board.
(i) Dividend Equivalent means a right, granted to an Eligible Person under Section 6(g), to receive cash, Stock, other Awards or other property equal in value to dividends paid with respect to a specified number of shares of Stock, or other periodic payments.
(j) Effective Date means December 17, 2013.
(k) Eligible Person means all officers and employees of the Company and other Persons who provide services to the Company, including directors of the Company; provided, that consultants and advisors shall only be considered Eligible Persons if they are natural persons who provide bona fide services to the Company not in connection with the offer or sale of securities in a capital-raising transaction. An employee on leave of absence may be considered as still in the employ of the Company for purposes of eligibility for participation in this Plan.
(l) Exchange Act means the Securities Exchange Act of 1934, as amended from time to time, including rules thereunder and successor provisions and rules thereto.
(m) Fair Market Value means, as of any specified date, (i) if the Stock is listed on a securities exchange, the closing sales price of the Stock, as reported on the stock exchange composite tape on that date (or if no sales occur on that date, on the last preceding date on which such sales of the Stock are so reported); (ii) if the Stock is not traded on a securities exchange but is traded over the counter at the time a determination of its fair market value is required to be made under the Plan, the average between the reported high and low bid and asked prices of Stock on the most recent date on which Stock was publicly traded; (iii) in the event Stock is not publicly traded at the time a determination of its value is required to be made under the Plan, the amount determined by the Committee in its discretion in such manner as it deems appropriate, taking into account all factors the Committee deems appropriate including, without limitation, the Nonqualified Deferred Compensation Rules; or (iv) on the date of a Qualifying Public Offering of Stock, the offering price under such Qualifying Public Offering.
(n) Incentive Stock Option or ISO means any Option intended to be and designated as an incentive stock option within the meaning of section 422 of the Code.
(o) Incumbent Board means the portion of the Board constituted of the individuals who are members of the Board as of the Effective Date and any other individual who becomes a director of the Company after the Effective Date and whose election or appointment by the Board or nomination for election by the Companys stockholders was approved by a vote of at least a majority of the directors then comprising the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Incumbent Board.
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(p) Nonqualified Deferred Compensation Rules means the limitations or requirements of section 409A of the Code, as amended from time to time, including the guidance and regulations promulgated thereunder and successor provisions, guidance and regulations thereto.
(q) Nonstatutory Stock Option means any Option that is not intended to be an incentive stock option within the meaning of section 422 of the Code.
(r) Option means any Incentive Stock Option or Nonstatutory Stock Option granted to an Eligible Person under Section 6(b) hereof, to purchase Stock or other Awards at a specified price during specified time periods.
(s) Other Stock-Based Awards means Awards granted to an Eligible Person under Section 6(h) hereof that may be denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to, Stock, including cash Awards.
(t) Participant means a Person who has been granted an Award under this Plan which remains outstanding, including a Person who is no longer an Eligible Person.
(u) Performance Award means a right, granted to an Eligible Person under Section 8 hereof, to receive Awards based upon performance criteria specified by the Committee.
(v) Person means any person or entity of any nature whatsoever, specifically including an individual, a firm, a company, a corporation, a partnership, a limited liability company, a trust or other entity; a Person, together with that Persons Affiliates and Associates (as those terms are defined in Rule 12b-2 under the Exchange Act, provided that registrant as used in Rule 12b-2 shall mean the Company), and any Persons acting as a partnership, limited partnership, joint venture, association, syndicate or other group (whether or not formally organized), or otherwise acting jointly or in concert or in a coordinated or consciously parallel manner (whether or not pursuant to any express agreement), for the purpose of acquiring, holding, voting or disposing of securities of the Company with such Person, shall be deemed a single Person.
(w) Qualifying Public Offering means a firm commitment underwritten public offering of Stock for cash where the shares of Stock registered under the Securities Act are listed on a national securities exchange.
(x) Restricted Stock means Stock granted to an Eligible Person under Section 6(d) hereof, that is subject to certain restrictions and to a risk of forfeiture.
(y) Restricted Stock Unit means a right, granted to an Eligible Person under Section 6(e) hereof, to receive Stock, cash or a combination thereof at the end of a specified deferral period (which may or may not be coterminous with the vesting schedule of the Award).
(z) Securities Act means the Securities Act of 1933, as amended from time to time, including rules thereunder and successor provisions and rules thereto.
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(aa) Stock means the Companys common stock, par value $0.001 per share, and such other securities as may be substituted (or resubstituted) for Stock pursuant to Section 9.
(bb) Stock Appreciation Rights or SARs means a right to receive an amount equal to the excess of the Fair Market Value of one share of Stock on the date of exercise over the grant price of the SAR that is granted to an Eligible Person under Section 6(c) hereof.
(cc) Subsidiary means with respect to the Company, any corporation or other entity of which a majority of the voting power of the voting equity securities or equity interest is owned, directly or indirectly, by the Company.
3. Administration.
(a) Authority of the Committee. This Plan shall be administered by the Committee except to the extent the Board elects to administer this Plan, in which case references herein to the Committee shall be deemed to include references to the Board. Subject to the express provisions of the Plan, the Committee shall have the authority, in its sole and absolute discretion, to (i) adopt, amend, and rescind administrative and interpretive rules and regulations relating to the Plan; (ii) determine the Eligible Persons to whom, and the time or times at which, Awards shall be granted; (iii) determine the amount of cash and/or the number of shares of Stock, as applicable, that shall be the subject of each Award; (iv) determine the terms and provisions of each Award Agreement (which need not be identical); (v) accelerate the time of vesting or exercisability of any Award that has been granted; (vi) construe the respective Award Agreements and the Plan; (vii) make determinations of the Fair Market Value of the Stock pursuant to the Plan; (viii) delegate its duties under the Plan (including, but not limited to, the authority to grant Awards) to such agents as it may appoint from time to time, provided that the Committee may not delegate its duties where such delegation would violate any applicable law; (ix) subject to Section 10(f), terminate, modify or amend the Plan; and (x) make all other determinations, perform all other acts, and exercise all other powers and authority necessary or advisable for administering the Plan. The Committee may correct any defect, supply any omission, or reconcile any inconsistency in the Plan, in any Award, or in any Award Agreement in the manner and to the extent it deems necessary or desirable to carry the Plan into effect, and the Committee shall be the sole and final judge of that necessity or desirability.
(b) Manner of Exercise of Committee Authority. Any action of the Committee pursuant to the Plan shall be final, conclusive and binding on all Persons, including the Company, stockholders, Participants, beneficiaries, and transferees under Section 10(b) hereof or other Persons claiming rights from or through a Participant. The express grant of any specific power to the Committee, and the taking of any action by the Committee, shall not be construed as limiting any power or authority of the Committee. The Committee may delegate to officers or managers of the Company, or committees thereof, the authority, subject to such terms as the Committee shall determine, to perform such functions, including administrative functions, as the Committee may determine, to the extent that such delegation will not violate any applicable law. The Committee may appoint agents to assist it in administering the Plan.
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(c) Limitation of Liability. The Committee and each member thereof shall be entitled to, in good faith, rely or act upon any report or other information furnished to him or her by any officer or employee of the Company, the Companys legal counsel, independent auditors, consultants or any other agents assisting in the administration of this Plan. Members of the Committee and any officer or employee of the Company acting at the direction or on behalf of the Committee shall not be personally liable for any action or determination taken or made in good faith with respect to this Plan, and shall, to the fullest extent permitted by law, be indemnified and held harmless by the Company with respect to any such action or determination.
4. Stock Subject to Plan.
(a) Overall Number of Shares Available for Delivery. Subject to adjustment in a manner consistent with any adjustment made pursuant to Section 9, the total number of shares of Stock reserved and available for issuance in connection with Awards under this Plan shall not exceed 909,090 shares, and such total will be available for the issuance of Incentive Stock Options.
(b) Application of Limitation to Grants of Awards. No Award may be granted if the number of shares of Stock to be delivered in connection with such Award exceeds the number of shares of Stock remaining available under this Plan minus the number of shares of Stock issuable in settlement of or relating to then-outstanding Awards. The Committee may adopt reasonable counting procedures to ensure appropriate counting, avoid double counting (as, for example, in the case of tandem or substitute awards) and make adjustments if the number of shares of Stock actually delivered differs from the number of shares previously counted in connection with an Award.
(c) Availability of Shares Not Issued under Awards. Shares of Stock subject to an Award under this Plan that expire or are canceled, forfeited, exchanged, settled in cash or otherwise terminated, including (i) shares forfeited with respect to Restricted Stock, (ii) the number of shares withheld in payment of any exercise or purchase price of an Award or taxes relating to Awards, and (iii) the number of shares surrendered in payment of any exercise or purchase price of an Award or taxes relating to any Award, will again be available for Awards under this Plan.
(d) Stock Offered. The shares to be delivered under the Plan shall be made available from (i) authorized but unissued shares of Stock, (ii) Stock held in the treasury of the Company, or (iii) previously issued shares of Stock reacquired by the Company, including shares purchased on the open market.
5. Eligibility. Awards may be granted under this Plan only to Persons who are Eligible Persons at the time of grant thereof.
6. Specific Terms of Awards.
(a) General. Awards may be granted on the terms and conditions set forth in this Section 6. In addition, the Committee may impose on any Award or the exercise thereof, at the date of grant or thereafter (subject to Section 10(f)), such additional terms and conditions, not inconsistent with the provisions of this Plan, as the Committee shall determine, including treatment of the Award upon a termination of employment by the Participant, or termination of the Participants service relationship with the Company, and terms permitting a Participant to make elections relating to his or her Award.
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(b) Options. The Committee is authorized to grant Options to Eligible Persons on the following terms and conditions:
(i) Exercise Price. Each Option agreement shall state the exercise price per share of Stock (the Exercise Price); provided, however, that the Exercise Price per share of Stock subject to an Option shall not be less than the greater of (A) the par value per share of the Stock, or (B) 100% of the Fair Market Value per share of the Stock as of the date of grant of the Option (or in the case of an individual receiving an ISO who owns stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Company or its parent or any subsidiary, 110% of the Fair Market Value per share of the Stock on the date of grant).
(ii) Time and Method of Exercise. The Committee shall determine the time or times at which or the circumstances under which an Option may be exercised in whole or in part (including based on achievement of performance goals and/or future service requirements), the methods by which such Exercise Price may be paid or deemed to be paid, the form of such payment, including without limitation cash, Stock, other Awards or awards granted under other plans of the Company or any Subsidiary, or other property (including notes or other contractual obligations of Participants to make payment on a deferred basis), and the methods by or forms in which Stock will be delivered or deemed to be delivered to Participants, including, but not limited to, the delivery of Restricted Stock subject to Section 6(d). In the case of an exercise whereby the Exercise Price is paid with Stock, such Stock shall be valued as of the date of exercise.
(iii) ISOs. The terms of any ISO granted under this Plan shall comply in all respects with the provisions of section 422 of the Code. Except as otherwise provided in Section 9, no term of this Plan relating to ISOs (including any SAR in tandem therewith) shall be interpreted, amended or altered, nor shall any discretion or authority granted under this Plan be exercised, so as to disqualify either this Plan or any ISO under section 422 of the Code, unless the Participant has first requested the change that will result in such disqualification. ISOs shall not be granted more than ten years after the earlier of the adoption of this Plan or the approval of this Plan by the Companys stockholders. Notwithstanding the foregoing, the Fair Market Value (determined as of the date of grant of an ISO) of shares of Stock subject to an ISO and the aggregate Fair Market Value of shares of stock of any parent or subsidiary corporation (within the meaning of sections 424(e) and (f) of the Code) subject to any other ISO (within the meaning of section 422 of the Code)) of the Company or a parent or subsidiary corporation (within the meaning of sections 424(e) and (f) of the Code) that first becomes purchasable by a Participant in any calendar year may not (with respect to that Participant) exceed $100,000, or such other amount as may be prescribed under section 422 of the Code or applicable regulations or rulings from time to time. Failure to comply with this provision shall not impair the enforceability or exercisability of any Option, but shall cause the excess amount of shares to be reclassified in accordance with the Code.
(c) Stock Appreciation Rights. The Committee is authorized to grant SARs to Eligible Persons on the following terms and conditions:
(i) Right to Payment. An SAR shall confer on the Participant to whom it is granted a right to receive, upon exercise thereof, the excess of (A) the Fair Market Value of one share of Stock on the date of exercise over (B) the Exercise Price of the SAR as determined by the Committee.
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(ii) Terms. Each SAR agreement shall state the Exercise Price per share of Stock; provided, however, that the Exercise Price per share of Stock subject to an SAR shall not be less than the greater of (A) the par value per share of the Stock, or (B) 100% of the Fair Market Value per share of the Stock as of the date of grant of the SAR. Except as otherwise provided herein, the Committee shall determine, at the date of grant or thereafter, the number of shares of Stock to which the SAR relates, the time or times at which and the circumstances under which an SAR may be vested and exercised in whole or in part (including based on achievement of performance goals and/or future service requirements), the method of exercise, method of settlement, form of consideration payable in settlement, and any other terms and conditions of any SAR. SARs maybe either freestanding or in tandem with an Option.
(iii) Rights Related to Options. An SAR granted pursuant to an Option shall entitle a Participant, upon exercise, to surrender that Option or any portion thereof, to the extent unexercised, and to receive payment of an amount determined by multiplying (A) the difference obtained by subtracting the Exercise Price with respect to a share of Stock specified in the related Option from the Fair Market Value of a share of Stock on the date of exercise of the SAR, by (B) the number of shares as to which the SAR has been exercised. The Option shall then cease to be exercisable to the extent surrendered. SARs granted in connection with an Option shall be subject to the terms of the Award Agreement governing the Option, which shall provide that the SAR is exercisable only at such time or times and only to the extent that the related Option is exercisable and shall not be transferable except to the extent that the related Option is transferable.
(d) Restricted Stock. The Committee is authorized to grant Restricted Stock to Eligible Persons on the following terms and conditions:
(i) Grant and Restrictions. Restricted Stock shall be subject to such restrictions on transferability, risk of forfeiture and other restrictions, if any, as the Committee may impose, which restrictions may lapse separately or in combination at such times, under such circumstances (including based on achievement of performance goals and/or future service requirements), in such installments or otherwise, as the Committee may determine at the date of grant or thereafter. During the restricted period applicable to the Restricted Stock, the Restricted Stock may not be sold, transferred, pledged, hypothecated, margined or otherwise encumbered by the Participant.
(ii) Certificates for Stock. Restricted Stock granted under this Plan may be evidenced in such manner as the Committee shall determine. If certificates representing Restricted Stock are registered in the name of the Participant, the Committee may require that such certificates bear an appropriate legend referring to the terms, conditions and restrictions applicable to such Restricted Stock, that the Company retain physical possession of the certificates, and that the Participant deliver a stock power to the Company, endorsed in blank, relating to the Restricted Stock.
(iii) Dividends and Splits. As a condition to the grant of an Award of Restricted Stock, the Committee may require or permit a Participant to elect that any cash dividends paid on a share of Restricted Stock be automatically reinvested in additional shares of Restricted Stock, applied to the purchase of additional Awards under this Plan or deferred without interest to the date of vesting of the associated Award of Restricted Stock; provided, that, to the
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extent applicable, any such election shall comply with the Nonqualified Deferred Compensation Rules. Unless otherwise determined by the Committee, Stock distributed in connection with a Stock split or Stock dividend, and other property (other than cash) distributed as a dividend, shall be subject to restrictions and a risk of forfeiture to the same extent as the Restricted Stock with respect to which such Stock or other property has been distributed.
(e) Restricted Stock Units. The Committee is authorized to grant Restricted Stock Units to Eligible Persons, subject to the following terms and conditions:
(i) Award and Restrictions. Settlement of Restricted Stock Units shall occur upon expiration of the deferral period specified for such Restricted Stock Units by the Committee (or, if permitted by the Committee, as elected by the Participant). In addition, Restricted Stock Units shall be subject to such restrictions (which may include a risk of forfeiture) as the Committee may impose, if any, which restrictions may lapse at the expiration of the deferral period or at earlier specified times (including based on achievement of performance goals and/or future service requirements), separately or in combination, in installments or otherwise, as the Committee may determine. Restricted Stock Units shall be satisfied by the delivery of cash or Stock in the amount equal to the Fair Market Value of the specified number of shares of Stock covered by the Restricted Stock Units, or a combination thereof, as determined by the Committee at the date of grant or thereafter.
(ii) Dividend Equivalents. Unless otherwise determined by the Committee at date of grant and specified in the applicable Award Agreement, Dividend Equivalents on the specified number of shares of Stock covered by an Award of Restricted Stock Units shall be paid with respect to such Restricted Stock Units on the dividend payment date in cash or in shares of unrestricted Stock having a Fair Market Value equal to the amount of such dividends.
(f) Bonus Stock and Awards in Lieu of Obligations. The Committee is authorized to grant Stock as a bonus, or to grant Stock or other Awards in lieu of obligations to pay cash or deliver other property under this Plan or under other plans or compensatory arrangements. Stock or Awards granted hereunder shall be subject to such other terms as shall be determined by the Committee. In the case of any grant of Stock to an officer of the Company or any of its Subsidiaries in lieu of salary or other cash compensation, the number of shares granted in place of such compensation shall be reasonable, as determined by the Committee.
(g) Dividend Equivalents. The Committee is authorized to grant Dividend Equivalents to an Eligible Person, entitling the Person to receive cash, Stock, other Awards, or other property equal in value to dividends paid with respect to a specified number of shares of Stock, or other periodic payments. Dividend Equivalents may be awarded on a free-standing basis or in connection with another Award. The Committee may provide that Dividend Equivalents shall be paid or distributed when accrued or at a later specified date, or shall be deemed to have been reinvested in additional Stock, Awards, or other investment vehicles, and subject to such restrictions on transferability and risks of forfeiture, as the Committee may specify.
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(h) Other Stock-Based Awards. The Committee is authorized, subject to limitations under applicable law, to grant to Participants such other Awards that may be denominated or payable in, valued in whole or in part by reference to, or otherwise based on, or related to, Stock, as deemed by the Committee to be consistent with the purposes of this Plan, including without limitation convertible or exchangeable debt securities, other rights convertible or exchangeable into Stock, purchase rights for Stock, Awards with value and payment contingent upon performance of the Company or any other factors designated by the Committee, and Awards valued by reference to the book value of Stock or the value of securities of or the performance of specified Subsidiaries of the Company. The Committee shall determine the terms and conditions of such Other Stock-Based Awards. Stock delivered pursuant to an Award in the nature of a purchase right granted under this Section 6(h) shall be purchased for such consideration, paid for at such times, by such methods, and in such forms, including, without limitation, cash, Stock, other Awards, or other property, as the Committee shall determine. Cash awards, as an element of or supplement to any other Award under this Plan, may also be granted pursuant to this Section 6(h).
7. Certain Provisions Applicable to Awards.
(a) Stand-Alone, Additional, Tandem, and Substitute Awards. Awards granted under this Plan may, in the discretion of the Committee, be granted either alone or in addition to, in tandem with, or in substitution or exchange for, any other Award or any award granted under another plan of the Company, or of any business entity to be acquired by the Company, or any other right of an Eligible Person to receive payment from the Company. Such additional, tandem and substitute or exchange Awards may be granted at any time. If an Award is granted in substitution or exchange for another Award, the Committee shall require the surrender of such other Award in consideration for the grant of the new Award. Awards under this Plan may be granted in lieu of cash compensation, including in lieu of cash amounts payable under other plans of the Company, in which the value of Stock subject to the Award is equivalent in value to the cash compensation, or in which the Exercise Price, grant price or purchase price of the Award in the nature of a right that may be exercised is equal to the Fair Market Value of the underlying Stock minus the value of the cash compensation surrendered. Awards granted pursuant to the preceding sentence shall be designed, awarded and settled in a manner that does not result in additional taxes under the Nonqualified Deferred Compensation Rules.
(b) Term of Awards. Except as otherwise specified herein, the term of each Award shall be for such period as may be determined by the Committee; provided, that in no event shall the term of any Option or SAR exceed a period of ten years (or such shorter term as may be required in respect of an ISO under section 422 of the Code).
(c) Form and Timing of Payment under Awards; Deferrals. Subject to the terms of this Plan and any applicable Award Agreement, payments to be made by the Company upon the exercise of an Option or other Award or settlement of an Award may be made in such forms as the Committee shall determine, including without limitation cash, Stock, other Awards or other property, and may be made in a single payment or transfer, in installments, or on a deferred basis; provided, however, that any such deferred or installment payments will be set forth in the Award Agreement and/or otherwise made in a manner that will not result in additional taxes under the Nonqualified Deferred Compensation Rules. Except as otherwise provided herein, the settlement of any Award may be accelerated, and cash paid in lieu of Stock in connection with such settlement, in the discretion of the Committee or upon occurrence of one or more specified events (in addition to a Change in Control). Installment or deferred payments may be required by the
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Committee (subject to Section 10(f) of this Plan, including the consent provisions thereof in the case of any deferral of an outstanding Award not provided for in the original Award Agreement) or permitted at the election of the Participant on terms and conditions established by the Committee and in compliance with the Nonqualified Deferred Compensation Rules. Payments may include, without limitation, provisions for the payment or crediting of reasonable interest on installment or deferred payments or the grant or crediting of Dividend Equivalents or other amounts in respect of installment or deferred payments denominated in Stock. Any deferral shall only be allowed as is provided in a separate deferred compensation plan adopted by the Company and shall be made pursuant to the Nonqualified Deferred Compensation Rules. This Plan shall not constitute an employee benefit plan for purposes of section 3(3) of the Employee Retirement Income Security Act of 1974, as amended.
(d) Non-Competition Agreement. Each Participant to whom an Award is granted under this Plan may be required to agree in writing as a condition to the granting of such Award not to engage in conduct in competition with the Company for a period after the termination of such Participants employment with the Company and its Subsidiaries as determined by the Committee (a Non-Competition Agreement); provided, however, to the extent a legally binding right to an Award within the meaning of the Nonqualified Deferred Compensation Rules is created with respect to a Participant, the Non-Competition Agreement must be entered into by such Participant within 30 days following the creation of such legally binding right.
8. Performance Awards and Annual Incentive Awards.
(a) Awards Subject to Performance Conditions. The Committee is authorized to grant Performance Awards and Annual Incentive Awards to Eligible Persons. The right of an Eligible Person to exercise or to receive a grant or settlement of any Award, and the timing or amount thereof, may be subject to such performance conditions as may be specified by the Committee. The Committee may use such business criteria and other measures of performance as it may deem appropriate in establishing any performance conditions, and may exercise its discretion to reduce or increase the amounts payable under any Performance Award or Annual Incentive Award.
(b) Performance Goals. The performance goals for such Performance Awards and Annual Incentive Awards shall consist of one or more business criteria or individual performance criteria and a targeted level or levels of performance with respect to each of such criteria, as specified by the Committee consistent with this Section 8(b). The Committee may determine that such Performance Awards or Annual Incentive Awards shall be granted, exercised, and/or settled upon achievement of any one performance goal or that two or more of the performance goals must be achieved as a condition to grant, exercise and/or settlement of such Performance Awards or Annual Incentive Awards. Performance goals may differ for Performance Awards or Annual Incentive Awards granted to any one Participant or to different Participants. Achievement of performance goals in respect of Performance Awards or Annual Incentive Awards shall be measured over a performance period of up to ten years, as specified by the Committee.
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(c) Award Pool. The Committee may establish an Award pool, which shall be an unfunded pool, for purposes of measuring performance of the Company in connection with Performance Awards or Annual Incentive Awards. The amount of such Award pool shall be based upon the achievement of a performance goal or goals based on one or more of the business criteria during the given performance period, as specified by the Committee. The Committee may specify the amount of the Award pool as a percentage of any of such criteria, a percentage thereof in excess of a threshold amount, or as another amount which need not bear a strictly mathematical relationship to such criteria.
(d) Settlement of Awards; Other Terms. After the end of each performance period, the Committee shall determine the amount, if any, of (A) the Award pool, and the maximum amount of the potential Performance Award or Annual Incentive Award payable to each Participant in the Award pool, or (B) the amount of the potential Performance Award or Annual Incentive Award otherwise payable to each Participant. Settlement of Performance Awards or Annual Incentive Awards shall be in cash, Stock, other Awards or other property, in the discretion of the Committee. The Committee shall specify the circumstances in which such Performance Awards or Annual Incentive Awards shall be paid or forfeited in the event of termination of employment by the Participant prior to the end of a performance period or settlement of Performance Awards or Annual Incentive Awards, as applicable.
9. Subdivision or Consolidation; Recapitalization; Change in Control; Reorganization.
(a) Existence of Plans and Awards. The existence of this Plan and the Awards granted hereunder shall not affect in any way the right or power of the Company, the Board or the stockholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Companys capital structure or its business, any merger or consolidation of the Company, any issue of debt or equity securities ahead of or affecting Stock or the rights thereof, the dissolution or liquidation of the Company or any sale, lease, exchange or other disposition of all or any part of its assets or business or any other corporate act or proceeding. In no event will any action taken by the Committee pursuant to this Section 9 result in the creation of deferred compensation within the meaning of the Nonqualified Deferred Compensation Rules. No employee, beneficiary or other Person shall have any claim against the Company as a result of any such action.
(b) Subdivision or Consolidation of Shares. The terms of an Award and the number of shares of Stock authorized pursuant to Section 4 for issuance under the Plan shall be subject to adjustment from time to time, in accordance with the following provisions:
(i) If at any time, or from time to time, the Company shall subdivide as a whole (by reclassification, by a Stock split, by the issuance of a distribution on Stock payable in Stock, or otherwise) the number of shares of Stock then outstanding into a greater number of shares of Stock, or in the event the Company distributes an extraordinary cash dividend, then, as appropriate for the situation, (A) the maximum number of shares of Stock available for the Plan as provided in Section 4 shall be increased proportionately, and the kind of shares or other securities available for the Plan shall be appropriately adjusted, (B) the number of shares of Stock (or other kind of shares or securities) that may be acquired under any then outstanding Award shall be increased proportionately, and (C) the price (including the Exercise Price) for each share of Stock (or other kind of shares or securities) subject to then outstanding Awards shall be reduced proportionately, without changing the aggregate purchase price or value as to which outstanding Awards remain exercisable or subject to restrictions.
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(ii) If at any time, or from time to time, the Company shall consolidate as a whole (by reclassification, by reverse Stock split, or otherwise) the number of shares of Stock then outstanding into a lesser number of shares of Stock, then (A) the maximum number of shares of Stock for the Plan as provided in Section 4 shall be decreased proportionately, and the kind of shares or other securities available for the Plan shall be appropriately adjusted, (B) the number of shares of Stock (or other kind of shares or securities) that may be acquired under any then outstanding Award shall be decreased proportionately, and (C) the price (including the Exercise Price) for each share of Stock (or other kind of shares or securities) subject to then outstanding Awards shall be increased proportionately, without changing the aggregate purchase price or value as to which outstanding Awards remain exercisable or subject to restrictions.
(iii) Whenever the number of shares of Stock subject to outstanding Awards and the price for each share of Stock subject to outstanding Awards are required to be adjusted as provided in this Section 9(b), the Committee shall promptly prepare a notice setting forth, in reasonable detail, the event requiring adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the change in price and the number of shares of Stock, other securities, cash, or property purchasable subject to each Award after giving effect to the adjustments. The Committee shall promptly provide each affected Participant with such notice.
(iv) Adjustments under Sections 9(b)(i) and (ii) shall be made by the Committee, and its determination as to what adjustments shall be made and the extent thereof shall be final, binding, and conclusive. No fractional interest shall be issued under the Plan on account of any such adjustments.
(c) Corporate Recapitalization. If the Company recapitalizes, reclassifies its capital stock, or otherwise changes its capital structure (a recapitalization) without the occurrence of a Change in Control, the number and class of shares of Stock covered by an Option or an SAR theretofore granted shall be adjusted so that such Option or SAR shall thereafter cover the number and class of shares of stock and securities to which the holder would have been entitled pursuant to the terms of the recapitalization if, immediately prior to the recapitalization, the holder had been the holder of record of the number of shares of Stock then covered by such Option or SAR and the share limitation provided in Section 4 shall be adjusted in a manner consistent with the recapitalization.
(d) Additional Issuances. Except as hereinbefore expressly provided, the issuance by the Company of shares of stock of any class or securities convertible into shares of stock of any class, for cash, property, labor or services, upon direct sale, upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, and in any case whether or not for fair value, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of shares of Stock subject to Awards theretofore granted or the purchase price per share, if applicable.
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(e) Change in Control. Upon a Change in Control, the Committee, acting in its sole discretion without the consent or approval of any holder, shall affect one or more of the following alternatives, which may vary among individual holders and which may vary among Options or SARs (collectively, Grants) held by any individual holder: (i) accelerate the time at which Grants then outstanding may be exercised so that such Grants may be exercised in full for a limited period of time on or before a specified date (before or after such Change in Control) fixed by the Committee, after which specified date all unexercised Grants and all rights of holders thereunder shall terminate, (ii) provide for a cash payment with respect to outstanding Grants by requiring the mandatory surrender to the Company by selected holders of some or all of the outstanding Grants held by such holders (irrespective of whether such Grants are then exercisable under the provisions of this Plan) as of a date, before or after such Change in Control, specified by the Committee, in which event the Committee shall thereupon cancel such Grants (with respect to all shares subject to such Grants) and pay to each holder an amount of cash (or other consideration including securities or other property) per share equal to the excess, if any, of the amount calculated in Section 9(f) (the Change in Control Price) of the shares subject to such Grants over the Exercise Price(s) under such Grants for such shares (except that to the extent the Exercise Price under any such Grant is equal to or exceeds the Change in Control Price, in which case no amount shall be payable with respect to such Grant, and provided, that the Committee may determine that, notwithstanding the cancellation of all shares subject to a Grant, any such cash payment shall only be made for shares for which a Grant is vested and exercisable), or (iii) make such adjustments to Grants then outstanding as the Committee deems appropriate to reflect such Change in Control; provided, however, that the Committee may determine in its sole discretion that no adjustment is necessary to Grants then outstanding; provided, further, however, that the right to make such adjustments shall include, but not require or be limited to, the modification of Grants such that the holder of the Grant shall be entitled to purchase or receive (in lieu of the total number of shares of Stock as to which an Option or SAR is exercisable (the Total Shares) or other consideration that the holder would otherwise be entitled to purchase or receive under the Grant (the Total Consideration)), the number of shares of stock, other securities, cash or property to which the Total Consideration would have been entitled to in connection with the Change in Control (A) (in the case of Options), at an aggregate exercise price equal to the exercise price that would have been payable if the Total Shares had been purchased upon the exercise of the Grant immediately before the consummation of the Change in Control and (B) in the case of SARs, if the SARs had been exercised immediately before the occurrence of the Change in Control.
(f) Change in Control Price. The Change in Control Price shall equal the amount determined in the following clause (i), (ii), (iii), (iv) or (v), whichever is applicable, as follows: (i) the price per share offered to holders of Stock in any merger or consolidation, (ii) the per share Fair Market Value of the Stock immediately before the Change in Control without regard to assets sold in the Change in Control and assuming the Company has received the consideration paid for the assets in the case of a sale of the assets, (iii) the amount distributed per share of Stock in a dissolution transaction, (iv) the price per share offered to holders of Stock in any tender offer or exchange offer whereby a Change in Control takes place, or (v) if such Change in Control occurs other than pursuant to a transaction described in clauses (i), (ii), (iii), or (iv) of this Section 9(f), the Fair Market Value per share of the Stock that may otherwise be obtained with respect to such Grants or to which such Grants track, as determined by the Committee as of the date determined by the Committee to be the date of cancellation and surrender of such Grants. In the event that the consideration offered to stockholders of the Company in any transaction described in this Section 9(f) or in Section 9(e) consists of anything other than cash, the Committee shall determine the fair cash equivalent of the portion of the consideration offered which is other than cash and such determination shall be binding on all affected Participants to the extent applicable to Awards held by such Participants.
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(g) Impact of Corporate Events on Awards Generally. In the event of a Change in Control or changes in the outstanding Stock by reason of a recapitalization, reorganization, merger, consolidation, combination, exchange or other relevant change in capitalization occurring after the date of the grant of any Award and not otherwise provided for by this Section 9, any outstanding Awards and any Award Agreements evidencing such Awards shall be subject to adjustment by the Committee at its discretion, which adjustment may, in the Committees discretion, be described in the Award Agreement and may include, but not be limited to, adjustments as to the number and price of shares of Stock or other consideration subject to such Awards, accelerated vesting (in full or in part) of such Awards, conversion of such Awards into awards denominated in the securities or other interests of any successor Person, the cash settlement of such Awards in exchange for the cancellation thereof, or the cancellation of unvested Awards with or without consideration. In the event of any such change in the outstanding Stock, the aggregate number of shares of Stock available under this Plan may be appropriately adjusted by the Committee, whose determination shall be conclusive.
10. General Provisions.
(a) Restricted Securities. Prior to a Qualifying Public Offering, the Stock to be issued under this Plan, which may be issued in reliance on the exemption from registration set forth in Rule 701, shall be deemed to be restricted securities as defined in Rule 144, promulgated by the Securities and Exchange Commission under the Securities Act as from time to time in effect and applicable to the Plan and Participants. Resales of such Stock by the holder thereof shall be in compliance with the Securities Act or an exemption therefrom. Such Stock may bear a legend if determined necessary by the Committee in substantially the following form:
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THE SHARES MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED, TRANSFERRED, OR OTHERWISE DISPOSED OF UNTIL THE HOLDER HEREOF PROVIDES EVIDENCE SATISFACTORY TO CS DISCO, INC. (WHICH, IN THE DISCRETION OF CS DISCO, INC., MAY INCLUDE AN OPINION OF COUNSEL SATISFACTORY TO CS DISCO, INC.) THAT SUCH OFFER, SALE, PLEDGE, TRANSFER, OR OTHER DISPOSITION WILL NOT VIOLATE APPLICABLE FEDERAL OR STATE LAWS.
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(b) Transferability.
(i) Permitted Transferees. The Committee may, in its discretion, permit a Participant to transfer all or any portion of an Option or SAR, or authorize all or a portion of an Option or SAR to be granted to an Eligible Person to be on terms which permit transfer by such Participant; provided that, in either case the transferee or transferees must be any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships, in each case with respect to the Participant, an individual sharing the Participants household (other than a tenant or employee of the Company), a trust in which any of the foregoing individuals have more than fifty percent of the beneficial interest, a foundation in which any of the foregoing individuals (or the Participant) control the management of assets, and any other entity in which any of the foregoing individuals (or the Participant) own more than fifty percent of the voting interests (collectively, Permitted Transferees); provided further that, (X) there may be no consideration for any such transfer and (Y) subsequent transfers of Options or SARs transferred as provided above shall be prohibited except subsequent transfers back to the original holder of the Option or SAR and transfers to other Permitted Transferees of the original holder. Award Agreements evidencing Options or SARs with respect to which such transferability is authorized at the time of grant must be approved by the Committee, and must expressly provide for transferability in a manner consistent with this Section 10(b)(i).
(ii) Qualified Domestic Relations Orders. An Award may be transferred, to a Permitted Transferee, pursuant to a domestic relations order entered or approved by a court of competent jurisdiction upon delivery to the Company of written notice of such transfer and a certified copy of such order.
(iii) Other Transfers. Except as expressly permitted by Sections 10(b)(i) and 10(b)(ii), Awards shall not be transferable other than by will or the laws of descent and distribution. Notwithstanding anything to the contrary in this Section 10(b), an Incentive Stock Option shall not be transferable other than by will or the laws of descent and distribution.
(iv) Effect of Transfer. Following the transfer of any Award as contemplated by this Section 10(b), (A) such Award shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer, provided that the term Participant shall be deemed to refer to the Permitted Transferee, the recipient under a qualified domestic relations order, or the estate or heirs of a deceased Participant or other transferee, as applicable, to the extent appropriate to enable the Participant to exercise the transferred Award in accordance with the terms of this Plan and applicable law and (B) the provisions of the Award relating to exercisability shall continue to be applied with respect to the original Participant and, following the occurrence of any applicable events described therein the Awards shall be exercisable by the Permitted Transferee, the recipient under a qualified domestic relations order, or the estate or heirs of a deceased Participant, as applicable, only to the extent and for the periods that would have been applicable in the absence of the transfer.
(v) Procedures and Restrictions. Any Participant desiring to transfer an Award as permitted under this Section 10(b) shall make application therefor in the manner and time specified by the Committee and shall comply with such other requirements as the Committee may require to assure compliance with all applicable securities laws.
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(vi) Registration. To the extent the issuance to any Permitted Transferee of any shares of Stock issuable pursuant to Awards transferred as permitted in this Section 10(b) is not registered pursuant to the effective registration statement of the Company generally covering the shares to be issued pursuant to this Plan to initial holders of Awards, the Company shall not have any obligation to register the issuance of any such shares of Stock to any such transferee.
(c) Right of First Refusal. If any Participant (Transferor), regardless of whether such Participant is the original holder of the Award contemplated in this Section 10(c), proposes to sell, transfer, assign, hypothecate, make gifts of or in any manner dispose of, encumber, or alienate (each individually constituting a Transfer) to a transferee, any Stock, obtained in connection with any Award held by such Transferor, either pursuant to a bona fide offer (Offer) from a potential transferee (Offeror) or by effecting a gift of the Stock (Gift) to a donee (Donee) without consideration, then the Transferor must comply with the provisions of this Section 10(c), including, without limitation, acknowledging and allowing the applicable time periods to lapse with respect to the rights of the Company as provided herein, before accepting any such Offer or otherwise affecting the Transfer of any Stock pursuant to such Offer, or affecting any such Gift.
(i) Statement of Offer. Before accepting any Offer or affecting any Gift, the Transferor shall obtain from the Offeror or Donee, as the case may be, a statement (Statement) in writing addressed to the Transferor and signed by the Offeror or Donee, setting forth: (A) the date of the Statement (the Statement Date); (B) the number of shares of Stock covered by the Offer or Gift and, in the case of an Offer, the price per share to be paid by the Offeror and the terms of payment of such price; (C) the Offerors or Donees willingness to be bound by the terms of this Section 10(c) and execute and deliver to the Company such documentation as required under this Section 10(c); (D) the Offerors or Donees name, address and telephone number; and (E) the Offerors or Donees willingness to supply any additional information about himself or herself as may be reasonably requested by the Company. Promptly upon receipt of a Statement, and before accepting the Offer or affecting the Gift to which the Statement relates, the Transferor shall deliver to the Company (1) a copy of the Statement, and (2) in the case of an Offer, evidence reasonably satisfactory to the Company as to the Offerors financial ability to consummate the proposed purchase.
