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As filed with the U.S. Securities and Exchange Commission on July 7, 2014.

Registration No. 333-          

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

YODLE, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   7311   57-1219336

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

50 West 23rd Street, Suite 401

New York, NY 10010

(212) 542-5400

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Court Cunningham

Chief Executive Officer

Yodle, Inc.

50 West 23rd Street, Suite 401

New York, NY 10010

(212) 542-5400

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

 

 

Copies to:

 

Babak Yaghmaie

Nicole Brookshire

Stephane Levy

Cooley LLP

1114 Avenue of the Americas

New York, NY 10036

(212) 479-6000

 

Michael Gordon

Chief Operating Officer and

Chief Financial Officer

Yodle, Inc.

50 West 23rd Street, Suite 401

New York, NY 10010

(212) 542-5400

 

Kirk A. Davenport

Latham & Watkins LLP

885 Third Avenue

New York, NY 10022-4834

(212) 906-1200

 

Approximate date of commencement of proposed sale 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, as amended, 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, 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 number of the earlier effective registration statement for the same offering.  ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Securities being Registered  

Proposed

Maximum

Aggregate

Offering Price(1)

 

Amount of

Registration Fee(2)

Common Stock, $0.0002 par value per share

  $75,000,000   $9,660

 

 

(1) Estimated solely for purposes of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act.
(2) Calculated pursuant to Rule 457(o) under the Securities Act of 1933, as amended, based on an estimate of the proposed maximum aggregate offering price.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 under the Securities Exchange Act of 1934. (Check one):

 

Large Accelerated Filer  ¨   Accelerated Filer  ¨   Non-accelerated Filer  x   Smaller Reporting Company  ¨

 

 

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

 

 

 


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The information in this 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 prospectus is not an offer to sell these securities and we and the selling stockholders are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED JULY 7, 2014

PRELIMINARY PROSPECTUS

                Shares

 

LOGO

Common Stock

 

 

We are selling                 shares of common stock and the selling stockholders are selling                 shares of common stock. We will not receive any of the proceeds from the shares of common stock sold by the selling stockholders.

Prior to this offering, there has been no public market for our common stock. The initial public offering price of our common stock is expected to be between $             and $         per share. We intend to apply to list our common stock on                 under the symbol “YO.”

We are an “emerging growth company” as defined under the U.S. federal securities laws and, as such, may elect to comply with certain reduced public company reporting requirements for this and future filings. See “Prospectus Summary—Implications of Being an Emerging Growth Company.”

The underwriters have an option to purchase a maximum of                 additional shares from                 solely to cover over-allotments of shares.

Investing in our common stock involves risks. See “Risk Factors” beginning on page 12.

 

      

Price to

Public

    

Underwriting

Discounts and

Commissions(1)

    

Proceeds to

Yodle, Inc.

    

Proceeds to

Selling
Stockholders

Per Share

     $                      $                      $                      $                

Total

     $                      $                      $                      $                

 

(1) See “Underwriting” on page 135 for additional information regarding underwriting compensation.

Delivery of the shares of common stock will be made on or about                 , 2014.

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

 

Credit Suisse   Deutsche Bank Securities   Jefferies   Piper Jaffray
Canaccord Genuity   Needham & Company   Oppenheimer & Co.

The date of this prospectus is                 , 2014.


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TABLE OF CONTENTS

 

PROSPECTUS SUMMARY

     1   

RISK FACTORS

     12   

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     41   

USE OF PROCEEDS

     43   

DIVIDEND POLICY

     45   

CAPITALIZATION

     46   

DILUTION

     48   

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

     50   

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     53   

BUSINESS

     79   

MANAGEMENT

     96   

EXECUTIVE AND DIRECTOR COMPENSATION

     103   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     114   

PRINCIPAL AND SELLING STOCKHOLDERS

     119   

DESCRIPTION OF CAPITAL STOCK

     122   

SHARES ELIGIBLE FOR FUTURE SALE

     128   

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS

     131   

UNDERWRITING

     135   

LEGAL MATTERS

     140   

EXPERTS

     140   

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     140   

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1   

 

 

You should rely only on the information contained in this document or to which we have referred you. We have not, the selling stockholders have not and the underwriters have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document.

Dealer Prospectus Delivery Obligation

Until                 , 2014 (the 25th day after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.

For investors outside the United States: We have not, the selling stockholders have not and the underwriters have not done anything that would permit this offering, or possession or distribution of this prospectus, in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside of the United States.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our consolidated financial statements and the related notes and the information set forth under the sections titled “Risk Factors,” “Special Note Regarding Forward-Looking Statements,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in each case included in this prospectus. Unless the context otherwise requires, we use the terms “Yodle,” “company,” “our,” “us,” and “we” in this prospectus to refer to Yodle, Inc. and, where appropriate, our consolidated subsidiaries.

Overview

Yodle is a leading provider of cloud-based marketing automation solutions for local businesses that makes digital marketing easy, affordable and transparent. Our platform provides our customers with an online, mobile and social presence, as well as automates, manages and optimizes their marketing activities and other consumer interactions. We utilize our proprietary data assets and algorithms to increase the likelihood that consumers will find our customers and become their paying consumers. Our platform provides our customers with transparency into their marketing activities and business operations, thereby enabling them to evaluate their return on investment, or ROI. Our solutions are highly integrated and designed to be easy-to-use, helping local businesses navigate the rapidly evolving, technologically challenging and highly fragmented digital marketing landscape without having to invest a significant amount of time and money or needing any in-house marketing or IT expertise.

We believe the market for our local marketing automation platform is large and underserved. According to the most recent U.S. Census Bureau data, there are more than 28 million local businesses in the United States. We currently target industry verticals with approximately 7 million local businesses, the largest categories of which include legal and professional, dental and medical and contractor and other home services. We served approximately 44,800 local businesses as of March 31, 2014. Local businesses are increasingly purchasing cloud-based technologies and services to operate and grow. According to a report by Parallels, a hosting and cloud services company, small- and medium-sized businesses, or SMBs, in the United States spent $8.5 billion in 2013 on cloud services related to web presence, web applications and business applications, and are expected to spend $15.1 billion in 2017. BIA/Kelsey estimates that spending on local digital advertising will increase from $28 billion in 2013 to $53 billion in 2018. In addition, AMI-Partners, an independent market research firm, estimates that there are approximately 74 million local businesses globally.

We generate revenues from subscriptions to our platform and sales of our media offering. Our platform revenue is attributable to direct sales of subscriptions to our platform products, which currently include our Marketing Essentials, Centermark and Lighthouse products. Marketing Essentials is our flagship product that includes three modules: presence, conversion optimization and communication automation. Centermark leverages certain core capabilities of Marketing Essentials by providing a standardized source of shared data, communication and reporting to address the needs of national franchisors and other similar businesses. Lighthouse is our business practice automation product, which automates many of our customers’ daily consumer interactions or office routines. We also derive additional platform revenues from sales of our products sold through resellers. Our media revenue is attributable to direct sales of our Yodle Ads media product, which automates, manages and optimizes our customers’ media spend across mobile and desktop search engines. We refer to our offerings and the packages in which we sell them as products.

Over nine years of focusing on the unique and constantly evolving digital marketing needs of local businesses, we have developed a differentiated approach to addressing this large and fragmented market. We use our sophisticated technology, rigorous data collection and analytics and scalable process automation in all key aspects of our business. Our solutions are highly integrated and optimized using our proprietary algorithms and

 

 

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the data assets we have built by tracking billions of consumer interactions. Our local inside sales force utilizes our proprietary and sophisticated customer prospecting and sales force automation system, which helps us determine the most effective sales strategy for each local business prospect. In addition, our customer onboarding and service processes for all of our products are highly automated, which enables us to rapidly launch the digital presence of our customers. We also offer some customization for our brand network customers that enables them to tailor our products for their specific business objectives. As a result, we believe we have a compelling business model which is characterized by low customer acquisition and onboarding costs and rapid payback, resulting in attractive customer economics and high returns on our initial investment.

We have grown our revenues from $87.6 million in 2011 to $161.9 million in 2013, representing a compound annual growth rate of 36%. Over this same period, our cost of revenues as a percentage of revenues have decreased from 39% to 33%, while our net loss has decreased from $15.4 million to $10.4 million. For the three months ended March 31, 2014, we had revenues of $45.7 million and net losses of $5.9 million. Our customers have increased from approximately 6,000 as of December 31, 2009 to approximately 44,800 as of March 31, 2014.

Our Industry

Consumers are increasingly changing the way they discover and interact with local businesses, shifting away from traditional media such as yellow pages directories, newspapers, radio and television, and interactions in person and over the telephone, to various digital resources, including desktop and mobile search, online directories, review sites, email and other mobile applications. As a result, businesses are challenged to navigate and manage an increasingly complex marketing landscape. Businesses need a comprehensive digital presence that includes a professional quality website that is easily discoverable and optimized for mobile devices, exposure on leading online directories and ratings and reviews sites, and tools to communicate with customers via email, text messages and social media. Large enterprises address this complexity by using sophisticated third-party software solutions that are expensive and require significant internal expertise to manage. However, local businesses generally lack the resources and expertise to access the benefits of enterprise-level solutions. Instead, they are left to choose from a number of disparate point solutions that only address a limited set of their challenges, are not integrated to work together and require local businesses to pay for and manage multiple vendors.

In addition, many national franchisors, manufacturers and multi-location businesses operate networks of individually-operated franchises, dealerships and offices that sell products or provide services at a local level. We refer to these businesses as brand networks. We believe that the challenges faced by individual locations within a brand network are very similar to those of independent local businesses. Brand network owners, however, have additional unique challenges that include ensuring that individual network locations have a robust local digital presence that is consistent with their brand identity and facilitating their individual locations to maximize their investments in local marketing solutions in order to increase sales across the network. To accomplish this, a brand network owner requires clear visibility and analytics into the performance of its marketing programs across its network and an ability to enable the individual locations within its network to achieve the brand network owner’s marketing objectives.

Our Solution

We are seeking to transform the way that local businesses create and manage their online and mobile presence, and how they attract and engage with consumers. Our platform provides local businesses with a comprehensive suite of capabilities to compete in the digital world. For our customers, we establish a digital presence that is algorithmically optimized to increase the likelihood that consumers will find and transact with them and provide powerful tools that we believe help them attract, manage and retain consumers. Our cloud-based marketing automation platform provides local businesses with the following key benefits:

 

   

Comprehensive, intuitive and easy-to-use platform for attracting and engaging consumers. Our local marketing automation platform provides the essential features that local businesses need to attract, manage and retain consumers, including a mobile-optimized website, social presence, offer management, automated media buying and communication tools, such as email and text messaging. These features are

 

 

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bundled into an integrated and easy-to-use platform, thereby liberating a local business from the confusion and complexity of deciding which point solutions to utilize and avoiding the expense and challenges of managing multiple vendors.

 

    Increased revenues from new and existing consumers. Our platform is designed to help our customers to efficiently acquire and retain consumers, improve the effectiveness of their marketing efforts and help them meet their marketing and business objectives.

 

    Mobile solutions optimized for consumers and local business owners. We optimize our customers’ websites for use on mobile devices in order to make their websites easier for consumers to discover and use. We also provide our customers with a mobile dashboard that allows them to monitor performance metrics and manage their content from their mobile devices.

 

    Transparency. Our platform allows our customers to easily monitor and manage their digital presence and marketing activities. We present relevant, real-time performance metrics which enable our customers to better understand and evaluate their ROI.

 

    Affordable pricing. Based on data from BIA/Kelsey, we believe the average SMB spends approximately $400 per month on marketing. We have generally priced our flagship product, Marketing Essentials, including all three of its current modules, at less than $300 per month since its introduction in March 2014. We believe, based on publicly available market pricing information, that re-creating the functionality of our Marketing Essentials product by purchasing multiple point solutions would cost a local business at least twice that amount.

As a result of these benefits, we refer to our platform as a “CMO-in-a-box” for our local business customers, because our solutions are designed to develop and manage their marketing activities and other consumer interactions, similar to the manner in which a chief marketing officer, or CMO, would for a large enterprise.