(ii) Company Rights. Subject to the provisions of Section 10(c)(i), upon receipt of a copy of the Statement, the Company shall have the exclusive right and option (the Right), but not the obligation, to purchase all of the shares of Stock that the Offeror proposes to purchase from the Transferor or, in the case of a Gift, that the Transferor proposes to give to the Donee (collectively, Subject Securities) (A) in the case of an Offer, for the per share price and on the terms as set forth in the Statement; provided, however, that if the purchase price is payable in whole or in part in property (which term shall include the securities of any issuer other than the Company) other than cash, the Company may pay, in lieu of such property, a sum of cash equal to the fair market value of such property as determined by the Transferor and the Company in good faith or, if the Transferor and the Company do not agree on the fair market value of such property within five days after the Company delivers written notice (as described below) of its intention to exercise the Right, then the Transferor and the Company shall select one independent appraiser (with each of the Transferor and the Company jointly bearing one-half of the expense of the appraiser) to determine the fair market value of that property and the appraised fair market value of that property as determined by such appraiser shall be deemed the fair market value of that property for purposes of this Section 10(c)(ii), or (B) in the case of a Gift, the Fair Market Value
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of the Subject Securities, as determined in good faith by the Company; provided that the Transferor may elect to retain the Subject Securities rather than sell the Subject Securities at the Fair Market Value as determined by the Company by giving written notice thereof to the Company within five days after such determination by the Company is received in writing by the Transferor. The Company shall exercise the Right by giving written notice thereof to the Transferor. Upon exercising the Right, the Company shall have the obligation, to the extent it lawfully may do so, to purchase the Subject Securities within 30 days after the date of the Companys receipt of its copy of the Statement on and subject to the terms and conditions hereof. If the terms of the purchase include the Transferors release of any pledge or encumbrance on the Subject Securities and the Transferor shall have failed to obtain the release of the pledge or encumbrance by the purchase date, at the Companys option the purchase shall occur on the scheduled date with the purchase price reduced to the extent of all unpaid indebtedness for which the Subject Securities are then pledged or encumbered. Failure by the Company to exercise the Right, or failure by the Company to otherwise perform its obligations under this Section 10(c)(ii), within the 30 day period herein prescribed shall be deemed an election by the Company not to exercise the Right. If the Company exercises the Right and is unable for any reason to perform its obligations thereunder in accordance with this Section 10(c), the Company may assign all or a portion of its rights under the Right to any one or more of the Companys stockholders (other than the Transferor) (Assignee Stockholder), as the Board shall determine, in its sole and absolute discretion.
(iii) Purchase of Less Than All Shares. Anything in Section 10(c) to the contrary notwithstanding, the Company and any Assignee Stockholder individually may, pursuant to the exercise of the Right, purchase fewer than all of the Subject Securities provided that such Persons in the aggregate purchase all, and not less than all, of the Subject Securities, and it shall be a condition precedent to the obligation of any of such Persons to purchase any Subject Securities, that all, and not less than all, of the Subject Securities have been elected to be purchased pursuant to the exercise of the Right.
(iv) Failure to Exercise Right or Consummate Transaction. If the Company elects not to exercise the Right, or if the Right is exercised and the obligations to be performed thereunder by the Company are not performed in accordance with this Section 10(c), or if the Companys rights are assigned to an Assignee Stockholder and such Assignee Stockholder fails to perform his or her obligations under the assigned Right in accordance with this Section 10(c), then, subject to the application of any applicable state or federal securities laws, the Transferor may dispose of all of the Subject Securities within 90 days after the date of the Statement at the per share price and on the terms, if any, as set forth in the Statement free and clear of the terms of this Section 10(c); provided, however, that (A) any subsequent transfer by the Offeror or Donee, as applicable, shall once again be subject to this Section 10(c) and (B) if the sale or gift of the Subject Securities is not consummated within such 90-day period, then the Transfer of any such Stock shall once again be subject to the terms of this Section 10(c).
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(v) Legend. To assure the enforceability of the Companys rights under this Section 10(c), until the date of a Qualifying Public Offering, each certificate or instrument representing Stock or an Award held by him, her, or it may, in the Committees discretion, bear a conspicuous legend in substantially the following form:
THE SHARES [REPRESENTED BY THIS CERTIFICATE] [ISSUABLE PURSUANT TO THIS AGREEMENT] ARE SUBJECT TO THE COMPANYS RIGHT OF FIRST REFUSAL IN THE CASE OF A TRANSFER AS PROVIDED UNDER THE COMPANYS LONG TERM INCENTIVE PLAN AND/OR AN AWARD AGREEMENT ENTERED INTO PURSUANT THERETO. COPIES OF SUCH PLAN AND AWARD AGREEMENT ARE AVAILABLE UPON WRITTEN REQUEST TO THE COMPANY AT ITS PRINCIPAL EXECUTIVE OFFICES.
(vi) Expiration. The rights and obligations pursuant to this Section 10(c) hereof will terminate upon the date of a Qualifying Public Offering.
(d) Purchase Option. Except as otherwise expressly provided in any particular Award, (A) if a Participant ceases to be employed by or perform services for the Company or its Subsidiaries for any reason at any time or (B) upon the occurrence of a Change in Control, the Company (and/or its designee(s)) shall have the option (the Purchase Option) to purchase, and the Participant (or the Participants executor or the administrator of the Participants estate in the event of the Participants death, or the transferee of the Stock or Award in the case of any disposition, or the Participants legal representative in the event of the Participants incapacity) (hereinafter, collectively with such Participant, the Grantor) shall sell to the Company and/or its designee(s), all or any portion (at the Companys option) of the shares of Stock issued pursuant to this Plan and held by the Grantor (such shares of Stock herein referred to as the Purchasable Shares).
(i) Notice. The Company shall give notice in writing to the Grantor of the exercise of the Purchase Option within one year of the date of the termination of the Participants employment or service relationship or the date of the Change in Control. Such notice shall state the number of Purchasable Shares to be purchased and the determination of the Board of the Fair Market Value per share of such Purchasable Shares, or the Change in Control Price as defined in Section 9(f), if applicable. If no notice is given within the time limit specified above, the Purchase Option shall terminate.
(ii) Payment of Purchase Price. The purchase price to be paid for the Purchasable Shares purchased pursuant to the Purchase Option shall be the Fair Market Value per share or the Change in Control Price, if applicable, as of the date of the notice of exercise of the Purchase Option times the number of shares being purchased. The purchase price shall be paid in cash. The closing of such purchase shall take place at the Companys principal executive offices within ten (10) days after the purchase price has been determined. At such closing, the Grantor shall deliver to the purchasers the certificates or instruments evidencing the Purchasable Shares being purchased free and clear of all liens and encumbrances (if any), duly endorsed (or accompanied by duly executed stock powers) and otherwise in good form for delivery, against payment of the purchase price by check of the purchasers. In the event that, notwithstanding the
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foregoing, the Grantor shall have failed to obtain the release of any pledge or other encumbrance on any Purchasable Shares by the scheduled closing date, at the option of the purchasers, the closing shall nevertheless occur on such scheduled closing date, with the cash purchase price being reduced to the extent of all unpaid indebtedness for which such Purchasable Shares are then pledged or encumbered.
(iii) Legend. To assure the enforceability of the Companys rights under this Section 10(d), until the date of a Qualifying Public Offering, each certificate or instrument representing Stock or an Award held by him, her, or it may, in the Committees discretion, bear a conspicuous legend in substantially the following form:
THE SHARES [REPRESENTED BY THIS CERTIFICATE] [ISSUABLE PURSUANT TO THIS AGREEMENT] ARE SUBJECT TO AN OPTION TO REPURCHASE PROVIDED UNDER THE PROVISIONS OF THE COMPANYS LONG TERM INCENTIVE PLAN AND/OR AN AWARD AGREEMENT ENTERED INTO PURSUANT THERETO. COPIES OF SUCH PLAN AND AWARD AGREEMENT ARE AVAILABLE UPON WRITTEN REQUEST TO THE COMPANY AT ITS PRINCIPAL EXECUTIVE OFFICES.
(iv) Expiration. The Companys rights under this Section 10(d) shall terminate upon the date of a Qualifying Public Offering.
(e) Taxes. The Company is authorized to withhold from any Award granted, or any payment relating to an Award under this Plan, including from a distribution of Stock, amounts of withholding and other taxes due or potentially payable in connection with any transaction involving an Award, and to take such other action as the Committee may deem advisable to enable the Company and Participants to satisfy obligations for the payment of withholding taxes and other tax obligations relating to any Award. This authority shall include authority to withhold or receive Stock or other property and to make cash payments in respect thereof in satisfaction of a Participants tax obligations, either on a mandatory or elective basis in the discretion of the Committee.
(f) Changes to this Plan and Awards.
(i) The Board may amend, alter, suspend, discontinue or terminate this Plan or the Committees authority to grant Awards under this Plan without the consent of stockholders or Participants, except that any amendment or alteration to this Plan, including any increase in any share limitation, shall be subject to the approval of the Companys stockholders not later than the annual meeting next following such Board action if such stockholder approval is required by any federal or state law or regulation or the rules of any securities exchange or automated quotation system on which the Stock may then be listed or quoted, and the Board may otherwise, in its discretion, determine to submit other such changes to this Plan to stockholders for approval; provided, that, without the consent of an affected Participant, no such Board action may materially and adversely affect the rights of such Participant under any previously granted and outstanding Award.
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(ii) The Committee may accelerate or waive any conditions or rights under, or amend, alter, suspend, discontinue or terminate any Award theretofore granted and any Award Agreement relating thereto, except as otherwise provided in this Plan; provided, however, that, (A) without the consent of an affected Participant, no such Committee action may materially and adversely affect the rights of such Participant under such Award, and (B) the Committee shall not have any discretion to accelerate, waive or modify any term or condition of any Award that provides for a deferral of compensation under the Nonqualified Deferred Compensation Rules if such acceleration, waiver or modification would subject a Participant to additional taxes under the Nonqualified Deferred Compensation Rules.
(iii) For purposes of clarity, any adjustments made to Awards pursuant to Section 9 will be deemed not to materially and adversely affect the rights of any Participant under any previously granted and outstanding Award and therefore may be made without the consent of affected Participants.
(g) Limitation on Rights Conferred under Plan. Neither this Plan nor any action taken hereunder shall be construed as (i) giving any Eligible Person or Participant the right to continue as an Eligible Person or Participant or in the employ or service of the Company, (ii) interfering in any way with the right of the Company to terminate any Eligible Persons or Participants employment or service relationship at any time, (iii) giving an Eligible Person or Participant any claim to be granted any Award under this Plan or to be treated uniformly with other Participants and/or employees and/or other service providers, or (iv) conferring on a Participant any of the rights of a stockholder of the Company unless and until the Participant is duly issued or transferred shares of Stock in accordance with the terms of an Award.
(h) Unfunded Status of Awards. This Plan is intended to constitute an unfunded plan for certain incentive awards.
(i) Nonexclusivity of this Plan. Neither the adoption of this Plan by the Board nor its submission to the stockholders of the Company for approval shall be construed as creating any limitations on the power of the Board or a committee thereof to adopt such other incentive arrangements as it may deem desirable. Nothing contained in this Plan shall be construed to prevent the Company or any of its Subsidiaries from taking any corporate action which is deemed by the Company or such Subsidiary to be appropriate or in its best interest, whether or not such action would have an adverse effect on this Plan or any Award made under this Plan. No employee, beneficiary or other person shall have any claim against the Company or any of its Subsidiaries as a result of any such action.
(j) Fractional Shares. No fractional shares of Stock shall be issued or delivered pursuant to this Plan or any Award. The Committee shall determine whether cash, other Awards or other property shall be issued or paid in lieu of such fractional shares or whether such fractional shares or any rights thereto shall be forfeited or otherwise eliminated.
(k) Severability. If any provision of this Plan is held to be illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining provisions hereof, but such provision shall be fully severable and the Plan shall be construed and enforced as if the illegal or invalid provision had never been included herein. If any of the terms or provisions of this Plan or
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any Award agreement conflict with the requirements of section 422 of the Code (with respect to Incentive Stock Options), then those conflicting terms or provisions shall be deemed inoperative to the extent they so conflict with the requirements of section 422 of the Code. With respect to Incentive Stock Options, if this Plan does not contain any provision required to be included herein under section 422 of the Code, that provision shall be deemed to be incorporated herein with the same force and effect as if that provision had been set out at length herein; provided, further, that, to the extent any Option that is intended to qualify as an Incentive Stock Option cannot so qualify, that Option (to that extent) shall be deemed a Nonstatutory Stock Option for all purposes of the Plan.
(l) Governing Law. All questions arising with respect to the provisions of the Plan and Awards shall be determined by application of the laws of the State of Delaware, without giving effect to any conflict of law provisions thereof, except to the extent Delaware law is preempted by federal law. The obligation of the Company to sell and deliver Stock hereunder is subject to applicable federal and state laws and to the approval of any governmental authority required in connection with the authorization, issuance, sale, or delivery of such Stock.
(m) Conditions to Delivery of Stock. Nothing herein or in any Award granted hereunder or any Award Agreement shall require the Company to issue, sell or deliver any shares with respect to any Award if that issuance, sale or delivery would, in the opinion of counsel for the Company, constitute a violation of the Securities Act or any similar or superseding statute or statutes, any other applicable statute or regulation, or the rules of any applicable securities exchange or securities association, as then in effect. At the time of any exercise of an Option or Stock Appreciation Right, or at the time of any grant of any other Award the Company may, as a condition precedent to the exercise of such Option or Stock Appreciation Right or settlement of any other Award, require from the Participant (or in the event of his or her death, his or her legal representatives, heirs, legatees, or distributees) such written representations, if any, concerning the holders intentions with regard to the retention or disposition of the shares of Stock being acquired pursuant to the Award and such written covenants and agreements, if any, as to the manner of disposal of such shares as, in the opinion of counsel to the Company, may be necessary to ensure that any disposition by that holder (or in the event of the holders death, his or her legal representatives, heirs, legatees, or distributees) will not involve a violation of the Securities Act or any similar or superseding statute or statutes, any other applicable state or federal statute or regulation, or any rule of any applicable securities exchange or securities association, as then in effect. No Option or Stock Appreciation Right shall be exercisable and no settlement of any Restricted Stock Award or Restricted Stock Unit shall occur with respect to a Participant unless and until the holder thereof shall have paid cash or property to, or performed services for, the Company that the Committee believes is equal to or greater in value than the par value of the Stock subject to such Award.
(n) Section 409A of the Code. In the event that any Award granted pursuant to this Plan provides for a deferral of compensation within the meaning of the Nonqualified Deferred Compensation Rules, it is the general intention, but not the obligation, of the Company to design such Award to comply with the Nonqualified Deferred Compensation Rules and such Award should be interpreted accordingly.
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(o) Plan Effective Date and Term. This Plan was adopted by the Board and the stockholders of the Company on the Effective Date. No Awards may be granted under this Plan on and after ______________________, ____.
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EXHIBIT A
FORM OF OPTION AGREEMENT
EXHIBIT A
CS DISCO, INC.
LONG TERM INCENTIVE
Nonstatutory Stock Option Agreement (This Agreement)
__________________ __, 20___ (the Date of Grant)
[Participant]
Re: | Grant of Nonstatutory Stock Option to Purchase Common Shares |
Dear _____________:
CS Disco, Inc., a Delaware corporation (the Company), is pleased to advise you that you have been granted a Nonstatutory Stock Option (the Option), as provided below, under the CS Disco, Inc. Long Term Incentive Plan, as amended from time to time (the Plan), a copy of which is attached hereto and incorporated herein by reference. Except to the extent the context requires otherwise, the term Company as used herein shall include Subsidiaries.
1. Definitions.
Capitalized terms used but not otherwise defined herein shall have the meanings given such terms in the Plan. For the purposes of this Agreement, the following terms shall have the meanings set forth below:
Cause shall have the meaning set forth in any employment agreement between the Company and you, or if no such employment agreement definition exists, shall mean (i) your embezzlement or wrongful diversion of funds of Company or any affiliate or client of Company confirmed by an outside auditor, or proven commission of any other fraud against the Company or any affiliate or client of the Company which materially adversely affects the Company; (ii) your being convicted of (or pleading guilty or no contest to) a felony or any crime of moral turpitude; (iii) your commission of gross negligence or an act of willful malfeasance, or gross and deliberate disregard of your duties and responsibilities including those set forth in your employment agreement (if any); provided that in any case, the Company has delivered to you written notice describing the occurrence of any such event, and you have not cured the same within 30 days following receipt of such notice.
A-1
Disability means that you are (i) unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 6 months; or (ii) by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 6 months, receiving income replacement benefits for a period of not less than 3 months under an accident and health plan covering employees of the Company. The Committee will determine whether you have incurred a Disability based on its own good faith determination and may require you to submit to reasonable physical and mental examinations for this purpose. You will also be deemed to have incurred a Disability if determined to be totally disabled by the Social Security Administration or in accordance with a disability insurance program, provided that the definition of disability applied under such disability insurance program complies with the requirements of Treasury Regulation Section 1.409A-3(i)(4) and authoritative guidance thereunder.
Option Shares shall mean the Common Shares issuable upon the exercise of your Option. Common Shares are subject to the transfer restrictions and other provisions contained in the Stockholders Agreement and will continue to be subject to such restrictions in the hands of any holder other than you.
Stockholders Agreement means that certain Amended and Restated Stockholders Agreement dated as of November 12, 2014 (as the same may be amended from time to time), by and among the Company and its stockholders.
Vesting Commencement Date means [___________], 20__.
2. Option.
(a) Terms. Subject to the terms set forth in this Agreement and in the Plan, you may purchase up to [____] Common Shares at a price per share of $[_____] (the Exercise Price), payable upon exercise as set forth in paragraph 2(b) below. Your Option shall expire at the close of business on the ten (10) year anniversary of the Date of Grant (the Expiration Date), subject to earlier expiration upon termination of your employment as provided in paragraph 4(b) below.
(b) Payment of Option Price. Subject to paragraph 3 below, your Option may be exercised in whole or in part upon payment of an amount equal to the Exercise Price of the number of Common Shares to be acquired, and compliance with the exercise procedures prescribed in paragraph 5 below. Payment shall be made in cash (including check, bank draft or money order) or, in the discretion of the Committee, by delivery of a promissory note having terms determined by the Committee or by such cashless means as determined by the Committee (if in accordance with policies approved by the Committee).
3. Exercisability/Vesting.
Your Option may be exercised only to the extent it has become vested. Your Option shall vest and become exercisable with respect to:
(a) twenty-five (25%) percent of the Option Shares on the first anniversary of the Vesting Commencement Date; and
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(b) thereafter become exercisable with respect to one thirty-sixth (1/36th) of the balance of the Option Shares after such vesting under clause (a) above on each monthly anniversary of the Vesting Commencement Date starting with the 13th month anniversary of the Vesting Commencement Date;
provided, however, that the portion of the Option scheduled to vest on any such date shall vest if and only if you are, and have been, continuously employed by or otherwise providing services to the Company from the date of this Agreement through such date. If you are not or have not been continuously employed by or providing services to the Company as of or through any such date, then the portion of your Option scheduled to vest on such date shall not vest or become exercisable.
4. Expiration of Option.
(a) Normal Expiration. In no event shall any part of your Option be exercisable after the Expiration Date set forth in paragraph 2(a) above.
(b) Early Expiration Upon Termination of Employment. Subject to any contrary provisions of a separate employment agreement between the Company and you, your Option shall expire and be forfeited on the date your employment or service with the Company terminates; provided that: (i) if your employment or service terminates due to your death or Disability, the portion of your Option that is vested and exercisable on the date of your employment or service termination shall expire ninety (90) days after the date of your termination, but in no event after the Expiration Date, (ii) if you retire after achieving a minimum age and/or a minimum period of service determined by the Committee to qualify for retirement, the portion of your Option that is vested and exercisable on the date of your retirement shall expire ninety (90) days after the date of your retirement, but in no event after the Expiration Date, or (iii) if you are discharged other than for Cause, the portion of your Option that is vested and exercisable on the date of your discharge shall expire ninety (90) days after the date of your discharge, but in no event after the Expiration Date.
5. Procedure for Exercise.
You may exercise all or any portion of your Option, to the extent it has vested and is outstanding, at any time and from time to time prior to its expiration, by delivering written notice to the Company (to the attention of the Committee) and your written acknowledgement that you have read and have been afforded an opportunity to ask questions of the Companys management regarding all financial and other information provided to you regarding the Company, together with payment of the Exercise Price in accordance with the provisions of paragraph 2(b) above. As a condition to any exercise of your Option, you shall permit the Company to deliver to you all financial and other information regarding the Company that the Company believes is necessary to enable you to make an informed investment decision, and you shall make all customary investment representations that the Company requires. Further, contemporaneous with and as a condition of any exercise of your Option, you shall, unless you have already executed the Stockholders Agreement, execute and deliver an Adoption Agreement joining you as a party to the Stockholders Agreement and shall be bound by the terms and subject to the benefits thereof (including but not limited to terms appointing Kiwi Alejandro Danao Camara as your proxy to vote the Common Shares issuable upon exercise of the Option on your behalf) as if an original party thereto. The Company will provide to you a copy of the Stockholders Agreement upon exercise of your Option.
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6. Securities Laws Restrictions and Other Restrictions on Transfer.
You represent that when you exercise your Option you shall be purchasing Common Shares for your own account and not on behalf of others. You understand and acknowledge that federal and state securities laws govern and restrict your right to offer, sell or otherwise dispose of any Common Shares unless your offer, sale or other disposition thereof is registered under the Securities Act and state securities laws, or in the opinion of the Companys counsel, such offer, sale or other disposition is exempt from registration or qualification thereunder. You agree that you shall not offer, sell or otherwise dispose of any Common Shares in any manner which would: (i) require the Company to file any registration statement with the Securities and Exchange Commission (or any similar filing under state law) or to amend or supplement any such filing or (ii) violate or cause the Company to violate the Securities Act, the rules and regulations promulgated thereunder or any other state or federal law. Further, the Option may not be exercised if the issuance of Common Shares upon exercise would constitute a violation of any applicable federal, state, or foreign securities laws or other law or regulations or the requirements of any stock exchange or market system upon which the Common Shares may then be listed, and you understand that you may not be able to exercise the Option when desired even though the Option is vested. In addition to the foregoing restrictions, except in the event of a Change in Control or a Qualifying Public Offering, the Common Shares (or any interest in the Common Shares) acquired on exercise of the Option may not be sold, assigned, pledged, hypothecated or otherwise transferred except as permitted by the provisions of Stockholders Agreement. You further understand that the certificates for any Common Shares you purchase shall bear such legends as the Company deems necessary or desirable in connection with the Securities Act or other rules, regulations or laws or to reflect the transfer restrictions imposed by this paragraph 6.
7. Non-Transferability of Option.
Your Option is personal to you and is not transferable by you (other than by will or the laws of descent and distribution). During your lifetime, only you (or your guardian or legal representative) may exercise your Option. In the event of your death, your Option may be exercised only (i) by the executor or administrator of your estate or the person or persons to whom your rights under the Option shall pass by will or the laws of descent and distribution and (ii) to the extent and during the period that you were entitled to exercise the Option hereunder at the date of your death (including in accordance with paragraph 4(b)(i) hereof).
8. Conformity with Plan.
Your Option is intended to conform in all respects with, and is subject to all applicable provisions of, the Plan (which is incorporated herein by reference). Inconsistencies between this Agreement and the Plan shall be resolved in accordance with the terms of the Plan. By executing and returning the enclosed copy of this Agreement, you acknowledge your receipt of this Agreement and the Plan and agree to be bound by all of the terms of this Agreement, the Plan and the Stockholders Agreement.
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9. Rights as a Participant.
Nothing in this Agreement shall interfere with or limit in any way the right of the Company to terminate your employment or service at any time (with or without Cause), nor confer upon you any right to continue in the employ or service of the Company for any period of time or to continue your present (or any other) rate of compensation, and, except if otherwise expressly provided herein, in the event of your termination of employment or service (including, but not limited to, termination by the Company without Cause) any portion of your Option that was not previously vested and exercisable shall be forfeited. Nothing in this Agreement shall confer upon you any right to be selected again as a Plan Participant, and nothing in the Plan or this Agreement shall provide for any adjustment to the number of Option Shares subject to your Option upon the occurrence of subsequent events except as provided in Section 9 of the Plan.
10. Withholding of Taxes.
The Company shall be entitled, if necessary or desirable, to withhold from any amounts due and payable by the Company to you (or secure payment from you in lieu of withholding) the amount of any withholding or other tax due from the Company with respect to any Option Shares issuable under this Agreement, and the Company may defer such issuance unless indemnified by you or otherwise protected to its satisfaction. Alternatively, the Company in its discretion may permit you to satisfy such withholding tax obligation by such cashless means as may be determined by the Company.
11. Remedies.
The parties hereto shall be entitled to enforce their rights under this Agreement specifically to recover damages by reason of any breach of any provision of this Agreement and to exercise all other rights existing in their favor. The parties hereto acknowledge and agree that monetary damages would be an inadequate remedy for any breach of the provisions of this Agreement and that any party hereto (and any investor as a third-party beneficiary) may, in its sole discretion, apply to any court of law or equity of competent jurisdiction for specific performance and/or injunctive relief (without posting bond or other security) in order to enforce or prevent any violation of the provisions of this Agreement.
12. Amendment.
Except as otherwise provided herein, any provision of this Agreement may be amended or waived only with the prior written consent of the Company and you.
13. Successors and Assigns.
Except as otherwise expressly provided herein, all covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and permitted assigns of the parties hereto whether so expressed or not.
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14. Severability.
Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement.
15. Counterparts; Electronic Signature.
This Agreement may be executed simultaneously in two or more counterparts and by facsimile or other means of electronically imaging a signature, each of which shall constitute an original, but all of which taken together shall constitute one and the same Agreement.
16. Descriptive Headings.
The descriptive headings of this Agreement are inserted for convenience only and do not constitute a part of this Agreement.
17. Governing Law.
All questions concerning the construction, validity and interpretation of this Agreement shall be governed by the internal law, and not the law of conflicts, of the State of Delaware.
18. Notices.
All notices, demands or other communications to be given or delivered under or by reason of the provisions of this Agreement shall be in writing and shall be deemed to have been given when delivered personally or mailed by certified or registered mail, return receipt requested and postage prepaid, to the recipient. Such notices, demands and other communications shall be sent to you and to the Company at the addresses indicated below:
(a) | If to the Optionee: |
(b) | If to the Company: |
CS Disco, Inc.
4400 Post Oak Parkway, Suite 2700
Houston, Texas 77027
Attention: Kiwi Camara, Chief Executive Officer
or to such other address or to the attention of such other person as the recipient party has specified by prior written notice to the sending party.
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19. Entire Agreement.
This Agreement, the Stockholders Agreement, and the Plan constitute the entire understanding between you and the Company, and supersede all other agreements, whether written or oral, with respect to the acquisition by you of the Common Shares that are the subject of the Option granted under this Agreement.
* * * *
Please execute the extra copy of this Agreement in the space below and return it to the Company to confirm your understanding and acceptance of the agreements contained in this Agreement.
Very truly yours, | ||
CS DISCO, INC. | ||
By |
| |
Name: |
| |
Title: |
|
Address: | 4400 Post Oak Parkway | |
Suite 2700 | ||
Houston, Texas 77027 |
[Signature Pages Continued on Next Page]
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The undersigned hereby acknowledges having read this Agreement and the Plan and hereby agrees to be bound by all provisions set forth herein and in the Plan. In addition, the undersigned understands and acknowledges that if the Exercise Price of the Option Shares is less than the fair market value of the Common Shares on the Date of Grant, then the undersigned may incur adverse tax consequences under Section 409A of the Code. The undersigned acknowledges and agrees that (a) the undersigned is not relying upon any determination by the Company, its affiliates or any of their respective employees, directors, officers, attorneys or agents (collectively, the Company Parties) of the fair market value of the Common Shares on the Date of Grant, (b) the undersigned is not relying upon any written or oral statement or representation of the Company Parties regarding tax effects associated with the undersigneds execution of this Agreement and the undersigneds receipt, holding and exercise of this Option, and (c) in deciding to enter into this Agreement, the undersigned is relying on the undersigneds own judgment and the judgment of the professionals of the undersigneds choice with whom the undersigned has consulted. The undersigned hereby releases, acquires and forever discharges the Company Parties from all actions, causes of actions, suits, debts, obligations, liabilities, claims, damages, losses, costs and expenses of any nature whatsoever, known or unknown, on account of, arising out of, or in any way related to the tax effects associated with the undersigneds execution of this Agreement and the undersigneds receipt, holding and exercise of this Option.
To accept the grant of this Option, you must execute this Agreement and return an executed copy to [______________] no later than [__________, 20__]. Failure to return the executed copy by such date will render this Option invalid.
OPTIONEE:
| ||
Name | ||
Dated: | , 20__ | |
Address: | ||
Fax: | ||
Spouse: | ||
| ||
Name |
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AMENDMENT TO
CS DISCO, INC.
LONG TERM INCENTIVE PLAN
The CS Disco, Inc. Long Term Incentive Plan (the Plan), is hereby amended as follows:
Amendment to Section 4(a). Section 4(a) of the Plan is hereby amended by deleting the first sentence thereto and replacing it with the following:
Subject to adjustment in a manner consistent with any adjustment made pursuant to Section 9, the total number of shares of Stock reserved and available for issuance in connection with Awards under this Plan shall not exceed 12,772,458 shares (after giving effect to the adjustment made pursuant to Section 9 on July 29, 2015 in connection with a 1:10 stock split effected upon the filing of an amendment to the Companys certificate of incorporation), and such total will be available for the issuance of Incentive Stock Options.
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AMENDMENT NO. 2 TO
CS DISCO, INC.
LONG TERM INCENTIVE PLAN
The CS Disco, Inc. Long Term Incentive Plan (the Plan), is hereby amended as follows:
Amendment to Section 4(a). Section 4(a) of the Plan is hereby amended and restated in its entirety to read as follows:
(a) Overall Number of Shares Available for Delivery. Subject to adjustment in a manner consistent with any adjustment made pursuant to Section 9, the total number of shares of Stock reserved and available for issuance in connection with Awards under this Plan shall not exceed 17,442,779 shares (after giving effect to the adjustment made pursuant to Section 9 on July 29, 2015 in connection with a 1:10 stock split effected upon the filing of an amendment to the Companys certificate of incorporation), and such total will be available for the issuance of Awards.
AMENDMENT NO. 3 TO
CS DISCO, INC.
LONG TERM INCENTIVE PLAN
The CS Disco, Inc. Long Term Incentive Plan, as amended to date (the Plan), is hereby amended as follows:
Amendment to Section 4(a). Section 4(a) of the Plan is hereby amended and restated in its entirety to read as follows:
(a) Overall Number of Shares Available for Delivery. Subject to adjustment in a manner consistent with any adjustment made pursuant to Section 9, the total number of shares of Stock reserved and available for issuance in connection with Awards under this Plan shall not exceed 24,762,135 shares (after giving effect to the adjustment made pursuant to Section 9 on July 29, 2015 in connection with a 1:10 stock split effected upon the filing of an amendment to the Companys certificate of incorporation), and such total will be available for the issuance of Awards.
AMENDMENT NO. 4 TO
CS DISCO, INC.
LONG TERM INCENTIVE PLAN
The CS Disco, Inc. Long Term Incentive Plan, as amended to date (the Plan), is hereby amended as follows:
Amendment to Section 4(a). Section 4(a) of the Plan is hereby amended and restated in its entirety to read as follows:
(a) Overall Number of Shares Available for Delivery. Subject to adjustment in a manner consistent with any adjustment made pursuant to Section 9, the total number of shares of Stock reserved and available for issuance in connection with Awards under this Plan shall not exceed 30,062,135 shares (after giving effect to the adjustment made pursuant to Section 9 on July 29, 2015 in connection with a 1:10 stock split effected upon the filing of an amendment to the Companys certificate of incorporation), and such total will be available for the issuance of Awards.
Exhibit 10.6
SUBLEASE AGREEMENT
This Sublease is made this 8th day of August, 2018 (the Sublease), in Austin, Travis County, Texas by and between Spiceworks, Inc., a Delaware corporation (Sublessor), and CS Disco., Inc., a Delaware corporation (Sublessee).
Sublessor is the lessee under that certain Lease Agreement by and between San Clemente at Davenport North, LTD., a Texas limited partnership, as Landlord (Original Lessor), and Sublessor, as tenant, dated as of November 18, 2013, as amended by that certain First Amendment to Lease Agreement dated as of December 18, 2013, and that certain Second Amendment to Lease Agreement dated as of February 11, 2014 (as amended, the Main Lease) for the premises described in the Main Lease (the Leased Premises), AG San Clemente 3700 Inc., a Delaware corporation (Lessor) is the successor-in-interest to Original Lessor with respect to the Lease. A true and correct copy of the Main Lease is attached hereto as Exhibit A and incorporated herein by this reference.
In consideration of the mutual promises contained herein, Sublessor hereby subleases to Sublessee the portion of the Leased Premises containing approximately 23,180 rentable square feet and described on Exhibit B attached hereto (the Subleased Premises) and identified as Suite 150, subject to the terms of the Main Lease, and subject further to the terms of this Sublease, as follows:
1. | Sublessee acknowledges that it has read the Main Lease and is fully familiar with all terms and condition of the Main Lease. |
2. | The term of this Sublease shall commence on the later to occur of (i) the earlier of (a) the date Sublessee has a separate high speed internet connection and network connection at the Subleased Premises and (b) the date that is fourteen (14) days after the date Sublessor delivers possession of the Subleased Premises to Sublessee and (ii) one day following tech Sublessor and Sublessees receipt of Lessors written consent to this Sublease (the Commencement Date) and shall expire on July 31, 2020 (the Term). Sublessee may extend the Term through November 30, 2022 (the Renewal Period), by providing written notice to Sublessor six (6) months prior to the expiration of the Term. If the Main Lease terminates or expires, this Sublease shall automatically terminate without the need for notice or further documentation and Sublessor and Sublessee shall thereafter be relieved of all obligations and liabilities hereunder, except those that accrued prior to the date of the termination and those which expressly survive termination. Notwithstanding the preceding sentence, (I) If the Main Lease terminates as a result of a default or breach by Sublessor of the Main Lease, then Sublessor shall be liable to Sublessee. For the damage suffered as a result of such termination and (II) Sublessor hereby agrees that it shall not terminate the Main Lease prior to expiration or earlier termination of this Sublease. The terms of the preceding sentence shall survive termination of this Sublease. Sublessee shall be permitted entry into the Subleased Premises prior to the Commencement Date for the limited purpose of installing Sublessees furniture, fixtures and equipment, installing its telecommunications and security systems and cabling. Such entry shall be: (A) at Sublessees risk; and (B) subject to all the terms of this Sublease, except the obligation to pay Base Rent or Additional Rent (each as defined below). Notwithstanding anything to the contrary contained herein, if Sublessor does not deliver a copy of Lessors written consent to this Sublease within two business days after Sublessee delivers a counterpart of this Sublease (Written Consent) to Sublessor that is executed by Sublessee, Sublessee may terminate this Sublease by delivering written notice thereof to Sublessor at any time prior to Sublessors delivery of the Written Consent to Sublessee. |
3. | Insofar as the provisions of the Main Lease do not conflict with the specific provisions of this Sublease, they and each of them are incorporated into this Sublease as if fully completely rewritten herein and shall fix the rights and obligations of the parties hereto with respect to the Subleased Premises with the same effect as if Sublessor and Sublessee were, respectively, the Landlord and Tenant (as such terms are defined in the Main Lease) named in the Main Lease, Sublessee assumes and shall observe all obligations, liabilities, covenants, and undertakings of Sublessor as Tenant (as such term is defined in the Main Lease) under the Main Lease to the extent the same are applicable to the Subleased Premises during the Term, and agrees not to do or permit to be done any act, nor fail to do any action, which shall result in a violation of any of the terms and conditions of said Main Lease. Except as otherwise specifically provided herein, Sublessee is to have the benefit of the covenants and undertakings of Lessor in the Main Lease to the extent the same are applicable to the Subleased Premises during the Term. It is expressly understood and agreed, however, that Sublessor is not in the position to render any of the services or to perform any of the obligations required of |
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Lessor by the terms of this Sublease, and that performance by Sublessor of its obligations hereunder are conditioned upon due performance by Lessor of its corresponding obligations under the Main Lease. It is further understood and agreed, therefore, that notwithstanding anything to the contrary contained in this Sublease, Sublessor shall not be in default under this Sublease for failure to render such services or perform such obligations required by Sublessor by the terms of this Sublease that are the responsibility of the Lessor under the Main Lease, but Sublessor agrees to take prompt and reasonable measures to insure that Lessor performs said obligations. Sublessor shall not be required to (i) provide any of the insurance, services or construction to the Subleased Premises that Lessor may have agreed to provide pursuant to the Main Lease (or as required by law), (ii) provide any utilities (including electricity) to the Subleased Premises that Lessor may have agreed to provide pursuant to the Main Lease (or as required by law); provided, however, that Sublessee may obtain after-hours HVAC services for the price of $30.00/per hour per zone of the Subleased Premises, (iii) make any of the repairs that Lessor may have agreed to make pursuant to the Main Lease (or as required by law), (iv) take any other action relating to the operation, maintenance, repair, restoration, rebuilding, alteration or servicing of the Subleased Premises that Lessor may have agreed to provide, furnish, make, comply with, or take, or cause to be provided, furnished, made complied with or taken under the Main Lease, (v) provide any security for the Subleased Premises or (vi) provide Sublessee with any abatement, rebate, credit, allowance or other concession required of Lessor pursuant to the Main Lease. Subject to Sublessors compliance with the terms of this Section, Sublessee shall not make any claim against Sublessor for any damage which may arise by reason of (a) the failure of Lessor to keep, observe or perform any of its obligations under the Main Lease or (b) the acts or omissions of Lessor or its agents, contractors, employees, invitees or licensees. The payment of rent by Sublessee to Sublessor shall be governed by Paragraph 4 herein. The relationship between Sublessee and Sublessor shall be the same as that between Sublessor and Lessor under the Main Leaser, Sublessor shall not modify the Main Lease in any way that would expand the obligations or liabilities, or reduce the rights, of Sublessee under this Sublease. |
4. | Sublessee agrees to pay Sublessor, as rent for the Subleased Premises, the following monthly amounts as base rent (Base Rent), which are payable in advance on the 1st day of each calendar month during the Term: |
Time Period |
Monthly Base Rent | |||
Commencement Date Lease Month 12 |
$ | 46,360.00 | ||
Lease Month 13 July 31, 2020 |
$ | 47,325.83 | ||
August 1, 2020 July 31, 2021* |
$ | 48,291.67 | ||
August 1, 2021 November 30, 2022* |
$ | 49,257.30 |
As used herein, the term Lease Month means each calendar month during the Term (and if the Commencement Date does not occur on the first day of a calendar month, the period from the Commencement Date to the first day of the next calendar month shall be included in the first Lease Month for purposes of determining the monthly Rase Rent rate applicable for such partial month).
*If Sublessee extends the Term for the Renewal Period
Sublessee also agrees to pay Sublessor, beginning on the Commencement Date and on the first day of each month thereafter during the Term, Subtenants proportionate share of the Basic Costs (as defined in the Main Lease) paid by Sublessor in its capacity as tenant under the Main Lease (the Additional Rent), including, without limitation, Section 4(o) thereof. For Sublessee, the Tenants Proportionate Share (as such term is defined in the Main Lease) shall be 9.27%. The estimated annual Basic Costs for 2018 are $14.37 per rentable square foot in the Building (as defined in the Lease). Within 15 days after the actual amount of Basic Costs due under the Main Lease is known by Sublessor, Sublessor shall notify Sublessee thereof and of Sublessees portion thereof. If Sublessee has overpaid rent for the period in question, such overpayment shall be credited against the next installments of rent due or returned by Sublessor to Sublessee, or if Sublessee has underpaid rent, then Sublessee shall pay the amount of such underpayment to Sublessor within five days after the receipt of such notice.
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5. | The following events shall be deemed to be events of default by Sublessee under this Sublease: (a) Sublessees failure to perform any of its obligations under this Sublease and such failure is not cured within a period of time that is: (1) the same period of time afforded to Sublessor under the Main Lease to cure a failure to pay rent or a monetary default by Sublessee hereunder, and (2) a period of time that is two (2) business days less than the period of time afforded to Sublessor under the Main Lease to cure any other non-monetary default by Sublessee hereunder and (b) any events of default by Sublessees listed as events of default by Tenant (as such term is defined in the Main Lease) set forth in the Main Lease (including, without limitation, any act, omission or circumstance with respect to Sublessees use and enjoyment of the Subleased Premises that constitutes, after notice and the expiration at any cure periods set forth in the Main Lease, an Event of Default [as such term is defined the Main Lease]). Upon the occurrence of any such events of default, and in addition to any other available remedies provided by law or in equity, Sublessor shall have all remedies granted to Lessor in the Main Lease. |
6. | Sublessee shall, at no cost to Sublessee, have the right to use all of the furniture currently located in the Subleased Premises including, without limitation, the furniture listed on Exhibit C attached hereto and Sublessor shall deliver possession of the Subleased Premises to Sublessee with all such furniture located therein. Such furniture shall remain in the Sublease Premises at the expiration of the Term an shall be in substantially the same condition as it exists on the Commencement Date, reasonable wear and tear (and damages caused by casualty excluded), Sublessee may install a security system in the Subleased Premises; provided, however, that Sublessee removes any such security system at the end of the Term at Sublessees sole cost and expense. |
7. | Sublessee shall have the right, at no cost to Sublessee, to have building suite and directory signage. The Sublessor shall, on or before the Commencement Date, install signage identifying Sublessee on all building standard hallway and directory signage. Sublessee may request from Lessor the right, at Sublessees sole cost and expense, to install a panel on the Monument Sign (as such term is defined in the Main Lease) provided that such panel conforms to all applicable laws and restrictive covenants applicable to the Building (as such term is defined in the Main Lease) and Sublessee obtains Lessors prior written consent to the proposed sign panel prior to installation thereof; provided, however, that nothing in this Agreement will waive any of Sublessors rights to signage, including on the Monument Sign, as provided under the Main Lease. |
8. | Sublessor shall, at its sole cost and expense, construct a breakroom in the Subleased Premises in accordance with the plans and specifications attached hereto as Exhibit D (Breakroom). The construction of the Breakroom shall (a) be commenced by Sublessor promptly following execution of this Sublease and be completed within 75 days after the Commencement Date (Breakroom Construction Deadline) and Sublessor shall make reasonable efforts not to disturb or interfere with the quiet enjoyment of the Subleased Premises by Sublessee including the partition of construction areas from the remainder of the Subleased Premises and causing all construction areas and surrounding areas affecting by such construction areas to broom cleaned daily of trash, debris and non-useful materials, (b) be performed in a good and workmanlike manner, and (c) be comprised of all new materials and free of materiel defects in materials and workmanship. If Sublessee elects to have no construction of the Breakroom occur on any specific day or days and provides Sublessor with at least 24 hours advance notice thereof (which notice may be verbal), no such construction of the Breakroom shall occur on such day(s) and the Breakroom Construction Deadline shall be extended one day for each such day; provided, however that Sublessee may not exercise such election for more than five days of construction. Any alterations performed by Sublessee shall be subject to restoration at Lessors discretion. Notwithstanding the foregoing, Sublessor hereby acknowledges and agrees that the neither the Breakroom nor the card key system described below in this Section will be required to be removed or restored at the end of the Term. If the Breakroom Completion Date has not occurred on or before Breakroom Construction Deadline, Base Rent and Additional Rent shall be abated one day for each day thereafter until the Breakroom Completion Date occurs. As used herein, the Breakroom Completion Date means the date construction of the Breakroom is completed in accordance with this Sublease and applicable law (including final approval from all applicable governmental authorities). Sublessee may, at its sole cost and expense, install an electronic card key system within the Subleased Premises, provided that such electronic card key system is compatible with the current card key system serving the Building. |
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9. | Sublessor and Sublessee agree that during the Term, neither party will solicit, directly or indirectly, or hire any employee of the other party; provided, however, that nothing shall prevent either party from hiring an employee of the other who responds to a publicly available job posting or responding to other forms of recruiting that are not directly targeted to Sublessor or Sublessee. |
10. | Upon execution of this Sublease, Sublessee shall deposit with Sublessor the sum of $75,000 (Security Deposit) in cash, as a security deposit to be held by Sublessor to secure Sublessees performance of its obligations under this Sublease. Provided that Sublessee has performed all of its obligations hereunder, Sublessor shall, within 30 days after the expiration of the Term and Sublessees surrender of the Subleased Premises in compliance with the provisions of this Sublease, return to Sublessee the portion of the Security Deposit which was not applied to satisfy Sublessees obligations. If Sublessor transfers its interest in the Subleased Premises and the transferee assumes Sublesssors obligations under this Sublease, then Sublessor may assign the Security Deposit to the transferee and Sublessor thereafter shall have no further liability for the return of the Security Deposit. The rights and obligations of Sublessor and Sublessee under this Section 10 are subject to any other requirements and conditions imposed by laws applicable to the Security Deposit, |
11. | Time is of the essence of this Sublease, and each and all the terms hereof. |
12. | Any notice or other communication required or permitted to be given under this Sublease or under the Main Lease shall be in writing and shall be deemed to be delivered on the date it is hand delivered to the party to whom such notice is given, at the address set forth below, or if such notice is mailed, on the date on which it is deposited in the United States Mail, postage prepaid, certified or registered mail, return receipt requested, addressed to the party to whom such notice is directed, at the address set forth below: |
If to Sublessor:
3700 N. Capital of Texas Highway Suite 100 Austin, Texas 78746 Attn: Scott Di Valerio |
If to Sublessee:
7000 N Mopac Expy, Suite 455 Austin, TX 78731 Attn: Chief Executive Officer |
13. | Sublessee shall have no right to assign or sublet any interest in this Sublease without first obtaining the written consent of the Lessor and Sublessor, which consent shall not be unreasonably withheld, conditioned or delayed. |
14. | Sublessor shall have no liability to Sublessee for any wrongful action or default on the part of Lessor pursuant to the terms of the Main Lease, and Sublessee hereby agrees to look solely to Lessor in event of any such default, the liability and obligations of Sublessor being solely pursuant to the terms and conditions of this Sublease. |
15. | In the event any one or more of the provisions contained in this Sublease shall for any reason be held invalid, illegal, or unenforceable in any respects such invalidity, illegality or unenforceability shall not affect any other provision hereof and this agreement shall be construed as if such invalid, illegal or unenforceable provisions had never been contained herein. |
16. | Neither Sublessor nor Sublessee has dealt with any broker or agent in connection with the negotiation or execution of this Sublease other than HPI Corporate Services, LLC, whose commission (in the amount of four percent (4%) of the aggregate gross rentals payable over the Term) shall be paid by Sublessor pursuant to a separate written agreement. Sublessee and Sublessor shall each indemnify the other against all costs, expenses, attorneys fees, liens and other liability for commissions or other compensation claimed by any other broker or agent claiming the same by, through, or under the indemnifying party. |
17. | This agreement constitutes the sole and only agreement of the parties hereto and supersedes any prior understandings and written or oral agreements between the parties respecting the subject matter of this Sublease. |
18. | This Sublease is subject to and conditioned upon the written consent of Lessor to this subletting. |
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19. | This Sublease (and amendments to this Sublease) may be executed in any number of counterparts, each of which shall be deemed to be an original, and all of such counterparts shall constitute one document. To facilitate execution of this Sublease, the parties may execute and exchange, by telephone facsimile or electronic mail PDF, counterparts of the signature pages. Signature pages may be detached from the counterparts and attached to a single copy of this Sublease to physically term one document. |
20. | During the Term, Sublessee shall be permitted to use Spaces (as such term is defined in Exhibit E of the Main Lease) in the Garage and/or the surface lots around the Building at a ratio of four parking spaces for every 1,000 rentable square feet in the Subleased Premises (Sublessee Spaces). The Sublessee Spaces allocated to Sublessee pursuant to this Sublease shall be unreserved and non-exclusive. The rent for the Sublessee Spaces shall be $0.00 between the Commencement Date and expiration of the Renewal Period. |
21. | Sublessor hereby covenants and agrees that it shall maintain the insurance required or Tenant in Section 11 of the Main Lease and such insurance shall name Sublessee an additional insured. And, Sublessor shall furnish certificates of such insurance of the maintenance of the insurance required of Sublessor pursuant to the preceding sentence and Sublessor shall obtain a written obligation on the part of each insurance company to notify Sublessee at least 30 days before cancellation or a material change of any such insurance. Sublessee covenants and agrees that from and after the execution date hereof and continuing throughout the Sublease Term, Sublessee will comply with the same insurance requirements imposed by Landlord on Sublessor pursuant to Section 11 of the Main Lease as they apply to Sublessee and the Sublease Premises. |
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EXECUTED on the 8th day of August, 2018.
SUBLESSOR:
SPICEWORKS, INC., a Delaware corporation
|
SUBLESSEE:
CS DISCO, INC., a Delaware corporation
| |||||||
By: | /s/ Scott Abel |
By: | /s/ Michael Lafair | |||||
Title: | President & CEO | Title: | CFO | |||||
Date: | Aug. 9, 2018 | Date: | August 8, 2018 |
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EXHIBIT A
MAIN LEASE
A-1
LEASE AGREEMENT
Between
SAN CLEMENTE AT DAVENPORT NORTH, LTD.
as Landlord,
and
SPICEWORKS, INC.
as Tenant,
Covering approximately 95,268 rentable square feet
of the Building known as
3700 San Clemente
located at
3700 N. Capital of Texas Highway
Austin, Texas 78746
BASIC LEASE INFORMATION
Tenant: | SPICEWORKS, INC., a Delaware corporation | |||
Tenants Address: | Prior to the Commencement Date: 7300 FM 2222 Building 3, Suite 100 Austin, Texas 75730 Attention: Scott Abel |
After the Commencement Date: 3700 N. Capital of Texas Highway Suite 100 Austin, Texas 78746 Attention: Scott Abel | ||
Contact: | Scott Abel | |||
Telephone: | (512) 628-8201 | |||
Landlord: | San Clemente at Davenport North, Ltd., a Texas limited partnership | |||
Landlords Address: | c/o HPI Real Estate, Inc. 3600 N. Capital of Texas Highway Building B Suite 250 Austin, Texas 78746 Attention: Property Manager |
|||
Contact: | Adri Baker / Sam Houston | |||
Telephone: | 512-435-4455 | |||
Premises: | (i) Prior to the Mandatory Expansion Date (hereinafter defined), the space identified as the Initial Premises on Exhibit A-1 to this lease (the Initial Premises), containing a total of approximately 72,088 rentable square feet and comprised of all of the rentable area of 2nd floor of the Building and a portion of the 1st floor of the Building, and (ii) from and after the Mandatory Expansion Date, the Initial Premises, together with the area identified as the Mandatory Expansion Space on Exhibit A-1 to this Lease (the Mandatory Expansion Space), which Mandatory Expansion Space contains approximately 23,180 rentable square feet and is all of the remaining rentable area of the 1st floor of the Building. | |||
Building: | 3700 San Clemente, which contains 249,870 rentable square feet and is located or to be located on the land described on Exhibit A attached hereto (the Land). The Building, the Land and all other improvements located on or to be located on and appurtenances to the Building and the Land are referred to collectively as the Property. | |||
Term: | Ninety (90) months, commenting on the Commencement Date, as hereinafter defined, and ending at 5:00 pm on the last day of the ninetieth (90th) calendar month following the Commencement Date. The Commencement Date shall be the later of (i) April 1, 2015, and (ii) the date of Substantial Completion (as defined in Exhibit D) of Tenants improvements (as defined in Exhibit D), as determined in accordance with the Work Letter attached hereto as Exhibit D, subject to adjustment and earlier termination as provided in the Lease. Tenant shall have the Renewal Option set forth in Exhibit H attached hereto. | |||
Basic Rental on 72,088 rsf | Months 1 12: | $24.00 per rentable square foot ($144,176.00 per month) | ||
Month 13 Month 17 | $24,50 per rentable square foot ($147,179.66 per month) | |||
Basic Rental on 95,268 rsf | Mandatory Expansion Date Month 24: | $24.50 per rentable square foot ($194,505.50 per month) | ||
Months 25 36: | $25.00 per rentable square Pont ($198,475.00 per month) | |||
Months 37 48: | $25.50 per rentable square foot ($202,444.50 per month) |
Page i
Months 49 60: | $26.00 per rentable square foot ($206,414.00 per month) | |||
Months 61 72: | $26.50 per rentable square foot ($210,381.50 per month) | |||
Months 73 84: | $27.00 per rentable square foot ($214,353.00 per month) | |||
Months 85 90: | $27.50 per rentable square foot ($218,322.50 per month) |
As used herein, with respect to the first Month, a Month shall meant the period commencing on the Commencement Date and ending on the last day of the first full calendar month thereafter, and with respect to the remaining Term, a Month shall mean a calendar month. The Mandatory Expansion Date shall be the first day of the eighteenth (18th) Month of the Term. Basic Rental with respect to the Mandatory Expansion Space shall not commence until the Mandatory Expansion Date.
Security Deposit: | $0.00 | |
Rent: | Basic Rental, Tenants Proportionate Share of Basic Costs and all other sums that Tenant may owe to Landlord under the Lease. | |
Payments: | All payments shall be sent to Landlord: c/o HPI Real Estate, Inc. at /ADDRESS TBD P.O. Box ____________, Dept. __________________, _____________________, Texas _______________/ or such other place as Landlord may designate from time to time. All payments shall be in the form of check until otherwise designated by Landlord, provided that payment by check shall not be deemed made if the check is not duly honored with good funds. | |
Permitted Use: | General office use. | |
Tenants Proportionate Share: |
Effective as of the Commencement Date, 28.85%, which is the percentage obtained by dividing (a) the 72,088 rentable square feet in the Initial Premises by (b) the 249,870 rentable square feet in the Building. Effective as of the Mandatory Expansion Date, 38.13%, which is the percentage obtained by dividing (a) the 95,268 rentable square feet in the total Premises by (b) the 249,870 rentable square feet in this Building. | |
Tenants Estimated Proportionate Share of Basic Costs: | Costs of approximately $11.80 per rentable square foot per year ($70,886.53 per month) based on a Premises of 72;088 rentable square feet. | |
Initial Liability Insurance Amount: | $3,000,000.00 |
The foregoing Basic Lease Information is incorporated into and made a part of the Lease identified above. If any conflict exists between any Basic Lease Information and the Lease, then the Lease shall control.
Page ii
Executed this 18 day of November, 2013:
LANDLORD: | ||||||
SAN CLEMENTE AT DAVENPORT NORTH, LTD., a Texas Limited partnership | ||||||
By: | Office-360, Inc., a Texas corporation, its general partner | |||||
Landlord Witness | ||||||
/s/ Adri Baker |
By: | /s/ Richard E. Anderson | ||||
Adri Baker | Name: | Richard E. Anderson | ||||
Title: | President | |||||
TENANT: | ||||||
SPICEWORKS, INC., a Delaware corporation | ||||||
By: | /s/ Scott Abel | |||||
Name: | Scott Abel | |||||
Title: | President & CEO |
Page iii
LEASE
THIS LEASE AGREEMENT (this Lease) is entered into by and between San Clemente at Davenport North, Ltd., a Texas limited partnership (Landlord). and Spice Works, Inc., a Delaware corporation (Tenant).
DEFINITIONS AND BASIC PROVISIONS
1. The definitions and basic provisions set forth in the Basic Lease Information (the Basic Lease Information) executed by Landlord and Tenant contemporaneously herewith are incorporated herein by reference for all purposes.
LEASE GRANT
2. Subject to the terms of this Lease, Landlord leases to Tenant, and Tenant leases from Landlord, the Premises.
TERM
3. (a) Acceptance of Premises. If the Commencement Date is not the first day of a calendar month, then the Term shall be extended by the time between the Commencement Date and the first day of the next month. If this Lease is executed before the Premises become available and ready for occupancy by Tenant, then (a) Landlord shall not be in default hereunder or be liable for damages therefor, and (b) Tenant shall accept possession of the Premises when Landlord tenders possession thereof to Tenant. Upon Substantial Completion of Tenants Improvements, Landlord and Tenant shall execute the Acceptance of Premises Memorandum (herein so called) attached hereto as Exhibit F setting forth the Commencement Date. If Tenant occupies the Premises without executing an Acceptance of Premises Memorandum, Tenant shall be deemed to have accepted the Premises foe all purposes and Substantial Completion shall be deemed to have occurred on the Commencement Dale set forth in the Acceptance of Premises Memorandum delivered to Tenant by Landlord. Landlord shall deliver possession of the Premises to Tenant in broom clean condition, with all Building .systems in good working order and the roof water-tight, and fit compliance with all applicable laws. Tenants acceptance of the Premises shall not be deemed a waiver of Tenants right to have latent defects in the Tenants Improvements reported to Landlord within 180 days after the Commencement Date repaired at no Cost to Tenant.
(b) Early Possession. Provided that such possession does not interfere with the construction of the Tenants Improvements by Landlord, Tenant may take possession of the Premises (including the Mandatory Expansion Space) approximately four (4) weeks prior to the Commencement Date for the sole purpose of performing improvements therein or installing furniture, equipment or other personal property of Tenant. If Tenant takes possession of the Premises before the Commencement Date, such possession shall be subject to the terms and conditions of the lease, except that Tenant shall not be required to pay Rent with respect to the period of time prior to the Commencement Date during which Tenant performs such work. Provided, however, Tenant shall remain liable for the cost of any above Building standard or third party services (including utilities) requested by Tenant and provided to the Premises during the period of Tenants possession prior to the Commencement Date, Early occupancy of the Premises shall not advance the expiration date of the lease. Further, at any time following the Commencement Date, Tenant may occupy all or any portion of the Mandatory Expansion Space prior to the Mandatory Expansion Date for the Permitted Use under this Lease. If Tenant occupies the Mandatory Expansion Space, or portion thereof following foe Commencement Date but before the Mandatory Expansion Date, such possession shall be subject to the terms and conditions of the Lease, except that Tenant shall not be required to pay Rent for that portion of the Mandatory Expansion Space occupied by Tenant during the period of time prior to the Mandatory Expansion Date.
(c) Financing of Construction. Landlord and Tenant acknowledge that as of the date of this Lease, the Building in which the Premises is to be located has not yet been constructed. Landlord shall not be obligated to proceed with construction, of the Building unless and until financing acceptable to Landlord has been obtained. If Landlord has not entered in to a construction loan satisfactory to Landlord by January 1, 2014, Landlord shall so notify Tenant, and thereafter, but prior to the date the Landlord obtains a construction loan, either party hereto shall be entitled to terminate this Lease by delivering written notice of termination to the other party. Such termination shall be effective upon the date of receipt of the termination option by the non-terminating party, and this Lease shall thereupon cease and terminate and each of the parties hereto shall be released and discharged from any and all liability and responsibility hereunder (provided that Landlord shall refund to Tenant all pre-paid Rent hereunder), and neither party shall have any liability to the other by reason of such termination.
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RENT
4. (a) Payment. Tenant shall timely pay to Landlord the Basic Rental and all additional sums to be paid by Tenant to Landlord under this Lease, including the amounts set forth In Exhibit C, without deduction or set off, in care of HPI Real Estate, Inc. at /ADDRESS TBD P.O. Box __________, Dept. ___________, Texas ________/ (or auch other address as Landlord may from time to time designate in writing to Tenant). Basic Rental, adjusted as herein provided, shall be payable monthly to advance. The monthly installment of Basic Rental payment for the first Month of the Term and all additional sums payable for the first Month of the Term shall be payable March 1, 2015, thereafter, monthly installments of Basic Rental and all additional sums shall be due on the first day of the second Month of the Term and continuing on the first day of each succeeding calendar month during the Term. Basic Rental for any fractional month at the beginning of the Term shall be prorated based on 1/365 of the current annual Basic Rental for each day of the partial month this Lease is to effect, and shall be due on the Commencement Date. Notwithstanding anything contained herein or in the Basic Lease Information to the contrary, the parties acknowledge that the Basic Rent payable during the initial six (6) Months of the Initial Term shall be calculated as if the Premises contained only 56,000 square feet of rentable area (i.e., Basic Rent payable during such six (6) Months shall equal $112,000.00 per month).
(b) Consumer Price Index to Basic B. (Intentionally Omitted.)
(c) Basic Costs. Tenant shall pay to Landlord an amount equal to the product of (1) Basic Costs (as described on Exhibit C), multiplied by (2) Tenants Proportionate Share. Tenant shall pay to Landlord, on the Commencement Date and on the first day of each calendar month thereafter, an amount equal to Tenants Estimated Proportionate Share of Basic Costs. From time to time during any calendar year, Landlord may estimate and re-estimate the Proportionate Share of Basic Costs to be due by Tenant for that calendar year and deliver a copy of the estimate of re-estimate to Tenant. Thereafter, the monthly installments of estimated Basic Costs payable by Tenant shall be appropriately adjusted in accordance with the estimations so that, by the end of the calendar year in question, Tenant shall have paid all of its Proportionate Share of Basic Costs as estimated by Landlord. Notwithstanding anything contained herein to the contrary, during the initial six (6) Months of the initial Term, for purposes of calculating Tenants Proportionate Share of Basic Costs payable hereunder, Tenants Proportionate Share shall be calculated as if the Premises contained 56,000 square feet of rentable area.
(d) Annual Cost Statement. By April 1 of each calendar year, or as soon thereafter as practicable, Landlord shall furnish to Tenant a statement of Landlords actual Basic Costs (the Annual Cost Statement) for the previous year adjusted as provided in Section 4(e). If the Annual Cost Statement reveals that Tenant paid more for then Landlord shall reimburse or credit Tenant for such excess within 30 days after delivery of the Annual Cost Statement in question likewise, if Tenant paid less than Tenants Proportionate Share of Basic Costs, then Tenant shall pay Landlord such deficiency within 30 days after delivery of the Annual Cost Statement in question.
(e) Adjustments to Basic Costs. With respect to any calendar year or partial calendar year in which the Building is not occupied to the extent of 95% of the rentable area thereof, the Basic Costs for such period shall, for the purposes hereof, be increased in the amount which would have been incurred had the Building been occupied to the extent of 95% of the rentable area thereof.
DELINQUENT PAYMENT;
HANDLING CHARGES
5. All payments required of Tenant hereunder shall bear interest from the date due until paid at the maximum lawful rate. Alternatively, Landlord may charge Tenant a fee equal to 10% of the delinquent payment in reimburses Landlord for its cost and inconvenience incurred as a consequence of Tenants delinquency. In no event, however, shall the changes permitted under this Section 5 or elsewhere in this Lease, to the extent the same are considered to be interest under applicable law, exceed the maximum lawful rate of interest.
SECURITY DEPOSIT
6. Intentionally omitted.
LANDLORDS OBLIGATIONS
7. (a) Services. Provided no Event of Default exists, Landlord shall furnish to Tenant (1) water (how and cold) at those points of supply provided for general use of tenants of the Building; (2) heated and refrigerated air conditioning as appropriate, during normal business hours, and at such temperatures and in such amounts as and
2
reasonably considered by Landlord to be standard; (3) janitorial service to the Premises on weekdays other than holidays for Building standard installations (Landlord reserves the right to bill Tenant separately for extra janitorial service required for non-standard installations) and such window washing as may from time to time in Landlords judgment be reasonably required; (4) an elevator for Ingress and egress to the flow on which the Premises are located, in coming with other tenants; (5) replacement of Building standard light builds and fluorescent tubes; and (6) electrical current during normal business hours at a power capacity of 4 watts per rentable space foot for lighting and outlets (Normal Usage). Landlord shall maintain the common areas of the Building in reasonably good order and condition, except for damage occasioned by Tenant, or its employees, agents or invitees. If Tenant desires any of the services specified in this Section 7(a) at any time other than times herein designated, such services shall be supplied Tenant upon the written request of Tenant delivered Landlord before 3:00 p.m. on the business day preceding such extra usage, and Tenant shall pay to Landlord the cost of such services (at the approximate hourly rate charged to other tenants in the Building) within ten days after Landlord has delivered to Tenant an invoice therefor. As used herein, the term normal business hours shall mean from 7:00 a.m. to 7:00 p.m. Monday through Friday and from 9:00 a.m. to 1:00 p.m. on Saturdays, except for legal holidays. Tenant shall have access to the Building 24 hours a day, 7 days per week, subject to the terms of this Lease. Any after hours HVAC charges shall be at the rate of $30.00 per hour, per zone, plus applicable taxes.
(b) Excess Utility Use. Landlord shall use reasonable efforts to furnish electrical current for special lighting, computers and other equipment whose electrical energy consumption exceeds Normal usage through the then-existing feeders and risers serving the Building and the Premises (not to exceed, however, 7.0 watts per usable square foot of the Premises, determined on a floor-by-floor basis, excluding Building systems), and Tenant shall pay to Landlord the cost of such service within ten days after Landlord has delivered to Tenant an invoice therefor, Landlord may determine the amount of such additional consumption and potential consumption by either or both: (1) a survey of standard or average tenant usage of electricity in the Building performed by a reputable consultant selected by Landlord and paid for by Tenant; or (2) a separate meter in the Premises installed, maintained, and read by Landlord, at Tenants expense, Tenant shall not install any electrical equipment requiring special wiring or requiring electrical current in excess of Normal Usage unless approved in advance by Landlord. The use of electricity in the Premises shall not exceed the capacity of existing feeders and risers to or wiring in the Premises. Any risers or wiring required to meet Tenants excess electrical requirements shall, upon Tenants written request, be installed by Landlord, at Tenants cost, if, in Landlords sole and absolute judgment, the same are necessary and shall not cause permanent damage or injury to the Building or the Premises, cause or create a dangerous or hazardous condition, entail excessive or unreasonable `alterations, repairs, or expenses, or interfere with or disturb other tenants of the Building. If Tenant uses machines or equipment (other than general office machines, personal computers and electronic data processing equipment) in the Premises which affect the temperature otherwise maintained by the air conditioning system or otherwise overload any utility, Landlord may install supplemental air conditioning units or other supplemental equipment in the Premises, and the cost thereof, including the cost of installation, operation, use, and maintenance, shall be paid by Tenant to Landlord within ten days after Landlord has delivered to Tenant an invoice therefor.
(c) Subject to Rules of Provider. Landlords obligation to furnish services under Section 7(a) shall be subject to the rules and regulations of the supplier of such services and governmental rules and regulations.
(d) Restoration of Services; Abatement. Landlord shall use reasonable efforts to restore any service that becomes unavailable; however, such unavailability shall not (i) render Landlord liable for any damages caused thereby, (ii) be a constructive eviction of Tenant, (iii) constitute a breach of any implied warranty, or (iv) except as provided in the next sentence, entitle Tenant to any abatement of Tenants obligations hereunder. However, if Tenant is prevented from making reasonable use of the Premises for more than 45 consecutive days (or 10 consecutive days if the reason for such unavailability is within the reasonable control of Landlord) because of the unavailability of any such service, Tenant shall, as its sole and exclusive remedy therefor, be entitled to a reasonable abatement of Rent for each consecutive day (after such 45 day or 10 day period, as applicable) that Tenant is so prevented from making reasonable use of the Premises.
IMPROVEMENTS; REPAIRS
8. (a) Improvements; Alterations. Improvements to the Premises shall be installed at the expense of Tenant only in accordance with plans and specifications which have been previously submitted to and approved in written by Landlord. After the initial Tenants Improvements (as defined in Exhibit D) are completed, no alterations or physical additions in or to the Premises may be made without Landlords prior written consent. Prior to commencing any alteration, addition, or improvement and as a condition to obtaining Landlords consent, Tenant shall deliver to Landlord plans and specifications acceptable to Landlord; names and addresses of contractors reasonably acceptable to Landlord; copies of contracts; necessary permits and approval; evidence of contractors and subcontractors insurance reasonably acceptable to Landlord; and a payment bond or other security, all in form and amount satisfactory to Landlord. Tenant shall not paint or install lighting or decorations, signs, window or door lettering, or advertising media of any type on or
3
about the Premises without the prior written consent of Landlord. All alterations, additions, or improvements (whether temporary or permanent in character, and including without limitation all air-conditioning equipment and all other equipment that is in any manner connected to the Buildings plumbing system) made in or upon the Premises, either by Landlord or Tenant, shall be Landlords property at the end of the Term and shall remain on the Premises without compensation to Tenant. Approval by Landlord of any of Tenants drawings and plans and specifications prepared in connection with any improvements in the Premises shall not constitute a representation or warranty of Landlord as to the adequacy or sufficiency of such drawings, plans and specifications, or the improvements to which they relate, for any use, purpose, or condition, but such approval shall merely be the consent of Landlord as required hereunder. In connection with any such alteration, addition, or improvement, Tenant shall pay to Landlord an administration fee of 5% of all costs incurred for such work. Upon completion of the alteration, addition, or improvement, Tenant shall deliver to Landlord as built plans, contractors affidavits, and full and final lien waivers of lien and receipted bills covering all labor and materials. Notwithstanding anything in this Lease to the contrary, except with respect to the Tenant Improvements, Tenant shall be responsible for the cost of all work required to comply with the requirements of the provisions of Tex. Rev. Civ. Stat. Ann. art. 9102 and the provisions of the Americans With Disabilities Act of 1990, 42 U.S.C. §§12101-12213 (collectively, the Disability Acts), and all rules, regulations, and guidelines promulgated thereunder, as the same may be amended from time to time, necessitated by any installations, additions, or alterations made in or to the Premises at the request of or by Tenant or by Tenants specific use of the Premises (other than retrofit work whose cost has been particularly identified as being payable by Landlord in an instrument signed by Landlord and Tenant), regardless of whether such cost is incurred in connection with retrofit work required in the Premises or in other areas of the Building.
(b) Repairs; Maintenance. Tenant shall maintain the Premises in a clean, safe operable attractive condition, and shall not permit or allow to remain any waste or damage to an port of the Premises. Tenant shall repair or replace, subject to Landlords direction and supervision any damage to the Building caused by Tenant or Tenants agents, employees, contractors, or invitees. If Tenant fails to make such repair or replacements within 15 days after the occurrence of such damage, then Landlord may make the same at Tenants cost. In lieu of having Tenant repair any such damage outside of the Premises, Landlord may repair such damage at Tenants cost. The cost of any repair or replacement work performed by Landlord under this Section 8 shall be paid by Tenant to Landlord within ten days after Landlord has delivered to Tenant an invoice therefor. Landlord shall keep and maintain in good condition, repair and working order and make repairs to and perform maintenance upon: (1) structural elements of the Building, including the foundation; (2) mechanical (including HVAC), electrical, plumbing and fire/life safety systems serving the Building in general; (3) the roof of the Building; (4) exterior windows of the Building; and (5) elevators serving the Building.
(c) Performance of Work. All work described in this Section 8 shall be performed only by Landlord or by contractors and subcontractors approved in writing by Landlord. Tenant shall cause all contractors and subcontractors to procure and maintain insurance coverage against risks, in such amounts, and with such companies as Landlord may reasonably require, and to procure payment and performance bonds reasonably satisfactory to Landlord covering the cost of the work. All such work shall be performed in accordance with all legal requirements, and in a good and workmanlike manner so as not to damage the Premises, the primary structure or structural qualities of the Building, or plumbing, electrical lines, or other utility transmission facility. All such work which may affect the HVAC, electrical system, or plumbing must be approved by the Buildings engineer of record.
(d) Mechanics Liens. Tenant shall not permit any mechanics liens to be filed against the Premises or the Building for any work performed, materials furnished or obligation incurred by or at the request of Tenant. If such a lien is filed, then Tenant shall, within ten days after Landlord has delivered notice of the filing to Tenant, either pay the amount of the lien or diligently contest such lien and deliver to Landlord a bond or other security reasonably satisfactory to Landlord. If Tenant fails to timely take either such action, then Landlord may pay the lien claim without inquiry as to the validity thereof, and any amounts so paid, including expenses and interest, shall be paid by Tenant to Landlord within ten days after Landlord has deliver to Tenant an Invoice therefor.
USE
9. Tenant shall occupy and use the Premises only for the Permitted Use and shall comply with all laws, orders, rules and regulations relating to the use, condition, and occupancy of the Premises; provided that Tenant shall not be required to make any alterations or improvements to the Building systems serving the Premises or to the structure of the Building within the Premises in order to comply with any applicable law, except to extent that the obligation to so comply arises by reason of (a) Tenants performance of any alterations or to Tenants specific use of the Premises. The Premises shall not be used for an use which is disreputable or creates extraordinary fire hazards or results in an increased rate of insurance on the Building or its contents. If, because of Tenants acts, the rate of insurance on the Building or its contents increases, then such acts shall be an Event of Default, Tenant shall pay to Landlord the amount of such increase on demand, and acceptance of such payment shall not constitute a waiver of any of Landlords other rights. Tenant shall conduct its business and control its agents, employees, and invitees in such a manner as not to create any nuisance or interfere with other tenants or Landlord in is management of the Building.
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ASSIGNMENT AND SUBLETTING
10. (a) Transfers; Consent. Tenant shall not, without the prior written consent of Landlord (which Landlord may grant or deny in its reasonable discretion), (1) assign, transfer, or encumber this Lease or any estate or interest herein, whether directly or by operation of law, (2) permit any other entity to become Tenant hereunder by merger, consolidation, or other reorganization, (3) if Tenant is an entity other than a corporation whose stock is publicly traded, permit the transfer of an ownership interest in Tenant so as to result in a change in the current control of Tenant, (4) sublet any portion of the Premises, (5) grant any license, concession, or other right of occupancy of any portion of the Premises, or (6) permit the use of the Premises by any parties other than Tenant (any of the events listed in Section 10(a)(1) though 10(a)(6) being a Transfer). Notwithstanding anything herein to the contrary, Tenant may assign this Lease without obtaining Landlords consent (a Permitted Transfer) to any of the following (each a Permitted Transferee): (a) any Affiliate, or (b) any entity which acquires all or substantially all of the assets of Tenant (whether or not there is a change in Tenants name), provided that such transferee assumes in full the obligations of Tenant under this Lease either by law or by executing an assignment that meets Landlords reasonable approval and provided that all of the following criteria or conditions are satisfied: (i) no Event of Default exists under this Lease, (ii) with respect to an assignment to a Permitted Transferee descried in (b), Tenants successor shall own all or substantially all of the assets or stock of Tenant and such successor shall have a tangible net worth which is at least equal to Tenants tangible net worth at the date of this Lease as evidenced to Landlords reasonable satisfaction, (iii) such Affiliates or successors use of the Premises shall be restricted to the Permitted Use; and (iv) Tenant shall give Landlord written notice at least thirty (30) days prior to the effective date of the proposed assignment, along with the legal name of the proposed Permitted Transferee. Further notwithstanding anything herein to the contrary, Tenant may sublet the Premises or any portion thereof to an Affiliate of Tenant and such Affiliate shall be deemed a Permitted Transferee and such sublease shall be deemed a Permitted Transfer so long as parts (1), (ii) and (iv) of the foregoing sentence are satisfied. Affiliate means and refers to any entity controlling, controlled by, or under common control with another such entity, where control means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of such controlled person or entity; the ownership, directly or indirectly, of more than 50% of the voting securities of any entity, or possession of the right to vote, in the ordinary direction of its affairs, more than 50% of the voting interest in, any entity, shall be presumed to constitute such control. If Tenant requests Landlords consent to a Transfer, then Tenant shall provide Landlord with the following (the Required Information); a written description of all terms and conditions of the proposed Transfer, copies of the proposed documentation, and the following information about the proposed transferee; name and address; reasonably satisfactory information about its business and business history; its proposed use of the Premises; banking, financial, and other credit information; and general references sufficient to enable Landlord to determine the proposed transferees creditworthiness and character. Notwithstanding the foregoing, Landlord shall not unreasonably withhold its consent to a proposed assignment or sublease, provided that Landlord shall be deemed to have reasonably withheld its consent to any sublease or assignment if the refusal is based on (i) Landlords determination (in its reasonable discretion) that such subtenant or assignee is not of the character or quality of a tenant to whom Landlord would generally lease space of the Building, (ii) the fact that such sublease or assignment is not in form and of substance reasonably satisfactory to Landlord, (iii) such sublease or assignment conflicts in any manner with this Lease, including, but not limited to, the Permitted Use, (iv) the proposed subtenant or assignee is a governmental entity or a medical office, (v) the proposed subtenants or assignees primary business is prohibited by any non-compete clause then affecting the Building, (vi) the proposed subtenant or assignee is a tenant of the Building or other building owned by Landlord in the San Clemente office park or Landlord is negotiating with the proposed subtenant or assignee to become a tenant of the Building or another building owned by Landlord in the San Clement office park, (vii) the population density of the proposed subtenant or assignee within the Premises will exceed the general population density requirement for the Building, (viii) the character of the business to be conducted within the Premises by the proposed subtenant or assignee is likely to substantially increase the expenses or costs or providing Building services, or the burden on parking, existing janitorial services or elevators in the Building, (ix) the sublease or assignment would cause Landlord to breach any recorded covenants or contractual obligations to which the Property or Landlord is subject or (x) such sublessee or assignee has a net worth insufficient to meet the obligations of the tenant under the Lease at the time Tenant submits the Required Information in connection with this Lease. Tenant shall reimburse Landlord for its attorneys fees and other expenses incurred in connection with considering any request for its consent to a Transfer. If Landlord consents to a proposed Transfer, then the proposed transferee shall deliver to Landlord a written agreement whereby it expressly assumes the Tenants obligations hereunder; however, any transferee of less than all of the space in the Premises shall be liable only for obligations under this Lease that are properly allocable to the space subject to the Transfer, and only to the extent of the rent it has agreed to pay Tenant therefor. Landlords consent to a Transfer shall not release Tenant from performing its obligations under this Lease, but rather Tenant and its transferee shall be jointly and severally liable therefor. Landlords consent to any Transfer shall not waive Landlords rights as to any subsequent Transfers. If an Event of Default occurs while the Premises or any part thereof are subject to a Transfer, then Landlord, in addition to its other remedies, may collect directly from such transferee all rents becoming due to Tenant and apply such rents against Rent. Tenant authorizes its transferees to make payments of rent directly to Landlord upon receipt of notice from Landlord to do so.
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(b) Cancellation. Landlord may, within 10 days after submission of Tenants written request for Landlords consent to a Transfer, cancel this Lease (or, as to a subletting, cancel as to the portion of the Premises proposed to be sublet) as of the date the proposed Transfer was to be effective. If Landlord cancels t is Lease as to any portion of the Premises, then this Lease shall cease for such portion of the Premises and Tenant shall pay to Landlord all Rent accrued through the cancellation date relating to the portion of the Premises covered by the proposed Transfer. Thereafter, Landlord may lease such portion of the Premises to the prospective transferee (or to any other person) without liability to Tenant.