We also address the unique requirements of brand networks with our Centermark product, which leverages the core capabilities of our platform by providing a standardized source of shared data, communication and reporting to brand network owners. Centermark enables brand network owners to extend many of the same benefits enjoyed by our local business customers to the individual locations in their network. Additionally, Centermark incorporates powerful communication, monitoring and analytics tools, which help brand network owners increase the value of their networks.

Our Competitive Strengths

Our key competitive strengths include:

 

    Comprehensive, integrated and easy-to-use platform. The breadth, depth and highly integrated nature of our platform offers significant advantages to our customers as it is designed to be comprehensive and work together. We believe that these attributes provide our customers with superior value and performance results compared to the disparate point solutions available in the market.

 

    Proprietary data assets. We utilize our proprietary data assets to algorithmically optimize our customers’ online and mobile content, email campaigns, website and ad copy templates, and keywords for search engine optimization, or SEO, and search engine marketing, or SEM, purposes. We believe our proprietary data assets allow us to more effectively measure and improve the marketing performance of websites, digital advertising and communications for our customers.

 

    Powerful data-driven network effects. As we continue to add more local business customers to our platform and collect and analyze more data about our customers’ marketing performance and business operations, we are able to improve the performance of our platform and ultimately drive higher value to our current and future customers by further improving their ROI.

 

 

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    Vertical expertise. We currently target local businesses in the following key categories of industry verticals: legal and professional, dental and medical and contractor and other home services. As we grow our presence in these industry verticals, we are able to develop additional expertise in those verticals. We believe that our scale, depth and operational integration in specific verticals provide us with a competitive advantage in gathering data and optimizing marketing performance and business operations for our customers in those industry verticals.

 

    Low customer acquisition costs. Our highly automated, technology- and data-driven approach to sales promotes efficiency and scalability in our business model and enables us to efficiently acquire customers. Between 2011 and 2013, we reduced our average cost to acquire a customer while at the same time more than doubling the headcount of our sales force.

 

    Rapid and scalable customer onboarding and service driven by process automation. We have made technology investments in process automation that allow us to scale rapidly and onboard customers without adding significant incremental costs or impacting the level of quality. Although we have designed our products to be highly intuitive, we provide our customers access to our responsive, technology-enabled customer service team.

 

    Track record of innovation. We are focused on driving innovation in the local digital marketing industry, identifying and interpreting emerging technology and trends on behalf of our customers to enable them to benefit from our innovation. Our focus on innovation allows us to quickly adapt to the evolving landscape and provide our customers with valuable solutions, often before they identify a need for such solutions.

Our competitive strengths result in what we believe is an attractive business model. Our low customer acquisition and onboarding costs minimize our initial investment to bring on new customers and allow us to achieve rapid payback. We define payback as occurring when the costs associated with acquiring and launching a cohort of new customers in any given quarter is offset by the ongoing cash flow from those customers, less our ongoing costs. We are typically able to generate positive cash flows within the first year after acquiring and launching a cohort of new customers, including the impact from customers who do not renew their subscriptions or service during the first year and excluding overhead costs. As a result, we believe our business model benefits from rapid payback. We refer to customers who we acquired directly (i.e., not through resellers) and who remain as customers after their initial year as our tenured customers. For the 12 months ended March 31, 2014, we experienced a monthly average revenue retention rate of 97.5% for our tenured customers. We expect the revenue retention rate for our tenured customers to continue to improve as our mix of revenues shifts toward revenues from platform products, as revenue derived from customers who subscribe to our platform products generally exhibits a higher retention rate than revenue derived from customers who purchase our media product. We believe that our low customer acquisition and onboarding costs, rapid payback and high monthly revenue retention of our tenured customers results in a business model that generates attractive customer economics and high returns on our initial investment.

Our Growth Strategy

We believe that we are in the very early stages of a large and long-term business opportunity. Our growth strategy for pursuing this opportunity includes the following key components:

 

    Further penetrate our existing industry verticals. Of the estimated 28 million local businesses in the United States, we currently target industry verticals that include approximately 7 million local businesses. We plan to further penetrate these verticals by leveraging our existing sales infrastructure, investing in our direct sales teams and expanding our sales through partnerships with resellers.

 

   

Increase the number of customers that are operationally integrated with our platform. We intend to increase the number of customers with whom we have operational systems integration, including business

 

 

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management, scheduling and billing. We intend to accomplish this by increasing the number of salespeople selling Lighthouse, our business practice automation product, and Centermark, and increasing the number of industry verticals that we are targeting with our Lighthouse product.

 

    Expand our distribution channels. We intend to pursue opportunities to sell our products through organizations that have existing relationships with local businesses, including by targeting brand network owners through our Centermark product and selectively partnering with resellers.

 

    Expand into new industry verticals and geographies. We see significant opportunity in continuing to expand our footprint beyond our current industry verticals across a broad spectrum of local businesses in the United States. While we believe that the global market of 74 million local businesses provides us with further growth opportunities over the long term, our focus in the near term is growing our business in the United States and Canada.

 

    Continue to introduce new products and enhance the functionality of our platform. We plan to introduce new products, develop new functionality for our platform and address the latest marketing opportunities and challenges facing local businesses.

 

 

    Pursue selective strategic acquisitions. We intend to selectively acquire businesses that can provide us with complementary technologies and products, or access to new customers, industry verticals or geographies.

Risks Related to Our Business and Our Industry

Our business is subject to numerous risks and uncertainties, including those highlighted in the section titled “Risk Factors” immediately following this prospectus summary. These risks include, among others, the following:

 

    We have a short operating history in an evolving industry, which makes it difficult to evaluate our future prospects and may increase the risk that we will not be successful.

 

    We have incurred significant operating losses in the past, and we may not be able to generate sufficient revenues to achieve or maintain profitability.

 

    Our products are sold on a short-term basis, and if subscription renewal or customer retention rates decrease or we do not accurately predict these rates, our future revenues and operating results may be harmed.

 

    Many of our products are new and if we are unsuccessful at marketing our products to local businesses, we may not be able to achieve our growth and business objectives.

 

    Our future success will depend in part on our ability to expand into new industry verticals.

 

    We purchase a majority of our media from Google, and our business could be adversely affected if Google takes actions that are adverse to our interests. Similar actions from Yahoo!, Microsoft and other media providers could adversely affect our business to a lesser degree.

 

    If our SEO strategies fail to help our customers get discovered more easily in unpaid search results, our business could be adversely affected.

 

    Our revenue growth will be adversely affected if we cannot continue to successfully retain, hire, train and manage qualified personnel, especially those in sales and marketing.

 

    We may not be able to continue to add new customers or retain or increase sales to our existing customers, which could adversely affect our operating results.

 

    We expect to face increased competition in the digital marketing industry, which could require us to reduce our selling prices or expand the products or features that we offer. As a result of such competitive pressures, we may not be able to maintain or improve our competitive position or market share.

 

 

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Implications of Being an Emerging Growth Company

We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies. These provisions include:

 

    a requirement to have only two years of audited financial statements and only two years of related selected financial data and management’s discussion and analysis of financial condition and results of operations disclosure;

 

    an exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act;

 

    an exemption from new or revised financial accounting standards until they would apply to private companies and from compliance with any new requirements adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation;

 

    reduced disclosure about the emerging growth company’s executive compensation arrangements; and

 

    no requirement to seek non-binding advisory votes on executive compensation or golden parachute arrangements.

We may take advantage of some or all these provisions until we are no longer an emerging growth company. We will remain an emerging growth company until the earlier to occur of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenues of at least $1.0 billion or (c) in which we are deemed to be a “large accelerated filer,” under the rules of the U.S. Securities and Exchange Commission, or SEC, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

 

We are choosing to “opt out” of the provision of the JOBS Act that permits emerging growth companies to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies and, as a result, we will comply with new or revised accounting standards as required when they are adopted. This decision to opt out of the extended transition period is irrevocable.

We have elected to adopt the reduced disclosure requirements available to emerging growth companies, and only provide three years of selected financial data and reduced disclosure about our executive compensation arrangements in this prospectus. As a result of these elections, the information that we provide in this prospectus may be different than the information you may receive from other public companies in which you hold equity interests. In addition, it is possible that some investors will find our common stock less attractive as a result of these elections, which may result in a less active trading market for our common stock and higher volatility in our stock price.

Corporate Information

Yodle, Inc. was originally incorporated under the laws of the State of Delaware under the name Natpal, Inc. in March 2005. We changed our name to Yodle, Inc. in July 2007.

Our principal executive office is located at 50 West 23rd Street, Suite 401, New York, NY 10010. Our telephone number is (212) 542-5400. Our website address is www.yodle.com. Information contained in, or accessible through, our website does not constitute a part of, and is not incorporated into, this prospectus.

The Yodle logo and names Yodle® and Centermark and other trademarks or service marks of Yodle, Inc. appearing in this prospectus are the property of Yodle, Inc. and its consolidated subsidiaries. This prospectus contains additional trade names, trademarks and service marks of others, which are the property of their respective owners. Solely for your convenience, trade names, trademarks and service marks contained in this prospectus may appear without the “®” or “” symbols. Such references are not intended to indicate, in any way, that we will not assert, to the fullest extent possible under applicable law, our rights or the rights of the applicable licensor to those trade names, trademarks and service marks.

 

 

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THE OFFERING

 

Common stock offered by Yodle

                shares

 

Common stock offered by the selling stockholders

                shares

 

Total common stock offered

                shares

 

Total common stock to be outstanding after this offering

                shares

 

Over-allotment option offered by                   

                shares

 

Use of proceeds

The principal purposes of this offering are to create a public market for our common stock and to facilitate our future access to the public equity markets, as well as to obtain additional capital. We intend to use a portion of the net proceeds from this offering to repay (1) $             million of indebtedness outstanding under our existing credit facilities and (2) a $6.2 million deferred payment obligation. We intend to use the remainder of the net proceeds for general corporate purposes. In addition, we may use a portion of the proceeds from this offering for acquisitions of complementary businesses, technologies or other assets, although we do not currently have any plans for any acquisitions. We will not receive any of the proceeds from the sale of shares to be offered by the selling stockholders. See the section of this prospectus titled “Use of Proceeds.”

 

Risk factors

See the section of this prospectus titled “Risk Factors” and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.

 

Proposed                 Symbol

“YO”

The number of shares of our common stock that will be outstanding after this offering is based on the number of shares outstanding as of May 31, 2014, and excludes:

 

    21,929,642 shares of common stock issuable upon the exercise of options outstanding as of May 31, 2014, at a weighted-average exercise price of $1.5648 per share;

 

                    shares of our common stock reserved for future issuance pursuant to our equity incentive plans, including (1)                 shares pursuant to our 2014 Equity Incentive Plan, or 2014 Plan, (2)                 shares pursuant to our 2014 Employee Stock Purchase Plan, or 2014 ESPP, each of which will become effective prior to the completion of this offering and will include provisions that automatically increase the number of shares of common stock reserved for issuance thereunder each year and (3) 1,170,473 shares of our common stock reserved for issuance under our 2007 Equity Incentive Plan, or the 2007 Plan, which shares will be added to the shares reserved under the 2014 Plan upon its effectiveness;

 

    1,242,829 shares of common stock issuable upon the exercise of certain preferred stock warrants that were outstanding as of May 31, 2014, at a weighted-average exercise price of $0.9937 per share; and

 

    200,553 shares of common stock issuable upon the exercise of certain common stock warrants that were outstanding as of May 31, 2014, at a weighted-average exercise price of $1.1676 per share.

 

 

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Unless otherwise indicated, this prospectus reflects and assumes the following:

 

    a     -for-     reverse stock split of our common stock expected to be completed prior to the completion of this offering;

 

    the reclassification of 1,242,829 shares of preferred stock issuable upon the exercise of outstanding preferred stock warrants immediately prior to the completion of this offering into 1,242,829 shares of common stock issuable upon the exercise of such warrants, which reclassification is expected to occur automatically immediately prior to the completion of this offering;

 

    the automatic net exercise of preferred stock warrants to purchase 1,537,917 shares of our common stock at an exercise price of $1.4045 per share, which will occur immediately prior to the completion of this offering, as described in the section titled ‘‘Description of Capital Stock—Warrants,’’ which we refer to as the automatic preferred stock warrant exercise;

 

    the automatic conversion of 82,650,815 outstanding shares of our preferred stock into an aggregate of                 shares of our common stock, which will occur automatically immediately prior to the completion of this offering (assuming a conversion ratio equal to                 common shares for each Series F preferred share based on an assumed initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus);

 

    the filing and effectiveness of our certificate of incorporation in Delaware and the adoption of our bylaws, each of which will occur immediately prior to the completion of this offering;

 

    no exercise of outstanding options, common stock warrants or preferred stock warrants (other than the automatic preferred stock warrant exercise) after May 31, 2014; and

 

    no exercise by the underwriters of their over-allotment option.