(c) Additional Compensation. Tenant shall pay to Landlord, immediately upon receipt thereof, one-half (1/2) of all compensation received by Tenant for a Transfer that exceeds the Basic Rental and Tenants share of Basic Costs allocable to the portion of the Premises covered thereby.
INSURANCE; WAIVERS
SUBROGATION; INDEMNITY
11. (a) Insurance. Tenant shall at its expense procure and maintain throughout the Term the following insurance policies: (1) commercial general liability insurance in amounts of not less than a combined single limit per the Basic Lease Information (the Initial Liability Insurance Amount) or such other amounts as landlord May from time to time reasonably require, insuring Tenant, Landlord, Landlords, Agents and their respective affiliates against all liability for injury to or death of a person or persons or damage to property arising from the use and occupancy of the Premises, (2) contractual liability insurance coverage sufficient to cover Tenants indemnity obligations hereunder, (3) causes of loss special form property insurance covering the full value of Tenants property and improvements made by Tenant to the Premises (excluding the Tenant Improvements), and other property (including property of others), in the Premises, (4) workers compensation insurance containing a waiver of subrogation endorsement reasonably acceptable to Landlord, and (5) business interruption insurance. Tenants insurance shall provide primary coverage to landlord when any policy issued to Landlord provides duplicate or similar coverage, and in such circumstance Landlords policy will be excess over Tenants policy. All such insurance shall name Landlord, Property Manager, and any mortgages, as additional insureds on a form that does not limit the coverage provided under such policy to any additional insured (i) by reason of such additional insureds negligent acts or omissions (sole or otherwise), (ii) by reason of other insurance available to such additional insured, or (ii) to claims for which a primary insured has agreed to indemnify the additional insured. Tenant shall furnish certificates of such insurance and such other evidence satisfactory to Landlord of the maintenance of all insurance coverages required hereunder, and Tenant shall obtain a written obligation on the part of each insurance company to notify Landlord at least 30 days before cancellation or a material change of any such insurance. All such an insurance policies shall be in form, and issued by companies, reasonably satisfactory to Landlord. The term affiliate dont mean any person or entity which, directly or indirectly, controls, is controlled by, or is under common control with the party in question.
(b) No Subrogation. Notwithstanding anything in this Lease to the contrary, Landlord and Tenant each waives any claim it might have against the other for any damages to or theft, destruction, loss, or loss of use of any property, to the extent the same is insured against under any insurance policy that covers the Building, the Premises, Landlords or Tenants fixtures, personal property, leasehold improvements, or business, or in the case of Tenants wavier, is required to be insured against under the terms hereof REGARDLESS OF WHETHER THE NEGLIGENCE OR FAULT OF THE OTHER PARTY CAUSED SUCH LOSS. Landlord and Tenant shall give each insurance company which issues policies of insurance, with respect to the items covered by this waiver, written notice of the terms of the mutual wavier, and shall have such insurance policies properly endorsed, if necessary, to prevent the invalidation of any of the coverage provided by such insurance policies properly endorsed, if necessary, to prevent the invalidation of any of the coverage provided by such insurance policies by reason of such mutual waiver. For the purpose of the foregoing waiver the amount of nay deductible applicable to any loss or damage shall be deemed covered by, and recoverable by the insured under the insurance policy to which such deductible relates.
(c) Indemnity. Subject to Section 11(b), Tenant shall defend, indemnify, and hold harmless Landlord and its agents from and against all claims, demands, liabilities, causes of action, suits, judgements, and expenses (including attorneys fees) for any injury to or death of any person or persons or the damage to or theft, destruction, loss, or loss of use of any property or inconvenience (Loss) arising from any occurrence on the Premises or from Tenants failure to perform its obligations under this Lease (other than a Loss arising from the sole negligence, gross negligence or willful misconduct of Landlord or its agents), EVEN THOUGH CAUSED OR ALLEGED TO BE CAUSED BY THE JOINT, COMPARATIVE, OR CONCURRENT NEGLIGENCE OR FAULT OF LANDLORD OR ITS AGENTS, AND EVEN THOUGH ANY SUCH CLAIM, CAUSE OF ACTION, OR SUIT IS BASED UPON OR ALLEGED TO BE BASED UPON THE STRICT LIABILITY OF LANDLORD OR ITS AGENTS. This indemnity provision shall survive termination or expiration of this Lease.
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SUBORDINATION AND ATTORNMENT;
NOTICE TO LANDLORDS MORTGAGE
12. (a) Subordination. This Lease is subordinate to any lease wherein Landlord is the tenant and any deed of trust, mortgage, or other security instrument (collectively, a Mortgage), that now or hereafter cover all or any part of the Premises (the mortgage under any Mortgage is referred to herein as Landlords Mortgage). The provisions of this Section 12(a) shall be self-operative, and no further instrument shall be required to effect such subordination; provided that the foregoing subordination in respect of any mortgage or deed of trust placed on the Premises after the date hereof shall not become effective until and unless the older of such mortgage or deed of trust delivers to Tenant a non-disturbance agreement (which may include Tenants agreement to allow as set forth below) permitting Tenant, if Tenant is not then in default under, or in breach of any provision of, this Lease, to remain in occupancy of the Premises in the event of a foreclosure of any such mortgage or deed of trust. Tenant also agrees that any lessor, mortgagees, or trustees may elect (which election shall be revocable) to have this Lease superior to the said lease, mortgage or deed of trust, whether this Lease is dated prior to or subsequent to the date of said lease, mortgage or deed of trust, whether this Lease is dated prior to or subsequent to the date of said lease, mortgage or deed of trust. Within ten (10) days after receipt of a request from Landlord from time to time, Tenant agrees to execute a subordination, non-disturbance and attornment agreement (SNDA) in a form reasonably approved by Tenant. Tenant acknowledges that the form of the SNDA attached hereto as Exhibit J is approved by Tenant.
(b) Attornment. Tenant shall attorn to any party succeeding to Landlords interest in the Premises, whether by purchase, foreclosure, deed in lieu of foreclosure, power of safe, termination of lease, or otherwise, upon such partys request, and shall execute such agreements confirming such attornment as such party may reasonably request.
(c) Notice to Landlords Mortgage. Tenant shall not seek to enforce any remedy it may have for any default on the part of the Landlord without first giving written notice by certified mail, return receipt requests, specifying the default in reasonable detail, to any Landlords Mortgage whose address has been given to Tenant, and affording such Landlords Mortgagee a reasonable opportunity to perform Landlords obligations hereunder.
RULES AND REGULATIONS
13. Tenant shall comply with the rules and regulations of the Building which are attached hereto as Exhibit B. Landlord may from time to time change such rules and regulations for the safety, care, or cleanliness of the Building and related facilities, provided that such changes are reasonable, applicable to all tenants of the Building and will not unreasonably interfere with Tenants use of the Premises. Tenant shall be responsible for the compliance with such rules and regulations by its employees, agents, and invitees.
CONDEMNATION
14. (a) Taking Landlords and Tenants Rights. If any part of the Buildings taken by right of eminent domain or conveyed in lieu thereof (a Taking), and such Taking prevents Tenant from conducting its business in the Premises in a manner reasonably comparable to that conducted immediately before such Taking, then Landlord may at its expense, relocate Tenant to office space reasonably comparable to the Premises, provided that Landlord notifies Tenant of its intention to do so prior to the effective date of the Taking. Such relocation may be for a portion of the remaining Term or the entire Term. Landlord shall complete any such relocation within 180 days after Landlord has notified Tenant of its intention to relocate Tenant. If Landlord does not elect to relocate Tenant following such Taking, then Tenant may terminate this Lease as of the date of such Taking by giving written notice to Landlord within 60 days after the Taking, and Rent shall be apportioned as of the date of such Taking. If Landlord does not relocate Tenant and Tenant does not terminate this Lease then Rent shall be adjusted on a reasonable basis as to that portion of the Premises rendered untenantable by the Taking.
(b) Taking Landlords Rights. If any material portion, but less than all, of the Building becomes subject to a Taking, or if Landlord is required to pay any of the proceeds received for a Taking to Landlords Mortgagee, then this Lease, at the option of Landlord, exercised by written notice to Tenant within 30 days after such Taking, shall terminate and Rent shall be apportioned as of the date of such Taking. If Landlord does not so terminate this Lease and does not elect to relocate Tenant, then this Lease will continue, but if any portion of the premises has been taken, Basic Rental shall adjust as provided in the last sentence of Section 14(a).
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(c) Award. If any Taking occurs, then Landlord shall receive the entire award or other compensation for the Land, the Building, and other improvements taken, and Tenant may separately pursue a claim against the condemnor for the value of Tenants personal property which Tenant is entitled to remove under this Lease moving costs, loss of business, and other claims it may have.
FIRE OR OTHER CASUALTY
15. (a) Repair Estimate. If the Premises or the Building are damaged by fire or other casualty (a Casualty). Landlord shall, within 60 days after such Casualty, deliver to tenant a good faith estimate (the Damage Notice) of the time needed to repair the damage caused by such Casualty.
(b) Landlords and Tenants Rights. If a material portion of the Premises or the Building is damaged by Casualty such that Tenant is prevented from conducting its business in the Premises in a manner reasonably comparable to that conducted immediately before such Casualty and Landlord estimates that the damage caused thereby cannot be repaired within 180 days after the commencement of repair, then Tenant may terminate this Lease by delivering written notice to Landlord of its election to terminate within 30 days after the Damage Notice has been delivered to Tenant. If Tenant does not terminate the Lease, then (subject to Landlords rights under Section 15(c)) Landlord shall repair the Building or the Premises, as the case may be, as provided below, and Rent for the portion of the Premises rendered untenantable by the damage shall be adjusted on a reasonable basis from the date of damage until the completion of the repair, unless such damage was caused by the gross negligence or willful misconduct of Tenant, in which case, Tenant shall continue to pay Rent without abatement.
(c) Landlords Rights. If a casualty damages a material portion of the Building, and Landlord makes a good faith determination that restoring the Premises would be uneconomical, or if Landlord is required to pay any insurance proceeds arising out of the Casualty to Landlords Mortgagee, then Landlord may terminate this Lease by giving written notice of its election to terminate within 30 days after the Damage Notice has been delivered to Tenant, and Basic Rental hereunder shall be abated as of the date of the Casualty.
(d) Repair Obligation. If neither party elects to terminate this Lease following a Casualty, then Landlord shall, within a reasonable time after such Casualty, commence to repair the Building and the Premises and shall proceed with reasonable diligence to restore the Building and Premises to substantially the same condition as they existed immediately before such Casualty; however, Landlord shall not be required to repair or replace any part of the furniture, equipment, fixtures, and other improvements which may have been placed by, or at the request of, Tenant or other occupants in the Building or the Premises, and Landlords obligation to repair or restore the Building or Premises shall be limited to the extent of the insurance proceeds actually received by Landlord for the Casualty in question.
TAXES
16. Tenant shall be liable for all taxes levied or assessed against personal property, furniture, or fixtures placed by Tenant in the Premises. If any taxes for which Tenant is liable are levied or assessed against Landlord or Landlords property and Landlord elects to pay the same, or if the assessed value of Landlords property is increased by inclusion of such personal property, furniture or fixtures and Landlord elects to pay the taxes based on such increase, then Tenant shall pay to Landlord, upon demand, that part of such taxes for which Tenant is primarily liable hereunder.
EVENTS OF DEFAULT
17. Each of the following occurrences shall constitutes an Event of Default:
(a) Tenant fails to pay any Rent or other sums due from Tenant to Landlord under the Lease when due; provided that the first two (2) such failures during any consecutive twelve (12) month period during the Term shall not be an Event of Default if Tenant pays the amount due within five (5) days after Tenants receipt of written notice from Landlord that such payments were not made when due;
(b) Tenants failure to perform, comply with, or observe any agreement or obligation of Tenant under this Lease (other than a payment of obligation) on or before the thirtieth (30th) day following written notice of such failure;
(c) the filing of a petition by or against Tenant (the term Tenant shall include, for the purpose of this Section 17(c), any guarantor of the Tenants obligations hereunder) (1) in any bankruptcy or other insolvency proceeding; (2) seeking any relief under any state or federal debtor relief law; (3) for the appointment of a liquidator or
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receiver for all or substantially all of Tenants property or for Tenants interest in this Lease; or (4) for the reorganization or modification of Tenants capital structure; provided that Tenant shall have sixty (60) days following the commencement of an involuntary proceeding to have such proceeding dismissed before such proceeding shall constitute an Event of Default;
(d) intentionally omitted; and
(e) the admission by Tenant that it cannot meet its obligations as they become due or the making by Tenant of an assignment for the benefit of its creditors.
In the event tenant fails to take possession of and occupy the Premises within thirty (30) days following the Commencement Date or if Tenant vacates all or substantially all of the Premises for any period of sixty (60) or more consecutive days (other than a vacancy due to a casualty or condemnation or a vacancy for which Tenant is expressly entitled to abatement of rent under this Lease), Tenant shall notify Landlord if such vacation. Further, in the event Tenant vacates all or substantially all of the Premises for any period of ninety (90) or more consecutive days, including failure to occupy the Premises for ninety (90) days after the Commencement Date (other than a vacancy due to a casualty, condemnation, or a vacancy for which Tenant is expressly entitled to abatement of rent under this Lease), such vacancy shall not be an Event of Default hereunder, however, in such event Landlord shall have the right, but not the obligation, to terminate this Lease by delivering written notice of termination to Tenant prior to the date that Tenant occupies or re-occupies all or substantially all of the Premises.
REMEDIES
18. Upon any Event of Default, Landlord may, in addition to all other rights and remedies afforded Landlord hereunder or by law or equity, take any of the following actions:
(a) Terminate this Lease by giving Tenant written notice thereof, in which event, Tenant shall pay to Landlord the sum of (1) all Rent accrued hereunder through the date of termination, (2) all amounts due under Section 19(a), and (3) an amount equal to (A) the total Rent that Tenant would have been required to pay for the remainder of the Term discounted to present value at a per annum rate equal to the Prime Rate as published on the date this Lease is terminated by The Wall Street Journal, Southwest Edition, in its listing of Money Rates, minus (B) the then present fair rental value of the Premised for such period, similarly discounted; or
(b) Terminate Tenants right to possession of the Premises without terminating this Lease by giving, written notice thereof to Tenant, in which event Tenant shall pay to Landlord (1) all Rent and other amounts accrued hereunder to the date of termination of possession, (2) all amounts due from time to time under Section 19(a), and (3) all Rent and other sums required hereunder to be paid by Tenant during the remainder of the Term, diminished by any net sums thereafter received by Landlord through reletting the Premises during such period. Landlord shall use reasonable efforts to relet the Premises on such terms and conditions as Landlord in its sole discretion may determine (including a term different from the Term, rental concessions, and alterations to, and improvement of, the Premises); however, Landlord Shall not be obligated to relet the Premises before leasing other portions of the Building, Landlord shall not be liable for, nor shall Tenants obligations hereunder be diminished because of, Landlords failure to relet the Premises or to collect rent due for such reletting. Tenant shall not be entitled to the excess of any consideration obtained by reletting over the Rent due hereunder. Reentry by Landlord in the Premises shall not affect Tenants obligations hereunder for the unexpired Term; rather, Landlord may, from time to time, bring action against Tenant to collect amounts due by Tenant, without the necessity of Landlords waiting until the expiration of the Term. Unless Landlord delivers written notice to Tenant expressly stating that it has elected to terminate this Lease, all actions taken by Landlord to exclude or dispossess Tenant of the Premises shall be deemed to be taken under this Section 18(b). If Landlord elects |to proceed under this Section 18(b), it may at any time elect to terminate this Lease under Section 18(a).
Additionally, without notice, Landlord may alter looks or other security devices at the Premises to deprive Tenant of access thereto, and Landlord shall not be required to provide a new key or right of access to Tenant. All property of Tenant removed from the Premises by Landlord pursuant to any provision of this Lease or applicable law may be handled, removed or stored by Landlord at the cost and expense of Tenant, and Landlord shall not be responsible in any event for the value, preservation or safekeeping thereof. Tenant shall pay Landlord for all expenses incurred by Landlord with respect to such removal and storage so long as the same is in Landlords possession or under Landlords control. All such property not removed from the Premises or retaken from storage by Tenant within thirty (30) days after the end of the Term or termination of Tenants right to possession of the Premises, however terminated, at Landlords option, shall be conclusively deemed to have been conveyed by Tenant to Landlord by bill of sale with general warranty of title without further payment or credit by Landlord to Tenant.
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(c) Without judicial process and without having any liability therefor, enter upon the Premises and do whatever Tenant is obligated to do under the terms of this Lease, and Tenant further agrees that Landlord shall not be liable for any damages resulting to Tenant from such action, WHETHER CAUSED BY THE NEGLIGENCE OF LANDLORD OR OTHERWISE.
(d) TENANT AND LANDLORD HEREBY KNOWINGLY AND VOLUNTARILY WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTER CLAIM, BROUGHT BY ONE PARTY AGAINST THE OTHER OR ANY MATTER WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS LEASE, THE RELATIONSHIP OF LANDLORD AND TENANT CREATED HEREBY, TENANTS USE OR OCCUPANCY OF THE PREMISES AND/OR ANY CLAIM FOR INJURY OR DAMAGE, THE PARTIES ARE HEREBY AUTHORIZED TO FILE A COPY OF THIS PARAGRAPH IN ANY PROCEEDING AS CONCLUSIVE EVIDENCE OF THE FOREGOING WAIVER.
PAYMENT BY TENANT;
NON-WAIVER; REMEDIES CUMULATIVE
19. (a) Payment by Tenant. Upon any Event of Default, Tenant shall pay to Landlord all costs incurred by Landlord (including court costs and reasonable attorneys fees and expenses) in (1) obtaining possession of the Premises, (2) removing and storing Tenants or any other occupants property, (3) repairing, restoring, altering, remodeling, or otherwise putting the Premises into conditions acceptable to a new tenant, (4) if Tenant is dispossessed of the Premises and this Lease is not terminated, reletting all or any part of the Premises (including brokerage commissions, cost of tenant finish work, and other costs incidental to such reletting), (5) performing Tenants obligations which Tenant failed to perform, and (6) enforcing, or advising Landlord of, its rights, remedies, and recourses arising out of the Event of Default.
(b) No Waiver. Landlords acceptance of Rent following an Event of Default, shall not waive Landlords rights regarding such Event of Default. No waiver by Landlord of any violation or breach of any of the terms continued herein shall waive Landlords rights regarding any future violation of such term or violation of any other term.
(c) Remedies Cumulative. No right or remedy herein conferred upon or reserved to Landlord is intended to be exclusive of any other right or remedy set forth herein or otherwise available to Landlord at law or in equity and each and every right and remedy shall be cumulative and in addition to any other right or remedy given hereunder or now or hereafter existing at law or in equity or by statute. In addition to the other remedies provided in this Lease and without limiting the preceding sentence, Landlord shall be entitled, to the extent permitted by applicable law, to injunctive relief in case of the violation, or attempted or threatened violation, of any of the covenants, agreements, conditions or provisions of this Lease, or to a decree compelling performance of any of the covenants, agreements, conditions or provisions of this Lease, or to any other remedy allowed to Landlord at law or in equity.
SURRENDER OF PREMISES
20. No act by Landlord shall be deemed an acceptance or a surrender of the Premises, and no agreement to accept a surrender of the Premises shall be valid unless the same is made in writing and signed by Landlord. At the expiration or termination of this Lease, Tenant shall deliver to Landlord the Premises with all improvements located thereon in good repair and condition, reasonable wear and tear (and condemnation and fire or other casualty damage, as to which Sections 14 and 15 shall control) excepted, and shall deliver to Landlord all keys to the Premises. Provided that Tenant has performed all of its obligations hereunder, Tenant may remove all unattached trade fixtures, furniture, and personal property placed in the Premises by Tenant (but Tenant shall not remove any such item which was paid for, in whole or in part, by Landlord). Additionally, Tenant shall remove such alterations, additions, improvements, trade fixtures, equipment, wiring, and furniture that is installed or placed in the Premises by Tenant as Landlord may request at the time Landlord approves such alterations (excluding however the Tenants Improvements, which Tenant may surrender). Tenant: shall repair all damage caused by such removal. If Tenant fails to deliver the Premises in the condition aforesaid, then Landlord may restore the Premises to such a condition at Tenants expense. All items not so removed shall be deemed to have been abandoned by Tenant and may be appropriated, sold, stored, destroyed, or otherwise disposed of by Landlord without notice to Tenant and without any obligation to account for such items. The provisions of this Section 20 shall survive the end of the Term.
MOLDING OVER
21. If Tenant fails to vacate the Premises at the end of the Term, then Tenant shall be a tenant at will and, in addition, to all other damages and remedies to which Landlord may be entitled for such holding over, Tenant shall pay, Rent equal to the greater of (a) 200% of the daily Rent payable during the last month of the Term, or (b) the prevailing
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rental rate in the property for similar space. Additionally, Tenant shall defend, indemnify, and hold harmless Landlord from any damage, liability and expense (including attorneys fees and expenses) incurred because of such holding over. No holding over in the premises by Tenant or payments of money by Tenant to Landlord after the Term shall reinstate, continue or extend the Term, and no extension of this Term shall be valid unless it is in writing and signed by Landlord and Tenant.
CERTAIN RIGHTS RESERVED BY LANDLORD
22. Landlord shall have the following rights:
(a) to decorate and to make inspections, repairs, alterations, additions, changes, or improvements, whether structural or otherwise, in and about the Building, or any part thereof, for such purposes, to enter upon the Premises and, during the continuance of any such work, to temporarily close doors, entryways, public space, and corridors in the Building; to interrupt or temporarily suspend Building services and facilities; and to change the arrangement and location of entrances or passageways, doors, and doorways, corridors, elevators, stairs, restrooms, or other public parts of the Building;
(b) to make such reasonable measures as Landlord deems advisable for the security of the Building and its occupants, including without limitation searching all persons entering or leaving the Building; evacuating the Building for cause, suspected cause, or for drill purposes; temporarily denying access to the Building; and closing the Building: after normal business hours and on Saturdays, Sundays, and holidays, subject, however, to Tenants right to enter when the Building is closed after normal business hours under such reasonable regulations as Landlord may prescribe from time to time which may include by way of example, but not of limitation, that persons entering or leaving the Building, whether or not during normal business hours, identify themselves to a security officer by registration or otherwise and that such persons establish their right to enter or leave the Building;
(c) to change the name by which the Building is designated; and
(d) to enter the Premises at all reasonable hours upon giving Tenant reasonable notice (except in the case of any emergency, in which case no notice shall be required) and to show the Premises to prospective purchasers, lenders, or tenants.
When exercising the foregoing rights, Landlord agrees to use commercially reasonable efforts not to interfere with Tenants occupancy of the Premises;
SUBSTITUTION SPACE
23. (a) Notwithstanding anything to the contrary set forth herein, prior to Landlords commencement of construction, of the Tenant Improvements in the Premises (which construction is anticipated to commence on or about December 1, 2014), Landlord shall have the right to notify Tenant of Landlords election to relocate Tenant to space of approximately the same size as the Premises in ant comparable building within a three (3) mile radius from the Premises in Austin, Texas owned or managed by Landlord or an affiliate of Landlord (the Substitution Space);
(b) If Landlord exercises such right by giving Tenant notice thereof (Substitution Notice), the Substitution Notice shall contain (i) a description of the proposed Substitution Space, (ii) the economic terms of the proposed lease of the Substitution Space, including without limitation, the basic rental rate, the projected basic costs for the Substitution Space, and the tenant finish allowance to be provided by the landlord, and (iii) all other relevant terms of the proposed lease of the Substitution Space, including expansion and/or renewal options. Within fifteen (15) days after Tenants receipt of a Substitution Notice, Tenant shall notify Landlord whether or not Tenant approves the Substitution Space and the terms of the lease of the Substitution Space set forth in the Substitution Notice (the Tenant Response), it being agreed that Tenant shall not unreasonably withhold its approval thereof. If Tenant timely delivers the Tenant Response approving the Substitution Space and the terms set forth in the Substitution Notice, then Landlord (or its affiliate and/or the owner of the Substitution Space) and Tenant shall promptly, but not later than fifteen (15) days after Landlords receipt of the Tenant Response) enter into a new lease with respect to the Substitution Space in form substantially similar to this Lease with the appropriate business terms incorporated. If Tenant timely delivers a Tenant Response disapproving the Substitution Space and/or the terms set forth in the Substitution Notice, then landlord and Tenant shall negotiate in good faith for a period of thirty (30) days with respect to other space and/or other terms applicable for the relocation of Tenant; provided however, if landlord and Tenant ore unable to reach an agreement as to the location of and/or terms with respect to the Substitution Space, this Lease shall continue in full force and effect, and Landlord shall have no further right to relocate the Premises. If Tenant fails to timely deliver a Tenant Response, Tenant
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shall be deemed to have approved the Substitution Space and the terms set forth in the Substitution Notice) and Landlord (or its affiliate and/or the owner of the Substitution Space) and Tenant shall promptly, but not later than fifteen (15) days after the expiration of the time period for Tenant to deliver a Tenant Response) enter into a new lease with respect to the Substitution Space in for substantially similar to this Lease with the appropriate business terms incorporated.
MISCELLANEOUS
24. (a) Landlord Transfer. Landlord may transfer, in whole or in part, the Building and any of its rights under this Lease. If Landlord assigns its rights under this Lease, then Landlord shall thereby be released from any further obligations hereunder.
(b) Landlords Liability. The liability of Landlord to Tenant for any default by Landlord under the terms of this Lease shall be limited to Tenants actual direct, but not consequential, damages therefor and shall be recoverable only from the interest of Landlord in the Building and the Land, and neither Landlord nor Landlords owners shall be personally liable therefor. This Section 24(b) shall not be deemed to limit or deny any remedies which Tenant may have in the event of a default by Landlord hereunder which do not involve the personal liability of Landlord.
(c) Force Majeure. Other than for Tenants monetary obligations under this Lease and obligations which can be cured by the payment of money (e.g., maintaining insurance), whenever a period of time is herein prescribed for action to be taken by either party hereto, such party shall not be liable or responsible for, and there shall be excluded from the computation for any such period of time, any delays due to strikes, riots, acts of God, shortages of labor or materials, war, governmental laws, regulations, or restrictions, or any other causes of any kind whatsoever which are beyond the control of such party.
(d) Brokerage. Landlord and Tenant each warrant to the other that it has not dealt with any broker or agent in connection with the negotiation or execution of this Lease, except for HPI Real Estate, Inc., Landlords exclusive agent. Tenant and Landlord shall each indemnify the other against all costs, expenses, attorneys fees, and other liability for commissions or other compensation claimed by any broker or agent claiming the same by, through, or under the indemnifying party.
(e) Estoppel Certificates and Financial Information. From time to time, Tenant shall furnish to any party designated by Landlord, within ten days after Landlord has made a request therefor, a certificate signed by Tenant confirming and containing such factual certifications sod representations as to this Lease as Landlord may reasonably request. Further, from time to time (but not more often than once in any given six (6) month period), within ten days after Landlords request therefore, Tenant shall furnish to Landlord or Landlords Mortgagee the most recent annual financial statements for Tenant.
(f) Notices. All notices and other communications given pursuant to this Lease shall be in writing and shall be (1) mailed by United States Mail, postage prepaid, certified, with return receipt requested, and addressed to the parties hereto at the address specified in the Basic Lease Information, (2) hand delivered or delivered by overnight delivery service to the intended address, (3) sent by facsimile transmission followed by a confirmatory letter, or (4) sent by email provided that the recipient has personally responded confirming receipt. Notice sent by certified mail, postage prepaid, shall be effective three business days after being deposited in the United States Mail; all other notices shall be effective upon delivery to the address of the addressee (or if delivery Is not accepted, upon the first attempted delivery). The parties hereto may change their addresses by giving notice thereof to the other in conformity whit this provision.
(g) Separability. If any clause or provision of this Lease is illegal, invalid, or unenforceable under present or future laws, then the remainder of this Lease shall not be affected thereby and in lieu of such clause or provision, there shall be added as a part of this Lease, a clause or provision, as similar in terms to such illegal, invalid, or unenforceable clause or provision as may be possible and be legal, valid, and enforceable.
(h) Amendments; and Binding Effect. This Lease may not be amended except by instrument in writing signed by Landlord and Tenant. No provision of this Lease shall be deemed to have been waived by Landlord unless such waiver is in writing signed by Landlord, and no custom or practice which may evolve between the parties in the administration of the terms hereof shall waive or diminish the right of Landlord to insist upon the performance by Tenant in strict accordance with the terms hereof. The terms and conditions contained in this Lease shall inure to the benefit of and be binding upon the patties hereto, and upon their respective successors to interest and legal representatives, except as otherwise herein expressly provided. This Lease is for the sole benefit of Landlord and Tenant, and, other than Landlords Mortgagee, no third party shall be deemed a third party beneficiary hereof.
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(i) Quiet Enjoyment. Provided Tenant has performed all of the terms and conditions of this Lease to be performed by Tenant, Tenant shall peaceably and quietly bold and enjoy the Premises for the Term, without hindrance from Landlord or any party claiming by, through, or under Landlord, subject to the terms and conditions of this Lease.
(j) Joint and Several Liability. If there is more than one Tenant, then the obligations hereunder imposed upon Tenant shall be joint and several. If there in a guarantor of Tenants obligations hereunder, then the obligation hereunder imposed upon Tenant shall be the joint and several obligations of Tenant and such guarantor, and Landlord need not first proceed against Tenant before proceeding against such guarantor nor shall any such guarantor be released from its guaranty for any reason whatsoever.
(k) Captions. The captions contained in this Lease are for conveniences of reference only, and do no| limit or enlarge the terms and conditions of this Lease.
(l) No Merger. There shall be no merger of the leasehold estate hereby created with the fee estate in the Premises or any part thereof. If the same person acquires or holds, directly or indirectly, this Lease or any interest in this Lease and the fee estate in the leasehold Premises or any interest in such estate,
(m) No Offer. The submission of this Lease to Tenant shall not be construed as an offer, nor shall Tenant have any right under this Lease unless Landlord executes a copy of this Lease and delivers it to Tenant.
(n) Exhibits. All exhibits and attachments hereto are incorporated herein by this reference,
Exhibit A |
Land | |
Exhibit A-1 |
Outline of Premises | |
Exhibit A-2 |
Property | |
Exhibit B |
Building Rules and Regulation | |
Exhibit C |
Basic Costs | |
Exhibit D |
Tenant Finish-Work | |
Exhibit B |
Parking | |
Exhibit F |
Acceptance of Premises Memorandum | |
Exhibit G |
Signage | |
Exhibit H |
Renewal Option | |
Exhibit I |
Right of First Offer | |
Exhibit J |
Form of SNDA |
(o) Entire Agreement. This Lease constitutes the entire agreement between Landlord and Tenant regarding the subject matter hereof and supersedes all oral statements and prior writings relating thereto. Except for those set forth in this Lease, no representations, warranties, or agreements have been made by Landlord or Tenant to the other with respect to this Lease or the obligations of Landlord or Tenant in connection therewith.
(p) Governing Law. THIS LEASE WILL BE GOVERNED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS.
(q) Calculation of Charges. Landlord and Tenant agree that each provision of this Lease for determining charges, amounts and additional rent payments by Tenant (including without limitation, Section 4 and Exhibit C of this Lease) is commercially reasonable, and as to each such charge or amount, constitutes a method by which the charge is to be computed for purposes of Section 93.012 (Assessment of Charges) of the Texas Property Code, as such section now exists or as it may be hereafter amended or succeeded.
(r) WAIVER OF DECEPTIVE TRADE PRACTICES ACT. TENANT HEREBY WAIVES ALL, ITS RIGHTS UNDER THE TEXAS DECEPTIVE TRADE PRACTICESCONSUMER PROTECTION ACT, SECTION 17.41 ET. SEQ. OF THE TEXAS BUSINESS AND COMMERCE CODE, A LAW THAT GIVES CONSUMERS SPECIAL RIGHTS AND PROTECTIONS. AFTER CONSULTATION WITH AN ATTORNEY OF TENANTS OWN SELECTION, TENANT VOLUNTARILY CONSENTS TO THIS WAIVER.
(s) Lease Not a Construction Contract. Landlord and Tenant acknowledge and agree that this Lease including all exhibits a part thereof and hereof, is not a construction contract or an agreement collateral to or affecting a construction contract.
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(t) Landlords Reimbursement of Tenants Existing Lease Obligations. Tenant currently leases approximately 56,l96 rentable square feet of space in the building known as Ladera Bend Building 3 located at 7300 FM 2222, Austin, Texas (the Existing Lease). Landlord and Tenant acknowledge and agree that Existing Lease expires by its terms on December 11, 2016. Provided that Tenant is not in default under this Lease, commencing on the Commencement Date and continuing monthly thereafter, Landlord agrees to reimburse Tenant for the base rent, operating expenses and utilities (the Existing Lease Payments) paid by Tenant under the Existing Lease; provided that in no event shall Landlord be required to pay any Existing Lease Payments with respect to the Existing Lease for any period after December 31, 2016 or for any premises leased by Tenant under the Existing Leese in excess of 56,196 rentable square feet. Landlord shall pay such reimbursement to Tenant within fifteen (15) business days after receipt of evidence (which evidence may be in the form of a copy of Tenants check) of Tenants payment of such amounts under the Existing Lease. In no event shall Landlord have any liability to perform any obligations of Tenant under the Existing Lease. In consideration of Landlords agreements set forth in this Section 24(t), Tenant hereby grants Landlord the right to negotiate directly with the Landlord under the Existing Lease for a buy-out of such lease, and Tenant shall cooperate with Landlord in connection with such negotiations and shall execute any required documentation to consummate such buyout; provided that Tenant shall not be required to pay any termination fee or other amounts or perform any additional obligations in connection with any buy-out. Landlord shall pay such termination fee directly to the Landlord under the Existing Lease. Further, Landlord shall have the right to identify and negotiate with prospective subtenants for the premises under the Existing Lease, and, subject to the approval of the Landlord under the Existing Lease. If required thereunder, Tenant shall execute any sublease covering such premises requeued by Landlord. Tenant hereby represents and warrants to Landlord the following; (i) Tenant has delivered to Landlord a true and correct copy of the Existing Lease, (ii) Tenant has not subleased any portion of the premises under the Existing Lease, and (iii) no default exists under the Existing Lease, and no condition exists which with the giving or notice or the passage of time, or both, would constitute a default under the Existing Lease. In the event the Existing Lease is terminated prior to December 31, 2016 and/or to the event sublease is executed for the premises under the Existing Lease prior to December 31, 2016, Landlord shall pay to Tenant fifty percent (50%) of the savings realized by Landlord (after deduction of all costs and expenses payable by Landlord in connection with such early termination and/or sublease(s)) over the Existing Lease Payments that would have been payable by Landlord absent such early termination and/or sublease(s). Tenants share of such savings shall be paid by Landlord to Tenant by January 31, 2017.
HAZARDOUS SUBSTANCES
25. The term Hazardous Substances, as used in this Lease shall mean pollutants, contaminants, toxic or hazardous wastes, or any other substances, the removal of which is required or the use of which is restricted, prohibited or penalized by any Environmental Law, which term shall mean any Law relating to health, pollution, or protection, of the environment. Tenant hereby agrees that (a) no activity will be conducted on the Premises that will produce any Hazardous Substances, except for such activities that are part of the ordinary course of Tenants business activities (the Permitted Activities) provided such Permitted Activities are conducted in accordance with alt Environmental Laws and have been approved in advance in writing by Landlord; (b) the Premises will not be used in any manner for the storage of any Hazardous Substances except for any temporary storage of such materials that are used in the ordinary course of Tenants business (the Permitted Materials) provided such Permitted Materials are properly stored in a manner and location satisfying all Environmental Laws and approved in advance in writing by Landlord; (c) no portion of the Premises will be used as a landfill or a dump; (d) Tenant will not install any underground tanks of any type; (e) Tenant will not allow any surface or subsurface conditions to exist or cause into existence that constitute, or with the passage of time may constitute a public or private nuisance; (f) Tenant will not permit any Hazardous Substances to be brought onto the Premises, except for the Permitted Materials, and if so brought or found located thereon, the same shall be immediately removed by Tenant, with, proper disposal, and all required cleanup procedures shall be diligently undertaken pursuant to all Environmental Laws; (g) Tenant will maintain on the Premises a list of all materials stored at the Premises for which a material safety data sheet (an MSDS) was issued by the producers or manufacturers thereof, together with copies of the MSDSs for such materials, and shall deliver such list and MSDS copies to Landlord upon Landlords request therefor; and (h) Tenant shall remove all Permitted Materials from the Premises in a manner acceptable to Landlord before Tenants right to possess the Premises is terminated. If at any time during or after the Term, the Premises are found to be so contaminated or subject to such conditions, Tenant shall defend, indemnify and hold Landlord harmless from all claims, demands, actions, liabilities, costs, expenses, damages end obligations of any nature arising from or as a result of the use of the Premises by Tenant, except for any conditions or contamination caused by Landlord. The foregoing indemnity shall survive termination or expiration of this Lease. Unless expressly identified on an addendum to this Lease, as of the date hereof there are no Permitted Activities or Permitted Materials for purposes of the foregoing provision and none shall exist unless and until approved in writing by the Landlord. Landlord may enter the Premises and conduct environmental inspections and tests therein as it may reasonably require from time to time, provided that Landlord shall use reasonable efforts to minimize the interference with Tenants business. Such inspections and tests shall be conducted at Landlords expense, unless they reveal the presence of Hazardous Substances (other than Permitted Materials or those placed in the Premises by Landlord) or that Tenant has not complied with the requirements set forth in this Section 25, in which case Tenant shall reimburse Landlord for the cost thereof within ten days after landlords request therefor.
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LANDLORDS LIEN
26. Landlord waives any right of distraint with respect to Tenants property and any landlords lien against Tenants property that may arise at law.
TENANT ACKNOWLEDGES THAT (1) IT HAS INSPECTED AND ACCEPTS THE PREMISES IN AN AS IS, WHERE IS CONDITION, SUBJECT TO SUBSTANTIAL COMPLETION OF THE TENANTS IMPROVEMENTS AS SET FORTH IN EXHIBIT D. (2) THE BUILDINGS IMPROVEMENTS ARE SUITABLE FOR THE PURPOSE FOR WHICH THE PREMISES ARE LEASED AND LANDLORD HAS MADE NO WARRANTY, REPRESENTATION, COVENANT, OR AGREEMENT WITH RESPECT TO THE MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF THE PREMISES, (3) NO REPRESENTATIONS AS TO THE REPAIR OF TIIE PREMISES, NOR PROMISES TO ALTER, REMODEL OR IMPROVE TIIE PREMISES HAVE BEEN MADE BY LANDLORD (UNLESS AND EXCEPT AS MAY BE SET FORTH IN EXHIBIT D ATTACHED TO THIS LEASE, OR AS IS OTHERWISE EXPRESSLY SET FORTH IN THIS LEASE), AND (4) NO WARRANTIES, EXPRESS OR IMPLIED, ARE MADE REGARDING THE CONDITION OR SUITABILITY OF THE PREMISES ON THE COMMENCEMENT DATE, FURTHER, TO THE EXTENT PERMITTED BY LAW, TENANT WAIVES ANY IMPLIED WARRANTY OF SUITABILITY OR OTHER IMPLIED WARRANTIES THAT LANDLORD WILL MAINTAIN OR REPAIR THE PREMISES OR ITS APPURTENANCES EXCEPT AS MAY BE CLEARLY AND EXPRESSLY PROVIDED IN THIS LEASE.