Series F Conversion Ratio

The number of shares of our common stock to be issued upon the automatic conversion of all outstanding shares of our Series F preferred stock depends on the initial public offering price of our common stock. The terms of our Series F preferred stock provide that the ratio at which each share of this series of preferred stock automatically converts into shares of our common stock in connection with this offering will increase if the initial public offering price is below $             per share, which would result in additional shares of our common stock being issued upon conversion of our Series F preferred stock immediately prior to the closing of this offering. Based upon the assumed initial public offering price of $             per share, the midpoint of the price range set forth on the cover page of this prospectus, the outstanding shares of our Series F preferred stock will convert into an aggregate of approximately                 shares of our common stock immediately prior to the completion of this offering.

For illustrative purposes only, the table below shows the number of shares of our common stock that would be issuable upon conversion of the Series F preferred stock at various initial public offering prices, as well as the total number of outstanding shares of our common stock as a result:

 

Assumed Public Offering Price
per Share

   Series F Preferred
Stock Conversion

Ratio
   Shares of Common
Stock Issuable upon
Conversion of Series F
Preferred Stock
   Total Shares of
Common Stock Outstanding
After this Offering
        
        
        
        
        

 

 

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SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA

The following tables set forth a summary of our consolidated financial and other data for, and as of the periods ended on, the dates indicated. The consolidated statements of operations and comprehensive loss data for the years ended December 31, 2011, 2012 and 2013 and the consolidated balance sheet data as of December 31, 2013 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The condensed consolidated statements of operations and comprehensive income (loss) data for the three months ended March 31, 2013 and March 31, 2014 and the condensed consolidated balance sheet data as of March 31, 2014 are derived from our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus. Our unaudited interim condensed consolidated financial statements were prepared on a basis consistent with our audited consolidated financial statements and include, in management’s opinion, all normal recurring adjustments necessary for the fair presentation of the financial information set forth in those statements included elsewhere in this prospectus.

When you read this summary consolidated financial and other data, it is important that you read it together with the historical consolidated financial statements and related notes to those statements, as well as the sections of this prospectus titled “Selected Consolidated Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our historical results are not necessarily indicative of the results that may be expected for any future period.

 

    Year Ended December 31,     Three Months
Ended March 31,
 
    2011     2012     2013     2013     2014  
    (in thousands, except per share and customer data)  
          (unaudited)  

Consolidated Statements of Operations Data:

         

Revenues

  $ 87,584      $ 132,321      $ 161,863      $ 35,202      $ 45,746   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

         

Cost of revenues (exclusive of depreciation and amortization shown separately below)(1)

    33,876        42,760        53,843        11,925        14,446   

Selling and marketing(1)

    36,318        51,623        64,605        14,076        18,628   

Technology and product development(1)

    10,157        14,977        20,346        4,568        5,660   

General and administrative(1)

    15,305        19,591        29,271        6,085        8,349   

Depreciation and amortization

    2,328        3,721        6,419        1,248        1,845   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

    97,984        132,672        174,484        37,902        48,928   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (10,400     (351     (12,621     (2,700     (3,182

Interest expense and other

    (7,074     (4,690     (2,912     (440     (2,660
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (17,474     (5,041     (15,533     (3,140     (5,842

(Benefit) provision for income taxes

    (2,035     387        (5,131     (5,327     103   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income and comprehensive (loss) income

  $ (15,439   $ (5,428   $ (10,402   $ 2,187      $ (5,945
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income per share attributable to common stockholders(2)

         

Basic

  $ (0.48   $ (0.17   $ (0.29   $ —        $ (0.14
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ (0.48   $ (0.17   $ (0.29   $ —        $ (0.14
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used to compute net (loss) income per share attributable to common stockholders(2)

         

Basic

    31,955        32,573        35,743        34,279        41,243   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    31,955        32,573        35,743        46,876        41,243   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net (loss) income per share attributable to common stockholders—basic and diluted(3)

         
         

 

 

 

Pro forma weighted-average shares used to compute pro forma net (loss) income per share attributable to common stockholders—basic and diluted(3)

         
         

 

 

 

Other Financial and Other Data (unaudited):

         

Number of Customers(4)

    27,200        29,300        42,000        33,800        44,800   

Adjusted EBITDA(5)

  $ (5,899   $ 6,236      $ 1,819      $ 286      $ 378   

 

 

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     As of
December 31,
2013
    As of March 31, 2014
       Actual     Pro forma as
adjusted(6)
     (in thousands)
           (unaudited)

Consolidated Balance Sheet Data:

      

Cash and cash equivalents

   $ 12,345      $ 10,274     

Working capital (deficit)(7)

     (27,325     (32,721  

Total assets

     93,729        93,663     

Long-term debt, including current portion(8)

     29,609        30,228     

Total liabilities

     74,456        75,825     

Convertible preferred stock

     62,411        65,159     

Total stockholders’ (deficit) equity

     (43,138     (47,321  

 

(1)   Includes stock-based compensation expense as follows:

 

     Year Ended December 31,      Three Months
Ended March 31,
 
     2011      2012      2013      2013      2014  
     (in thousands)  
            (unaudited)  

Cost of revenues

   $ 15       $ 17       $ 15       $ 4       $ 10   

Selling and marketing

     422         577         780         241         237   

Technology and product development

     235         445         675         159         218   

General and administrative

     1,160         1,827         1,161         521         214   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 1,832       $ 2,866       $ 2,631       $ 925       $ 679   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) See note 15 to our unaudited interim condensed consolidated financial statements and note 21 to our consolidated financial statements for an explanation of the calculations of our actual basic and diluted net (loss) income per share attributable to common stockholders.

 

(3) Pro forma basic and diluted net (loss) income per share attributable to common stockholders represents net (loss) income and comprehensive (loss) income divided by the pro forma weighted-average shares of common stock outstanding. Pro forma weighted-average shares of common stock outstanding reflects (a) the automatic preferred stock warrant exercise and (b) the conversion of preferred stock (using the if-converted method) into common stock as though the conversion had occurred on the later of the issuance date or the first day of the relevant period (assuming a conversion ratio equal to                 common shares for each Series F preferred share based on an assumed initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus). See the section “—The Offering” above for a description of the number of shares issuable upon conversion of our Series F preferred stock, which depends on the initial public offering price of our common stock.

 

(4) We calculate the number of customers at the end of each fiscal year as the number of unique customers with a subscription to one or more of our platform products and customers of our Yodle Ads product, rounded down to the nearest hundred. We consider as separate customers each location of a brand network that uses one of our more of our products. In cases where our customers have subscriptions to our platform obtained through resellers, we include those customers in our customer count.

 

(5) We define Adjusted EBITDA as our net (loss) income and our comprehensive (loss) income plus (minus): interest expense and other, (benefit) provision for income taxes and depreciation and amortization expense, adjusted to eliminate the impact of stock-based compensation expense, which is a non-cash item, and the effect of charges related to business combination and asset acquisition. Please see footnote (5) to the table of the section of this prospectus titled “Selected Consolidated Financial and Other Data” for more information and for a reconciliation of Adjusted EBITDA to net (loss) income and our comprehensive (loss) income, the most directly comparable financial measure calculated and presented in accordance with accounting principles generally accepted in the United States of America, or GAAP.

 

(6) Reflects on a pro forma as adjusted basis (a) the conversion described in footnote (3)(b) above, (b) the reclassification of our preferred stock warrant liabilities to additional paid-in capital upon the automatic conversion of certain of our preferred stock warrants into warrants exercisable for our common stock, which will occur automatically upon the completion of this offering, (c) the automatic preferred stock warrant exercise, (d) our sale of                 shares of common stock in this offering at an assumed initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, (e) a $             million deemed dividend on our Series F preferred stock, as described in “Capitalization,” and (f) the application of $             million of the net proceeds of this offering to repay indebtedness outstanding under our existing credit facilities and $6.2 million of the net proceeds of this offering to satisfy certain of our deferred payment obligations, as described in “Use of Proceeds.”

 

 

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    The pro forma as adjusted information presented in the summary balance sheet data is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing. Each $1.00 increase or decrease in the assumed initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus, would increase or decrease each of cash and cash equivalents, working capital, total assets and total stockholders’ (deficit) equity on a pro forma as adjusted basis by approximately $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting estimated underwriting discounts and commissions. We may also increase or decrease the number of shares we are offering. Each increase or decrease of             in the number of shares offered by us would increase or decrease each of cash and cash equivalents, working capital, total assets and total stockholders’ (deficit) equity by approximately $             million, assuming that the assumed initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions.

 

(7)   Working capital (deficit) includes all current assets less all current liabilities.

 

(8)   Includes current and long-term portions of bank loan, current and long-term portions of subordinated debt and deferred consideration. As of March 31, 2014, it also included $4.8 million in accrued expenses and other current liabilities and $0.3 million in other liabilities, long-term portion, which includes deferred payments of $4.5 million related to our acquisition of Lighthouse Practice Management classified as accrued compensation expense and $0.6 million related to our asset acquisition from New Service, LLC. As of December 31, 2013, it also included the cash portion of contingent consideration in business combination and $4.0 million in long-term portion of other liabilities, but excluded the fair value attributable to 869,565 shares of Series E preferred stock payable as non-cash earn-out consideration. Amounts are disclosed at full payment value and do not reflect reductions for fair value adjustments that are reflected on the balance sheet.

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this prospectus, including the information set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, before deciding whether to purchase shares of our common stock. Any of the following risks could materially and adversely affect our business, financial condition, results of operations and future growth prospects. As a result, the market price of our common stock could decline and you could lose some or all of your investment.

Risks Related to Our Business and Our Industry

We have a short operating history in an evolving industry, which makes it difficult to evaluate our future prospects and may increase the risk that we will not be successful.

We were founded in 2005, and our first product was a search engine marketing, or SEM, optimization bidding engine, which we typically sold in conjunction with building a website for our customers. We have since expanded our product offerings to address a broad array of digital marketing needs of local businesses, which we define as non-employer firms and businesses with up to 99 employees. Our short history, evolving strategy and operations in a new and developing market make it difficult to effectively assess our future prospects. You should, therefore, consider our future prospects in light of the challenges and uncertainties that we face, including, among other things:

 

    that our business has grown rapidly, and we only recently expanded from an SEM, website building and SEO company to a company offering a broad suite of marketing products to local businesses and brand networks;

 

    that it may not be possible to discern fully the trends that we are subject to based on our limited operating history in a new and developing market;

 

    increased competition and the offering of new products and solutions by our competitors;

 

    our ability to retain and increase sales to existing customers and attract new customers on a cost-effective basis;

 

    our ability to monitor and comply with evolving regulations affecting our business or our customers’ businesses;

 

    our ability to meet our customers’ evolving needs and expectations; and

 

    our ability to manage, measure and demonstrate the effectiveness of our platform and to continue to develop or acquire new products and technologies that are appealing to our customers.

These factors and others may make it difficult to evaluate our current business and future prospects. Failure to adequately address any of the challenges above could adversely affect our business and, as a result, our revenues and results of operations.

We have incurred significant operating losses in the past, and we may not be able to generate sufficient revenue to achieve or maintain profitability.

Since our inception, we have incurred significant operating losses, and, as of March 31, 2014, we had an accumulated deficit of approximately $84.5 million. Although our revenues have grown rapidly, increasing from $87.6 million in 2011 to $161.9 million in 2013, we have experienced net losses of $15.4 million, $5.4 million and $10.4 million in 2011, 2012 and 2013, respectively. For the three months ended March 31, 2014, we had revenues of $45.7 million and net losses of $5.9 million. In addition, we may not be able

 

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to continue our historical growth rate and you should not rely on the revenue growth of any prior quarterly or annual period as an indication of our future performance. We also expect our costs to increase in future periods as we continue to expend substantial financial resources on:

 

    sales and marketing;

 

    customer service;

 

    product and feature development;

 

    our technology infrastructure;

 

    domestic expansion efforts;

 

    strategic opportunities, including commercial relationships and acquisitions;

 

    ongoing compliance efforts in connection with new and evolving regulatory requirements; and

 

    general and administration functions, including legal and accounting expenses related to being a public company.