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Executed this 18 day of November, 2013:
LANDLORD: | ||||||
SAN CLEMENTE AT DAVENPORT NORTH, LTD., a Texas Limited partnership | ||||||
By: | Office-360, Inc., a Texas corporation, its general partner | |||||
Landlord Witness
|
||||||
/s/ Adri Baker |
By: | /s/ Richard E. Anderson | ||||
Adri Baker | Name: Richard E. Anderson | |||||
Title: President | ||||||
TENANT: | ||||||
SPICEWORKS, INC., a Delaware corporation | ||||||
By: | /s/ Scott Abel | |||||
Name: Scott Abel | ||||||
Title: President & CEO |
1
EXHIBIT A
LAND
Lots 37, 38, 39, 40, 41, 42 and 43, Block A, DAVENPORT WEST P.U.D. SECTION 5, PHASE 6, a subdivision in Travis County, Texas, according to the map or plat thereof, recorded under Document No. 200000169 of the Official Public Records of Travis County, Texas.
Exhibit A-1
FIRST AMENDMENT TO LEAST AGREEMENT
THIS FIRST AMENDMENT TO LEASE AGREEMENT (this Amendment) is executed as of the 18th day of December, 2013 by and between SAN CLEMENTE AT DAVENPORT NORTH, LTD., a Texas limited partnership (Landlord) and SPICEWORKS, INC., a Delaware corporation (Tenant).
A. Landlord and Tenant are parties to that certain Lease Agreement dated November 18, 2013 (the Lease) covering approximately 95,268 rentable square feet of space the building to be located at 3700 N. Capital Texas of Highway, Austin, Texas 78746.
B. Landlord and Tenant not mutually desire to amend the Lease.
C. Unless otherwise defined herein, all capitalized terms have the meanings assigned to them in the Lease.
NOW, THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and adequacy of which are acknowledged, Landlord and Tenant hereby agree as follows:
1. Section 3(c) of the Lease is hereby amended in its entirety to read as follows:
(c) Financing of Construction. Landlord and Tenant acknowledge that as of the date of this Lease, the Building in which the Premises is to be located has not yet been constructed. Landlord shall not be obligated to proceed with construction of the Building unless and until financing acceptable to Landlord has been obtained. If Landlord has not entered in to a construction loan satisfactory to Landlord by January 31, 2014, Landlord shall so notify Tenant, and thereafter, but prior to the date the Landlord obtains a construction loan, either party hereto shall be entitled to terminate this Lease by delivery written notice of termination to the other party. Such termination shall be effective upon the date of receipt of the termination notice by the non-terminating party, and this Lease shall thereupon cease and terminate and each of the parties hereto shall be released and discharged from any and all liability and responsibility hereunder (provided that Landlord shall refund to Tenant all pre-paid Rent hereunder), and neither party shall have any liability to the other by reason of such termination.
2. Except as herein and hereby modified and amended, the Lease shall remain in full force and effect and all the terms, provisions, covenants and conditions thereof are hereby ratified and confirmed. In the event of any conflict between the terms and conditions of the Lease and the terms and conditions of this Amendment, the terms and conditions of this Amendment shall prevail.
3. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. The parties agree that this amendment may be transmitted between them by facsimile, and any faxed signature shall constitute an original signature and is binding upon the parties.
4. The terms and provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns.
5. The Lease, together with this Amendment represent the entire agreement of the parties with respect to the subject matter thereof.
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IN WITNESS WHEREOF, the Landlord and Tenant have duly executed this Amendment as of the date set forth below.
Landlord Witness | LANDLORD:
SAN CLEMENTE AT DAVENPORT NORTH, LTD., a Texas Limited partnership
By: Office-360, Inc., a Texas corporation, its general partner | |||||
/s/ Adri Baker |
||||||
Adri Baker | By: | /s/ Richard E. Anderson | ||||
Name: | Richard E. Anderson | |||||
Title: | President |
TENANT:
SPICEWORKS, INC., a Delaware corporation | ||||||
By: | /s/ Scott Abel | |||||
Name: | Scott Abel | |||||
Title: | President & CEO |
2
SECOND AMENDMENT TO LEASE AGREEMENT
THIS SECOND AMENDMENT TO LEASE AGREEMENT (this Amendment) is executed as of the 11th day of February, 2014 by and between SAN CLEMENTE AT DAVENPORT NORTH, LTD., a Texas limited partnership (Landlord) and SPICEWORKS, INC., a Delaware corporation (Tenant).
A. Landlord and Tenant are parties to that certain Lease Agreement dated November 18, 2013, and amended by the First Amendment dated December 18, 2013, (the Lease) covering approximately 95,268 rentable square feet of space the building to be located at 3700 N. Capital Texas of Highway, Austin, Texas 78746.
B. Landlord and Tenant not mutually desire to amend the Lease.
C. Unless otherwise defined herein, all capitalized terms have the meanings assigned to them in the Lease.
NOW, THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and adequacy of which are acknowledged, Landlord and Tenant hereby agree as follows:
1. Section 3(c) of the Lease is hereby amended in its entirety to read as follows:
(c) Financing of Construction. Landlord and Tenant acknowledge that as of the date of this Lease, the Building in which the Premises is to be located has not yet been constructed. Landlord shall not be obligated to proceed with construction of the Building unless and until financing acceptable to Landlord has been obtained. If Landlord has not entered in to a construction loan satisfactory to Landlord by February 17, 2014, Landlord shall so notify Tenant, and thereafter, but prior to the date the Landlord obtains a construction loan, either party hereto shall be entitled to terminate this Lease by delivery written notice of termination to the other party. Such termination shall be effective upon the date of receipt of the termination notice by the non-terminating party, and this Lease shall thereupon cease and terminate and each of the parties hereto shall be released and discharged from any and all liability and responsibility hereunder (provided that Landlord shall refund to Tenant all pre-paid Rent hereunder), and neither party shall have any liability to the other by reason of such termination.
2. Except as herein and hereby modified and amended, the Lease shall remain in full force and effect and all the terms, provisions, covenants and conditions thereof are hereby ratified and confirmed. In the event of any conflict between the terms and conditions of the Lease and the terms and conditions of this Amendment, the terms and conditions of this Amendment shall prevail.
3. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. The parties agree that this Amendment may be transmitted between them by facsimile, and any faxed signature shall constitute an original signature and is binding upon the parties.
4. The terms and provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns.
5. The Lease, together with this Amendment represent the entire agreement of the parties with respect to the subject matter thereof.
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IN WITNESS WHEREOF, the Landlord and Tenant have duly executed this Amendment as of the date set forth below.
Landlord Witness | LANDLORD:
SAN CLEMENTE AT DAVENPORT NORTH, LTD., a Texas Limited partnership
By: Office-360, Inc., a Texas corporation, its general partner | |||||
/s/ Adri Baker |
||||||
Adri Baker | By: | /s/ Richard E. Anderson | ||||
Name: | Richard E. Anderson | |||||
Title: | President |
TENANT:
SPICEWORKS, INC., a Delaware corporation | ||||||
By: | /s/ Scott Abel | |||||
Name: | Scott Abel | |||||
Title: | President & CEO |
2
FIRST AMENDMENT TO AGREEMENT OF SUBTENANT
THIS FIRST AMENDMENT TO AGREEMENT OF SUBTENANT (this Amendment) is entered into as of the 8th day of May, 2019, by and between AG SAN CLEMENTE 3700 LLC, a Delaware limited liability company (Landlord) and CS DISCO, INC., a Delaware corporation (Subtenant).
WHEREAS, Landlord and Subtenant executed that certain Agreement of Subtenant dated as of August 14, 2018 (the Agreement) pursuant to which Landlord consented to Subtenants sublease from Spiceworks, Inc., a Delaware corporation (Tenant) of approximately 23,180 square feet of rentable area in the building located at 3700 N. Capital of Texas Highway, Austin, Texas 78746 (such space, the Original Sublease Premises) pursuant to that certain Sublease Agreement August 8 2018 by and between Tenant and Subtenant (the Sublease Agreement);
WHEREAS, pursuant to the Agreement, Landlord consented to the Sublease Agreement and to Subtenants sublease of the Sublease Premises;
WHEREAS, Tenant and Subtenant desire to amend the Sublease Agreement and have mutually executed that certain First Amendment to Sublease dated as of April 30, 2019 (the First Sublease Amendment), pursuant to which the term of the Sublease Agreement would be extended and the Sublease Premises would be expanded to include approximately 25,921 rentable square feet of space (the Sublease Expansion Space and, together with the Original Sublease Premises, the Sublease Premises) known as Suite 250 and located on the second (2nd) floor of the Building, as more particularly described therein;
WHEREAS, pursuant to the terms of the Agreement, Landlord has the right to approve any amendment of the Sublease Agreement; and
WHEREAS, Landlord has agreed to consent to the First Sublease Amendment on the terms and conditions set forth in this Amendment.
NOW, THEREFORE, in consideration of the premises and the mutual covenants between the parties herein contained, Landlord and Subtenant hereby agree as follows:
1. All references in the Agreement to Sublease Premises shall mean the Original Sublease Premises and the Sublease Expansion Space; all references in the Agreement to the Consent to Sublease and Agreement shall mean the Consent to Sublease and Agreement dated as of August 14, 2018 between Landlord and Tenant, as amended by that certain Consent to Amendment to Sublease dated as of May 8th, 2019 between Landlord and Tenant; and all references in the Agreement to the Sublease shall mean the Sublease Agreement, as amended by the First Sublease Amendment.
2. Landlord hereby consents to the First Amendment to Sublease, subject to the terms and conditions of this Amendment.
3. Notwithstanding anything to the contrary set forth in the Agreement or the Lease, (i) Landlord hereby acknowledges and agrees that Tenant remains entitled to place a panel on the Monument Sign despite that Tenant has subleased a portion of the Premises to Subtenant, (ii) subject to compliance with the terms and conditions of Exhibit G regarding, Section B of the Lease Agreement, Landlord hereby consents to removal of Tenants sign panel on the Monument Sign and installation of a new sign panel thereon containing Subtenants name (which sign panel shall be in the same location of, and replace, Tenants sign panel thereon), (iii) Landlord acknowledges that the Additional FF&E (as defined in the First Sublease Amendment) may be removed from the Sublease Premises and the Sublease Expansion Space and (iv) subject to compliance with the terms and conditions of the Lease, the alterations described in the last paragraph of Section 7 of the First Sublease: Amendment and further described as follows: installation of a control panel in the IDF room in the Sublease Expansion Space; installation of new Cat 3 cables from the doors of the Sublease Expansion Space to the IDF room in the Sublease Expansion Space and installation of one Cat 6 cable from the IDF room in the Sublease Expansion Space to support one additional WiFi ceiling-mounted access point; pulling twelve (12) Cat 6 cables from the IDF room in the Original Sublease Premises to the IDF room in the Sublease Expansion Space via an existing floor penetration that connects both IDF rooms may be installed in the Sublease Expansion Space.
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4. Subtenant agrees to indemnify and hold Landlord harmless from and against any loss, cost, expense, damage or liability, including reasonable attorneys fees, incurred as a result of a claim by any person or entity that it is entitled to a commission, finders fee or like payment in connection with the First Sublease Amendment.
5. Landlord and Landlords agents have made no representations or warranties (express or implied) with respect to the subject matter of this Amendment except as expressly set forth herein, and Subtenant has not relied on any such representations or warranties not contained herein.
6. Except as defined differently herein, all capitalized terms used in this Amendment shall have the meanings ascribed to them under the Agreement.
7. Subtenant represents to Landlord that (i) other than the Sublease and the First Sublease Amendment, there are no other agreements or understandings, whether written or oral, between Tenant and Subtenant with respect to Subtenants use and occupancy of the Sublease Premises or any property of Tenant located in the Building, and (ii) no compensation or consideration is payable or will become due and payable to Tenant or any affiliate of Tenant in connection with the First Sublease Amendment other than the rentals expressly set forth in the First Sublease Amendment.
8. Landlord represents to Subtenant that (i) other than that certain First Amendment to Lease Agreement dated as of December 18, 2013, and that certain Second Amendment to Lease Agreement dated as of February 11, 2014, the Lease has not been amended and (ii) to Landlords current, actual knowledge, as of the date of this Amendment, Tenant is not in default of any provision of the Lease.
9. Except as amended hereby, the Agreement shall remain in full force and effect in accordance with its terms and is hereby ratified. In the event of a conflict between the Agreement and this Amendment, this Amendment shall control.
[Signature page follows.]
2
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first above written.
LANDLORD: | ||
AG SAN CLEMENTE 3700 LLC, a Delaware limited liability company | ||
By: |
| |
Name: | Eyal Chenkin | |
Title: | President | |
SUBTENANT: | ||
CS DISCO, INC., a Delaware corporation | ||
By: | /s/ Michael Lafair | |
Name: | Michael Lafair | |
Title: | CFO |
3
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first above written.
LANDLORD: | ||
AG SAN CLEMENTE 3700 LLC, a Delaware limited | ||
liability company | ||
By: | /s/ Eyal Chenkin | |
Name: Eyal Chenkin | ||
Title: President | ||
SUBTENANT: | ||
CS DISCO, INC., a Delaware corporation | ||
By: |
| |
Name: | ||
Title: |
4
Exhibit 10.7
CS DISCO, INC.
SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
This SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (as amended, restated, supplemented or otherwise modified from time to time, this Agreement) is entered into as of December 14, 2020 (the Restatement Date), by and between COMERICA BANK, a Texas banking association (Bank) and CS DISCO, INC. (Borrower).
RECITALS
A. | Borrower and Bank are parties to that certain Amended and Restated Loan and Security Agreement dated as of November 16, 2018 (as the same may from time to time be further amended, modified, supplemented or restated, the Original Agreement). Borrower and Bank wish to amend and restate the terms of the Original Agreement. |
B. | Borrower wishes to obtain credit from time to time from Bank, and Bank desires to extend credit to Borrower. This Agreement sets forth the terms on which Bank will advance credit to Borrower, and Borrower will repay the amounts owing to Bank. |
AGREEMENT
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION; EFFECT OF AMENDMENT AND RESTATEMENT.
1.1 Definitions. As used in this Agreement, all capitalized terms shall have the definitions set forth on Exhibit A. Any term used in the Code and not defined herein shall have the meaning given to the term in the Code.
1.2 Accounting Terms. Any accounting term not specifically defined on Exhibit A shall be construed in accordance with GAAP and all calculations shall be made in accordance with GAAP. The term financial statements as it relates to annually audited financial statements shall include the accompanying notes and schedules. All accounting terms not specifically or completely defined on Exhibit A hereto shall be construed in conformity with, and all financial data (including financial ratios and other financial calculations) required to be submitted pursuant to this Agreement shall be prepared in conformity with, GAAP, except as otherwise specifically prescribed herein. If at any time any change (or implementation of a previously agreed upon change) in GAAP would affect the computation of any financial ratio or requirement (including any negative covenant basket) set forth in any Loan Document, and Borrower shall request, Bank and Borrower shall negotiate in good faith to amend such ratio or requirement to preserve the original intent thereof in light of such change in GAAP; provided, that until so amended, (i) such ratio or requirement shall continue to be computed in accordance with GAAP prior to such change therein, and (ii) Borrower(s) shall provide to Bank financial statements and other documents required under this Agreement or as reasonably requested hereunder setting forth a reconciliation between calculations of such ratio or requirement made before and after giving effect to such change in GAAP.
1.3 Effect of Amendment and Restatement. Except as otherwise set forth herein, this Agreement is intended to and does completely amend and restate, without novation, the Original Agreement. All security interests granted under the Original Agreement are hereby confirmed and ratified and shall continue to secure all Obligations under this Agreement from the date of the Original Agreement.
2. LOAN AND TERMS OF PAYMENT.
2.1 Credit Extensions.
(a) Promise to Pay. Borrower promises to pay to Bank, in lawful money of the United States, the aggregate unpaid principal amount of all Credit Extensions made by Bank to Borrower, together with interest on the unpaid principal amount of such Credit Extensions at rates in accordance with the terms hereof.
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(b) [Reserved.]
(c) Revolving Line.
(i) Advances. Subject to and upon the terms and conditions of this Agreement, Borrower may request Advances in an aggregate outstanding principal amount not to exceed an amount equal to (A) the lesser of (x) the Revolving Line Amount or (y) the Borrowing Base, less (B) the sum of the reserves required in connection with the Automatic Clearinghouse Transactions pursuant to the ACH Sublimit, the aggregate face amount of Letters of Credit issued under the Letter of Credit Sublimit, and the aggregate limits of the corporate credit cards issued to Borrower and merchant credit card processing reserves under the Credit Card Services Sublimit. Advances may be repaid and reborrowed at any time without penalty or premium prior to the Revolving Maturity Date, at which time the aggregate principal amount of all outstanding Advances plus accrued and unpaid interest thereon shall be immediately due and payable. Any repayment hereunder shall also be accompanied by the payment of all accrued and unpaid interest on the amount so repaid.
(ii) Form of Request. Whenever Borrower desires an Advance, Borrower will notify Bank (which notice shall be irrevocable) no later than 3:00 p.m. Central Time (12:00 p.m. Central Time for wire transfers), on the Business Day that the Advance is to be made. Each such notice shall be made in accordance with Section 2.3(c) hereof and shall be signed by a Responsible Officer. Bank will credit the amount of Advances made under this Section 2.1(c) to Borrowers deposit account.
(iii) Letter of Credit Sublimit. Subject to the availability under the Revolving Line, and in reliance on the representations and warranties of Borrower set forth herein, at any time and from time to time from the date hereof through the Business Day immediately prior to the Revolving Maturity Date, Bank shall issue for the account of Borrower such Letters of Credit as Borrower may request by delivering to Bank a duly executed letter of credit application on Banks standard form; provided, however, that the outstanding and undrawn amounts under all such Letters of Credit (i) shall not at any time exceed the Letter of Credit Sublimit, and (ii) shall be deemed to constitute Advances for the purpose of calculating availability under the Revolving Line. Any drawn but unreimbursed amounts under any Letters of Credit shall be charged as Advances against the Revolving Line. All Letters of Credit shall be in form and substance and shall include terms (including, without limitation, the expiration date thereof) acceptable to Bank in its sole discretion and shall be subject to the terms and conditions of Banks form of letter of credit application and agreement. Borrower will pay any standard issuance and other fees that Bank notifies Borrower it will charge for issuing and processing Letters of Credit.
(iv) Credit Card Services Sublimit. Subject to the terms and conditions of this Agreement, Borrower may request corporate credit cards and standard and e-commerce merchant account services from Bank (collectively, the Credit Card Services). The aggregate limit of the corporate credit cards and merchant credit card processing reserves shall not exceed the Credit Card Services Sublimit. The terms and conditions (including repayment and fees) of such Credit Card Services shall be subject to the terms and conditions of the Banks standard forms of application and agreement for the Credit Card Services, which Borrower hereby agrees to execute.
(v) ACH Sublimit. Subject to the terms and conditions of this Agreement, Borrower may request ACH origination services by delivering to Bank a duly executed ACH application on Banks standard form; provided, however, that the total amount of the ACH processing reserves shall not exceed the ACH Sublimit, and availability under the Revolving Line shall be reduced by the total amount of the ACH processing reserves. In addition, Bank may, in its sole discretion, charge as Advances any amounts that become due or owing to Bank in connection with the ACH services. Bank may also provide ACH origination services on a guaranteed settlement basis, which shall not give rise to ACH processing reserves that reduce the ACH Sublimit, or reduce availability under the Revolving Line.
(vi) Collateralization of Obligations Extending Beyond Maturity. If any Letters of Credit, Credit Card Services, or ACH origination services extend beyond the Revolving Maturity Date, then, effective as of the Revolving Maturity Date, the balance in any deposit accounts held by Bank and the certificates of deposit or time deposit accounts issued by Bank in Borrowers name (and any interest paid thereon or proceeds thereof, including any amounts payable upon the maturity or liquidation of such certificates or accounts), shall automatically secure such obligations to the extent of the then continuing or outstanding and undrawn Letters of Credit, Credit Card Services, or ACH origination services; provided, however, that if there are insufficient balances in such accounts to secure such obligations, Borrower shall immediately deposit such additional funds as are necessary to fully secure such obligations. Borrower authorizes Bank to hold such balances in pledge and to decline to honor any drafts thereon or any requests by Borrower or any other Person to pay or otherwise transfer any part of such balances for so long as the Letters of Credit, Credit Card Services, or ACH origination services are outstanding or continue.
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(d) Discretionary Increase of Revolving Line. At Borrowers option but at Banks sole discretion, as long as an Event of Default has not occurred that is continuing, following the one-year anniversary of the Restatement Date, Borrower may request a one-time discretionary increase to the Revolving Line Amount by an amount up to the Revolving Line Discretionary Increase Amount, by delivery of a Revolving Line Discretionary Increase Request, at least five (5) Business Days before the date such increase is requested to be effective, which day shall be a Business Day. Upon receipt of such request, Bank shall determine, in its sole discretion whether to approve the requested increase. The increase shall be effective upon Banks notice of approval of such increase.
2.2 Overadvances. If the aggregate amount of the outstanding Advances exceeds the amount equal to (i) the lesser of (x) the Revolving Line Amount or (y) the Borrowing Base, less (ii) the sum of the reserves required in connection with the Automatic Clearinghouse Transactions pursuant to the ACH Sublimit, the aggregate face amount of Letters of Credit issued under the Letter of Credit Sublimit, and the aggregate limits of the corporate credit cards issued to Borrower and merchant credit card processing reserves under the Credit Card Services Sublimit, at any time, Borrower shall promptly pay to Bank, in cash, the amount of such excess.
2.3 Interest Rates, Payments, and Calculations.
(a) Interest Rates.
(i) Advances. The Advances shall bear interest, on the outstanding daily balance thereof, at the Applicable Interest Rate.
(ii) Default Interest Rate. From and after the occurrence of (x) any Event of Default specified in Section 8.1 and/or Section 8.5 or (y) at the Banks election, any other Event of Default, and in each case so long as any such Event of Default remains unremedied or uncured thereafter (or, in the case of the foregoing clause (y), the Bank rescinds such election), the Obligations outstanding shall bear interest at a per annum rate of five percent (5%) above the otherwise Applicable Interest Rate hereunder, which interest shall be payable upon demand. In addition to the foregoing, a late payment charge equal to five percent (5%) of any portion of any regularly scheduled payment of interest payment or fee not timely paid may be charged on any payment not received by Bank within ten (10) calendar days after the payment due date therefor, but acceptance of payment of any such charge shall not constitute a waiver of any Event of Default. In no event shall the interest payable under this Agreement at any time exceed the maximum rate permitted by law. THE MAXIMUM INTEREST RATE SHALL NOT EXCEED THE HIGHEST APPLICABLE USURY CEILING.
(b) Payments; Loan Requests.
(i) Accrued and unpaid interest on the unpaid principal balance of the Obligations shall be payable monthly, in arrears, on the first Business Day of each month, from the date made until the same is paid in full (whether in accordance with the terms hereof, by acceleration, or otherwise). In the event that any payment becomes due and payable on any day which is not a Business Day, the due date thereof shall be extended to the next succeeding Business Day, and additional fees or interest, as the case may be, shall continue to accrue and be payable thereon during such extension at the rates set forth hereto. Interest accruing on the basis of the Prime Referenced Rate shall be computed on the basis of a year of 360 days, and shall be assessed for the actual number of days elapsed, and in such computation, effect shall be given to any change in the Applicable Interest Rate as a result of any change in the Prime Referenced Rate on the date of each such change.
(ii) Bank shall, at its option, charge such interest, all Bank Expenses, and all Periodic Payments against any of Borrowers deposit accounts or against the Revolving Line, in which case those amounts shall thereafter accrue interest at the rate then applicable hereunder. Any interest not paid when due shall be compounded by becoming a part of the Obligations, and such interest shall thereafter accrue interest at the rate then applicable hereunder. All payments shall be free and clear of any taxes, withholdings, duties, impositions or other charges, to the end that Bank will receive the entire amount of any Obligations payable hereunder, regardless of source of payment.
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(c) Request. Borrower may request an Advance hereunder, either (i) upon the delivery to Bank of a written Request for Advance duly completed and executed by Borrower, or, (ii) to the extent applicable, pursuant to a request submitted through Banks Loan Management System (each a Request).
2.4 Crediting Payments. Prior to the occurrence and continuance of an Event of Default, Bank shall credit a wire transfer of funds, check or other item of payment to such deposit account or Obligation as Borrower specifies. After the occurrence and during the continuance of an Event of Default, Bank shall have the right, in its sole discretion, to immediately apply any wire transfer of funds, check, or other item of payment Bank may receive to conditionally reduce Obligations, but such applications of funds shall not be considered a payment on account unless such payment is of immediately available federal funds or unless and until such check or other item of payment is honored when presented for payment. Notwithstanding anything to the contrary contained herein, any wire transfer or payment received by Bank after 12:00 noon Central Time shall be deemed to have been received by Bank as of the opening of business on the immediately following Business Day. Whenever any payment to Bank under the Loan Documents would otherwise be due (except by reason of acceleration) on a date that is not a Business Day, such payment shall instead be due on the next Business Day, and additional fees or interest, as the case may be, shall accrue and be payable for the period of such extension.
2.5 Fees and Bank Expenses. Borrower shall pay to Bank the following:
(a) Amendment Fee. On the Restatement Date, an amendment fee equal to Fifty Five Thousand Dollars ($55,000), which shall be fully earned as of the Restatement Date and nonrefundable;
(b) Unused Facility Fee. A quarterly unused facility fee equal to one quarter percent (0.25%) per annum of the difference between the Revolving Line Amount and the average outstanding principal balance of Advances during the applicable quarter, which fee shall be payable in arrears within five (5) days of the last day of each such quarter and shall be nonrefundable, provided that in the event of an increase to the Revolving Line Amount in accordance with Section 2.1(d), the unused amount shall be ratably adjusted according to the amount of the increase and the number of days in such quarterly period that the increased amount was in effect.
(c) Bank Expenses. On the Restatement Date, all Bank Expenses incurred through the Restatement Date, and, after the Restatement Date, all Bank Expenses, as and when they become due; provided, that to the extent the Bank Expenses relating to the negotiation and closing of this Agreement are greater than $35,000 and, Bank agrees to pay 50% of such Bank Expenses in excess of $35,000, and in no event shall the amount of Bank Expenses that the Borrower shall be required to reimburse Bank on the Restatement Date exceed $50,000.
2.6 Term. This Agreement shall become effective on the Restatement Date and, subject to Section 13.7, shall continue in full force and effect for so long as any Obligations remain outstanding or Bank has any obligation to make Credit Extensions under this Agreement. Notwithstanding the foregoing, Bank shall have the right to terminate its obligation to make Credit Extensions under this Agreement immediately and without notice upon the occurrence and during the continuance of an Event of Default.
3. CONDITIONS OF LOANS.
3.1 Conditions Precedent to Initial Credit Extension. The obligation of Bank to make the initial Credit Extension is subject to the condition precedent that Bank shall have received, in form and substance reasonably satisfactory to Bank, the following:
(a) this Agreement and the other Loan Documents required by Bank;
(b) an intellectual property security agreement;
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(c) an officers certificate of Borrower with respect to incumbency and resolutions authorizing the execution and delivery of this Agreement and the other Loan Documents;
(d) the Itemization of Amount Financed Disbursement Instructions signed by a Responsible Officer of Borrower;
(e) agreement to furnish insurance;
(f) payment of the fees and Bank Expenses then due as specified in Section 2.5;
(g) current SOS Reports indicating that except for Permitted Liens, there are no other security interests or Liens of record in the Collateral;
(h) current financial statements, including audited statements for Borrowers most recently ended fiscal year, together with an unqualified opinion, company prepared consolidated and consolidating balance sheets and income statements for the most recently ended month in accordance with Section 6.2, and such other updated financial information as Bank may reasonably request;
(i) current Compliance Certificate in accordance with Section 6.2;
(j) a Warrant in form and substance reasonably satisfactory to Bank;
(k) to the extent required by Bank (i) a landlord waiver in form satisfactory to Bank, duly executed by the landlord at each location at which Borrower leases real property other than any location that satisfies the exclusion set forth in Section 6.10, and (ii) a bailee waiver or other similar agreement, in form reasonably satisfactory to Bank, duly executed by any Person maintaining Borrowers assets, to the extent required by Section 6.10;
(l) an Automatic Loan Payment Authorization;
(m) a Collateral Information Certificate;
(n) evidence satisfactory to Bank that Borrower shall have achieved Eligible Monthly Recurring Revenue as of the most recent month-end prior to the Restatement Date of not less than $5,400,000; and
(o) such other documents or certificates, and completion of such other matters, as Bank may reasonably deem necessary or appropriate.
3.2 Conditions Precedent to all Credit Extensions. The obligation of Bank to make each Credit Extension, including the initial Credit Extension, is further subject to the following conditions:
(a) timely receipt by Bank of Request for Advance, as provided in Section 2.1;
(b) there has occurred no circumstance or circumstances that could reasonably be expected to have a Material Adverse Effect; and
(c) the representations and warranties contained in Article 5 shall be true and correct in all material respects on and as of the date of such Request for Advance and on the effective date of each Credit Extension as though made at and as of each such date (provided, however, that those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of such date), no Event of Default shall have occurred and be continuing, or would exist after giving effect to such Credit Extension, and after giving effect to the requested Advance, the aggregate principal amount of the outstanding Advances shall not exceed an amount equal to (A) the lesser of (x) the Revolving Line Amount or (y) the Borrowing Base, less (B) the sum of the reserves required in connection with the Automatic Clearinghouse Transactions pursuant to the ACH Sublimit, the aggregate face amount of Letters of Credit issued under the Letter of Credit Sublimit, and the aggregate limits of the corporate credit cards issued to Borrower and merchant credit card processing reserves under the Credit Card Services Sublimit. The making of each Credit Extension shall be deemed to be a representation and warranty by Borrower on the date of such Credit Extension as to the accuracy of the facts referred to in this Section 3.2.
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4. CREATION OF SECURITY INTEREST.
4.1 Grant of Security Interest. Borrower grants and pledges to Bank a continuing security interest in the Collateral to secure prompt repayment of any and all Obligations and to secure prompt performance by Borrower of each of its covenants and duties under the Loan Documents. Subject to Permitted Liens, such security interest constitutes a valid, first priority security interest in the presently existing Collateral, and will constitute a valid, first priority security interest in later-acquired Collateral. Notwithstanding any termination of this Agreement, Banks Lien on the Collateral shall remain in effect for so long as any Obligations (other than contingent obligations for which no claim has been made) are outstanding. Notwithstanding the foregoing, except as required by Section 6.11, in no event shall Borrower be required to execute any document, instrument or agreement, complete any filing or take any other action with respect to the creation or perfection of Banks security interest in such ownership interests in any jurisdiction outside of the United States or any state thereof.
4.2 Perfection of Security Interest. Borrower authorizes Bank to file at any time financing statements, continuation statements, and amendments thereto that (i) either specifically describe the Collateral or describe the Collateral as all assets of Borrower of the kind pledged hereunder, and (ii) contain any other information required by the Code for the sufficiency of filing office acceptance of any financing statement, continuation statement, or amendment, including whether Borrower is an organization, the type of organization and any organizational identification number issued to Borrower, if applicable. Any such financing statements may be filed by Bank at any time in any jurisdiction Bank reasonably deems necessary to perfect the security interest granted hereunder whether or not Division 9 of the Code is then in effect in that jurisdiction. Borrower shall from time to time endorse and deliver to Bank, at the request of Bank, all Negotiable Collateral with an aggregate value in excess of Three Hundred Thousand Dollars ($300,000) and other documents that Bank may reasonably request, in form reasonably satisfactory to Bank, to perfect and continue perfection of Banks security interests in the Collateral. Borrower shall have possession of the Collateral, except where expressly otherwise provided in this Agreement or where Bank chooses to perfect its security interest by possession in accordance with the terms hereof in addition to the filing of a financing statement. Where Collateral is in possession of a third party bailee, (other than (a) the exceptions set forth in Section 6.10 and (b) Borrowers employees holding movable items of personal property, such as laptops and other computer equipment, in the ordinary course of business if the aggregate book value of all such personal property does not exceed Five Hundred Thousand Dollars ($500,000)), Borrower shall take such steps as Bank reasonably requests for Bank to (i) obtain an acknowledgment, in form and substance reasonably satisfactory to Bank, of the bailee that the bailee holds such Collateral for the benefit of Bank, (ii) obtain control (as defined in Division 9 of the Code) of any Collateral consisting of investment property, deposit accounts, securities accounts, letter-of-credit rights or electronic chattel paper (as such items are defined in Division 9 of the Code), are defined in Division 9 of the Code by causing the securities intermediary or depositary institution or issuing bank to execute a control agreement in form and substance reasonably satisfactory to Bank, except to the extent expressly not required by the terms of Section 6.6. Borrower will not create any chattel paper with an individual value in excess of Three Hundred Thousand Dollars ($300,000) without placing a legend on the chattel paper acceptable to Bank indicating that Bank has a security interest in the chattel paper.
4.3 Right to Inspect. Bank (through any of its officers, employees, or agents) shall have the right, upon reasonable prior notice, from time to time during Borrowers usual business hours but no more than twice a year (unless an Event of Default has occurred and is continuing), to inspect Borrowers Books and to make copies thereof and to check, test, and appraise the Collateral (including, without limitation, the Intellectual Property Collateral) in order to verify Borrowers financial condition or the amount, condition of, or any other matter relating to, the Collateral.
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4.4 Lock Box / Dominion of Funds.
(a) Borrower shall at its sole expense establish and maintain (and Bank, at Banks option, may establish and maintain at Borrowers expense, provided such expenses are reasonable and documented):
(i) A United States Post Office lock box (the Lock Box), to which Bank shall have exclusive access and control. Borrower expressly authorizes Bank, from time to time, to remove contents from the Lock Box, for disposition in accordance with this Agreement. Borrower agrees to notify all account debtors and other parties obligated to Borrower that all payments made to Borrower (other than payments by electronic funds transfer) shall be remitted, for the credit of Borrower, to the Lock Box, and Borrower shall include a like statement on all invoices; and
(ii) A Business Deposit Capturesm feature at Bank (the BDC) by which all funds received by Borrower from any source (other than through the Lock Box or electronic funds transfer payments) shall be immediately and directly deposited into the Collection Account (as defined below) in accordance with Section 4.4(b).
(b) Borrower agrees that immediately upon an Event of Default occurring and continuing, the Obligations shall be on a remittance basis in accordance with the following. Borrower agrees to notify all account debtors and other parties obligated to Borrower that all payments made to Borrower by electronic funds transfer shall be remitted to an account at Bank (the Collection Account), and Borrower shall include a like statement on all invoices; Borrowers Collection Account shall, upon the occurrence and during the continuance of an Event of Default, convert to a non-interest bearing deposit account with Bank (the Springing DOF Account) to which Bank shall have exclusive access and control;
(c) Upon the occurrence and during the continuance of an Event of Default, Borrower shall hold in trust for Bank all amounts that Borrower receives despite the directions to make payments to the Lock Box or the Springing DOF Account, and immediately deliver such payments to Bank in their original form as received from the account debtor, with proper endorsements for deposit into the Lock Box or the Springing DOF Account, as applicable or process such payment items using the BDC check scanner. Borrower hereby authorizes Bank to transfer to the Springing DOF Account any amounts that Bank reasonably determines are proceeds of the Accounts (provided that Bank is under no obligation to do so and this allowance shall in no event relieve Borrower of its obligations hereunder).
(d) Borrower shall execute all documents and authorizations as required by Bank, including but not limited to, documentation and authorizations to establish and maintain the Lock Box and the Springing DOF Account. Borrower further acknowledges and agrees that: (i) Borrower is not an authorized signer on the Springing DOF Account; (ii) Borrower shall not order or write checks on the Springing DOF Account; and (iii) the Springing DOF Account: (A) is non-interest bearing; and (B) may not be used to initiate or authorize debit transactions of any kind, including, but not limited to: writing of paper or electronic checks, over the counter withdrawals, ATM Card or Check Card withdrawals, account transfers from the account, ACH debit transactions and debit wire transfers.
(e) All items or amounts which are remitted to the Lock Box, the Springing DOF Account, or otherwise delivered by or for the benefit of Borrower to Bank on account of partial or full payment of, or with respect to, any Collateral shall, on a daily basis, in accordance with Banks standard procedures and practices, be deposited to Borrowers Collection Account maintained at Bank so long as no Event of Default has occurred and is continuing. If an Event of Default has occurred and is continuing, all items or amounts remitted to the Lock Box, the Springing DOF Account or otherwise delivered by or for the benefit of Borrower to Bank shall, on a daily basis, be applied to the payment of any Obligations, whether then due or not, in such order or at such time of application as Bank may determine in its sole discretion. Borrower agrees that Bank shall not be liable for any loss or damage which Borrower may suffer as a result of Banks processing of items or its exercise of any other rights or remedies under this Agreement, including without limitation indirect, incidental, special, consequential, or punitive damages, loss of revenues or profits, or any claim, demand or action by any third party arising out of or in connection with the processing of items or the exercise of any other rights or remedies under this Agreement. Borrower agrees to indemnify and hold Bank harmless from and against all such third party claims, demands or actions, and all related expenses or liabilities, including, without limitation, attorneys fees and including claims, damages, fines, expenses, liabilities or causes of action of whatever kind resulting from Banks own negligence, except to the extent (but only to the extent) caused by Banks gross negligence or willful misconduct.
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4.5 Pledge of Shares. Borrower hereby pledges, assigns and grants to Bank a security interest in the Shares, together with all proceeds and substitutions thereof, all cash, stock and other moneys and property paid thereon, all rights to subscribe for securities declared or granted in connection therewith, and all other cash and noncash proceeds of the foregoing, as security for the performance of the Obligations. On or about the Restatement Date, the certificate or certificates, if any, for the Shares will be delivered to Bank, accompanied by an instrument of assignment duly executed in blank by Borrower. To the extent required by the terms and conditions governing the Shares, Borrower shall cause the books of each entity whose Shares are part of the Collateral and any transfer agent to reflect the pledge of the Shares. Upon the occurrence of an Event of Default hereunder, Bank may effect the transfer of any securities included in the Collateral (including but not limited to the Shares) into the name of Bank and cause new certificates representing such securities to be issued in the name of Bank or its transferee. Borrower will execute and deliver such documents, and take or cause to be taken such actions, as Bank may reasonably request to perfect or continue the perfection of Banks security interest in the Shares. Unless an Event of Default shall have occurred and be continuing, Borrower shall be entitled to exercise any voting rights with respect to the Shares and to give consents, waivers and ratifications in respect thereof, provided that no vote shall be cast or consent, waiver or ratification given or action taken which would be inconsistent with any of the terms of this Agreement or which would constitute or create any violation of any of such terms. All such rights to vote and give consents, waivers and ratifications shall terminate upon the occurrence and continuance of an Event of Default. The Shares are not and will not be maintained in a securities account.