These investments may not result in increased revenue or growth of our business. If we are unable to maintain adequate revenue growth and to manage our expenses, we may continue to incur significant losses in the future and may not be able to achieve or maintain profitability.

Our products are sold on a short-term basis, and if subscription renewal or customer retention rates decrease or we do not accurately predict these rates, our future revenue and operating results may be harmed.

Typically, subscriptions to Marketing Essentials and related modules of our platform (including predecessor products) range from three- to 12-month initial subscription terms. Historically, these contracts have generally been extended on a month-to-month basis after the initial subscription term. After the initial subscription term, our customers can cancel their subscription at any time with little or no penalty. Subscriptions to our Centermark product, which we introduced in December 2013, typically have 12-month initial subscription terms or longer; however, some of these agreements are subject to termination if we do not achieve certain criteria. Typically, subscriptions to our Lighthouse product are for month-to-month subscription terms. In addition, sales of our Yodle Ads media product are generally on a short-term basis. As a result, we may have limited visibility into our future revenue streams, our revenues could quickly decelerate and we may not accurately forecast our future revenue streams or our subscription renewal or customer retention rates. If we fail to project accurately and/or our revenues decline, our operating results would be harmed and our stock price may decline.

Historically, we have experienced a high turnover rate in our customer base, especially within the first year of launching a customer. We believe there are a variety of factors which may result in increases in our turnover rate or fluctuations in our revenue. These factors include:

 

    customer satisfaction with our products;

 

    our customers’ perceived value of our products and their return on investment, or ROI;

 

    changes to pricing, including in connection with expanding our offerings;

 

    the number of our products used by our customers;

 

    decreased spending by our customers on advertising and marketing generally, and on digital marketing in particular;

 

    cessation of our customers’ businesses, as small- and medium-sized local businesses have historically experienced high failure rates;

 

    increased competition in the local business digital marketing environment;

 

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    the products and prices offered by us and our competitors;

 

    the evolving use of technology-based marketing solutions by local businesses; and

 

    the overall economic environment in the United States and its impact on local businesses.

If our customers do not renew their subscriptions or if they decrease the amount they spend with us, our revenue could decline and our operating results could suffer. In particular, if our Centermark customers do not renew their subscriptions or we do not renew our relationship with any of our resellers, we would likely lose a large number of customers at once, which could cause our revenue to decline and our operating results to suffer.

Many of our products are new and if we are unsuccessful at marketing our products to local businesses, we may not be able to achieve our growth and business objectives.

We introduced Marketing Essentials in the first quarter of 2014 as an integrated product to address the broad array of marketing needs of local businesses, and we introduced Centermark in December 2013 to address the marketing needs of brand networks. We have designed our products to address how our customers engage with and expand their relationships with consumers. For example, we have recently launched many of our mobile and social functionalities, as well as photo management, email automation, review management and offer management. Historically, and prior to expanding our product offerings, we focused our efforts on SEO and SEM activities. Because our growth strategy involves marketing our products to local businesses for use across a broader spectrum of our customers’ marketing objectives, such as retention, outreach and appointment automation, our ability to grow our business and increase our revenues will depend on our ability to successfully market our products and solutions to existing and prospective customers.

In addition, some of our newer products, such as Lighthouse, our business practice automation product, require integration into a customer’s practice management system, or PMS, or other customer relationship management or point of sale systems. While we have successfully integrated into a number of PMSs available in the marketplace, some of the PMSs, or other customer relationship management or point of sale systems, providers may not allow us to integrate into their systems or may charge a fee for this integration. Therefore, we may not be able to integrate with all PMSs, or other customer relationship management or point of sale systems, on terms that are reasonable to us, or at all. If we face significant challenges in integrating into widely used or newly adopted and popular PMSs, or other customer relationship management or point of sale systems, our ability to market our business practice automation product to our existing customers and prospective customers would be impaired, which could have a material adverse effect on our growth and business objectives.

We need to continue to make significant investments in product development and enhance our ability to demonstrate measurable benefits of the use of our products for our customers. Further, we may need to make significant additional investments in sales, marketing and customer service to educate the market on the benefits of our products. However, we have limited experience marketing our products to address the broader array of marketing and customer management objectives. Therefore, if we are unable to successfully market our products and local businesses do not adopt our products to pursue those objectives, our business will suffer.

Our future success will depend in part on our ability to expand into new industry verticals.

As we market our products to a wider group of potential customers outside of our current primary industry verticals, legal and professional, dental and medical and contractor and other home services, we will need to adapt and effectively market our products. We have limited experience with businesses within industry verticals which we have recently expanded into and businesses that are outside of the industry verticals we have historically focused on. Our success in expanding our products to businesses in new industry verticals and verticals into which we have recently expanded will depend on various factors, including our ability to:

 

    design products that are attractive to businesses in these industries and integrate new products and features into our platform;

 

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    tailor our products to enable our customers to comply with rules and regulations applicable to businesses in these industries, including potential professional licensing requirements and/or advertising and marketing restrictions;

 

    hire personnel with relevant industry vertical experience to lead sales, marketing, customer service and product development teams; and

 

    accumulate sufficient data sets relevant for those industry verticals to ensure that we can deliver efficient and effective offerings within that industry.

In particular, Lighthouse depends on our customers gathering sufficient data from their clients, customers or patients and having necessary consents from those clients, customers or patients in order for them to be contacted. Local businesses within certain industry verticals may not keep digital records of operational activities, such as appointments, which may make it more challenging for us to sell to these businesses, as we would not have access to the data on which our product relies. In addition, our appointment automation tool that is part of Lighthouse involves making telephone calls and sending text messages, which requires consent from the recipients of those calls and messages that may be challenging for a local business to obtain.

Because our business model depends, in part, on developing a highly standardized and scalable digital marketing solution for local businesses, we may face challenges in adapting our products to account for the needs of potential customers in new industry verticals, including due to the diverse ways in which they manage their clients, customers or patients and the broad array of potentially applicable licensing and regulatory regimes. If we are unable to successfully adapt or market our products to appeal to businesses in industries other than the verticals we have historically focused on, we may not be able to achieve our growth or business objectives. Further, as we expand our customer base and products into new industry verticals, we may be unable to maintain our current customer retention rates.

We purchase a majority of our media from Google, and our business could be adversely affected if Google takes actions that are adverse to our interests. Similar actions from Yahoo!, Microsoft and other media providers could adversely affect our business to a lesser degree.

A significant portion of our cost of revenues is composed of net traffic acquisition costs for the purchase of media, and a majority of the media we purchase is from Google. Google accounts for a large majority of all U.S. Internet searches, and Google’s share in foreign markets is often even greater. As a result, we expect that our media revenue will continue to depend on purchases from Google. This dependence makes us vulnerable to actions that Google may take to change the manner in which it sells AdWords, as described below, or conducts its business on a number of levels:

 

    Google can change the terms and conditions upon which it does business with us. Google can act unilaterally to change the terms and conditions for our purchase of media or the purchase of Google products, and Google has done so in the past. For example, Google requires us to disclose to customers of our Yodle Ads product the cost of our media purchases from Google, and recently requested that we increase the prominence of such disclosure. Failure to adequately comply with such requests could cause Google to remove certain benefits that we rely on for our business, such as free access to its application programming interfaces, or APIs, and our ability to benefit from its rebate programs described below, which could have a material adverse impact on our business and results of operations. Future changes by Google to the terms and conditions upon which we purchase media could materially and adversely affect our business.

 

    Competitive risk. Google offers its products directly to local businesses through an online self-service option. Google enjoys substantial competitive advantages over us, such as substantially greater financial, technical and other resources. In addition, Google continues to launch products that are targeted directly at local businesses, which Google does not always make available to third parties. While we cannot assess at this time the effect of Google offering such products directly to local businesses, the prices charged by Google for direct service are lower than the prices we charge for the same media. As a result, we must convince our customers of the added value or performance of our products.

 

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    Technology risk. Our technology platform interacts with Google through publicly available APIs. If Google were to discontinue or change the availability of all or a portion of these APIs to us, we may have to change our technology, incur additional costs or discontinue certain products that we currently offer our customers. Any of these changes could adversely affect our ability to provide effective digital marketing and reporting solutions to our customers. In addition, Google may decide to charge us for the right to use its APIs, which would adversely impact our results of operations absent any change in our pricing to our customers.

 

    Rebate/Incentive risk. Google retains broad authority with respect to its rebate programs and has, from time to time, canceled certain of its rebate programs. In January 2014, we entered into a revised agreement with Google that, among other things, provides us with certain performance bonuses if we meet certain advertiser spend targets and other requirements. If we fail to meet those requirements, and as a result do not qualify for the rebates, our operating results would be harmed. Our agreement with Google expires in January 2016 and is subject to broad mutual termination rights. We may not be able to renew our agreement with Google on favorable terms, or at all. Termination of this agreement, or our failure to meet the requirements to earn the applicable rebates, would negatively affect our cost of revenues.

In addition, any new developments or rumors of developments regarding Google’s business practices that affect the local online advertising industry may create perceptions with our customers or investors that our ability to compete has been impaired.

The above risks also apply to other publishers from whom we purchase media, including Yahoo! and Microsoft, which together with Google, accounted for approximately 89% of our traffic acquisition costs in 2013. Similar actions from Yahoo! and Microsoft would also have adverse effects on our operating results, the impact of which we believe would most likely be in proportion to their market share relative to Google’s.

If our SEO strategies fail to help our customers get discovered more easily in unpaid search results, our business could be adversely affected.

Our success depends in part on our ability to help our customers’ websites and contact information get discovered more easily in unpaid Internet search results on search engines like Google, Yahoo! and Bing. Algorithms are used by these search engines to determine search result listings and the order of such listings displayed in response to specific searches. Accordingly, our products help our customers to be discovered more easily in organic search engine results, making it more likely that search engine users will visit our customers’ websites. This is commonly referred to as search engine optimization, or SEO. However, there can be no assurance that our SEO efforts on behalf of our customers will succeed in improving the discoverability of their content. Google in particular is the most significant source of traffic to our customers’ websites. Therefore, it is important for us to maintain an effective SEO strategy so that our local business customers maintain a prominent presence in Google search results for queries regarding their businesses.

In addition, search engines frequently change the criteria that determine the order in which their search results are displayed, and our SEO efforts on behalf of our customers will be unsuccessful if we do not effectively respond to those changes on a timely basis. Therefore, if we are unable to respond effectively to changes made by search engine providers in their algorithms and other processes, our customers may experience substantial decreases in traffic to their websites. This may lead to a decrease in the perceived value of our products, which could result in our inability to acquire new customers, the loss of existing customers, a decrease in revenues and a material adverse effect on our results of operations.

Our revenue growth will be adversely affected if we cannot continue to successfully retain, hire, train and manage qualified personnel, especially those in sales and marketing.

Our ability to successfully pursue our growth strategy and to further penetrate our target markets will depend on our ability to attract, retain and motivate our personnel, especially those in sales and marketing. We

 

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face intense competition for these employees from numerous technology, software, advertising, media and other companies, and we cannot ensure that we will be able to attract, integrate or retain additional qualified employees in the future. In addition, as we target new industry verticals, we may need to attract sales personnel who are familiar with the relevant industry vertical. We believe that there is significant competition for these employees with the sales skills that we require, and that qualified individuals of the requisite caliber and number needed to fill these positions may be in short supply in some geographical areas. For example, our competitors may be able to attract and retain more qualified personnel by offering more competitive compensation packages. If we are unable to attract new employees and retain our current employees, we may not be able to develop, maintain and adequately market our products at the same levels as our competitors and we may, therefore, lose customers and market share. Our failure to attract and retain personnel, especially those in sales and marketing for which we have historically had a high turnover rate, could have an adverse effect on our ability to execute our business objectives and, as a result, our ability to compete could decrease, our operating results could suffer and our revenues could decrease.

In addition, due in part to the high standards of performance we expect from our sales personnel, we have historically experienced relatively high turnover in such personnel. Therefore, our ability to achieve significant revenue growth in the future will depend, in large part, on our success in identifying, recruiting, training and retaining sufficient numbers of qualified sales personnel. Even if we are able to identify and recruit a sufficient number of new hires, those new hires will require significant training before they achieve full productivity. Newly hired customer development personnel may not become productive as quickly as we would like, or at all, thus representing increased operating costs and lost opportunities which in turn could adversely affect our business, financial condition and results of operations. Therefore, if we are not successful in recruiting and training our customer development personnel and streamlining our sales and business development processes with customers to cost-effectively grow our customer base, our ability to grow our business and our results of operation could be adversely affected.

Providing technology-based marketing products to local businesses is an evolving market that may not grow as quickly as we anticipate, or at all.

Our products and the market for our products are relatively new. We believe our future success depends on our ability to offer an integrated and comprehensive suite of cost-effective digital marketing products to local businesses. Although we expect continued demand in the local business market for such products, it is possible that the rate of growth may not meet our expectations, or that the market may not grow at all, either of which could adversely affect our business.

The value of our products is predicated upon the assumption that an online and mobile presence, acquisition and retention marketing and the ability to connect and interact with consumers online and on mobile devices are, and will continue to be, important and valuable strategies for local businesses to enhance their abilities to establish, grow, manage and market their businesses. If this assumption is incorrect, or if local businesses do not, or perceive that they do not, derive sufficient value from our products, then our ability to retain existing customers, attract new customers to our products and grow our revenues could be adversely affected.

We must keep up with rapid and ongoing technological change to remain competitive in a rapidly evolving industry.

Our industry is characterized by rapid and ongoing technological change and frequent new product introductions. Our future success will depend on our ability to adapt quickly to rapidly changing technologies and to improve the performance and reliability of our product offerings. To achieve market acceptance for our products, we must anticipate the needs of our customers and offer products that meet changing customer demands quickly and effectively. For example, application marketplaces, mobile platforms and new search engines and search methods are changing the way in which consumers find and purchase products and services

 

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from our existing and potential local business customers, including the emergence of consumer-facing booking services that allow consumers to connect directly with local businesses. While these services generally have not been available in our target industry verticals, they may become available in the future. Therefore, our existing and potential local business customers may require features and functionality that our current product offerings do not have or our products are unable to support. While we continuously seek to enhance our product offerings, as we have recently with the launch of our communication automation module and business practice automation product, such additional features may not fully address the needs of our customers and may not gain market acceptance. Moreover, the success of such new offerings may depend, in part, on our ability to timely integrate such new products into our existing customers’ PMSs, or other customer relationship management or point of sale systems. If we fail to develop products that satisfy customer preferences in a timely and cost-effective manner or if the products that we do develop and deploy fail to gain market acceptance, our existing customers may not want to pay for such additional offerings and may be less likely to renew their subscriptions for our products, and our ability to attract new customers will be harmed.

In addition, the sale of new product offerings, the value or utility of which may be different from our current product offerings or less easily understood by our customers, may require increasingly sophisticated and costly sales efforts related, in part, to additional training of our employees and education of our customers. These efforts would likely result in increased operating costs, and if not successful, our results of operations may suffer. Further, many local businesses have modest advertising budgets. Accordingly, introduction of new product offerings may adversely affect sales of our current product offerings and may not result in an increase in our customers’ aggregate spending as a result of the introduction of new product offerings.

We may not be able to continue to add new customers or retain or increase sales to our existing customers, which could adversely affect our operating results.

Our growth is dependent on our ability to further penetrate our existing industry verticals and continue to attract new customers while retaining and increasing sales of our products, including new product offerings, to our existing customers. To do so, we must convince prospective local business customers, including those who may not be familiar with the products we offer, of the benefits of our products. In addition, we must continuously educate our existing local business customers with respect to newly launched products that we may offer. Many of our target customers are more accustomed to using more traditional methods of advertising, such as newspapers or yellow pages directories. Moreover, historically we have experienced a high turnover rate in our customer base, especially within the first year of launching a customer. Growth in the demand for our products may be inhibited, and we may be unable to retain customers or sustain growth in our customer base, for a number of reasons, including, but not limited to:

 

    the quality, cost and effectiveness of our products compared to other alternatives;

 

    our failure to develop or offer new or additional products in a timely manner that keeps pace with new technologies and the evolving needs of our customers;

 

    our inability to market our products in a cost-effective manner to new customers and to increase our sales to existing customers, including due to rules and regulations applicable to customers within particular industries, changes in regulations or changes in the enforcement of existing regulations that would impair our marketing practices or require us to change our onboarding processes;

 

    our inability to offer products that are adequately integrated and customizable to meet the needs of our highly diverse and fragmented customer base;

 

    our focus on developing a standardized, scalable digital marketing solution for local businesses, which may limit our ability to successfully adapt our products to customers in industries that are subject to regulation of their marketing activities, including adapting to the ways in which they are required to manage, communicate and/or interact with their clients, customers or patients;

 

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    changes in search engine algorithms that reduce the actual or perceived value of the products we offer to our customers;

 

    the inability of our customers to differentiate our products from those of our competitors or our inability to effectively communicate the distinctions;

 

    our inability to maintain, or strengthen awareness of, our brands;

 

    our inability to enter into automatically renewing contracts with our customers or increase subscription prices;

 

    our inability to integrate into our customers’ PMSs, or other customer relationship management or point of sale systems, in order to deliver Lighthouse, our business practice automation product to these customers;

 

    our inability to demonstrate the effectiveness of our products and consistently deliver a meaningful ROI to our customers relative to offline and other digital marketing alternatives;

 

    our disclosure of costs on media purchases for our customers, which could impact our customers’ perception of the value of our solutions;

 

    customer perception that the value of our products is not commensurate with the cost of those products as a result of the feedback and transparency we provide;

 

    our customers’ unwillingness to adopt our integrated Marketing Essentials product due to their preference for a more tailored and potentially less expensive solution that meets their more limited needs;

 

    customer dissatisfaction causing our existing customers to stop utilizing our products and to stop referring prospective customers to us; and

 

    perceived or actual security, integrity, reliability, quality or compatibility problems with our platform, including related to unscheduled downtime or outages.

Any inability to grow demand for our products or sustain growth in our customer base could have a material adverse effect on our business and results of operations.

We expect to face increased competition in the digital marketing industry, which could require us to reduce our selling prices or expand the products or features that we offer. As a result of such competitive pressures, we may not be able to maintain or improve our competitive position or market share.

The market for digital marketing solutions is intensely competitive and rapidly changing, and with the emergence of new technologies and market entrants, we expect competition to intensify in the future. Our competitors include:

 

    traditional yellow pages directories, direct mail campaign providers and advertising and listings services on local newspapers, magazines, television and radio, such as Dex Media, Gannett, Hearst and YP.com;

 

    online search engines, such as Google, Yahoo! and Bing and online business directories, such as Yelp and Angie’s List;

 

    providers of digital presence offerings, such as domain name registrars, shared hosting providers and website creation and reputation management companies, including Endurance, GoDaddy, Main Street Hub, Web.com and Wix;

 

    providers of digital marketing solutions, such as search engine marketing companies and search engine optimization companies; and

 

    productivity and office management tools, such as business-class email, scheduling and practice management systems, including Constant Contact, Demandforce, MailChimp and Solutionreach.

 

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We have only recently launched our Marketing Essentials, Lighthouse and Centermark products. We are also developing other new subscription products designed to provide local businesses with additional tools to enable them to convert leads to paying consumers and to retain and transact with consumers. In each case, as we enter new markets we will encounter new competitors. Many of our current and potential competitors enjoy substantial competitive advantages, such as greater name recognition, longer operating histories, exclusive relationships, substantially greater financial, technical and other resources and, in some cases, the ability to combine their digital marketing products with traditional offline media such as newspapers or yellow pages directories. These companies may use these advantages to offer products similar to ours at a lower price, develop different products to compete with our current products and respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. In particular, if major Internet search companies such as Google, Yahoo! and Microsoft decide to devote greater resources to develop and market online advertising offerings directly to local businesses, greater numbers of our current and potential customers may choose to purchase online advertising services directly from these competitors, particularly if and as the ease of their self-service models increases. In addition, many of our current and potential competitors have established marketing relationships with and access to larger customer bases and are heavily investing in recruiting sales personnel, which may affect our ability to achieve our salespeople hiring targets.

As the market for local online advertising increases, we expect new competitors, business models and solutions to emerge, some of which may be superior to ours. For example, a new competitor may elect to specialize in just one industry vertical, which may give them a competitive advantage and a larger share of the market opportunity in that particular vertical. Moreover, we also believe that the marketplace for online media is more transparent than other media marketplaces. Our competitors may use information available to them to price their products at a discount to the prices that we currently offer and to identify and target our current customers. In particular, we face competitive pressure with our Yodle Ads product, which may adversely impact the margins associated with this product. If we are not able to differentiate our products and convince customers that our products are more effective than our competitors’ offerings, current and potential customers may adopt competitive products in lieu of purchasing our products and solutions, even if our digital marketing and reporting solutions are more effective than those offered by our competitors. For all of these reasons, we may not be able to compete successfully against our current and potential competitors.

If economic conditions or other factors negatively affect levels of spending by local businesses, local businesses may become unwilling or unable to subscribe to our platform or purchase media, which could adversely affect our business.

Our existing and target customers are local businesses, and our performance is subject to economic conditions and their impact on levels of spending by local businesses. These businesses are more likely to be significantly affected by economic downturns than larger, more established businesses. Historically, economic downturns have resulted in overall reductions in spending on advertising and marketing by local businesses as local businesses often have limited discretionary funds, which they may choose to spend on other items. In particular, our products may be viewed by some of our existing and potential customers as a lower priority and those local businesses could terminate their subscription to our products. To the extent that worldwide economic conditions materially deteriorate, our existing and potential customers (including those acquired through our resellers) may elect to reduce their advertising and marketing budgets or may not be able to sustain operations generally. As a result, local businesses may become unwilling or unable to subscribe to or purchase media through our platform. Because customer purchases of discretionary items generally decline during recessionary periods and other periods in which disposable income is adversely affected, and because our customers generally subscribe to our platform on a short-term basis, our business is especially susceptible to overall economic downturns.

 

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If our mobile solutions fail to achieve widespread acceptance or if we are unable to maintain functionality for our mobile products, our business and future prospects may be adversely affected.

Consumers are increasingly accessing the Internet through devices other than personal computers, including mobile phones, smart phones and tablets. This trend has increased dramatically in the past few years and is projected to continue to increase. In response to this market demand trend, we provide our Marketing Essentials customers with a mobile-optimized website and a mobile dashboard. The mobile device market is characterized by the frequent introduction of new products and solutions, short product life cycles, evolving industry standards, continuous improvement in performance characteristics and rapid adoption of technological and product advancements. We may incur additional costs and face technical challenges adapting our mobile products to different versions of already supported operating systems, such as Android variants offered by different mobile phone manufacturers. If we are unable to offer continual improvements to our mobile products or adapt their functionalities to new and different operating systems, our mobile products, and our platform as a whole, may fail to achieve widespread acceptance. As a result, our business and future prospects may be adversely affected.

Because a significant portion of our revenues are recognized from customer subscriptions over the term of an agreement, a significant downturn in our business may not be immediately reflected in our results of operations.

We recognize a significant portion of our revenues from sales of our products over the term of our contracts, which are generally one, three, six or 12 months in length. As a result, a portion of the revenues we report each quarter is generated from contracts entered into during previous quarters. Consequently, a shortfall in demand for our products or a decline in new or renewed contracts in any one quarter may not significantly reduce our revenues in that quarter but could negatively affect our revenues in future quarters. Accordingly, the effect of a significant downturn in our business may not be reflected in our results of operations until future periods.

If local businesses increasingly opt to perform advertising tasks on their own, their demand for our products would decrease, thereby negatively affecting our revenue.

Large Internet marketing providers such as Google, Yahoo! and Microsoft offer online advertising products through self-service platforms. As local businesses become more familiar with and experienced in interacting online, they may prefer to actively manage their own Internet presence and their demand for our products may decrease. We cannot predict the evolving experiences and preferences of local businesses and cannot assure you that we can develop our products in a manner that will suit their needs and expectations faster or more effectively than our competitors, or at all. If we are not able to do so, our results of operations would suffer.