5. REPRESENTATIONS AND WARRANTIES.
Borrower represents and warrants as follows:
5.1 Due Organization and Qualification. Borrower and each Subsidiary is an entity duly existing under the laws of the jurisdiction in which it is organized and qualified and licensed to do business in any state in which the conduct of its business or its ownership of property requires that it be so qualified, except where the failure to do so could not reasonably be expected to cause a Material Adverse Effect.
5.2 Due Authorization; No Conflict. The execution, delivery, and performance of the Loan Documents are within Borrowers powers, have been duly authorized, and are not in conflict with nor constitute a breach of any provision contained in Borrowers organizational documents, nor will they constitute an event of default under any material agreement by which Borrower is bound. Borrower is not in default under any agreement by which it is bound, except to the extent such default would not reasonably be expected to cause a Material Adverse Effect.
5.3 Collateral. Borrower has rights in or the power to transfer the Collateral, and its title to the Collateral is free and clear of Liens, adverse claims, and restrictions on transfer or pledge except for Permitted Liens. The property or services giving rise to such Eligible Monthly Recurring Revenue has been delivered or rendered to the applicable customer or its agent. Borrower has not received notice of actual or imminent Insolvency Proceeding of any customer if revenue derived from an agreement with such customer is included in the most recently delivered Borrowing Base Certificate as included in Eligible Monthly Recurring Revenue. No licenses or agreements giving rise to such Eligible Monthly Recurring Revenue is with any Prohibited Territory or with any Person organized under or doing business in a Prohibited Territory. All Inventory is in all material respects of good and merchantable quality, free from all material defects, except for Inventory for which adequate reserves have been made. Except as set forth in the Schedule, none of the Collateral consisting of deposit accounts, securities accounts, certificates of deposit, money market accounts or other similar financial accounts is maintained or invested with a Person other than Bank or Banks Affiliates.
5.4 Intellectual Property. Borrower is the sole owner of the Intellectual Property Collateral, except for licenses granted by Borrower to its customers in the ordinary course of business. To the best of Borrowers knowledge, each of the Copyrights, Trademarks and Patents is valid and enforceable, and no part of the Intellectual Property Collateral has been judged invalid or unenforceable, in whole or in part, and no written claim has been made to Borrower that any part of the Intellectual Property Collateral violates the rights of any third party except to the extent such claim could not reasonably be expected to cause a Material Adverse Effect. Except as set forth in the Schedule, as the same may be updated by written notice from time to time, Borrowers rights as a licensee of intellectual property (other than inbound licenses for widely available business infrastructure software and similar inbound licenses), do not give rise to more than five percent (5%) of its gross revenue in the prior trailing twelve month period, including without limitation revenue derived from the sale, licensing, rendering or disposition of any product or service.
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5.5 Name; Location of Chief Executive Office; Location of Inventory and Equipment. Except as disclosed in the Schedule or as Borrower may have notified Bank pursuant to Section 7.2 hereof, within five years prior to the date hereof, Borrower has not done business under any name other than that specified on the signature page hereof, and its exact legal name is as set forth in the first paragraph of this Agreement. The chief executive office of Borrower is located at the address indicated in Section 10 hereof. Except as disclosed in the Schedule (or for locations as to which Borrower has notified Bank in writing pursuant to Section 7.2), all Collateral of Borrower (other than (a) the Collateral consisting of deposit accounts, securities accounts, certificates of deposit, money market accounts or other similar financial accounts and (b) movable items of personal property, such as laptops and other computer equipment, with an aggregate book value of not more than One Million Five Hundred Thousand Dollars ($1,500,000)) is located at the address indicated in Section 10 hereof.
5.6 Actions, Suits, Litigation, or Proceedings. Except as set forth in the Schedule, there are no actions, suits, litigation or proceedings, at law or in equity, pending by or against Borrower or any Subsidiary before any court, administrative agency, or arbitrator in which a likely adverse decision could reasonably be expected to have a Material Adverse Effect.
5.7 No Material Adverse Change in Financial Statements. All consolidated and consolidating financial statements related to Borrower and any Subsidiary that are delivered by Borrower to Bank fairly present in all material respects Borrowers consolidated and consolidating financial condition as of the date thereof and Borrowers consolidated and consolidating results of operations for the period then ended. There has not been a material adverse change in the consolidated or in the consolidating financial condition of Borrower since the date of the most recent of such financial statements submitted to Bank.
5.8 Solvency, Payment of Debts. Borrower is able to pay its debts (including trade debts) as they mature; the fair value of Borrowers assets exceeds the fair value of its liabilities; and Borrower is not left with unreasonably small capital after the transactions contemplated by this Agreement.
5.9 Compliance with Laws and Regulations. Borrower and each Subsidiary have met the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. No event has occurred resulting from Borrowers failure to comply with ERISA that is reasonably likely to result in Borrowers incurring any liability that could reasonably be expected to have a Material Adverse Effect. Borrower is not an investment company or a company controlled by an investment company within the meaning of the Investment Company Act of 1940. Borrower is not engaged principally, or as one of the important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations T, U, and X of the Board of Governors of the Federal Reserve System). Borrower is in compliance with all the provisions of the Federal Fair Labor Standards Act except where the failure to comply is not reasonably likely to have a Material Adverse Effect. Borrower is in compliance with all environmental laws, regulations and ordinances except where the failure to comply is not reasonably likely to have a Material Adverse Effect. Borrower is in compliance with all statutes, laws, ordinances or rules applicable to it except where the failure to comply is not reasonably likely to have a Material Adverse Effect. Borrower and each Subsidiary have filed or caused to be filed all tax returns required to be filed, and have paid, or have made adequate provision for the payment of, all material taxes reflected therein except those being contested in good faith and for which the Borrower has set aside adequate reserves under GAAP or where the failure to file such returns or pay such taxes could not reasonably be expected to have a Material Adverse Effect.
5.10 Investments. Borrower does not own any Equity Interests of any Person, except for Permitted Investments.
5.11 Government Consents. Borrower and each Subsidiary have obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all governmental authorities that are necessary for the continued operation of Borrowers business as currently conducted, except where the failure to do so would not reasonably be expected to cause a Material Adverse Effect.
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5.12 Restricted Agreements. Except as disclosed on the Schedule or as timely disclosed in writing to Bank pursuant to Section 6.9, Borrower is not a party to, nor is bound by, any Restricted Agreement.
5.13 Shares. Borrower has full power and authority to create a first lien on the Shares and no disability or contractual obligation exists that would prohibit Borrower from pledging the Shares pursuant to this Agreement. There are no subscriptions, warrants, rights of first refusal or other restrictions on, or options exercisable with respect to the Shares. The Shares have been and will be duly authorized and validly issued, and are fully paid and non-assessable. The Shares are not the subject of any present or threatened suit, action, arbitration, administrative or other proceeding, and such Borrower does not know of any reasonable grounds for the institution of any such proceedings.
5.14 Full Disclosure. No representation, warranty or other written statement made by Borrower in any certificate or written statement furnished to Bank, taken together with all such certificates and written statements furnished to Bank, in connection with the negotiation of the Loan Documents or included therein or delivered pursuant thereto contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained in such certificates or statements not misleading, it being acknowledged and agreed by Bank that the projections and forecasts provided by Borrower in good faith and based upon reasonable assumptions are not to be viewed as facts and that actual results during the period or periods covered by any such projections and forecasts may vary from the projected or forecasted results and that such variances may be material.
6. AFFIRMATIVE COVENANTS.
Borrower covenants and agrees that, for so long as Bank may have any commitment to make any Credit Extensions and until the outstanding Obligations (other than contingent obligations for which no claim has been made) are paid in full, Borrower shall do all of the following unless Bank otherwise consents in writing:
6.1 Good Standing and Government Compliance. Borrower shall maintain its and each of its Subsidiaries organizational existence and good standing in the Borrower State, shall maintain qualification and good standing in each other jurisdiction in which the failure to so qualify could reasonably be expected to have a Material Adverse Effect, and shall furnish to Bank the organizational identification number issued to Borrower by the authorities of the jurisdiction in which Borrower is organized, if applicable. Borrower shall meet, and shall cause each Subsidiary to meet, the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. Borrower shall comply in all material respects with all applicable Environmental Laws, and maintain all material permits, licenses and approvals required thereunder, in each case, where the failure to do so could reasonably be expected to have a Material Adverse Effect. Borrower shall comply, and shall cause each Subsidiary to comply, with all statutes, laws, ordinances and government rules and regulations to which it is subject, and shall maintain, and shall cause each of its Subsidiaries to maintain, in force all licenses, approvals and agreements, the loss of which or failure to comply with which would reasonably be expected to have a Material Adverse Effect.
6.2 Financial Statements, Reports, Certificates.
(a) Borrower shall deliver to Bank:
(i) as soon as available, but in any event within thirty (30) days after the end of each calendar month, a company prepared consolidated balance sheet, income statement and cash flow statement covering Borrowers operations during such period, in a form reasonably acceptable to Bank and certified by a Responsible Officer;
(ii) as soon as available, but in any event within forty-five (45) days after the end of each calendar quarter, a company prepared consolidated and consolidating balance sheet, income statement and cash flow statement covering Borrowers operations during such period, in a form reasonably acceptable to Bank and certified by a Responsible Officer;
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(iii) as soon as available, but in any event within one hundred eighty (180) days after the end of Borrowers fiscal year, audited consolidated financial statements of Borrower prepared in accordance with GAAP, consistently applied, together with an opinion which is unqualified (including no going concern comment or qualification except with respect to a lack of liquidity for the Borrower) or otherwise consented to in writing by Bank on such financial statements of an independent certified public accounting firm of national recognized standing or otherwise reasonably acceptable to Bank;
(iv) if applicable, copies of all material statements, reports and notices sent or made available generally by Borrower to its security holders generally or to any holders of Subordinated Debt and all reports on Forms 10-K and 10-Q filed with the Securities and Exchange Commission;
(v) promptly upon receipt of notice thereof, a report of any legal actions pending or, to the Borrowers knowledge, threatened in writing against Borrower or any Subsidiary that could result in damages or costs to Borrower or any Subsidiary of Seven Hundred Fifty Thousand Dollars ($750,000) or more;
(vi) promptly upon receipt, each management letter prepared by Borrowers independent certified public accounting firm regarding Borrowers management control systems, if prepared;
(vii) as soon as available, but in any event by February 28 of each year, Borrowers financial and business projections and budget for such year, with evidence of approval thereof by Borrowers Board of Directors, and any revisions of such projections approved by Borrowers Board of Directors shall be delivered to Bank within thirty (30) days after such approval;
(viii) such budgets, sales projections, operating plans or other financial information as Bank may reasonably request from time to time;
(ix) within forty-five (45) days of the last day of each fiscal quarter, a report signed by Borrower, in form reasonably acceptable to Bank, listing any applications or registrations that Borrower has made or filed in respect of any Patents, Copyrights or Trademarks and the status of any outstanding applications or registrations, as well as any material change in Borrowers Intellectual Property Collateral, including but not limited to any subsequent ownership right of Borrower in or to any Trademark, Patent or Copyright not specified in Exhibits A, B, and C of any intellectual property security agreement (the Intellectual Property Report);
(x) within forty-five (45) days of the last day of each fiscal quarter, a report of SaaS metrics, including Borrowers monthly recurring revenue as of the last day of each month, together with the information and computations used by Borrower to prepare such report in form and substance satisfactory to Bank;
(xi) within thirty (30) days after the last day of each month, aged listings by invoice date of accounts receivable and accounts payable, and at such time as the Revolving Line is available to Borrower, a Borrowing Base Certificate signed by a Responsible Officer in substantially the form of Exhibit C hereto;
(xii) Within thirty (30) days after the last day of each month, with the monthly financial statements a Compliance Certificate certified as of the last day of the applicable month and signed by a Responsible Officer in substantially the form of Exhibit D hereto; and
(xiii) Promptly (and in any event within three (3) Business Days) upon becoming aware of the occurrence or existence of an Event of Default hereunder, a written statement of a Responsible Officer setting forth details of the Event of Default, and the action which Borrower has taken or proposes to take with respect thereto.
(b) Bank shall have a right from time to time hereafter to audit Borrowers Accounts and appraise Collateral at Borrowers expense, provided that such audits will be conducted no more often than every six (6) months unless an Event of Default has occurred and is continuing.
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(c) Borrower may deliver to Bank on an electronic basis any certificates, reports or information required pursuant to this Section 6.2, and Bank shall be entitled to rely on the information contained in the electronic files, provided that Bank in good faith believes that the files were delivered by a Responsible Officer. If Borrower delivers this information electronically, it shall also deliver to Bank by U.S. Mail, reputable overnight courier service, hand delivery, facsimile or .pdf file within five (5) Business Days of submission of the unsigned electronic copy the certification of monthly financial statements, the Intellectual Property Report, the Borrowing Base Certificate and the Compliance Certificate, each bearing the physical signature of the Responsible Officer.
6.3 Inventory; Returns. Borrower shall keep all Inventory in good and merchantable condition, free from all material defects except for Inventory for which adequate reserves have been made. Returns and allowances, if any, as between Borrower and its account debtors shall be on the same basis and in accordance with the usual customary practices of Borrower, as they exist on the Restatement Date. Borrower shall promptly notify Bank of all returns and recoveries and of all disputes and claims involving more than Five Hundred Thousand Dollars ($500,000) with respect to any single event or series of related events.
6.4 Taxes. Borrower shall make, and cause each Subsidiary to make, due and timely payment or deposit of all material federal, state, and local taxes, assessments, or contributions required of it by law, including, but not limited to, those laws concerning income taxes, F.I.C.A., F.U.T.A. and state disability, and will execute and deliver to Bank, as reasonably requested, proof satisfactory to Bank indicating that Borrower or a Subsidiary has made such payments or deposits and any appropriate certificates attesting to the payment or deposit thereof; provided that Borrower or a Subsidiary need not make any payment if the amount or validity of such payment is contested in good faith by appropriate proceedings and is reserved against (to the extent required by GAAP) by Borrower.
6.5 Insurance. Borrower will keep the Collateral in good condition in all material respects and will protect it from loss, damage, or deterioration from any cause. Borrower has and will maintain at all times (a) with respect to the Collateral, insurance under an all risk policy against fire and other risks customarily insured against, and (b) public liability insurance and other insurance as may be required by law or reasonably required by Bank. All personal property and hazard insurance policies shall be in amount, form and content, and written by companies as may be reasonably satisfactory to Bank, and shall contain a lenders loss payable endorsement in favor of and reasonably acceptable to Bank. All real property insurance policies, if any, shall be in amount, form and content, and written by companies as may be reasonably satisfactory to Bank, and shall contain a mortgagee clause in favor of and reasonably acceptable to Bank. All general liability insurance policies shall be in amount, form and content, and written by companies as may be reasonably satisfactory to Bank, and shall show Bank as an additional insured. All such policies shall contain a provision whereby they may not be canceled or materially amended except upon thirty (30) days prior written notice to Bank (except ten (10) days in the case of non-payment of premium). Borrower will promptly deliver to Bank, at Banks request, evidence reasonably satisfactory to Bank that such insurance has been so procured and, with respect to casualty insurance, made payable to Bank. Notwithstanding the foregoing, if no Event of Default has occurred and is continuing, proceeds in an aggregate amount not to exceed $100,000, payable under any casualty policy will, at Borrowers option, be payable to Borrower to replace the property subject to the claim. If an Event of Default has occurred and is continuing, or if the aggregate proceeds are in excess of $50,000 ($500,000 in the aggregate for proceeds for all claims), all proceeds payable under any such policy shall, at Banks sole option, be payable to Bank to be applied on account of the Obligations. Borrower hereby appoints Bank, or any employee or agent of Bank, as Borrowers attorney-in-fact, which appointment is coupled with an interest and irrevocable, and authorizes Bank, or any employee or agent of Bank, on behalf of Borrower, so long as an Event of Default then exists or insurance proceeds are in excess of $50,000 ($500,000 in the aggregate for proceeds for all claims), to adjust and compromise any loss under said insurance and to endorse any check or draft payable to Borrower in connection with returned or unearned premiums on said insurance or the proceeds of said insurance, and any amount so collected may be applied toward satisfaction of the Obligations; provided, however, that Bank shall not be required hereunder so to act. If Borrower fails to maintain satisfactory insurance, Bank has the option (but not the obligation) to do so and Borrower agrees to repay all amounts so expended to Bank immediately upon demand, together with interest at the highest lawful default rate which could be charged by Bank on any Obligations. Such amounts so expended by Bank shall constitute Obligations secured by this Agreement.
6.6 Accounts. Borrower shall maintain all of its depository, operating and investment accounts with Bank; provided, however, Borrower shall be permitted to maintain an account in the United Kingdom and in Canada without an account control agreement provided the balance of each such account does not exceed $375,000 and the aggregate balance shall not exceed $750,000, in each case, at any time.
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6.7 Financial Covenant Minimum Gross Liquidity. At any time as the sum of the outstanding principal amount of Advances, plus reserves required in connection with the Automatic Clearinghouse Transactions pursuant to the ACH Sublimit, plus the aggregate face amount of Letters of Credit issued under the Letter of Credit Sublimit, plus the aggregate limits of the corporate credit cards issued to Borrower and merchant credit card processing reserves under the Credit Card Services Sublimit amount are equal to or in excess of $18,000,000, Borrower shall maintain Gross Liquidity equal to the greater of (a) $5,000,000 or (b) T6M Adjusted EBITDA Burn, determined as of the last day of the monthly financial reporting period most recently ended, tested daily.
6.8 Registration of Intellectual Property Rights.
(a) Borrower shall promptly (i) give Bank written notice of any applications or registrations of intellectual property rights which are material to the conduct of Borrowers business filed with the United States Copyright Office and/or with the United States Patent and Trademark Office, including the date of such filing and the registration or application numbers, if any, execute such documents as Bank may reasonably request for Bank to maintain its perfection in such intellectual property rights to be registered by Borrower; (ii) upon the request of Bank, either deliver to Bank or file such documents simultaneously with the filing of any such applications or registrations; (iii) upon filing any such applications or registrations, promptly (unless alternative timing is specified in Section 6.2) provide Bank with a copy of such applications or registrations together with any exhibits, evidence of the filing of any documents requested by Bank to be filed for Bank to maintain the perfection and priority of its security interest in such intellectual property rights, and the date of such filing.
(b) Borrower shall execute and deliver such additional instruments and documents from time to time as Bank shall reasonably request to perfect and maintain the perfection and priority of Banks security interest in the Intellectual Property Collateral.
(c) Borrower shall (i) use commercially reasonable efforts to protect, defend and maintain the validity and enforceability of the Trademarks, Patents, Copyrights, and trade secrets owned by or exclusively licensed to Borrower, (ii) use commercially reasonable efforts to detect infringements of Trademarks, Patents and Copyrights and promptly advise Bank in writing of material infringements detected and (iii) not allow any material Trademarks, Patents or Copyrights owned by Borrower to be abandoned, forfeited or dedicated to the public without the written consent of Bank, which shall not be unreasonably withheld, in each case, to the extent such Trademarks, Patents, Copyrights and trade secrets are material to the conduct of the Borrowers business.
(d) Bank may audit Borrowers Intellectual Property Collateral as set forth in Section 4.3, to confirm compliance with Section 6.2 and this Section 6.8. Bank shall have the right, but not the obligation, to take, at Borrowers sole expense, any actions that Borrower is required under this Section 6.8 to take but which Borrower fails to take, after fifteen (15) days notice to Borrower. Borrower shall (a) reimburse Bank for all reasonable costs and reasonable expenses incurred in the reasonable exercise of its rights under this Section 6.8 solely to the extent such costs and expenses constitute Bank Expenses and (b) indemnify Bank to the extent provided for in Section 13.2.
6.9 Restricted Agreement Consents. Prior to entering into or becoming bound by any license or agreement that would constitute a Restricted Agreement and which is core to the conduct of Borrowers business, Borrower shall (i) provide written notice to Bank of the material terms of such license or agreement with a description of its likely impact on Borrowers business or financial condition, and (ii) upon Banks request, will use commercially reasonable efforts to obtain the consent of, or waiver by, any person whose consent or waiver is necessary for (A) Borrowers interest in such licenses or contract rights to be deemed Collateral and for Bank to have a security interest in such license or contract right, and to have the power to assign such license or contract rights in connection with an enforcement of remedies, that might otherwise be restricted by the terms of the applicable license or agreement, whether now existing or entered into in the future, and (B) Bank to have the ability in the event of a liquidation of any Collateral to dispose of such Collateral in accordance with Banks rights and remedies under this Agreement and the other Loan Documents.
6.10 Landlord and Bailee Waivers. Borrower shall obtain (i) a landlord waiver in form satisfactory to Bank, duly executed by the landlord at each location at which Borrower leases real property other than (a) locations where the personal property at such location does not exceed $150,000 and (b) 3700 N. Capital Texas Highway, Austin, TX 78745 where the personal property does not exceed $1,000,000, and (ii) a bailee waiver or other similar agreement, in form satisfactory to Bank, duly executed by any Person maintaining Borrowers physical assets, provided no such bailee waiver shall be required to the extent the aggregate value of Borrowers assets at such locations does not exceed $500,000 for all such locations.
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6.11 Formation or Acquisition of Subsidiaries. Notwithstanding and without limiting the generality of the negative covenants contained in Sections 7.3 and 7.7 hereof, at the time that Borrower forms any direct or indirect Subsidiary or acquires any direct or indirect Subsidiary after the Restatement Date, including any Subsidiary organized under the laws of Canada or any province thereof, Borrower shall give prior written notice to Bank thereof, and, upon Banks written request, shall (a) cause such new Subsidiary to provide to Bank a secured guaranty or joinder to this Agreement to cause such Subsidiary to become a guarantor or co-borrower hereunder, together with such appropriate financing statements and/or control agreements, all in form and substance reasonably satisfactory to Bank (including being sufficient to grant Bank a first priority Lien (subject to Permitted Liens) in and to the assets of such newly formed or acquired Subsidiary), (b) provide to Bank appropriate certificates and powers, pledging all of the direct or beneficial ownership interest in such new Subsidiary, to the extent constituting Collateral, in form and substance reasonably satisfactory to Bank, and (c) provide to Bank all other documentation in form and substance reasonably satisfactory to Bank, which is reasonably appropriate with respect to the execution and delivery of the applicable documentation referred to above. To the extent such Subsidiary bills customers directly, within sixty (60) days of the date of formation of any such Subsidiary (to the extent not previously delivered), Borrower shall enter into a pledge agreement in form and substance acceptable to Bank with respect to the pledge of all Equity Interests of such Subsidiary constituting Collateral hereunder. Notwithstanding the foregoing, no joinder or secured guaranty shall be required of any Subsidiary, to the extent such joinder or guaranty would result in a material adverse tax consequence to Borrower, as determined by Borrower in good faith. Any document, agreement, or instrument executed or issued pursuant to this Section 6.11 shall be a Loan Document.
6.12 Further Assurances. At any time and from time to time Borrower shall execute and deliver such further instruments and take such further action as may reasonably be requested by Bank to effect the purposes of this Agreement. At Banks written request in connection with the addition of one or more new lenders (whether in connection with an increase to the Revolving Line Amount pursuant to Section 2.1(d) or otherwise), Borrower agrees to enter into any amendment, restatement or other modification of this Agreement to permit the addition of such lenders, including without limitation, agency provisions, lender voting provisions, application of proceeds provisions, and other similar provisions, provided that if such addition of one or more new lenders is in connection with an increase to the Revolving Line Amount, there may also be changes to applicable fees or other provisions as the parties may mutually agree, provided further, that if such addition of lenders is not in connection with an increase to the Revolving Line Amount, Borrower shall not be required to enter into an amendment if such amendment effects a change to the pricing of the Credit Extensions, the representations and warranties, covenants, Events of Default or Collateral.
7. NEGATIVE COVENANTS.
Borrower covenants and agrees that, for so long as Bank may have any commitment to make any Credit Extensions and until the outstanding Obligations (other than contingent obligations for which no claim has been made) are paid in full, Borrower shall not do any of the following unless Bank otherwise consents in writing:
7.1 Dispositions. Convey, sell, lease, license, transfer or otherwise dispose of (collectively, to Transfer), or permit any of its Subsidiaries to Transfer, all or any part of its business or property, or subject to Section 6.6, move cash balances on deposit with Bank to accounts opened at another financial institution, other than Permitted Transfers.
7.2 Change in Name, Location, Executive Office, or Executive Management; Change in Business; Change in Fiscal Year; Change in Control. Without thirty (30) days prior written notice to Bank, change its name or the Borrower State or, without ten (10) days prior written notice to Bank, relocate its chief executive office; replace its chief executive officer or chief financial officer without thirty (30) days prior written notification to Bank; provided, if such prior written notice cannot reasonably be provided, then Borrower shall provide notice as soon as practicable; engage in any business, or permit any of its Subsidiaries to engage in any business, other than or reasonably related or incidental to the businesses currently engaged in by Borrower; change its fiscal year end; have a Change in Control.
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7.3 Mergers or Acquisitions. Merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with or into any other business organization (other than mergers or consolidations of a Subsidiary into another Subsidiary or into Borrower), or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the Equity Interests or property of another Person, or enter into any agreement to do any of the same; except, with respect to any such transaction, if the following conditions are met (such transaction satisfying the following conditions, a Permitted Acquisitions):
(a) the aggregate consideration (including contingent or deferred consideration valued in accordance with GAAP) does not exceed $10,000,000 per fiscal year or $15,000,000 during the term of this Agreement;
(b) the target assets or Person is in the same or similar line of business as Borrower and is or are principally located in the United States;
(c) Borrower shall have provided a quality of earnings report that is reasonably satisfactory to Bank, demonstrating that the target assets or Person, after giving pro forma effect to the transaction shall have Adjusted EBITDA greater than zero;
(d) Borrower shall have delivered (i) notice of the proposed transaction not less than ten (10) Business Days prior to the closing of such transaction, together with a summary of material terms, and (ii) transaction documents (which may be in draft form) as soon as practicable following such notice, but in any event not less than three (3) Business Days prior to the closing of such transaction, and such historical financial statements with respect to the target assets or Person and updated projections as provided pursuant to such transaction documents, and calculations demonstrating financial covenant compliance immediately following the effectiveness of such transaction and for the then-next twelve month period after giving pro forma effect to such proposed transaction;
(e) no Event of Default has occurred, is continuing or would exist after giving effect to such transaction;
(f) such transaction does not result in a Change in Control; and
(g) in the case of a merger, Borrower shall be the surviving entity, and in the case of the formation of a new Subsidiary, Borrower shall comply with Section 6.11 with respect to such new Subsidiary (to the extent applicable).
7.4 Indebtedness. Create, incur, assume, guarantee or be or remain liable with respect to any Indebtedness, or permit any Subsidiary to do so, other than Permitted Indebtedness, or prepay any Indebtedness or take any actions which impose on Borrower an obligation to prepay any Indebtedness, except Indebtedness to Bank.
7.5 Encumbrances.
(a) Create, incur, assume or allow any Lien with respect to any of its property, or permit any of its Subsidiaries to do so, except for Permitted Liens.
(b) Covenant to any other Person that Borrower in the future will refrain from creating, incurring, assuming or allowing any Lien in favor of Bank with respect to any of Borrowers property other than:
(i) restrictions imposed by law;
(ii) any restrictions contained in (a) any Restricted Agreement set forth on the Schedule or (b) any Restricted Agreement that Borrower has disclosed to Bank pursuant to Section 6.9 and that Bank has consented to Borrower entering into (such consent not to be unreasonably withheld or delayed);
(iii) customary provisions in joint venture agreements and other similar agreements applicable to joint ventures (other than the Borrower) entered into in the ordinary course of business;
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(iv) any restrictions imposed by any agreement relating to secured Indebtedness permitted by this Agreement to the extent that such restrictions apply only to the property or assets securing such Indebtedness; or
(v) customary provisions restricting assignment of any agreement entered into in the ordinary course of business.
7.6 Distributions. Pay any dividends or make any other distribution or payment on account of or in redemption, retirement or purchase of any Equity Interests; provided that:
(a) the Borrower may declare and pay dividends or make other distributions with respect to its Equity Interests payable solely in additional shares of its Equity Interests;
(b) any Subsidiary may declare and pay dividends or make other distributions to the Borrower or any other Subsidiary; and
(c) the Borrower may pay dividends and make other distributions and payments, in each case to the extent such dividends, distributions and other payments constitute Permitted Investments.
7.7 Investments.
(a) Directly or indirectly acquire or own, or make any Investment in or to any Person, or permit any of its Subsidiaries to do so, other than Permitted Investments or maintain or invest any of its property consisting of deposit accounts, securities accounts, certificates of deposit, money market accounts or other similar financial accounts with a Person other than Bank or Banks Affiliates or permit any Subsidiary to do so unless, to the extent required by Section 6.6, such Person has entered into a control agreement with Bank, in form and substance reasonably satisfactory to Bank.
(b) Permit any Subsidiary to be a party to, or be bound by, an agreement that restricts such Subsidiary from paying dividends or otherwise distributing property to Borrower; except for:
(i) any agreement containing such restrictions to the extent such restrictions are imposed by law;
(ii) any Restricted Agreement set forth on the Schedule;
(iii) any Restricted Agreement that Borrower has disclosed to Bank pursuant to Section 6.9 and that Bank has consented to Borrower entering into (such consent not to be unreasonably withheld or delayed);
(iv) joint venture agreements and other similar agreements applicable to joint ventures (other than Borrower) entered into in the ordinary course of business;
(v) any agreement relating to secured Indebtedness permitted by this Agreement to the extent that such restrictions apply only to the property or assets securing such Indebtedness; or
(vi) any agreement entered into in the ordinary course of business restricting assignment of such agreement.
(c) Further, Borrower shall not enter into any license or agreement with any Prohibited Territory or with any Person organized under or doing business in a Prohibited Territory.
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7.8 Transactions with Affiliates.
(a) Directly or indirectly enter into or permit to exist any material transaction with any Affiliate of Borrower except for transactions that are in the ordinary course of Borrowers business, upon fair and reasonable terms that are no less favorable to Borrower than would be obtained in an arms length transaction with a non-affiliated Person; provided that the restrictions set forth in this Section 7.8 shall not apply to (i) Permitted Investments which are by their terms contemplated to be among Affiliates, (ii) any payment permitted by Section 7.6, (iii) employment and severance arrangements and health, disability and similar insurance or benefit plans between Borrower and the Subsidiaries and their respective future, current or former directors, officers, employees or consultants (including management and employee benefit plans or agreements, subscription agreements or similar agreements pertaining to the repurchase of Equity Interests pursuant to put/call rights or similar rights with future, current or former employees, officers, directors or consultants and equity option or incentive plans and other compensation arrangements) in the ordinary course of business or as otherwise approved by the board of directors of Borrower and (iv) the payment of customary fees and reasonable out-of-pocket costs to, and indemnities provided on behalf of, future, current or former directors, officers, employees and consultants of the Borrower and its Subsidiaries.
(b) The foregoing paragraph (a) shall not prohibit transactions among the Borrower and any Subsidiary otherwise permitted by this Agreement.
7.9 Subordinated Debt. Make any payment in respect of any Subordinated Debt, or permit any of its Subsidiaries to make any such payment, except in compliance with the terms of such Subordinated Debt and the terms of the subordination agreement relating to such Subordinated Debt, or amend any provision of any document evidencing such Subordinated Debt, except in compliance with the terms of the subordination agreement relating to such Subordinated Debt, or amend any provision affecting Banks rights contained in any documentation relating to the Subordinated Debt without Banks prior written consent.
7.10 Inventory and Equipment. Except as permitted by Section 6.10, store the Inventory or the Equipment with a bailee, warehouseman, or similar third party unless the third party has been notified of Banks security interest and Bank (a) has received an acknowledgment from the third party that it is holding or will hold the Inventory or Equipment for Banks benefit or (b) is in possession of the warehouse receipt, where negotiable, covering such Inventory or Equipment. Except for (a) Inventory sold in the ordinary course of business, (b) as permitted by Section 6.10, (c) Inventory in transit and (d) such other locations as Bank may approve in writing, Borrower shall keep the Inventory and Equipment only at the location set forth in Section 10, the current Schedule, and such other locations of which Borrower gives Bank prior written notice.
7.11 No Investment Company; Margin Regulation. Become or be controlled by an investment company, within the meaning of the Investment Company Act of 1940, or become principally engaged in, or undertake as one of its important activities, the business of extending credit for the purpose of purchasing or carrying margin stock, or use the proceeds of any Credit Extension for such purpose.
8. EVENTS OF DEFAULT.
Any one or more of the following events shall constitute an Event of Default by Borrower under this Agreement:
8.1 Payment Default. If Borrower fails to pay any of the Obligations when due;
8.2 Covenant Default.
(a) If Borrower fails to perform any obligation under Sections 6.2, 6.4, 6.5, 6.6 or violates any of the covenants contained in Article 6.11 of this Agreement; or
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(b) If Borrower fails or neglects to perform or observe any other material term, provision, condition, covenant contained in this Agreement, in any of the Loan Documents, or in any other present or future agreement between Borrower and Bank and as to any default under such other term, provision, condition or covenant that can be cured, has failed to cure such default within fifteen (15) days after Borrower receives notice thereof from Bank or any officer of Borrower becomes aware thereof; provided, however, that if the default cannot by its nature be cured within the fifteen (15) day period or cannot after diligent attempts by Borrower be cured within such fifteen (15) day period, and such default is likely to be cured within a reasonable time, then Borrower shall have an additional reasonable period (which additional period shall not in any case exceed thirty (30) days) to attempt to cure such default, so long as Borrower continues to diligently attempt to cure such default, and within such reasonable time period the failure to have cured such default shall not be deemed an Event of Default but no Credit Extensions will be made;
8.3 Investor Abandonment. If Bank reasonably determines, based on indications from Borrowers existing investors that such investors no longer intend to provide capital to Borrower in amounts and at times sufficient to enable Borrower to satisfy its obligations, including but not limited to all Obligations owing from Borrower to Bank.
8.4 Attachment. If any material portion of Borrowers and/or its Subsidiaries assets is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any trustee, receiver or person acting in a similar capacity and such attachment, seizure, writ or distress warrant or levy has not been removed, discharged or rescinded within ten (10) days, or if Borrower and/or its Subsidiaries is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs, or if a judgment or other claim becomes a lien or encumbrance upon any material portion of Borrowers and/or its Subsidiaries assets, or if a notice of lien, levy, or assessment is filed of record with respect to any material portion of Borrowers and/or its Subsidiaries assets by the United States, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, and the same is not paid within ten (10) days after Borrower and/or its Subsidiaries receives notice thereof, provided that none of the foregoing shall constitute an Event of Default where such action or event is stayed or an adequate bond has been posted pending a good faith contest by Borrower and/or its Subsidiaries (provided that no Credit Extensions will be made during such cure period);
8.5 Insolvency. If Borrower and/or its Subsidiaries becomes insolvent, or if an Insolvency Proceeding is commenced by Borrower and/or its Subsidiaries, or if an Insolvency Proceeding is commenced against Borrower and/or its Subsidiaries and is not dismissed or stayed within forty-five (45) days (provided that no Credit Extensions will be made prior to the dismissal of such Insolvency Proceeding);
8.6 Other Agreements. If there is a default or other failure to perform in any agreement to which Borrower and/or its Subsidiaries is a party with a third party or parties resulting in a right by such third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness in an amount in excess of Five Hundred Thousand Dollars ($500,000) or that would reasonably be expected to have a Material Adverse Effect;
8.7 Subordinated Debt. If Borrower and/or its Subsidiaries makes any payment on account of Subordinated Debt, except to the extent the payment is allowed under any subordination agreement entered into with Bank;
8.8 Judgments; Settlements. If one or more (a) judgments, orders, decrees or arbitration awards requiring the Borrower and/or its Subsidiaries to pay an aggregate amount of Five Hundred Thousand Dollars ($500,000) or greater shall be rendered against Borrower and/or its Subsidiaries and the same shall not have been satisfied, vacated or stayed within ten (10) days thereafter (provided that no Credit Extensions will be made prior to such matter being satisfied, vacated or stayed); or (b) settlements is agreed upon by Borrower and/or its Subsidiaries for the payment by Borrower and/or its Subsidiaries of an aggregate amount of Five Hundred Thousand Dollars ($500,000) or greater or that could reasonably be expected to have a Material Adverse Effect.
8.9 Misrepresentations. If any material misrepresentation or material misstatement exists now or hereafter in any warranty or representation set forth herein or in any certificate delivered to Bank by any Responsible Officer pursuant to this Agreement or to induce Bank to enter into this Agreement or any other Loan Document as of the date such representation or warranty was made or deemed made.
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8.10 Guaranty. If any guaranty of all or a portion of the Obligations (a Guaranty) ceases for any reason to be in full force and effect, or any guarantor fails to perform any obligation under any Guaranty or a security agreement securing any Guaranty (collectively, the Guaranty Documents), or any event of default occurs under any Guaranty Document or any guarantor revokes or purports to revoke a Guaranty, or any material misrepresentation or material misstatement exists now or hereafter in any warranty or representation set forth in any Guaranty Document or in any certificate delivered to Bank in connection with any Guaranty Document as of the date such representation or warranty was made or deemed made, or if any of the circumstances described in Sections 8.3 through 8.9 occur with respect to any guarantor, mutatis mutandi.
9. BANKS RIGHTS AND REMEDIES.
9.1 Rights and Remedies. Upon the occurrence and during the continuance of an Event of Default, Bank may, at its election, without notice of its election and without demand, do any one or more of the following, all of which are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable (provided that upon the occurrence of an Event of Default described in Section 8.5 (insolvency), all Obligations shall become immediately due and payable without any action by Bank);
(b) Demand that Borrower (i) deposit cash with Bank in an amount equal to the amount of any Letters of Credit remaining undrawn, outstanding Credit Card Services, outstanding and ACH origination services, as collateral security for the repayment of any future drawings under such Letters of Credit, outstanding Credit Card Services, or outstanding ACH origination services, and (ii) pay in advance all Letter of Credit fees scheduled to be paid or payable over the remaining term of the Letters of Credit, Credit Card Services fees, or ACH origination services fees, and Borrower shall promptly deposit and pay such amounts;
(c) Cease advancing money or extending credit to or for the benefit of Borrower under this Agreement or under any other agreement between Borrower and Bank;
(d) Settle or adjust disputes and claims directly with account debtors for amounts, upon terms and in whatever order that Bank reasonably considers advisable;
(e) Make such payments and do such acts as Bank considers necessary or reasonable to protect its security interest in the Collateral. Borrower agrees to assemble the Collateral if Bank so requires, and to make the Collateral available to Bank as Bank may designate. Borrower authorizes Bank to enter the premises where the Collateral is located, to take and maintain possession of the Collateral, or any part of it, and to pay, purchase, contest, or compromise any encumbrance, charge, or lien which in Banks determination appears to be prior or superior to its security interest and to pay all expenses incurred in connection therewith. With respect to any of Borrowers owned premises, Borrower hereby grants Bank a license to enter into possession of such premises and to occupy the same, without charge, in order to exercise any of Banks rights or remedies provided herein, at law, in equity, or otherwise;
(f) Set off and apply to the Obligations any and all (i) payments received by Bank, (ii) balances and deposits of Borrower held by Bank, and (iii) indebtedness at any time owing to or for the credit or the account of Borrower held by Bank;
(g) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Collateral. Bank is hereby granted a license or other right, solely pursuant to the provisions of this Section 9.1, to use, without charge, Borrowers labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and, in connection with Banks exercise of its rights under this Section 9.1, Borrowers rights under all licenses and all franchise agreements shall inure to Banks benefit;
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(h) Sell the Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Borrowers premises) as Bank determines is commercially reasonable, and apply any proceeds to the Obligations in whatever manner or order Bank deems appropriate. Bank may sell the Collateral without giving any warranties as to the Collateral. Bank may specifically disclaim any warranties of title or the like. This procedure will not be considered adversely to affect the commercial reasonableness of any sale of the Collateral. If Bank sells any of the Collateral upon credit, Borrower will be credited only with payments actually made by the purchaser, received by Bank, and applied to the indebtedness of the purchaser. If the purchaser fails to pay for the Collateral, Bank may resell the Collateral and Borrower shall be credited with the proceeds of the sale;
(i) Bank may credit bid and purchase at any public sale;
(j) Apply for the appointment of a receiver, trustee, liquidator or conservator of the Collateral, without notice and without regard to the adequacy of the security for the Obligations and without regard to the solvency of Borrower, any guarantor or any other Person liable for any of the Obligations; and
(k) Any deficiency that exists after disposition of the Collateral as provided above will be paid immediately by Borrower.