We rely on third-party technologies and software, and if we are unable to use or integrate these technologies or software, our product development may be delayed and our operating results may be negatively impacted.

We rely on certain technologies and software that we license from third parties, including technology and software that is integrated with internally developed technology or software and used in our products. These third-party licenses may not continue to be available on commercially reasonable terms, and the technology or software may not be appropriately supported, maintained or enhanced by the licensors. The loss of licenses to, or inability to support, maintain and enhance any such technology or software could result in increased costs or in delays or reductions in product performance until equivalent technology or software can be developed, identified, licensed and integrated, which may harm our business.

 

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We have expanded our geographic reach through relationships with third parties. If these relationships are terminated for any reason, our business and results of operations may be harmed.

We are able to reach a greater number of potential customers over a larger geographical area by working with certain third-party resellers. For example, through our arrangement with Rogers Communications Inc., or Rogers, a number of local businesses in Canada use our platform offering. The number of customers we are able to add through these relationships is dependent on the marketing efforts of these third parties over which we have little or no control. Generally, a third-party reseller accounts for a significant number of customers, and because we recognize revenue from these resellers on a net basis, the loss of any third-party reseller relationship or a significant decrease in the number of new customers generated through any such relationship could materially and adversely affect the size of our customer base, revenues and results of operations. Furthermore, our agreement with Rogers expires in December of 2018. If we are unable to maintain or replace our contractual relationship with these third-party resellers, including Rogers, or establish new contractual relationships with other third parties, we may fail to retain customers or acquire potential new customers in new geographies, we may experience delays and increased costs in adding or replacing customers that were lost and we would suffer a loss of revenue, any of which could have a material adverse effect on our business and results of operations.

If we fail to enhance our brand or our reputation is harmed, our financial condition may suffer.

We believe that developing and maintaining awareness of the Yodle brand is critical to achieving widespread acceptance of our products. Furthermore, we believe that the importance of brand recognition will increase as competition in our market increases. Successful promotion of our brand will depend largely on the effectiveness of our marketing efforts and on our ability to deliver valuable products to our customers. Brand promotion activities may not yield increased revenue, and even if they do, any increased revenues may not be immediately observable. Additionally, errors, defects, disruptions or other performance problems with our products may harm our reputation and brand and adversely affect our ability to attract new customers or retain existing customers, especially if these errors occur when we introduce new products, features or modules. If we fail to successfully promote and maintain the Yodle brand and/or our reputation is harmed, we may fail to attract sufficient new customers to maintain our growth or to retain our existing customers, which could adversely affect our business, financial condition, results of operations and future prospects.

Customer dissatisfaction with our products, complaints or negative publicity about our customer service or other business practices could adversely affect our reputation and brand.

Customer dissatisfaction with our products, customer complaints or negative publicity, including third-party publications in news or other media outlets, about our products, technology, personnel or customer service could severely diminish confidence in and the use of our products. Our products, as well as those of our competitors, are regularly reviewed, and those reviews are regularly shared, by our customers. Negative reviews, or reviews in which our competitors’ products are rated more highly than ours, could negatively affect our brand and reputation. From time to time, our customers have expressed dissatisfaction, including dissatisfaction with our customer service, our sales and billing practices and the way our products perform. If we do not handle customer complaints effectively, or otherwise adequately address customers’ concerns, our brand and reputation may suffer, we may lose our customers’ confidence and they may choose not to renew their subscriptions. Moreover, managing effective customer relationships requires significant personnel expense, which, if not managed properly, could significantly impact our operating results. As a result, complaints or negative publicity about our products or our customer service could materially and adversely impact our reputation, our brand, our ability to attract and retain customers, our business, financial condition and results of operations, and ultimately frustrate our efforts to continue to be a trusted provider of digital marketing solutions for the local business market.

 

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Our sales cycle with respect to our Centermark product can be long and unpredictable and may require considerable efforts, which could cause our operating results to fluctuate.

The sales cycle for our Centermark product, from initial contact with a potential lead to contract execution and implementation, varies widely by customer, but typically takes approximately six months. Some of our customers undertake a significant evaluation process that frequently involves not only a review of our products but also those of our competitors, which has in the past resulted in extended sales cycles. Our sales efforts involve educating our customers about the use, technical capabilities and benefits of our platform. We have no assurance that the substantial time and money spent on our sales efforts will produce sales. If sales expected from a customer are not realized in the time period expected or not realized at all, our business, operating results and financial condition could be adversely affected.

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

We believe our success has depended, and continues to depend, on the efforts and talents of senior management and key personnel. Our future success depends on our continuing ability to attract, develop, motivate and retain highly qualified and skilled employees. Qualified individuals are in high demand, and we may incur significant costs to attract them. In addition, the loss of any of our senior management or key personnel could interrupt our ability to execute our business plan, as such individuals may be difficult to replace. If we do not succeed in attracting well-qualified employees or retaining and motivating existing employees, our business and results of operations could be harmed.

If we fail to manage our growth effectively, our business and results of operations could be harmed.

We have experienced rapid growth in our business and operations, which places substantial demands on our management and operational infrastructure. As our customer base grows and our product offerings expand, we will need to devote additional resources to improving our infrastructure and continuing to enhance its scalability in order to maintain the performance of our platform. Our need to effectively manage our operations and growth will also require that we continue to assess and improve our operational, financial and management controls, reporting systems and procedures. If we do not manage the growth of our business and operations effectively, our operations and the quality of our platform could suffer, which could harm our business and results of operations.

Our corporate culture has contributed to our success, and if we cannot maintain this culture as we grow, we could lose the innovation, creativity and teamwork fostered by our culture, and our business may be harmed.

We believe that an important contributor to our success has been our corporate culture, which we believe fosters innovation, teamwork, passion for our customers, and a focus on innovative and technologically advanced products. As we continue to grow, we must effectively integrate, develop and motivate a growing number of new employees. As a result, we may find it difficult to maintain important aspects of our corporate culture, which could limit our ability to innovate and operate effectively. Any failure to preserve our culture could also negatively affect our ability to retain and recruit personnel, continue to perform at current levels or execute our business strategy.

Recent and potential future acquisitions and investments could result in operating difficulties, divert attention of our management, dilute stockholder value and otherwise harm our financial results.

From time to time, we evaluate potential strategic acquisition or investment opportunities. We intend to selectively acquire businesses and technologies as we did with the acquisition of ProfitFuel, Inc., or ProfitFuel, in May 2011 and Lighthouse Practice Management Group, Inc., or Lighthouse Practice Management, in February

 

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2013. Any transactions that we enter into could be material to our financial condition and results of operations. The process of integrating an acquired company, business or technology could create unforeseen operating difficulties and expenditures. Acquisitions and investments carry with them a number of risks, including the following:

 

    diversion of management time and focus from operating our business to address integration challenges;

 

    implementation or remediation of controls, procedures and policies of the acquired company;

 

    coordination of product, engineering and selling and marketing functions;

 

    retention of employees from the acquired company;

 

    cultural challenges associated with integrating employees from the acquired company into our organization;

 

    integrating technologies of the acquired company into our existing systems;

 

    challenges with integrating new products or technologies into our customers’ practice or business management systems;

 

    unforeseen liabilities;

 

    additional regulatory and compliance requirements;

 

    litigation or other claims arising in connection with the acquired company; and

 

    potential negative impact on our financial results because such acquisitions may require us to incur charges and substantial debt or liabilities, may require us to amortize, write down or record impairment of amounts related to deferred compensation, goodwill and other intangible assets, or may cause adverse tax consequences, substantial depreciation or deferred compensation charges.

Our failure to address these risks or other problems encountered in connection with acquisitions and investments could cause us to fail to realize the anticipated benefits of such acquisitions or investments, incur unanticipated liabilities and harm our business, results of operations and financial condition.

If our products contain serious errors or defects, then we may lose revenue and market acceptance, experience increased costs, suffer reputational harm and incur costs to defend or settle claims.

Sophisticated technology platforms such as ours often contain errors or defects, such as errors in computer code or other systems errors, particularly when first introduced or when new versions or enhancements are released. Because we also rely on third parties to provide certain aspects of our products, our products may contain additional errors or defects. Our solutions operate on a cloud-based architecture and we update our products regularly while our solutions are in operation. If our upgrades are not properly implemented, the availability and functioning of our products could be impaired. Despite quality assurance measures, internal testing and beta testing by our customers, we cannot guarantee that our current and future products, including upgrades to those products, will be free of serious defects, which could result in lost revenue, refunds without a commensurate decrease in costs, delays in market acceptance, increase in costs, reputational harm and costs associated with defending or settling claims.

Because local businesses use our platform to maintain contact with their clients, customers or patients, errors, defects or other performance problems could result in damage to our customers and their businesses. They could elect not to renew, delay or withhold payments to us, or seek significant compensation from us for the losses they suffer. Although our customer agreements typically contain provisions designed to limit our exposure to certain claims, not all of our customers execute a standard customer agreement and existing or future laws or unfavorable judicial decisions could negate or diminish these limitations. Even if not successful, a claim brought against us could be time-consuming and costly and could seriously damage our reputation in the marketplace, making it harder for us to acquire and retain customers.

 

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If our security measures are breached, our platform may be perceived as not being secure, and our business and reputation could suffer.

The use of our products involves the storage and transmission of our customers’ proprietary information, as well as payment information and personal data of the clients, customers or patients of our customers. Although we employ data encryption processes, an intrusion detection system and other internal control procedures to protect such sensitive data, we cannot guarantee that these measures will be sufficient for this purpose. If our security measures are breached as a result of third-party action, employee error or otherwise, and as a result such sensitive data becomes available to unauthorized parties, we could incur liability. In addition, most states have enacted laws requiring companies to notify individuals of data security breaches involving certain types of personal data, which may lead to negative publicity and the loss of current and potential customers. If we experience any breaches of our network security or sabotage, we may be required to expend significant capital and other resources to remedy, protect against or alleviate these and related problems, and we may not be able to remedy these problems in a timely manner, or at all. Because techniques used by outsiders to obtain unauthorized network access or to sabotage systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or implement adequate preventative measures.

We expect a number of factors may cause our operating results to fluctuate on a quarterly and annual basis, which may make it difficult to predict our future performance.

Our operating results could vary significantly from quarter to quarter and year to year because of a variety of factors, many of which are outside of our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful. In addition to other risk factors discussed in this section, factors that may contribute to the variability of our quarterly and annual results include:

 

    our ability to attract new customers and retain existing customers;

 

    our ability to accurately forecast revenues and appropriately plan our expenses;

 

    the effects of changes in search engine algorithms and the effectiveness of our marketing efforts on behalf of customers;

 

    the relative contributions of our media and platform products to total revenues and the contributions of sales through our Centermark platform in particular;

 

    the effects of increased competition in our business;

 

    our ability to successfully expand into new verticals;

 

    our ability to sell new products to our existing customer base;

 

    variations in our customers’ media budgets;

 

    the amount of revenue recognized by us in any period through our media product;

 

    the success of our sales and marketing efforts;

 

    our ability to keep pace with changes in technology;

 

    the impact of worldwide economic conditions, including the resulting effect on consumer spending at local businesses and the spending of local businesses on marketing and advertising generally;

 

    our relationships with third-party providers and resellers of our products;

 

    our ability to successfully manage any acquisitions of businesses, solutions or technologies;

 

    our ability to reach broader geographic markets;

 

    our ability to protect our intellectual property;

 

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    changes in government and other regulation affecting our business, as well as our customers’ businesses;

 

    chargebacks associated with refund requests by customers due to any disagreement with terms of our arrangements with them;

 

    costs associated with defending intellectual property infringement and other claims and related judgments or settlements;

 

    our ability to attract and retain highly qualified employees and key personnel;

 

    fluctuations in foreign exchange rates;

 

    the effects of natural or man-made catastrophic events;

 

    the effectiveness of our internal controls; and

 

    changes in our tax rates or exposure to additional tax liabilities.

Since revenue generated by our media product is recognized as local online advertising is purchased for a customer, if the entirety of that customer’s media budget is not used during a period, that remaining amount will be recorded as deferred revenue and only recognized when used. Therefore, our ability to recognize revenue for our media product will depend on our ability to use a customer’s media budget, which we may not be able to do in a consistent manner for various reasons, including seasonal trends. We believe that quarter-to-quarter comparisons of our results should not be relied upon as an indicator of future performance. As a result of such fluctuations, the price of our common stock may experience volatility.