Bank may comply with any applicable state or federal law requirements in connection with a disposition of the Collateral and compliance will not be considered adversely to affect the commercial reasonableness of any sale of the Collateral.
9.2 Power of Attorney. Effective only upon the occurrence and during the continuance of an Event of Default, Borrower hereby irrevocably appoints Bank (and any of Banks designated officers, or employees) as Borrowers true and lawful attorney to: (a) send requests for verification of Accounts or notify account debtors of Banks security interest in the Accounts; (b) endorse Borrowers name on any checks or other forms of payment or security that may come into Banks possession; (c) sign Borrowers name on any invoice or bill of lading relating to any Account, drafts against account debtors, schedules and assignments of Accounts, verifications of Accounts, and notices to account debtors; (d) dispose of any Collateral; (e) make, settle, and adjust all claims under and decisions with respect to Borrowers policies of insurance; (f) settle and adjust disputes and claims respecting the accounts directly with account debtors, for amounts and upon terms which Bank determines to be reasonable; (g) enter into a short-form intellectual property security agreement consistent with the terms of this Agreement for recording purposes only or modify, in its sole discretion, any intellectual property security agreement entered into between Borrower and Bank without first obtaining Borrowers approval of or signature to such modification by amending Exhibits A, B, and C, thereof, as appropriate, to include reference to any right, title or interest in any Copyrights, Patents or Trademarks acquired by Borrower after the execution hereof or to delete any reference to any right, title or interest in any Copyrights, Patents or Trademarks in which Borrower no longer has or claims to have any right, title or interest; and (h) file, in its sole discretion, one or more financing or continuation statements and amendments thereto, relative to any of the Collateral without the signature of Borrower where permitted by law; provided Bank may exercise such power of attorney to sign the name of Borrower on any of the documents described in clauses (g) and (h) above, regardless of whether an Event of Default has occurred. The appointment of Bank as Borrowers attorney in fact, and each and every one of Banks rights and powers, being coupled with an interest, is irrevocable until all of the Obligations (other than contingent obligations for which no claim has been made) have been fully repaid and performed and Banks obligation to provide advances hereunder is terminated.
9.3 Accounts Collection. At any time after the occurrence and during the continuation of an Event of Default, Bank may notify any Person owing funds to Borrower of Banks security interest in such funds and verify the amount of such Account. Borrower shall collect all amounts owing to Borrower for Bank, receive in trust all payments as Banks trustee, and immediately deliver such payments to Bank in their original form as received from the account debtor, with proper endorsements for deposit.
9.4 Bank Expenses. If Borrower fails to pay any amounts or furnish any required proof of payment due to third persons or entities, as required under the terms of this Agreement, and an Event of Default has occurred and is continuing, then Bank may do any or all of the following after reasonable notice to Borrower: (a) make payment of the same or any part thereof; (b) set up such reserves under the Revolving Line as Bank deems necessary to protect Bank from the exposure created by such failure; or (c) obtain and maintain insurance policies of the type discussed in Section 6.5 of this Agreement, and take any action with respect to such policies as Bank deems prudent. Any amounts so paid or deposited by Bank shall constitute Bank Expenses, shall be immediately due and payable, and shall bear interest at the then applicable rate hereinabove provided, and shall be secured by the Collateral. Any payments made by Bank shall not constitute an agreement by Bank to make similar payments in the future or a waiver by Bank of any Event of Default under this Agreement.
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9.5 Banks Liability for Collateral. Bank has no obligation to clean up or otherwise prepare the Collateral for sale. All risk of loss, damage or destruction of the Collateral shall be borne by Borrower.
9.6 No Obligation to Pursue Others. Bank has no obligation to attempt to satisfy the Obligations by collecting them from any other Person liable for them and Bank may release, modify or waive any collateral provided by any other Person to secure any of the Obligations, all without affecting Banks rights against Borrower. Borrower waives any right it may have to require Bank to pursue any other Person for any of the Obligations.
9.7 Remedies Cumulative. Banks rights and remedies under this Agreement, the Loan Documents, and all other agreements shall be cumulative. Bank shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by Bank of one right or remedy shall be deemed an election, and no waiver by Bank of any Event of Default on Borrowers part shall be deemed a continuing waiver. No delay by Bank shall constitute a waiver, election, or acquiescence by it. No waiver by Bank shall be effective unless made in a written document signed on behalf of Bank and then shall be effective only in the specific instance and for the specific purpose for which it was given. Borrower expressly agrees that this Section 9.7 may not be waived or modified by Bank by course of performance, conduct, estoppel or otherwise.
9.8 Demand; Protest. Except as otherwise provided in this Agreement, Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment and any other notices relating to the Obligations.
9.9 Shares. Each Borrower recognizes that Bank may be unable to effect a public sale of any or all the Shares, by reason of certain prohibitions contained in federal securities laws and applicable state securities laws or otherwise, and may be compelled to resort to one or more private sales thereof to a restricted group of purchasers which will be obliged to agree, among other things, to acquire such securities for their own account for investment and not with a view to the distribution or resale thereof. Each Borrower acknowledges and agrees that any such private sale may result in prices and other terms less favorable than if such sale were a public sale and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner. Bank shall be under no obligation to delay a sale of any of the Shares for the period of time necessary to permit the issuer thereof to register such securities for public sale under federal securities laws or under applicable state securities laws, even if such issuer would agree to do so.
10. NOTICES.
Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement or any other agreement entered into in connection herewith shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by a recognized overnight delivery service, certified mail, postage prepaid, return receipt requested, or by facsimile to Borrower or to Bank, as the case may be, at its addresses set forth below:
If to Borrower: |
CS DISCO, INC. | |
3700 N. Capital of Texas Highway, Suite 150 | ||
Austin, Texas 78746-3454 | ||
Attn: Kiwi Camara | ||
Attn: Michael Lafair |
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If to Bank: | Comerica Bank | |
M/C 7578 | ||
39200 Six Mile Rd. | ||
Livonia, MI 48152 | ||
Attn: National Documentation Services | ||
with a copy to: | Comerica Bank | |
230 Park Avenue, Suite 634 | ||
New York, NY 10169 |
The parties hereto may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other.
11. CHOICE OF LAW, VENUE, AND JURISDICTION; JURY TRIAL WAIVER.
11.1 THE PARTIES HEREBY AGREE THAT THIS AGREEMENT AND ALL OTHER LOAN DOCUMENTS, INSTRUMENTS AND AGREEMENTS RELATED TO THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO ITS CONFLICTS OF LAW PROVISIONS. BORROWER AND BANK EACH HEREBY IRREVOCABLY AND UNCONDITIONALLY (I) CONSENTS AND SUBMITS TO THE SOLE AND EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE STATE OF CALIFORNIA, AND ANY APPELLATE COURT THEREOF, (II) AGREES THAT ALL ACTIONS AND PROCEEDINGS BASED UPON, ARISING OUT OF, RELATING TO OR OTHERWISE CONCERNING THIS AGREEMENT OR ANY OTHER DOCUMENT, INSTRUMENT OR AGREEMENT RELATED TO THIS AGREEMENT, INCLUDING ALL CLAIMS FOR RECOGNITION OR ENFORCEMENT OF ANY JUDGMENT, SHALL SOLELY AND EXCLUSIVELY BE BROUGHT, HEARD, AND DETERMINED (LITIGATED) IN SUCH COURTS, (III) ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, THE SOLE AND EXCLUSIVE JURISDICTION OF THE AFORESAID COURTS, (IV) WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED UPON THE GROUNDS OF FORUM NON CONVENIENS, THAT IT MAY NOW OR HEREAFTER HAVE TO BRINGING OR MAINTAINING ANY SUCH ACTION OR PROCEEDING IN SUCH JURISDICTION, AND (V) AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT, OR ANY SUCH OTHER DOCUMENT, INSTRUMENT OR AGREEMENT. NOTHING HEREIN SHALL LIMIT THE RIGHT OF BANK TO BRING ANY ACTION OR PROCEEDING AGAINST BORROWER OR ITS PROPERTIES IN THE COURTS OF ANY OTHER JURISDICTION IN CONNECTION WITH THE ENFORCEMENT OF ANY LIENS OR SECURITY INTERESTS IN FAVOR OF BANK ON ANY OF BORROWERS PROPERTIES OR ASSETS.
11.2 JURY TRIAL WAIVER. THE UNDERSIGNED ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED UNDER CERTAIN CIRCUMSTANCES. TO THE EXTENT PERMITTED BY LAW, EACH PARTY, AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF ITS, HIS OR HER CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THE MUTUAL BENEFIT OF ALL PARTIES, WAIVES ANY RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION ARISING OUT OF OR RELATED TO THIS AGREEMENT OR ANY OTHER DOCUMENT, INSTRUMENT OR AGREEMENT BETWEEN THE UNDERSIGNED PARTIES.
12. JUDICIAL REFERENCE PROVISION.
12.1 In the event the Jury Trial Waiver set forth above is not enforceable, the parties elect to proceed under this Judicial Reference Provision.
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12.2 With the exception of the items specified in Section 12.3, below, any controversy, dispute or claim (each, a Claim) between the parties arising out of or relating to this Agreement or any other document, instrument or agreement between the undersigned parties (collectively in this Section, the Loan Documents), will be resolved by a reference proceeding in California in accordance with the provisions of Sections 638 et seq. of the California Code of Civil Procedure (CCP), or their successor sections, which shall constitute the exclusive remedy for the resolution of any Claim, including whether the Claim is subject to the reference proceeding. Except as otherwise provided in the Loan Documents, venue for the reference proceeding will be in the state or federal court in the county or district where the real property involved in the action, if any, is located or in the state or federal court in the county or district where venue is otherwise appropriate under applicable law (the Court).
12.3 The matters that shall not be subject to a reference are the following: (i) foreclosure of any security interests in real or personal property, (ii) exercise of self-help remedies (including, without limitation, set-off), (iii) appointment of a receiver and (iv) temporary, provisional or ancillary remedies (including, without limitation, writs of attachment, writs of possession, temporary restraining orders or preliminary injunctions). This Judicial Reference Provision does not limit the right of any party to exercise or oppose any of the rights and remedies described in clauses (i) and (ii) or to seek or oppose from a court of competent jurisdiction any of the items described in clauses (iii) and (iv). The exercise of, or opposition to, any of those items does not waive the right of any party to a reference proceeding pursuant to this Judicial Reference Provision as provided herein.
12.4 The referee shall be a retired judge or justice selected by mutual written agreement of the parties. If the parties do not agree within ten (10) days of a written request to do so by any party, then, upon request of any party, the referee shall be selected by the Presiding Judge of the Court (or his or her representative). A request for appointment of a referee may be heard on an ex parte or expedited basis, and the parties agree that irreparable harm would result if ex parte relief is not granted. Pursuant to CCP § 170.6, each party shall have one peremptory challenge to the referee selected by the Presiding Judge of the Court (or his or her representative).
12.5 The parties agree that time is of the essence in conducting the reference proceedings. Accordingly, the referee shall be requested, subject to change in the time periods specified herein for good cause shown, to (i) set the matter for a status and trial-setting conference within fifteen (15) days after the date of selection of the referee, (ii) if practicable, try all issues of law or fact within one hundred twenty (120) days after the date of the conference and (iii) report a statement of decision within twenty (20) days after the matter has been submitted for decision.
12.6 The referee will have power to expand or limit the amount and duration of discovery. The referee may set or extend discovery deadlines or cutoffs for good cause, including a partys failure to provide requested discovery for any reason whatsoever. Unless otherwise ordered based upon good cause shown, no party shall be entitled to priority in conducting discovery, depositions may be taken by either party upon seven (7) days written notice, and all other discovery shall be responded to within fifteen (15) days after service. All disputes relating to discovery which cannot be resolved by the parties shall be submitted to the referee whose decision shall be final and binding.
12.7 Except as expressly set forth herein, the referee shall determine the manner in which the reference proceeding is conducted including the time and place of hearings, the order of presentation of evidence, and all other questions that arise with respect to the course of the reference proceeding. All proceedings and hearings conducted before the referee, except for trial, shall be conducted without a court reporter, except that when any party so requests, a court reporter will be used at any hearing conducted before the referee, and the referee will be provided a courtesy copy of the transcript. The party making such a request shall have the obligation to arrange for and pay the court reporter. Subject to the referees power to award costs to the prevailing party, the parties will equally share the cost of the referee and the court reporter at trial.
12.8 The referee shall be required to determine all issues in accordance with existing case law and the statutory laws of the State of California. The rules of evidence applicable to proceedings at law in the State of California will be applicable to the reference proceeding. The referee shall be empowered to enter equitable as well as legal relief, enter equitable orders that will be binding on the parties and rule on any motion which would be authorized in a court proceeding, including without limitation motions for summary judgment or summary adjudication. The referee shall issue a decision at the close of the reference proceeding which disposes of all claims of the parties that are the subject of the reference. Pursuant to CCP § 644, such decision shall be entered by the Court as a judgment or an order in the same manner as if the action had been tried by the Court and any such decision will be final, binding and conclusive. The parties reserve the right to appeal from the final judgment or order or from any appealable decision or order entered by the referee. The parties reserve the right to findings of fact, conclusions of laws, a written statement of decision, and the right to move for a new trial or a different judgment, which new trial, if granted, is also to be a reference proceeding under this provision.
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12.9 If the enabling legislation which provides for appointment of a referee is repealed (and no successor statute is enacted), any dispute between the parties that would otherwise be determined by reference procedure will be resolved and determined by arbitration. The arbitration will be conducted by a retired judge or justice, in accordance with the California Arbitration Act §1280 through §1294.2 of the CCP as amended from time to time. The limitations with respect to discovery set forth above shall apply to any such arbitration proceeding.
12.10 THE PARTIES RECOGNIZE AND AGREE THAT ALL CONTROVERSIES, DISPUTES AND CLAIMS RESOLVED UNDER THIS JUDICIAL REFERENCE PROVISION WILL BE DECIDED BY A REFEREE AND NOT BY A JURY. AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF ITS, HIS OR HER OWN CHOICE, EACH PARTY KNOWINGLY AND VOLUNTARILY, AND FOR THE MUTUAL BENEFIT OF ALL PARTIES, AGREES THAT THIS JUDICIAL REFERENCE PROVISION WILL APPLY TO ANY CONTROVERSY, DISPUTE OR CLAIM BETWEEN OR AMONG THEM ARISING OUT OF OR IN ANY WAY RELATED TO, THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS.
13. GENERAL PROVISIONS.
13.1 Successors and Assigns. This Agreement shall bind and inure to the benefit of the respective successors and permitted assigns of each of the parties and shall bind all persons who become bound as a debtor to this Agreement; provided, however, that neither this Agreement nor any rights hereunder may be assigned by Borrower without Banks prior written consent, which consent may be granted or withheld in Banks sole discretion. Bank shall have the right without the consent of or notice to Borrower to sell, transfer, negotiate, or grant participation in all or any part of, or any interest in, Banks obligations, rights and benefits hereunder to any Person other than, unless an Event of Default has occurred and is continuing, to a direct competitor of Borrower.
13.2 Indemnification. INDEMNIFICATION AND HOLD HARMLESS. WITHOUT LIMITING ANY OTHER PROVISIONS OF THIS AGREEMENT, BORROWER AGREES TO INDEMNIFY AND HOLD BANK HARMLESS FROM AND AGAINST ALL LOSSES, COSTS, DAMAGES, LIABILITIES AND EXPENSES, INCLUDING, WITHOUT LIMITATION, IN-HOUSE AND OUTSIDE ATTORNEYS FEES AND DISBURSEMENTS, INCURRED BY BANK IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR ANY LOANS OR TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY OR BY REASON OF ANY DEFAULT OR EVENT OF DEFAULT, OR ENFORCING THE OBLIGATIONS OF BORROWER OR ANY LOAN PARTY UNDER THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS, AS APPLICABLE, OR IN EXERCISING ANY RIGHTS OR REMEDIES OF BANK OR IN THE PROSECUTION OR DEFENSE OF ANY ACTION OR PROCEEDING CONCERNING ANY MATTER GROWING OUT OF OR CONNECTED WITH THIS AGREEMENT OR ANY OF THE LOAN DOCUMENTS; PROVIDED, HOWEVER, THAT THE FOREGOING SHALL NOT BE APPLICABLE, AND THE BORROWER SHALL NOT BE LIABLE FOR ANY SUCH LOSSES, COSTS, DAMAGES, LIABILITIES OR EXPENSES, TO THE EXTENT (BUT ONLY TO THE EXTENT) THE SAME ARISE OR RESULT FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF BANK OR ANY OF ITS AGENTS OR EMPLOYEES. THE PROVISIONS OF THIS SECTION SHALL SURVIVE REPAYMENT OF THE INDEBTEDNESS AND SATISFACTION OF ALL OBLIGATIONS OF BORROWER TO BANK AND TERMINATION OF THIS AGREEMENT.
13.3 Time of Essence. Time is of the essence for the performance of all obligations set forth in this Agreement.
13.4 Severability of Provisions. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision.
13.5 Amendments in Writing, Integration. All amendments to or terminations of this Agreement or the other Loan Documents must be in writing signed by the parties. All prior agreements, understandings, representations, warranties, and negotiations between the parties hereto with respect to the subject matter of this Agreement and the other Loan Documents, if any, are merged into this Agreement and the Loan Documents.
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13.6 Counterparts. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement, and a photocopy, facsimile, .pdf or scanned copy of an executed counterpart of any Loan Document shall be sufficient to bind the party whose signature appears thereon.
13.7 Correction of Loan Documents. Bank may correct patent errors and fill in any blanks in this Agreement and the other Loan Documents consistent with the agreement of the parties; provided such corrections shall become effective upon notice of such to Borrower.
13.8 Final Agreement. This Agreement, together with the Loan Documents, entered into by and between Bank and Borrower with respect to the subject matter contained herein constitutes the entire understanding among the parties with respect to the subject matter hereof. This Agreement supersedes any and all prior oral or written agreements relating to the subject matter hereof.
13.9 Survival. All covenants, representations and warranties made in this Agreement shall continue in full force and effect so long as any Obligations (other than contingent obligations for which no claim has been made) remain outstanding or Bank has any obligation to make any Credit Extension to Borrower. The obligations of Borrower to indemnify Bank with respect to the expenses, damages, losses, costs and liabilities described in Section 13.2 shall survive until all applicable statute of limitations periods with respect to actions that may be brought against Bank have run.
13.10 Confidentiality. In handling any confidential information, Bank and all employees and agents of Bank shall exercise the same degree of care that Bank exercises with respect to its own proprietary information of the same types to maintain the confidentiality of any non-public information thereby received or received pursuant to this Agreement except that disclosure of such information may be made (i) to the parent, subsidiaries, or Affiliates and service providers of Bank, (ii) to prospective transferees, participants, or purchasers of any interest in the Obligations, (iii) as required by law, regulations, rule or order, subpoena, judicial order or similar order, (iv) as may be required in connection with the examination, audit or similar investigation of Bank, (v) to Banks accountants, auditors and regulators, and (vi) as Bank may determine in connection with the enforcement of any remedies hereunder. Confidential information hereunder shall not include information that either: (a) is in the public domain or in the knowledge or possession of Bank when disclosed to Bank, or becomes part of the public domain after disclosure to Bank through no fault of Bank; or (b) is disclosed to Bank by a third party, provided Bank does not have actual knowledge that such third party is prohibited from disclosing such information.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURES FOLLOW]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written.
CS DISCO, INC. | ||
By: | /s/ Michael Lafair | |
Name: Michael Lafair | ||
Title: Chief Financial Officer | ||
COMERICA BANK | ||
By: | /s/ David Kim | |
Name: David Kim | ||
Title: Vice President |
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EXHIBIT A
DEFINITIONS
Accounts mean all presently existing and hereafter arising accounts, contract rights, payment intangibles and all other forms of obligations owing to Borrower arising out of the sale or lease of goods (including, without limitation, the licensing of software and other technology) or the rendering of services by Borrower and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Borrower and Borrowers Books relating to any of the foregoing.
ACH Sublimit means a sublimit for Automated Clearing House transactions under the Revolving Line not to exceed the Sublimit Amount less the aggregate limits of the corporate credit cards issued to a Borrower and merchant credit card processing reserves under the Credit Card Services Sublimit, less the aggregate face amount of Letters of Credit issued under the Letter of Credit Sublimit.
Adjusted EBITDA means, for any period of determination, the sum of (a) Consolidated Net Income during such period plus (b) in each case, to the extent deducted in the calculation of Consolidated Net Income and, in each case, without duplication (i) Consolidated Total Interest Expense during such period, (ii) amortization and depreciation during such period, (iii) income tax expense during such period, (iv) stock-based compensation expense during such period, (v) any other non-cash expenses during such period, and (vi) extraordinary expenses during such period, provided that amounts added back pursuant to this clause (vi) shall be subject to the following conditions: (A) Borrower shall have notified Bank in writing, with reference to this provision, together with delivery of the monthly financial statements of its election to initiate as of the first day of the month covered by such monthly financial statements, a six-month period during which Borrower shall be entitled to add back up extraordinary expenses, which election shall be available one time during the term of this Agreement and shall be irrevocable, and (B) the aggregate amount of extraordinary expenses added back in reliance on this clause (vi) during such six-month period shall not exceed $900,000, minus (c) the sum of, in each case, to the extent included in the calculation of Consolidated Net Income (i) extraordinary income or gains during such period, (ii) capitalized software development costs, to the extent capitalized during such period, and (iii) capital expenditures not financed under a capital lease in excess of $600,000 in the aggregate for any consecutive six month period, plus/minus (d) any increase/decrease in deferred revenue.
Advance or Advances means a cash advance or cash advances under the Revolving Line.
Affiliate means, with respect to any Person, any Person that owns or controls directly or indirectly such Person, any Person that controls or is controlled by or is under common control with such Person, and each of such Persons senior executive officers, directors, and partners.
Applicable Factor means, as of any date of determination of the Borrowing Base, the multiple listed below corresponding to the period including such date of determination:
Period |
Applicable Factor | |||
Restatement Date 3/31/2021 |
7.50 | |||
4/1/2021 6/30/2021 |
7.25 | |||
7/1/2021 9/30/2021 |
7.00 | |||
10/1/2021 12/31/2021 |
6.75 | |||
1/1/2022 3/31/2022 |
6.50 | |||
4/1/2022 6/30/2022 |
6.25 | |||
7/1/2022 9/30/2022 |
6.00 | |||
10/1/2022 12/31/2022 |
5.75 | |||
1/1/2023 3/31/2023 |
5.50 | |||
4/1/2023 6/30/2023 |
5.25 | |||
7/1/2023 and thereafter |
5.00 |
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Applicable Interest Rate means the Prime Referenced Rate plus 0.25%.
Bank Expenses mean all reasonable and documented out-of-pocket costs or expenses of Bank, or any other holder or owner of the Loan Documents (including, without limit, court costs, legal expenses and reasonable attorneys fees and expenses of outside counsel, whether or not suit is instituted, and, if suit is instituted, whether at trial court level, appellate court level, in a bankruptcy, probate or administrative proceeding or otherwise) incurred in connection with the preparation, negotiation, execution, delivery, amendment, administration, and performance, or incurred in collecting, attempting to collect the Obligations, or incurred in defending the Loan Documents, or incurred in any other matter or proceeding relating to the Loan Documents or the Obligations; and reasonable Collateral audit fees.
BDC has the meaning set forth in Section 4.4(a)(ii)
Board of Directors means the Board of Directors of Borrower.
Borrower State means Delaware, the state under whose laws Borrower is organized.
Borrowers Books mean all of Borrowers books and records including: ledgers; records concerning Borrowers assets or liabilities, the Collateral, business operations or financial condition; and all computer programs, or tape files, and the equipment, containing such information.
Borrowing Base means, as of any date of determination, an amount equal to Borrowers Eligible Monthly Recurring Revenue, multiplied by the Applicable Factor, as determined by Bank with reference to the most recent Borrowing Base Certificate.
Borrowing Base Certificate means the certificate substantially in the form attached hereto as Exhibit C.
Business Day means any day that is not a Saturday, Sunday, or other day on which banks in the State of California are authorized or required to close.
Canadian Subsidiary means a Subsidiary of Borrower organized under the laws of Canada or any province thereof.
Cash means unrestricted cash and cash equivalents maintained with Bank or Banks Affiliates subject to an account control agreement.
Change in Control shall mean any transaction or series of related transactions in which any person or group, (within the meaning of Section 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) becomes the beneficial owner (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of a sufficient number of shares of all classes of Equity Interests then outstanding of Borrower ordinarily entitled to vote in the election of directors, empowering such person or group to elect a majority of the Board of Directors of Borrower, who did not have such power before such transaction, other than a transaction in which one of the following preferred stockholders or their respective controlled investment affiliates acquires such number of shares and such change in ownership does not result from the sale by one or more of such preferred stockholders of more than 50% of the number of shares owned by such preferred stockholder as of the Restatement Date:
LiveOak Venture Partners I, L.P.
Bessemer Venture Partners VIII L.P.
Georgian Partners Growth Fund IV, LP
SG-Disco, LLC
Code means the California Uniform Commercial Code as amended or supplemented from time to time.
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Collateral means the property described on Exhibit B attached hereto and all Negotiable Collateral and Intellectual Property Collateral, subject to the exclusions set forth on Exhibit B.
Collection Account has the meaning set forth in Section 4.4(b).
Consolidated Net Income (or Deficit) means the consolidated net income (or deficit) of any Person and its Subsidiaries, determined in accordance with GAAP, after eliminating therefrom all extraordinary nonrecurring items of income.
Consolidated Total Interest Expense means with respect to any Person for any period, the aggregate amount of interest required to be paid or accrued by a Person and its Subsidiaries during such period on all Indebtedness of such Person and its Subsidiaries outstanding during all or any part of such period, whether such interest was or is required to be reflected as an item of expense or capitalized, including payments consisting of interest in respect of any capitalized lease or any synthetic lease, and including commitment fees, agency fees, facility fees, balance deficiency fees and similar fees or expenses in connection with the borrowing of money but excluding the amortization of debt discount and fees and expenses related to the issuance of Indebtedness, capital leases or synthetic leases.
Contingent Obligation means, as applied to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to (i) any indebtedness, lease, dividend, letter of credit or other obligation, in each case, of another, including, without limitation, any such obligation directly or indirectly guaranteed, endorsed, co-made or discounted or sold with recourse by that Person, or in respect of which that Person is otherwise directly or indirectly liable; (ii) any obligations with respect to undrawn letters of credit, corporate credit cards or merchant services issued or provided for the account of that Person; and (iii) all obligations arising under any interest rate, currency or commodity swap agreement, interest rate cap agreement, interest rate collar agreement, or other agreement or arrangement designed to protect such Person against fluctuation in interest rates, currency exchange rates or commodity prices; provided, however, that the term Contingent Obligation shall not include endorsements for collection or deposit in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determined amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by Bank in good faith; provided, however, that such amount shall not in any event exceed the maximum amount of the obligations under the guarantee or other support arrangement.
Copyrights means any and all copyright rights, copyright applications, copyright registrations and like protections in each work or authorship and derivative work thereof, whether published or unpublished and whether or not the same also constitutes a trade secret, now or hereafter existing, created, acquired or held.
Credit Card Services has the meaning set forth in Section 2.1(c)(iii).
Credit Card Services Sublimit means a sublimit for corporate credit cards and e-commerce or merchant account services under the Revolving Line not to exceed the Sublimit Amount, less the reserves required in connection with the Automatic Clearinghouse Transactions pursuant to the ACH Sublimit, less the aggregate face amount of Letters of Credit issued under the Letter of Credit Sublimit.
Credit Extension means each Advance or any other extension of credit by Bank to or for the benefit of Borrower hereunder.
Daily Adjusting LIBOR Rate means, for any day, a per annum interest rate which is equal to the quotient of the following:
(1) | for any day, the per annum rate of interest determined on the basis of the rate for deposits in United States Dollars for a period equal to one (1) month appearing on Page BBAM of the Bloomberg Financial Markets Information Service at or about 11:00 a.m. (London, England time) (or as soon thereafter as practical) on such day, or if such day is not a Business Day, on the immediately preceding Business Day. In the event that such rate does not appear on Page BBAM of the Bloomberg Financial Markets Information Service (or otherwise on such Service) on any day, the Daily Adjusting LIBOR Rate for |
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such day shall be determined by reference to such other publicly available service for displaying eurodollar rates as may be reasonably selected by Bank, or in the absence of such other service, the Daily Adjusting LIBOR Rate for such day shall, instead, be determined based upon the average of the rates at which Bank is offered dollar deposits at or about 11:00 a.m. (Detroit, Michigan time) (or as soon thereafter as practical), on such day, or if such day is not a Business Day, on the immediately preceding Business Day, in the interbank eurodollar market in an amount comparable to the principal amount of the Obligations outstanding hereunder and for a period equal to one (1) month; |
divided by
(2) | 1.00 minus the maximum rate (expressed as a decimal) on such day at which Bank is required to maintain reserves on Euro-currency Liabilities as defined in and pursuant to Regulation D of the Board of Governors of the Federal Reserve System or, if such regulation or definition is modified, and as long as Bank is required to maintain reserves against a category of liabilities which includes eurodollar deposits or includes a category of assets which includes eurodollar loans, the rate at which such reserves are required to be maintained on such category. |
provided, however, and notwithstanding anything to the contrary set forth in this Agreement, if at any time the Daily Adjusting LIBOR Rate determined as provided above would be less than zero percent (0%) then the Daily Adjusting LIBOR Rate shall be deemed to be zero percent (0%) per annum for all purposes of this Agreement. Each calculation by Bank of the Daily Adjusting LIBOR Rate shall be conclusive and binding for all purposes, absent manifest error.
Dollars means lawful money of the United States.
Eligible Monthly Recurring Revenue shall mean for the applicable month, revenue for such month (or in the case of revenue derived from the Managed Review line of business of Borrower or any Subsidiary that is a secured Guarantor, the average revenue for the three month period ending with the applicable month) derived in the ordinary course of Borrowers business from Borrowers Software and Managed Review lines of business, determined in accordance with GAAP. Unless otherwise agreed to in writing by Bank, Eligible Monthly Recurring Revenue shall not include the following:
(a) revenue from any customer or account debtor who is subject to any Insolvency Proceeding, or becomes insolvent, or goes out of business;
(b) revenue from any customer which Bank and Borrower may mutually agree within ten (10) Business Days after written notice by Bank to Borrower that Bank has determined such customer is not creditworthy; provided that, in the event Bank and Borrower shall not so mutually agree, the revenue from such customer shall remain eligible as of the applicable date of determination only if Borrower submits written evidence to Bank, within such ten (10) Business Day period, confirming that all material performance obligations by the Borrower (or, if applicable, such secured Guarantor Subsidiary) have been met according to the contractual terms for the ninety (90) day period preceding such notice from Bank;
(c) to the extent Eligible Monthly Recurring Revenue from any customer (together with its Subsidiaries or other Affiliates) for such month exceeds 20% of total Eligible Monthly Recurring Revenue for such month, the amount of such excess revenue;
(d) to the extent that, with respect to any customer (together with any Subsidiaries or Affiliates of such customer), more than 35% of account receivable balances of such customer have not been paid within 120 days of the invoice date, any revenue derived from such customer (or Subsidiary or Affiliate thereof);
(e) with respect to revenue derived from the Managed Review line of business, to the extent such revenue exceeds 22.5% of Eligible Monthly Recurring Revenue, such excess revenue;
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(f) monthly recurring revenue from customers that are Affiliates of Borrower, provided that revenue from investors in Borrower from transactions entered into on an arms length basis shall not be excluded under this clause (f);
(g) monthly recurring revenue for services not billed or from amounts not collected by Borrower (or, if applicable, such secured Guarantor Subsidiary); and
(h) revenue related to installation, implementation and/or set-up fees or professional services.
Environmental Laws means all laws, rules, regulations, orders and the like issued by any federal state, local foreign or other governmental or quasi-governmental authority or any agency pertaining to the environment or to any hazardous materials or wastes, toxic substances, flammable, explosive or radioactive materials, asbestos or other similar materials.
Equipment means all present and future machinery, equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments in which Borrower has any interest.
Equity Interests means, with respect to any Person, the capital stock, partnership or limited liability company interest, or other equity securities or equity ownership interests of such Person.
ERISA means the Employee Retirement Income Security Act of 1974, as amended, and the regulations thereunder.
Event of Default has the meaning assigned in Article 8.
GAAP means generally accepted accounting principles, consistently applied, as in effect from time to time in the United States.
Gross Liquidity means, as of any date of determination, Borrowers aggregate Cash plus unused availability under the Revolving Line, in each case, as of such date.
Guarantor means any guarantor with respect to the Obligations, from time to time.
Indebtedness means (a) all indebtedness for borrowed money or the deferred purchase price of property or services, including without limitation reimbursement and other obligations with respect to surety bonds and letters of credit, (b) all obligations evidenced by notes, bonds, debentures or similar instruments, (c) all capital lease obligations, (d) all Contingent Obligations, if any, and (e) all obligations arising under the Credit Card Services Sublimit and the ACH Sublimit.
Insolvency Proceeding means any proceeding commenced by or against any Person or entity under any provision of the United States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law, including assignments for the benefit of creditors, formal or informal moratoria, compositions, extension generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief.
Intellectual Property Collateral means all of Borrowers right, title, and interest in and to the following:
(a) | Copyrights, Trademarks and Patents; |
(b) | Any and all trade secrets, and any and all intellectual property rights in computer software and computer software products now or hereafter existing, created, acquired or held; |
(c) | Any and all design rights which may be available to Borrower now or hereafter existing, created, acquired or held; |
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(d) | Any and all claims for damages by way of past, present and future infringement of any of the rights included above, with the right, but not the obligation, to sue for and collect such damages for said use or infringement of the intellectual property rights identified above; |
(e) | All licenses or other rights to use any of the Copyrights, Patents or Trademarks, and all license fees and royalties arising from such use to the extent permitted by such license or rights; |
(f) | All amendments, renewals and extensions of any of the Copyrights, Trademarks or Patents; and |
(g) | All proceeds and products of the foregoing, including without limitation all payments under insurance or any indemnity or warranty payable in respect of any of the foregoing. |
Intellectual Property Report has the meaning assigned in Section 6.2(a).
Inventory means all present and future inventory in which Borrower has any interest.
Investment means any beneficial ownership (including Equity Interests) of any Person, or any loan, advance or capital contribution to any Person.
IRC means the Internal Revenue Code of 1986, as amended, and the regulations thereunder.
Letter of Credit Sublimit means a sublimit for Letters of Credit under the Revolving Line not to exceed the Sublimit Amount, less the aggregate limits of the corporate credit cards issued to any Borrower and merchant credit card processing reserves under the Credit Card Services Sublimit.
Lien means any mortgage, lien, deed of trust, charge, pledge, security interest or other encumbrance.
Loan Documents means, collectively, this Agreement, the Warrants, any guaranty, any note or notes executed by Borrower in connection with this Agreement, and any other document, instrument or agreement entered into in connection with this Agreement, all as amended or extended from time to time.
Lock Box has the meaning set forth in Section 4.4(a)(i).
Material Adverse Effect means a material adverse effect (i) on Borrowers business or financial condition, or (ii) on the ability of the Borrower to perform its obligations or in otherwise performing Borrowers obligations under the Loan Documents, or (iii) on the perfection, value or priority of Banks security interests in the Collateral.
Negotiable Collateral means all of Borrowers present and future letters of credit of which it is a beneficiary, drafts, instruments (including promissory notes), securities, documents of title, and chattel paper, and Borrowers Books relating to any of the foregoing.
Obligations means all debt, principal, interest, Bank Expenses and other amounts owed to Bank by Borrower pursuant to this Agreement or any other agreement, whether absolute or contingent, due or to become due, now existing or hereafter arising, including any interest that accrues after the commencement of an Insolvency Proceeding and including any debt, liability, or obligation owing from Borrower to others that Bank may have obtained by assignment or otherwise but excluding any Warrants.
Patents means all patents, patent applications and like protections including without limitation improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same.
Periodic Payments means all installments or similar recurring payments that Borrower may now or hereafter become obligated to pay to Bank pursuant to the terms and provisions of any instrument, or agreement now or hereafter in existence between Borrower and Bank.
Permitted Acquisition has the meaning set forth in Section 7.3.