We rely on bandwidth providers, data centers and other third parties for key aspects of the process of providing digital marketing solutions to our customers, and any failure or interruption in the services provided by these third parties could harm our ability to operate our business and damage our reputation.

We rely on third-party vendors, including data center, software-as-a-service, bandwidth and cloud computing Internet infrastructure providers to operate certain aspects of our business. Our reliance on these vendors makes us vulnerable to any disruption in the services they provide, any failure to handle current or higher volumes of use or increases in costs from these vendors. Any financial or other difficulties our providers face may have negative effects on our business, the nature and extent of which we cannot predict. We exercise little control over these third-party vendors, which increases our vulnerability to problems with the services they provide. We have experienced and expect to continue to experience interruptions and delays in service and availability for such elements. Any unexpected and material cost increases, breaches in their security affecting our data, errors, failures, interruptions or delays experienced in connection with these third-party technologies and information services could negatively impact our relationship with our customers and adversely affect our business and results of operations, result in substantial recovery costs, expose us to liabilities to third parties and distract management from operating our business.

We increasingly rely on certain third-party vendors to perform certain aspects of our business, which could adversely affect our business.

We outsource certain functions, including portions of our sales and customer service functions to business process service providers in order to achieve cost savings and efficiencies. The failure of our third-party vendors to fulfill their obligations, and any changes we may make to the services we obtain from these vendors, may disrupt our operations and result in the loss of some or all of the cost savings and efficiencies we may have achieved through these vendors. We have recently renewed our contract with our third-party vendor in St. Lucia, which supplements our U.S.-based sales and customer service teams, for a period of three years. Our inability to renew this contract in the future, or to renew any future contract with other third-party vendors, on terms that are favorable to us may materially and adversely affect our business, financial condition and results of operations.

 

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We depend on the reliability, security, and performance of our internally developed systems and support operations, and any difficulties in maintaining these may result in interruptions in access to our products, decreased customer satisfaction, reduced revenue and increased expenditures.

Our employees are primarily responsible for developing the software and workflow processes that underlie our ability to deliver and support our products. The reliability and continuous availability of these internal systems are critical to our business, and any interruptions that impair the performance of our platform or our ability to timely deliver our products or that materially impact the efficiency or cost with which we provide our products would harm our reputation, profitability and ability to conduct business. In addition, many of the software systems we currently use will need to be enhanced over time or replaced with equivalent commercial products, either of which could entail considerable effort and expense. If we fail to develop and execute reliable policies, procedures and tools to operate our infrastructure, we could face a substantial decrease in workflow efficiency and increased costs, as well as a decline in our revenue. In addition, if we are unable to maintain adequate levels of access to our products or customer service, we may lose existing customers, our revenue may decrease and our results of operations may be adversely impacted.

Moreover, our failure to appropriately support our systems and operations over time could result in inefficiencies or operational failures and increased vulnerability to cyber-attacks. Cyber-attacks could include attacks impacting product availability and reliability; the exploitation of software vulnerabilities in Internet facing applications; social engineering of system administrators (tricking company employees into releasing control of their systems to a hacker); or the introduction of computer viruses or malware into our systems with a view to steal confidential or proprietary data. Cyber-attacks of increasing sophistication may be difficult to detect and could result in the theft of our intellectual property and our data or our customers’ data. In addition, we are vulnerable to unintentional errors as well as malicious actions by persons with authorized access to our systems that exceed the scope of their access rights, or unintentionally or intentionally alter parameters or otherwise interfere with the intended operations of our platform. Operational errors or failures or successful cyber-attacks would likely result in interruptions in access to our products, decreased customer satisfaction, harm to our reputation, loss of customers and increased expenditures.

We may face potential liability and expense for legal claims or proceedings related to the content stored on our platform by our customers or activities of customers on their websites.

Our platform allows our customers to create web and mobile presences for their businesses. In addition, we provide our customers with the ability to upload images to their website and syndicate them across numerous online directories. At present, we do not require that our customers post on their websites, or require their visitors to agree to, any terms of service, privacy policy, disclaimer or any other contractual documentation or policy. If our customers do not post or require agreement to the appropriate documentation and policies on their websites, or should our customers fail to take steps necessary to enjoy the benefits of certain statutory safe harbors, such as those set forth in Section 512 of the United States Copyright Act, then they may be more likely to expose themselves to liability under applicable law. It is possible that we could also be subject to liability as the host/platform for content that is posted by our customers or users of our customers’ websites. United States and international laws relating to the liability of hosts for content posted by their customers and other third parties are currently being tested and are subject to subjective interpretation by courts and regulators. Any court ruling or other governmental action that imposes liability on providers of online services for the activities of their customers and other third parties could harm our business. In the event we are required to defend against such claims, we will incur legal fees and costs which could be significant. Any liability attributed to us could adversely affect our brand, reputation, our ability to expand our customer base and our financial position. Further, not all of our customers have agreed to our standard terms and conditions, and for those that have, our indemnity from these customers may also not be fully effective as a matter of practice if any customer does not have sufficient assets, insurance or other means to fulfill that indemnity.

 

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Furthermore, our reputation and brand may be negatively affected by the actions of customers that are deemed to be hostile, offensive or inappropriate, or by customers acting under false or inauthentic identities. We do not monitor or review the appropriateness of the content of our customers’ websites, and we have little control over the activities in which our customers engage. While we retain authority to take down websites, customers could nonetheless engage in these activities. The safeguards we have in place may not be sufficient to avoid harm to our reputation and brand, especially if such hostile, offensive or inappropriate use was high profile, which could adversely affect our ability to expand our customer base, and our business and financial results.

Some of our products contain open source software, which may pose particular risks to our business.

We use open source software in our products and will use open source software in the future. From time to time, we may face claims from third parties claiming ownership of, or demanding release of, the open source software and/or derivative works that we developed using such software (which could include our proprietary source code), or otherwise seeking to enforce the terms of the applicable open source license. These claims could result in litigation and could require us to purchase a costly license or cease offering the implicated product unless and until we can re-engineer it to avoid infringement. This re-engineering process could require significant additional research and development resources. In addition to risks related to license requirements, use of certain open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or controls on the origin of software. Any of these risks could be difficult to eliminate or manage, and, if not addressed, could have a negative effect on our business and operating results.

Our business is subject to the risks of earthquakes, fires, floods and other natural catastrophic events and to interruption by man-made problems such as computer viruses or terrorism.

Our business and operations are vulnerable to damage or interruption from earthquakes, fires, floods, power losses, telecommunications failures, terrorist attacks, acts of war, human errors, break-ins and similar events affecting us or third-party vendors we rely on. For example, a significant natural disaster, such as an earthquake, fire or flood, could have a material adverse impact on our business, operating results and financial condition. Acts of terrorism, which may be targeted at metropolitan areas that have higher population density than rural areas, could cause disruptions in our or our customers’ businesses or the economy as a whole. Our servers and those of our third-party vendors may also be vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems, which could lead to interruptions, delays, loss of critical data or the unauthorized disclosure of confidential customer data. We or our third-party vendors may not have sufficient protection or recovery plans in place, and our business interruption insurance may be insufficient to compensate us for losses that may occur. As we rely heavily on our servers, computer and communications systems, that of third parties and the Internet to conduct our business and provide high quality customer service, such disruptions could have an adverse effect on our business, operating results and financial condition.

We could lose customers if we or our media partners fail to detect click-through or other fraud on advertisements in a manner that is acceptable to our customers.

One of the products that we offer is the purchase of local online advertising for our customers. As a result, we are exposed to the risk of fraudulent clicks or actions on our third-party publishers’ websites over which we have no control. We may lose customers or have to refund revenue that our customers have paid to us that was later attributed to, or suspected to be caused by, click-through fraud and that refund may not be recoverable. Click-through fraud occurs when an individual clicks on an ad displayed on a website or an automated system is used to create such clicks with little to no intent of viewing the underlying content. If fraudulent clicks are not detected, the affected customers may become dissatisfied with our campaigns, which in turn may lead to loss of customers and the related revenue.

 

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We may require additional capital to support business growth, and this capital might not be available on acceptable terms, if at all.

We intend to continue to make investments to support our business growth and may require additional capital to respond to business challenges, including the need to develop new products, enhance our existing platform, improve our operating infrastructure or acquire complementary businesses and technologies. Accordingly, we may need to raise additional funds through bank credit arrangements or public or private equity, equity-linked or debt financings. Any additional equity or convertible debt financing may be dilutive to our stockholders, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Moreover, if we raise additional funds through the incurrence of indebtedness, such indebtedness will likely require current payment of interest and contain covenants that restrict our operations, such as limitations on our ability to incur additional debt, and other operating restrictions that could adversely impact our ability to conduct our business. We may not be able to obtain additional financing on terms favorable to us, or at all. If we are unable to obtain adequate financing or financing on terms 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.

Impairment of goodwill and other intangible assets would result in a decrease in our earnings.

Current accounting rules provide that goodwill and other intangible assets with indefinite useful lives may not be amortized but instead must be tested for impairment at least annually. These rules also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We have substantial goodwill and other intangible assets, and we would be required to record a significant charge to earnings in our consolidated financial statements during the period in which any impairment of our goodwill or intangible assets is determined. Any impairment charges or changes to the estimated amortization periods would result in a decrease in our earnings.

When we further expand our sales to customers outside the United States, our business will be susceptible to risks associated with international operations.

While we have not historically directly marketed our products to customers in countries outside the United States, a component of our growth strategy in the long term will likely entail the further expansion of our operations and customer base internationally. Our future initiatives will involve a variety of risks, including:

 

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

 

    regulatory requirements, taxes or trade laws that differ from those in the United States;

 

    more stringent regulations relating to communication via email, telephone or text messages, data security and the unauthorized use of, or access to, commercial and personal information;

 

    differing labor regulations, where labor laws are generally more advantageous to employees as compared to the United States, including deemed hourly wage and overtime regulations in these locations;

 

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

 

    difficulties in managing a business in new markets with diverse cultures, languages, customs, legal systems, alternative dispute systems and regulatory systems;

 

    increased travel, real estate, infrastructure and legal compliance costs associated with international operations;

 

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    currency exchange rate fluctuations and the resulting effect on our revenues and expenses, and the cost and risk of entering into hedging transactions if we choose to do so in the future;

 

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

 

    laws and business practices favoring local competitors or general preferences for local vendors;

 

    limited or insufficient intellectual property protection;

 

    political instability or terrorist activities;

 

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

 

    adverse tax burdens and foreign exchange controls that could make it difficult to repatriate earnings and cash.

Our lack of 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 expand our international operations and are unable to do so successfully and in a timely manner, our business and operating results could suffer.

Risk Related to the Regulation of Our Business and Other Compliance Matters

Our business is subject to a variety of U.S. laws, many of which are unsettled and still developing and which could subject us to claims or otherwise harm our business or results of operations.

We are subject to a variety of laws in the United States, including laws, contractual obligations and standards regarding communications, telemarketing, data retention, online and credit card payments, privacy, data security, marketing, advertising, consumer protection and tax as well as anti-kickback laws, which, in each case, are frequently evolving and developing. The scope and interpretation of the laws and standards that are, or may be, applicable to us are often uncertain and may be conflicting. For example, laws relating to the liability of providers of online services for activities of their users and other third parties are currently being tested by a number of claims, including actions based on invasion of privacy and other torts, unfair competition, copyright and trademark infringement and other theories based on the nature and content of the materials searched, the ads posted or the content provided by users. In addition, regulatory authorities and governmental bodies in the United States are considering a number of legislative and regulatory proposals concerning privacy, data protection and other matters that may be applicable to our business. It is also likely that if our business grows and evolves and our products are used in a greater number of geographies, we will become subject to laws and regulations in additional jurisdictions. It is difficult to predict how existing laws will be applied to our business and the new laws to which we may become subject.