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Permitted Indebtedness means:
(a) | Indebtedness of Borrower in favor of Bank arising under this Agreement or any other Loan Document; |
(b) | Indebtedness existing on the Restatement Date and disclosed in the Schedule; |
(c) | Indebtedness not to exceed Seven Hundred Fifty Thousand Dollars ($750,000) in the aggregate at any time outstanding secured by a lien described in clause (c) of the defined term Permitted Liens, provided such Indebtedness does not exceed the lesser of the cost or fair market value of the assets financed with such Indebtedness; |
(d) | Subordinated Debt; |
(e) | Indebtedness to trade creditors incurred in the ordinary course of business; |
(f) | Indebtedness that constitutes a Permitted Investment; |
(g) | Indebtedness owed to any Person (including obligations in respect of letters of credit, bank guarantees and similar instruments for the benefit of such Person) providing workers compensation, health, disability or other employee benefits or property, casualty or liability insurance, pursuant to reimbursement or indemnification obligations to such Person, in each case incurred in the ordinary course of business; |
(h) | Endorsements of negotiable instruments for collection in the ordinary course of business; |
(i) | Other unsecured Indebtedness not otherwise permitted in clauses (a) through (h) above, provided the aggregate principal amount of such Indebtedness shall not exceed Seven Hundred Fifty Thousand Dollars ($750,000) at any time outstanding; |
(j) | Indebtedness arising under any credit card, purchasing card or substantially similar instrument in an amount not to exceed Seven Hundred Fifty Thousand Dollars ($750,000), at any one time; and |
(k) | Extensions, refinancings and renewals of any items of Permitted Indebtedness, provided that the principal amount is not increased or the terms modified to impose more burdensome terms upon Borrower or its Subsidiary, as the case may be. |
Permitted Investments means:
(a) | Investments existing on the Restatement Date disclosed in the Schedule; |
(b) | (i) Marketable direct obligations issued or unconditionally guaranteed by the United States or any agency or any State thereof maturing within one (1) year from the date of acquisition thereof, (ii) commercial paper maturing no more than one (1) year from the date of creation thereof and currently having rating of at least A-2 or P-2 from either Standard & Poors Rating Service or Moodys Investors Service, Inc., (iii) certificates of deposit maturing no more than one (1) year from the date of investment therein, and (iv) money market accounts and deposit accounts; |
(c) | Repurchases of Equity Interests (i) from current or former employees, directors, or consultants of Borrower under the terms of applicable stock option or restricted stock purchase plans, including in connection with the termination of employment or service for cash or in exchange for the cancellation of indebtedness owing by such employee, director or consultant, (ii) arising in connection with the funding of payroll taxes and withholding amounts due by an employee or future employee upon exercise of options in connection an employees or future employees acquisition of Equity Interests upon exercise of options in connection with the vesting of unvested Equity Interests, or (iii) arising by way of net settlement, provided that with respect to repurchases described in clause (i) (to the extent the consideration paid by Borrower is cash), clause (ii), (x) the aggregate cash payment made by Borrower shall not exceed Seven Hundred Fifty Thousand Dollars ($750,000) in any fiscal year, and (y) no Event of Default has occurred, is continuing or would exist after giving effect to a repurchase, |
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(d) | Investments accepted in connection with Permitted Transfers; |
(e) | (i) Investments of Subsidiaries in or to other Subsidiaries or Borrower, (ii) Investments by Borrower in Subsidiaries (other than UK Subsidiary or any Canadian Subsidiary) not to exceed Seven Hundred Fifty Thousand Dollars ($750,000) in the aggregate in any fiscal year and (iii) Investments by Borrower in each of UK Subsidiary and any Canadian Subsidiary not to exceed Two Million Dollars ($2,000,000) in the aggregate for each such Subsidiary in any fiscal year; |
(f) | Investments not to exceed One Million Dollars ($1,000,000) in the aggregate in any fiscal year consisting of (i) travel advances and employee relocation loans and other employee loans and advances in the ordinary course of business, and (ii) loans to employees, officers or directors relating to the purchase of Equity Interests of Borrower or its Subsidiaries pursuant to employee equity purchase agreements approved by Borrowers Board of Directors; |
(g) | Investments (including debt obligations) received in connection with the bankruptcy or reorganization of customers or suppliers and in settlement of delinquent obligations of, and other disputes with, customers or suppliers arising in the ordinary course of Borrowers business; |
(h) | Investments consisting of notes receivable of, or prepaid royalties and other credit extensions, to customers and suppliers who are not Affiliates, in the ordinary course of business, provided that this subparagraph (h) shall not apply to Investments of Borrower in any Subsidiary; |
(i) | Joint ventures or strategic alliances in the ordinary course of Borrowers business consisting of the non-exclusive licensing of technology, the development of technology or the providing of technical support, provided that any cash Investments by Borrower do not exceed Seven Hundred Fifty Thousand Dollars ($750,000) in the aggregate in any fiscal year; |
(j) | Permitted Acquisitions; and |
(k) | Other Investments not exceeding $100,000 in the aggregate through the term of this Agreement. |
Permitted Liens mean:
(a) | Any Liens existing on the Restatement Date and disclosed in the Schedule (excluding Liens to be satisfied with the proceeds of the Advances) or arising under this Agreement or the other Loan Documents; |
(b) | Liens for taxes, fees, assessments or other governmental charges or levies, either not delinquent or being contested in good faith by appropriate proceedings and for which Borrower maintains adequate reserves, provided the same have no priority over any of Banks security interests; |
(c) | Liens securing Indebtedness not to exceed Seven Hundred Fifty Thousand Dollars ($750,000) in the aggregate at any time outstanding (i) upon or in any asset acquired or held by Borrower or any of its Subsidiaries to secure the purchase price of such asset or indebtedness incurred solely for the purpose of financing the acquisition or lease of such asset, or (ii) existing on such asset at the time of its acquisition, provided that the Lien is confined solely to the property so acquired and improvements thereon, and the proceeds of such asset; |
(d) | carriers, warehousemens, mechanics, materialmens, repairmens or other like Liens arising in the ordinary course of business which are not overdue for a period of more than 30 days or which are being contested in good faith and by appropriate proceedings if adequate reserves with respect thereto are maintained on the books of the applicable Person; |
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(e) | deposits to secure the performance of bids, trade contracts (other than for borrowed money), contracts for the purchase of property, leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature, in each case, incurred in the ordinary course of business and not representing an obligation for borrowed money; |
(f) | pledges and deposits made in the ordinary course of business in compliance with workmens compensation, unemployment insurance and other social security laws or regulations; |
(g) | Leases, licenses, subleases or sublicenses in each case, granted to others in the ordinary course of business which do not interfere in any material respect with the business of any Loan Party or secure any Indebtedness; |
(h) | Liens of a banking institution (i) arising to secure the Indebtedness permitted by clause (h) in the definition of Permitted Indebtedness, or (ii) arising under the Uniform Commercial Code on items in the course of collection; |
(i) | Liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by Liens of the type described in clauses (a) through (h) above, provided that any extension, renewal or replacement Lien shall be limited to the property encumbered by the existing Lien (and additions, accessions and improvements thereto and replacements and proceeds thereof) and the principal amount of the indebtedness being extended, renewed or refinanced does not increase; and |
(j) | Liens arising from judgments, decrees or attachments in circumstances not constituting an Event of Default under Sections 8.4 (attachment) or 8.8 (judgments/settlements). |
Permitted Transfer means the conveyance, sale, lease, transfer or disposition by Borrower or any Subsidiary of:
(a) | Inventory in the ordinary course of business; |
(b) | Permitted Liens, Permitted Investments, Permitted Indebtedness and dividends, distributions or payments permitted under Section 7.6. |
(c) | Non-exclusive licenses and similar arrangements for the use of the property of Borrower or its Subsidiaries in the ordinary course of business; |
(d) | Worn-out, obsolete, or surplus Equipment; |
(e) | Property to the extent that (i) such property is exchanged for credit against the purchase price of similar replacement property or (ii) the proceeds of such transfer are promptly applied to the purchase price of such replacement property; provided that to the extent the property being transferred constitutes Collateral, such replacement property shall constitute Collateral; |
(f) | Accounts receivable in connection with the compromise or collection thereof in the ordinary course of business; |
(g) | Cash in the ordinary course of business |
(h) | Transfers that are explicitly permitted by Section 7.1; or |
(i) | Other assets of Borrower or its Subsidiaries that do not in the aggregate exceed Three Hundred Seventy Five Thousand Dollars ($375,000) in the aggregate in any fiscal year. |
Person means any individual, sole proprietorship, partnership, limited liability company, joint venture, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or governmental agency.
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Prime Rate means the per annum interest rate established by Bank as its prime rate for its borrowers, as such rate may vary from time to time, which rate is not necessarily the lowest rate on loans made by Bank at any such time.
Prime Referenced Rate means, for any day, a per annum interest rate which is equal to the Prime Rate in effect on such day, but in no event and at no time shall the Prime Referenced Rate be less than the sum of the Daily Adjusting LIBOR Rate for such day plus two and one-half percent (2.50%) per annum. If, at any time, Bank determines that it is unable to determine or ascertain the Daily Adjusting LIBOR Rate for any day, the Prime Referenced Rate for each such day shall be the Prime Rate in effect at such time, but not less than two percent (2.00%) per annum.
Prohibited Territory means any person or country listed by the Office of Foreign Assets Control of the United States Department of Treasury as to which transactions between a United States Person and that territory are prohibited.
Request has the meaning set forth in Section 2.3(c).
Request for Advance means a Loan Advance/Paydown Request Form issued by the Borrower under the Agreement in the form attached hereto as Exhibit E.
Responsible Officer means each of the Authorized Signers set forth in the Corporation Resolutions and Incumbency Certification Authority to Procure Loans.
Restricted Agreement is any material license or other material agreement (other than over-the-counter software that is commercially available to the public and open source licenses) to which Borrower is a party or under which Borrower is bound (including licenses and agreements under which Borrower is the licensee): (a) that prohibits or otherwise restricts Borrower from assigning to Bank, or granting to Bank a Lien in, Borrowers interest in such license or agreement, the rights arising thereunder or any other property, or (b) for which a default under or termination of such license or contract could interfere with the Banks right to use, license, sell or collect any Collateral or otherwise exercise its rights and remedies with respect to the Collateral under the Loan Documents or applicable law.
Revolving Line means the revolving line facility provided pursuant to Section 2.1(c).
Revolving Line Amount means Forty- Million Dollars ($40,000,000), subject to increase in accordance with Section 2.1(d).
Revolving Line Discretionary Increase Amount means Ten Million Dollars ($10,000,000).
Revolving Line Discretionary Increase Request means a request in form attached hereto as Exhibit F.
Revolving Maturity Date means November 30, 2023.
Schedule means the schedule of exceptions attached hereto and approved by Bank, if any.
Shares means the equity interest of a Subsidiary owned by a Borrower, to the extent constituting Collateral.
SOS Reports means the official reports from the Secretary of State of the Borrower State and other applicable federal, state or local government offices identifying all current security interests filed in the Collateral and Liens of record as of the date of such report.
Springing DOF Account has the meaning set forth in Section 4.4(b).
Sublimit Amount means $5,000,000.
Subordinated Debt means any debt incurred by Borrower that is subordinated in writing to the debt owing by Borrower to Bank on terms reasonably acceptable to Bank (and identified as being such by Borrower and Bank).
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Subsidiary means any corporation, partnership or limited liability company or joint venture in which (i) any general partnership interest or (ii) more than fifty percent (50%) of the Equity Interests of which by the terms thereof ordinary voting power to elect the Board of Directors, managers or trustees of the entity, at the time as of which any determination is being made, is owned by Borrower, either directly or through an Affiliate.
T6M Adjusted EBITDA Burn means, as of any date of determination, the absolute value of the Adjusted EBITDA for the six month period then ended (if negative), provided that if such amount is not a negative number, then T6M Adjusted EBITDA Burn shall be zero.
Trademarks means any trademark and service mark rights, whether registered or not, applications to register and registrations of the same and like protections, and the entire goodwill connected with and symbolized by such trademarks.
UK Subsidiary means CS Disco Ltd., a private company limited by shares, registered in England and Wales.
United States means the United States of America.
Warrant means any warrant to purchase Equity Interests of Borrower issued to Bank hereunder, including without limitation, that certain Warrant to Purchase Stock issued on the Restatement Date.
A-11
DEBTOR: | CS DISCO, INC. | |
SECURED PARTY: | COMERICA BANK |
EXHIBIT B
COLLATERAL DESCRIPTION ATTACHMENT TO LOAN AND SECURITY AGREEMENT
All personal property of Debtor of every kind, whether presently existing or hereafter created or acquired, and wherever located, including but not limited to: (a) all accounts (including health-care-insurance receivables), chattel paper (including tangible and electronic chattel paper), deposit accounts, documents (including negotiable documents), equipment (including all accessions and additions thereto), general intangibles (including payment intangibles and software), goods (including fixtures), instruments (including promissory notes), inventory (including all goods held for sale or lease or to be furnished under a contract of service, and including returns and repossessions), investment property (including securities and securities entitlements), letter of credit rights, money, and all of Debtors books and records with respect to any of the foregoing, and the computers and equipment containing said books and records; and (b) any and all cash proceeds and/or noncash proceeds thereof, including, without limitation, insurance proceeds, and all supporting obligations and the security therefor or for any right to payment. All terms above have the meanings given to them in the California Uniform Commercial Code, as amended or supplemented from time to time.
Notwithstanding the foregoing, the Collateral shall not include any of the following: (i) any property that is nonassignable by its terms without the consent of the licensor thereof or another party (but only to the extent such prohibition on transfer is enforceable under applicable law, including, without limitation, Sections 9406 and 9408 of the Code), (ii) any property to the extent the grant of a security interests therein is contrary to applicable law, provided that upon the cessation of any such restriction or prohibition, such property shall automatically become part of the Collateral, or (iii) Equity Interests of a Subsidiary that is a controlled foreign corporation (as defined in the IRC) and is not a Guarantor, to the extent in excess of sixty five percent (65%) of the voting power of all classes of Equity Interests of such Subsidiary entitled to vote and to the extent the pledge of Equity Interests in excess of such percentage would result in material adverse tax consequences to Borrower as determined by Borrower in good faith.
EXHIBIT C
BORROWING BASE CERTIFICATE
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Borrowing Base Certificate | |||
BORROWING BASE CERTIFICATE | ||||
Comerica Bank, Tech & Life Sciences | ||||
Borrowe CS DISCO, INC. | Loan Analysis Department | |||
333 W. Santa Clara St. | ||||
Notes: | San Jose, CA 95113 | |||
Please certify and submit the following information in accordance with the LSA. | Phone: (408) 556-5101 | |||
Where information my conflict with the LSA, default to LSA. | Fax: (650) 462-6061 | |||
Please review/update highlighted fields. | Revolving Line Amount: $400,000,000 | Email: NewYorkTLSComplianceMail@comerica.com | ||
Copy to: dkim@comerica.com |
1 |
Gross Monthly Recurring Revenue (MRR) for the period as of: | 12/31/2020 | ||||||||
GAAP MRR (i.e. Ediscovery and Managed Review GAAP revenues) |
$ | |||||||||
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2 |
Ineligible MRR for the period (indicate in positive amounts): | |||||||||
As needed, please provide supporting details. | ||||||||||
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(a) Revenue from any customer or account debtor who is subject to any Insolvency Proceeding, or becomes insolvent, or goes out of business; |
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(b) revenue from any customer which Bank and Borrower may mutually agree within ten (10) Business Days after written notice by Bank to Borrower that Bank has determined such customer is not creditworthy; provided that, in the event Bank and Borrower shall not so mutually agree, the revenue from such customer shall remain eligible as of the applicable date of determination only if Borrower submits written evidence to Bank, within such ten (10) Business Day period, confirming performance of contractual performance by the Borrower for preceding 90 dday period of such notice from Bank; |
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(c) to the extent Eligible Monthly Recurring Revenue from any customer (together with its Subsidiaries or other Affiliates) for such month exceeds 20% of total Eligible Monthly Recurring Revenue for such month, the amount of such excess revenue; |
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(d) to the extent that, with respect to any customer (incl. Subs/Affiliates of such customer), more than 35% of account receivable balances of such customer have not been paid within 120 days of the invoice date, any revenue derived from such customer; |
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(e) with respect to revenue derived from the Managed Review line of business, to the extent such revenue exceeds 22.5% of Eligible Monthly Recurring Revenue, such excess revenue; |
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(f) monthly recurring revenue from customers that are Affiliates of Borrower, provided that revenue from investors in Borrower from transactions entered into on an arms length basis shall not be excluded under this clause (f); |
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(g) monthly recurring revenue for services not billed or from amounts not collected by Borrower (or, if applicable, such secured Guarantor Subsidiary); and |
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(h) revenue related to installation, implementation and/or set-up fees or professional services. |
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2 |
Total Ineligible MRR for the Period: | $ | ||||||||
3 |
Eligible Monthly Recurring Revenue (Net MRR) (line #1 minus line #2) | $ | ||||||||
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4 |
Applicable Factor (expressed as %): | 750 | % |
Period |
Applicable Factor |
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Restatement Date 3/31/2021 |
750 | % | ||
4/1/2021 6/30/2021 |
725 | % | ||
7/1/2021 9/30/2021 |
700 | % | ||
10/1/2021 12/31/2021 |
675 | % | ||
1/1/2022 3/31/2022 |
650 | % | ||
4/1/2022 6/30/2022 |
625 | % | ||
7/1/2022 9/30/2022 |
600 | % | ||
10/1/2022 12/31/2022 |
575 | % | ||
1/1/2023 3/31/2023 |
550 | % | ||
4/1/2023 6/30/2023 |
525 | % | ||
7/1/2023 and thereafter |
500 | % |
5 |
Borrowing Base (line #3 multiplied by line #4) | $ | | |||||||
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BALANCES / AVAILABILITY: | $ | |||||||||
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6 |
Maximum Loan Amount (Revolving Line Amount) | $ | 40,000,000 | |||||||
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7 |
Total Funds Available (the lesser of line #5 or line #6) | $ | | |||||||
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8 |
Current balance outstanding on Revolving Line of Credit | $ | ||||||||
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9 |
Current value of outstanding Sublimits or balance reserved for Sublimits, if applicable | $ | ||||||||
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10 |
Remaining Availability under the Revolving Line (line #7 minus line #8 minus line #9) | $ | | |||||||
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A negative balance indicates an Overadvance. Borrower shall promptly pay to Bank, in cash, the amount of such excess. |
Comments/notes (if any):
The undersigned represents and warrants that the foregoing is true, complete and correct, and that the information reflected in this Borrowing Base Certificate complies with the representations and warranties set forth in the Loan & Security Agreement between the undersigned and Comerica Bank.
Sincerely, | BANK USE ONLY | |||||||
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Received By: |
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Authorized Signer | Date: |
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Name: |
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Reviewed By: |
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Title: |
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Date: |
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Date: |
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EXHIBIT D
COMPLIANCE CERTIFICATE | ||
Please send all Required Reporting to: | Comerica Bank | |
Technology & Life Sciences Division | ||
Loan Analysis Department | ||
230 Park Avenue, Suite 634 | ||
New York, NY 10169 | ||
FAX: (646) 823-1918 | ||
NewYorkTLSComplianceMail@comerica.com | ||
FROM: CS DISCO, INC. |
The undersigned authorized officer of CS DISCO, INC. (Borrower), hereby certifies that in accordance with the terms and conditions of the Loan and Security Agreement between Borrower and Bank (the Agreement), (i) Borrower is in complete compliance for the period ending __________________________ with all required covenants, including without limitation the ongoing registration of intellectual property rights in accordance with Section 6.8, except as noted below and (ii) all representations and warranties of Borrower stated in the Agreement are true and correct in all material respects as of the date hereof provided, however, that those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of such date. Attached herewith are the required documents supporting the above certification. The Officer further certifies that these are prepared in accordance with Generally Accepted Accounting Principles (GAAP) and are consistently applied from one period to the next except as explained in an accompanying letter or footnotes.
Please indicate compliance status by circling Yes/No under Complies or Applicable column.
REPORTING COVENANTS |
REQUIRED |
COMPLIES | ||||||
Company Prepared Monthly F/S | Monthly, within 30 days | YES | NO | |||||
Company Prepared Quarterly F/S | Quarterly within 45 days | |||||||
Compliance Certificate | Monthly, within 30 days | YES | NO | |||||
CPA Audited, Unqualified F/S | Annually, within 180 days of FYE | YES | NO | |||||
Borrowing Base Cert., A/R & A/P Agings | Monthly, within 30 days | YES | NO | |||||
Annual Business Plan (incl. operating budget) | By 02/28 of each year; within 30 days of revisions | YES | NO | |||||
Intellectual Property Report | Quarterly, within 45 days | YES | NO | |||||
SaaS Metrics Worksheet | Quarterly, within 45 days | YES | NO | |||||
Audit | No more than every 6 months | YES | NO | |||||
If Public: | ||||||||
10-Q | Quarterly, within 5 days of SEC filing (50 days) | YES | NO | |||||
10-K | Annually, within 5 days of SEC filing (95 days) | YES | NO | |||||
Total amount of Borrowers cash and investments | Amount: $ | YES | NO | |||||
Total amount of Borrowers cash and investments maintained with Bank | Amount: $ | YES | NO | |||||
Total amount of Borrowers cash and investments maintained outside Bank | Amount $ (up to $375,000 permitted for each of a UK account and a Canadian account, aggregate cap of $750,000) | |||||||
REQUIRED NOTICES | APPLICABLE | |||||||
Legal Action > $750,000 (Sect. 6.2(a)(iv)) | Notify promptly upon notice | YES | NO | |||||
Inventory Disputes > $500,000 (Sect. 6.3) | Notify promptly upon notice | YES | NO | |||||
FINANCIAL COVENANT | Required / Actual | COMPLIES | ||||||
Minimum Gross Liquidity (applicable only if aggregate outstanding Advances plus ACH reserves, L/C face amount and aggregate credit card limits (in each case established under sublimit) > $18,000,000) | Required: Greater of $5,000,000 or T6M Adjusted EBITDA Burn Actual T6M Adjusted EBITDA Burn (attach calculations) |
YES | NO | |||||
EVENTS OF DEFAULT | ||||||||
Cross default with other agreements>$500,000 (Sect. 8.6) | Notify promptly upon notice | YES | NO | |||||
Judgments > $500,000 (Sect. 8.8) | Notify promptly upon notice | YES | NO | |||||
OTHER COVENANTS |
REQUIRED |
ACTUAL |
COMPLIES | |||||
Mergers & Acquisitions | <$10,000,000 / year; <$15,000,000 / term | $__________ / year $__________ / term |
YES | NO | ||||
Permitted Indebtedness for equipment financing | <$750,000 / outstanding | $ | YES | NO | ||||
Other Indebtedness | <$750,000 outstanding | $ | YES | NO | ||||
Permitted Investments for stock repurchase (for cash) and distribution to pay taxes in connection with vesting of restricted stock | <$750,000 / year | $ | YES | NO | ||||
Permitted Investments for subsidiaries (other than UK Subsidiary) | <$750,000 / year | $ | YES | NO | ||||
Permitted Investments for UK Subsidiary | <$2,000,000 / year | $ | YES | NO | ||||
Permitted Investments for any Canadian Subsidiary | <$2,000,000 / year | $ | YES | NO | ||||
Permitted Investments for employee loans | <$750,000 / year | $ | YES | NO | ||||
Permitted Investments for joint ventures | <$750,000 / year | $ | YES | NO | ||||
Other Investments | <$100,000 aggregate during the term |
$ | YES | NO | ||||
Permitted Liens for equipment financings | <$750,000 outstanding at any time |
$ | YES | NO | ||||
Permitted Transfers | <$375,000 / year | $ | YES | NO |
Please Enter Below Comments Regarding Violations:
The undersigned authorized officer further acknowledges that at any time Borrower is not in compliance with all the terms set forth in the Agreement, no credit extensions will be made.
Very truly yours, |
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Authorized Officer |
Name: |
Title: |
EXHIBIT E
TECHNOLOGY & LIFE SCIENCES DIVISION
LOAN ANALYSIS
LOAN ADVANCE/PAYDOWN REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00* P.M., Central Time
*At month end and the day before a holiday, the cut off time is 1:30 P.M., Central Time
To: |
Loan Analysis |
DATE: _____________________ |
TIME: ______________ | |||
FAX #: | (646) 823-1918 | |||||
Email directly to: | ||||||
DKim@comerica.com; TJain@comerica.com |
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NewYorkTLSComplianceMail@comerica.com |
CS DISCO, Inc. | TELEPHONE REQUEST | |||
FROM: | (For Bank Use Only):
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Authorized Signers Name |
The following person is authorized to request the loan payment transfer/loan advances on the designated account and is known to me. | |||
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Authorized Signers Signature | ||||
PHONE #: |
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Authorized Request & Phone # | ||||
FROM | ACCOUNT #: |
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Received by (Bank) & Phone # | ||||
TO | ACCOUNT #: |
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Authorized Signature (Bank) |
REQUESTED TRANSACTION TYPE | REQUESTED DOLLAR AMOUNT | For Bank Use Only
Date Recd: Time: Comp. Status: YES NO Status Date: Time: Approval: | ||
PRINCIPAL INCREASE* (ADVANCE) | $ | |||
PRINCIPAL PAYMENT (ONLY) | $ | |||
OTHER INSTRUCTIONS: | ||||
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Each Borrower represents, warrants and certifies that no Default, Event of Default, or any condition or event which, with the giving of notice or the running of time, or both, would constitute a Default or Event of Default, has occurred and is continuing under the Agreement, and none will exist upon the making of the Advance requested hereunder.
Capitalized terms used but not otherwise defined herein shall have the respective meanings given to them in the Agreement.
EXHIBIT F
DISCRETIONARY REVOLVING INCREASE REQUEST
DATE: ________, 20__
TO: | Comerica Bank Technology & Life Sciences Division Loan Analysis Department 230 Park Avenue, Suite 634 New York, NY 10169 FAX: (646) 823-1918 NewYorkTLSComplianceMail@comerica.com; DKim@comerica.com; TJain@comerica.com |
RE: | Second Amended and Restated Loan and Security Agreement dated as of December __, 2020 (as amended, restated, supplemented or otherwise modified from time to time, the Agreement), by and between CS DISCO, INC. (Borrower) and COMERICA BANK (the Bank). |
Ladies and Gentlemen:
In accordance with Section 2.1(d), the undersigned, on behalf of Borrower, hereby makes a request to increase the Revolving Line Amount as follows:
1. | Requested increase to Revolving Line Amount: $_______________ |
2. | Requested effective date of increase: _________________ (at least five (5) Business Days following date of this request). |
The undersigned certifies that all representations and warranties of Borrower made in the Loan Documents are true and, accurate and complete in all material respects as of the date hereof (except to the extent any representation or warrant is qualified in the text thereof by materiality, in which case such representation or warrant is true, accurate and complete as of the date hereof), and no Event of Default has occurred and is continuing, or would result from the requested increase.
Sincerely,
CS DISCO, INC. | ||
By: |
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Name: |
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Title: |
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SCHEDULE OF EXCEPTIONS
TO LOAN AND SECURITY AGREEMENT
Permitted Indebtedness (Exhibit A)
None.
Permitted Investments (Exhibit A)
None.
Permitted Liens (Exhibit A)
None.
Collateral (Section 5.3) subject to restrictions in Section 6.6
Prior Names (Section 5.5)
CS Disco LLC
Inventory or Equipment Locations (Section 5.5)
None.
Litigation (Section 5.6)
None.
Restricted Agreements (Section 5.12)
None.
COMERICA BANK
Member FDIC
ITEMIZATION OF AMOUNT FINANCED
DISBURSEMENT INSTRUCTIONS
(Revolver)
Name(s): CS DISCO, INC. Date: December __, 2020 | ||
$ | credited to deposit account No. ___________ when Advances are requested or disbursed to Borrower by cashiers check or wire transfer | |
Amounts paid to others on your behalf: | ||
$55,000.00 | to Comerica Bank for Loan Fee | |
$ | to Comerica Bank for Document Fee | |
$ | to Comerica Bank for accounts receivable audit (estimate) | |
$ | to Bank counsel fees and expenses (subject to the limitations set forth in Section 2.5(c)) | |
$ | to _______________ | |
$ | to _______________ | |
$__________ | TOTAL (AMOUNT FINANCED) |
Upon consummation of this transaction, this document will also serve as the authorization for Comerica Bank to disburse the loan proceeds as stated above.
Signature |
Signature |
USA PATRIOT ACT
NOTICE
OF
CUSTOMER IDENTIFICATION
IMPORTANT INFORMATION ABOUT PROCEDURES FOR OPENING A NEW ACCOUNT
To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account.
WHAT THIS MEANS FOR YOU: when you open an account, we will ask your name, address, date of birth, and other information that will allow us to identify you. We may also ask to see your drivers license or other identifying documents.
CORPORATION RESOLUTIONS AND INCUMBENCY CERTIFICATION
AUTHORITY TO PROCURE LOANS
The undersigned, certifies that he/she am the duly elected and qualified Secretary of CS DISCO, INC. (the Corporation), and the keeper of the records of the Corporation; that the following is a copy of resolutions substantially in the form duly adopted by the Board of Directors of the Corporation in accordance with its bylaws and applicable statutes.
Copy of Resolutions:
Be it Resolved, that:
1. | The Chief Executive Officer of the Corporation (the Authorized Signer(s)) are/is authorized, for, on behalf of, and in the name of the Corporation to: |
(a) | Negotiate and procure loans, letters of credit and other credit or financial accommodations from Comerica Bank (the Bank), up to a principal amount not exceeding $50,000,000; |
(b) | Discount with the Bank, commercial or other business paper belonging to the Corporation made or drawn by or upon third parties, without limit as to amount; |
(c) | Purchase, sell, exchange, assign, endorse for transfer and/or deliver certificates and/or instruments representing stocks, bonds, evidences of Indebtedness or other securities owned by the Corporation, whether or not registered in the name of the Corporation; |
(d) | Give security for any liabilities of the Corporation to the Bank by grant, security interest, assignment, lien, deed of trust or mortgage upon any real or personal property, tangible or intangible of the Corporation; |
(e) | Issue and/or execute one or more warrants for the purchase of the Corporations capital stock to Bank; |
(f) | Execute and deliver in form and content as may be required by the Bank any and all notes, evidences of Indebtedness, applications for letters of credit, guaranties, subordination agreements, loan and security agreements, financing statements, assignments, liens, deeds of trust, mortgages, trust receipts and other agreements, instruments or documents, and any amendments or modifications thereto, to carry out the purposes of these Resolutions, any or all of which may relate to all or to substantially all of the Corporations property and assets; and |
(g) | Appoint, delegate and authorize such other person(s) (the Delegated Person(s)) as may be designated in writing from time to time by the above referenced Authorized Signer to (i) request loans, advances and/or letters of credit under any line of credit, loan or other credit or financial accommodation made available by Bank to or in favor of the Corporation, and to execute and/or deliver unto Bank, in form and content as may be required by the Bank, such agreements, instruments and documents as may be necessary or required to carry out such purposes, (ii) make loan payments for and on behalf of the Corporation, and (iii) execute and certify borrowing base certificates, account agings, inventory reports and collateral reports (together with any other documents, reports and certificates required to be delivered in connection with any of the foregoing) for and on behalf of the Corporation. |
2. | Said Bank be and it is authorized and directed to pay the proceeds of any such loans or discounts as directed by the Authorized Signer or Delegated Person(s) (if any), whether so payable to the order of any of said Authorized Signer or Delegated Person(s) (if any) in their individual capacities or not, and whether such proceeds are deposited to the individual credit of any of said Authorized Signer or Delegated Person(s) (if any) or not. |
3. | Any and all agreements, instruments and documents previously executed and acts and things previously done to carry out the purposes of these Resolutions are ratified, confirmed and approved as the act or acts of the Corporation. |
4. | These Resolutions shall continue in force, and the Bank may consider the holders of said offices and their signatures to be and continue to be as set forth in a certified copy of these Resolutions delivered to the Bank, until notice to the contrary in writing is duly served on the Bank (such notice to have no effect on any action previously taken by the Bank in reliance on these Resolutions). |
5. | Any person, corporation or other legal entity dealing with the Bank may rely upon a certificate signed by an officer of the Bank to effect that these Resolutions and any agreement, instrument or document executed pursuant to them are still in full force and effect and binding upon the Corporation. |
6. | The Bank may consider the holders of the offices of the Corporation and their signatures, respectively, to be and continue to be as set forth in the Certificate of the Secretary of the Corporation until notice to the contrary in writing is duly served on the Bank. |
The undersigned further certifies that the above Resolutions are in full force and effect as of the date of this Certificate; that these Resolutions and any borrowings or financial accommodations under these Resolutions have been properly noted in the corporate books and records, and have not been rescinded, annulled, revoked or modified; that neither the foregoing Resolutions nor any actions to be
taken pursuant to them are or will be in contravention of any provision of the articles of incorporation or bylaws of the Corporation or of any agreement, indenture or other instrument to which the Corporation is a party or by which it is bound; and that neither the articles of incorporation nor bylaws of the Corporation nor any agreement, indenture or other instrument to which the Corporation is a party or by which it is bound require the vote or consent of shareholders of the Corporation to authorize any act, matter or thing described in the foregoing Resolutions.
The undersigned further certifies that the following named persons have been duly elected to the offices set opposite their respective names, that they continue to hold these offices at the present time, and that the signatures which appear below are the genuine, original signatures of each respectively:
(PLEASE SUPPLY GENUINE SIGNATURES OF AUTHORIZED SIGNERS BELOW)
NAME (Type or Print) | TITLE | SIGNATURE | ||
Kiwi Alejandro Danao Camara |
Chief Executive Officer |
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Michael Lafair |
Chief Financial Officer |
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In Witness Whereof, I have affixed my name as Secretary on December __, 2020.
Secretary
The Above Statements are Correct.
SIGNATURE OF OFFICER OR DIRECTOR OR, IF NONE, A SHAREHOLDER OTHER THAN THE SECRETARY WHEN THE SECRETARY IS THE SOLE AUTHORIZED SIGNER SET FORTH ABOVE |
Failure to complete the above when the Secretary is the sole Authorized Signer set forth above, shall constitute a certification by the Secretary that the Secretary is the sole Shareholder, Director and Officer of the Corporation.
AUTOMATIC LOAN PAYMENT AUTHORIZATION
Date: December __, 2020
Obligor Name: CS DISCO, INC. Obligor Number: Lenders Cost Center #: Address:
The undersigned hereby authorizes Comerica Bank (Bank) to charge the account designated below for the payments due on the loan(s) as designated below and all renewals, extensions, modifications and/or substitutions thereof. This authorization will remain in effect unless the undersigned requests a modification that is agreed to by the Bank in writing. The undersigned remains fully responsible for all amounts outstanding to Bank if the designated account is insufficient for repayment.
☒ | Automatic Payment Authorization for all payments on all current and future borrowings, as and when such payments come due (which payments include, without limitation, principal, interest, fees, costs, and expenses). |
☐ | Automatic Payment Authorization for all payments on only the specific borrowing identified below, as and when such payments come due (which payments include, without limitation, principal, interest, fees, costs, and expenses). |
Specific Obligation Number:
☐ | Automatic Payment Authorization for less than all payments on only the specific borrowing identified below, as and when such payments come due. |
Specific Obligation Number:
☐ | Principal and Interest payments only |
☐ | Principal payments only |
☐ | Interest payments only |
☐ | SPECIAL INSTRUCTIONS/IRREGULAR PAYMENT INSTRUCTIONS |
Payment Due Date: Your loan payments will be charged to your account as indicated above on the dates such payments become due (or on a date thereafter when there are available funds) unless that day is a Saturday, Sunday, or Bank holiday in which case such payments will be charged on the following business day, with interest to accrue during this extension as provided under the loan documents.
Account to be Charged: |
Account No. |
Transit No. |
Number of lead days to issue billing. |
(Charges to account are withdrawals pursuant to account resolution)
BORROWER: CS DISCO, INC. | ||
By: | ||
Name: |
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Title: |
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Agreement to Furnish Insurance to Loan and Security Agreement
(Herein called Bank)
Borrower(s): CS DISCO, INC.
The Borrower understands that the Loan and Security Agreement which it executed in connection with this transaction requires it to provide a physical damage insurance policy including a Lenders Loss Payable Endorsement in favor of the Bank as shown below, within ten (10) days from the date of this agreement.
The following minimum insurance must be provided according to the terms of the security documents.
☐ AUTOMOBILES, TRUCKS, RECREATIONAL VEHICLES PROPERTY |
☒ MACHINERY & EQUIPMENT: MISCELLANEOUS PERSONAL | |
Comprehensive & Collision Lenders Loss Payable Endorsement |
Fire & Extended Coverage Lenders Loss Payable Endorsement ☐ Breach of Warranty Endorsement | |
☐ BOATS |
☐ AIRCRAFT | |
All Risk Hull Insurance Lenders Loss Payable Endorsement ☐ Breach of Warranty Endorsement |
All Risk Ground & Flight Insurance Lenders Loss Payable Endorsement ☐ Breach of Warranty Endorsement | |
☐ MOBILE HOMES |
☐ REAL PROPERTY | |
Fire, Theft & Combined Additional Coverage Lenders Loss Payable Endorsement ☐ Earthquake |
Fire & Extended Coverage Lenders Loss Payable Endorsement ☐ All Risk Coverage | |
☐ Special Form Risk Coverage | ||
☐ | ||
☒ INVENTORY |
☐ Earthquake | |
☐ Other |
☒ | Other Borrower at its expense, shall keep the Collateral insured against loss or damage by fire, theft, explosion, sprinklers, and all other hazards and risks, and in such amounts, as ordinarily insured against by other owners in similar businesses conducted in the locations where Borrowers business is conducted on the date hereof. Borrower shall also maintain liability and other insurance in amounts and of a type that are customary to businesses similar to Borrowers. |
The Borrower may obtain the required insurance from any company that is acceptable to the Bank, and will deliver proof of such coverage with an effective date of December __, 2020 or earlier.
The Borrower understands and agrees that if it fail to deliver proof of insurance to the Bank at the address below, or upon the lapse or cancellation of such insurance, the Bank may procure Lenders Single Interest Insurance or other similar coverage on the property. If the Bank procures insurance to protect its interest in the property described in the security documents, the cost for the insurance will be added to the Borrowers indebtedness as provided in the security documents. Lenders Single Interest Insurance shall cover only the Banks interest as a secured party, and shall become effective at the earlier of the funding date of this transaction or the date my insurance was canceled or expired. THE BORROWER UNDERSTAND THAT LENDERS SINGLE INTEREST INSURANCE WILL PROVIDE IT WITH ONLY LIMITED PROTECTION AGAINST PHYSICAL DAMAGE TO THE COLLATERAL, UP TO THE BALANCE OF THE LOAN, HOWEVER, THE BORROWERS EQUITY IN THE PROPERTY WILL NOT BE INSURED. FURTHER, THE INSURANCE WILL NOT PROVIDE MINIMUM PUBLIC LIABILITY OR PROPERTY DAMAGE INDEMNIFICATION AND DOES NOT MEET THE REQUIREMENTS OF THE FINANCIAL RESPONSIBILITY LAW.
CALIFORNIA CIVIL CODE SECTION 2955.5. HAZARD INSURANCE DISCLOSURE: No lender shall require a borrower, as a condition of receiving or maintaining a loan secured by real property, to provide hazard insurance coverage against risks to the improvements on that real property in an amount exceeding the replacement value of the improvements on the property.
Bank Address for Insurance Documents: |
Comerica Bank |
Insurance Service Center |
PO Box 863299 |
Plano, TX 75086-3329 |
The Borrower acknowledges having read the provisions of this agreement, and agrees to its terms. The Borrower authorizes the Bank to provide to any person (including any insurance agent or company) any information necessary to obtain the insurance coverage required.
OWNER(S) OF COLLATERAL: | DATED: December __, 2020 |
BORROWER: | ||
CS DISCO, INC. |
By: |
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Name: |
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Title: |
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INSURANCE VERIFICATION | ||||
Date | Phone | |||
Agents Name | Person Talked To | |||
Agents Address | ||||
Insurance Company | ||||
Policy Number(s) | ||||
Effective Dates: From | To: | |||
Deductible $
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Comments:
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Exhibit 21.1
Subsidiaries of CS Disco, Inc.
Legal Name of Subsidiary |
Jurisdiction of Organization | |
CS DISCO LTD | England & Wales |
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the reference to our firm under the caption Experts and to the use of our report dated May 7, 2021, in the Registration Statement (Form S-1) and related Prospectus of CS Disco, Inc. for the registration of shares of its common stock.
/s/ Ernst & Young LLP
Austin, Texas
June 25, 2021
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