In addition, while our customer agreements typically contain obligations requiring our customers to comply with applicable laws, not all of our customers execute a standard customer agreement or if our customers fail to adhere to these obligations, we may be subject to adverse publicity, and related possible inquiries, investigations, or other regulatory activities in connection with our practices or those of our customers. Therefore if we or our customers are not able to comply with these laws or regulations or if we become liable under these laws or regulations, we could be harmed, and we may be forced to implement new measures to reduce our exposure to this liability. This may require us to expend substantial resources or to change or discontinue certain products or

 

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features, which would negatively affect our business. In addition, the increased attention focused upon liability issues as a result of lawsuits and legislative proposals could harm our reputation or otherwise impact the growth of our business. Any costs incurred to prevent or mitigate this potential liability could also harm our business and results of operations.

Government regulation of the Internet is evolving, and unfavorable changes could substantially harm our business and results of operations.

We are subject to general business regulations and laws as well as federal and state regulations and laws specifically governing the Internet. Existing and future laws and regulations may impede the growth of the Internet or online services and increase the cost of providing online services. These regulations and laws may cover user privacy, data protection and security, spyware, “do not email” lists, text message marketing, access to high speed and broadband service, mobile applications, pricing, taxation, tariffs, patents, copyrights, trademarks, trade secrets, export of encryption technology, electronic contracting, click-through fraud, acceptable content, search terms, lead generation, behavioral targeting, consumer protection and quality of products. It is not clear how existing laws governing issues such as property ownership, sales, use and other taxes, libel and personal privacy apply to the Internet and online services. Unfavorable resolution of these issues may harm our business and results of operations.

Failure to comply with communications and telemarketing laws could result in significant fines or place significant restrictions on our business.

We rely on a variety of marketing techniques, including telemarketing and email marketing for our own business and text messaging, automatic telephone dialing and email marketing as part of the communication automation and business practice automation modules of our Marketing Essentials and Lighthouse products. We also record certain telephone calls of our sales and service representatives for the purpose of service observing and of our customers as part of our marketing platform. These activities are subject to a variety of state and federal laws such as the Telephone Consumer Protection Act of 1991 (also known as the Federal Do-Not-Call law, or the TCPA), the Telemarketing Sales Rule, the Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 (also known as the CAN-SPAM Act) and various U.S. state laws, including regarding telemarketing and telephone call recording. These laws are subject to varying interpretations by courts and governmental authorities and often require subjective interpretation. Further, over the past several years, class action lawsuits involving many of these laws have increased significantly. We cannot be certain that our or our customers’ efforts to comply with these laws will be deemed sufficient by the relevant courts and governmental authorities. Changes in these laws or the application or interpretation of these laws, or the enactment of any new state or federal laws regarding communications, marketing, solicitation, data protection or telephone call recording that may govern these activities, could adversely affect our business.

For example, the CAN-SPAM Act, among other things, obligates the sender of commercial emails to provide recipients with the ability to opt out of receiving future emails from the sender. The TCPA broadly regulates outbound calls, including live operator calls. Among other things, the TCPA limits the hours during which telemarketers may call consumers, restricts the use of automated telephone dialing equipment to call certain telephone numbers or send text messages unless consent has been obtained, and prohibits calling consumers at numbers that have been included on the National Do-Not-Call list. Numerous states also have state specific Do-Not-Call lists, as wells as laws regulating telemarketing and text message marketing. Further, the laws of several states prohibit the recording of any telephone call absent the consent of all parties to that call. In addition, certain of these laws include a private right of action and have been the subject of class action lawsuits, including one that we were a party to. If any of the foregoing laws or regulations significantly restricts our business, we may not be able to develop adequate alternative marketing strategies. Further, non-compliance with these laws and regulations carries significant financial penalties and the risk of class action litigation, which would adversely affect our financial performance and significantly harm our reputation and our business.

 

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We face potential liability related to the privacy and security of health-related information we receive from and/or create for our customers.

We have developed products that cater to dental and other health professionals. The privacy and security of information about the past, present, or future physical or mental health or condition of an individual is an area of significant focus in the United States because of heightened privacy concerns and the potential for significant consumer harm from the misuse of such sensitive data. We have procedures and technology in place intended to safeguard individually identifiable health information we receive from and/or create for our customers from unauthorized access or use.

The Privacy Standards and Security Standards under the Health Insurance Portability and Accountability Act of 1996, or HIPAA, establish a set of basic national privacy and security standards for the protection of individually identifiable health information by health plans, healthcare clearinghouses and certain healthcare providers, referred to as covered entities, and the business associates with whom such covered entities contract for services. Notably, whereas HIPAA previously directly regulated only these covered entities, the Health Information for Economic and Clinical Health Act of 2009, or HITECH, which was signed into law as part of the stimulus package in February 2009, and the Final HIPAA Omnibus Rule adopted in 2013, or Omnibus Rule, make certain of HIPAA’s Privacy and Security Standards also directly applicable to covered entities’ business associates. As a result, business associates are now subject to significant civil and criminal penalties for failure to comply with applicable Privacy and Security Standards. Moreover, HITECH created a new requirement that covered entities report certain breaches of unsecured, individually identifiable health information and imposes penalties on covered entities that fail to do so.

Our dental and other health professional customers may qualify as covered entities under HIPAA and provide us with, or ask us to create, individually identifiable health information in order for us to deliver our products, meaning that we qualify as a Business Associate. We have adopted a privacy policy and security policy to ensure compliance with HIPAA requirements and are working on completing the implementation of all of the requirements set forth in those policies, including entering into Business Associate Agreements, or BAAs, with our covered entity customers and conducting required training of our employees. If our practices to protect individually identifiable health information do not comply with the requirements of HIPAA and HITECH, we may be directly subject to liability. In addition, if our privacy and security practices do not comply with our contractual obligations stemming from our BAAs, we may be subject to contractual liability.

The Omnibus Rule modified the breach reporting standard in a manner that will likely make more data security incidents qualify as reportable breaches. Thus, to the extent that we endure improper uses or disclosures of individually identifiable health information, it is more likely that such an incident will rise to the level of a reportable breach. Additionally, the Omnibus Rule changed certain requirements relating to BAAs, and thus BAAs to which we are a party may need to be updated to ensure compliance. Any liability arising from a failure to comply with the requirements of HIPAA or HITECH, to the extent such requirements are deemed to apply to our operations, or contractual obligations, could adversely affect our financial condition.

The costs of complying with privacy and security related legal and regulatory requirements are burdensome and could have a material adverse effect on our results of operations. The Omnibus Rule may also be subject to interpretation by various courts and other governmental authorities, thus creating potentially complex compliance issues for us, as well as our customers and resellers. In addition, we are unable to predict what changes to the HIPAA Privacy Standards and Security Standards might be made in the future or how those changes could affect our business. Any new legislation or regulation in the area of privacy and security of personal information, including personal health information, could also adversely affect our business operations.

 

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Privacy concerns could limit our ability to leverage data about our customers and their clients, customers and patients.

In the ordinary course of business, we collect and utilize data, including personal information. We currently face certain legal obligations regarding the manner in which we treat such information. Increased regulation of data utilization practices, including self-regulation or findings under existing laws, that limit our ability to use collected data, could have an adverse effect on our business. As our business evolves, we may become subject to additional and/or more stringent legal obligations concerning our treatment of customer information. Failure to comply with these obligations could subject us to liability, and to the extent that we need to alter our business model or practices to adapt to these obligations, we could incur additional expenses.

We are exposed to risks associated with credit and debit card payment processing.

We accept payments primarily through credit and debit card transactions. We are subject to a number of risks related to credit and debit card payments, including:

 

    we pay interchange and other fees, which may increase over time and could require us to either increase the prices we charge for our products or experience an increase in our costs and expenses;

 

    we rely on a third party to provide credit and debit card payment processing services, and it could disrupt our business if this vendor became unwilling or unable to provide these services to us;

 

    if we are unable to maintain our chargeback rate at acceptable levels, our credit card fees for chargeback transactions, or our fees for other credit and debit card transactions or issuers, may increase, or issuers may terminate their relationship with us; and

 

    security breaches of confidential customer information in connection with our receipt of credit and debit card information.

We store our customers’ credit and debit card information as part of the telephonic closing script for short periods of time and transmit it to our third-party payment processor. As a result, we may in the future become subject to lawsuits or other proceedings for purportedly fraudulent transactions arising out of the actual or alleged theft of our customers’ credit or debit card information if our security or if the security of our third-party credit card payment processor is breached. We and our third-party credit card payment processor are also subject to payment card association operating rules, certification requirements and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we or our third-party credit card payment processor fail to comply with these rules or requirements, we may be subject to fines and higher transaction fees and lose our ability to accept credit and debit card payments from our customers, and our business and operating results could be adversely affected.

Risks Related to Our Intellectual Property

We may be subject to intellectual property rights claims by third parties, which are extremely costly to defend, could require us to pay significant damages and could limit our ability to use certain technologies.

Third parties may assert claims of infringement of intellectual property rights in proprietary technology against us or against our customers or partners for which we may be liable or have an indemnification obligation. Any claim of infringement by a third party, even those without merit, could cause us to incur substantial costs defending against the claim and could distract our management from operating our business. In any patent infringement suit brought against us, we may assert, as a defense, that we do not infringe the relevant patent claims, that the patent is invalid or both. The strength of our defenses will depend on the patents asserted, the interpretation of these patents, and our ability to invalidate the asserted patents. However, we could be unsuccessful in advancing non-infringement and/or invalidity arguments in our defense. In the United States,

 

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issued patents enjoy a presumption of validity, and the party challenging the validity of a patent claim must present clear and convincing evidence of invalidity, which is a high burden of proof. Conversely, the patent owner need only prove infringement by a preponderance of the evidence, which is a lower burden of proof.

Although third parties may offer a license to their technology, the terms of any offered license may not be acceptable and the failure to obtain a license or the costs associated with any license could cause our business, financial condition and results of operations to be materially and adversely affected. In addition, some licenses may be non-exclusive, and therefore our competitors may have access to the same technology licensed to us. Alternatively, we may be required to develop non-infringing technology, which could necessitate significant effort and expense and ultimately may not be successful. Furthermore, a successful claimant could secure a judgment or we may agree to a settlement that prevents us from distributing certain products or that requires us to pay substantial damages, including treble damages, if we are found to have willfully infringed such claimant’s patents or copyrights, royalties or other fees. Any of these events could seriously harm our business, financial condition and results of operations.

Failure to protect or enforce our intellectual property rights could harm our business and results of operations.

Our success depends, in part, on our ability to protect proprietary methods and technologies that we develop under the intellectual property laws of the United States, so that we can prevent others from using our inventions and proprietary information. If we fail to protect our intellectual property rights adequately, our competitors might gain access to our technology, and our business could be adversely affected. We rely on trademark, copyright, trade secret and patent laws, confidentiality procedures and contractual provisions to protect our proprietary methods and technologies. Our patent strategy is still in its early stages. We own one registered patent and have another patent application on file with the U.S. Patent and Trademark Office. In each case, the claims eventually allowed on these or any other patent we apply for may not be sufficiently broad to protect our technology or products. Any issued patents may be challenged, invalidated or circumvented, and any rights granted under these patents may not actually provide adequate defensive protection or competitive advantages to us. Additionally, the process of obtaining patent protection is expensive and time-consuming, and we may not be able to prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. Additional uncertainty may result from changes to intellectual property legislation enacted in the United States, including the recent America Invents Act, and other national governments and from interpretations of the intellectual property laws of the United States and other countries by applicable courts and agencies. Accordingly, despite our efforts, we may be unable to obtain adequate patent protection, or to prevent third parties from infringing upon or misappropriating our intellectual property.

In addition to patents, our trade secrets, general know-how and experience regarding our technology are a significant part of our intellectual property. We make assessments with respect to new technology and decide whether to apply for patents or retain and protect them as trade secrets. Unauthorized parties may attempt to copy aspects of our technology or obtain and use information that we regard as proprietary. We generally enter into confidentiality and/or license agreements with our employees, consultants and vendors and generally limit access to and distribution of our proprietary information. However, we cannot provide assurance that any steps taken by us will prevent misappropriation of our technology and proprietary information. Policing unauthorized use of our technology is difficult. In addition, the laws of some foreign countries may not be as protective of intellectual property rights as those of the United States, and mechanisms for enforcement of our proprietary rights in such countries may be inadequate. From time to time, legal action by us has been and may continue to be necessary to enforce our intellectual property rights, to protect our trade secrets and proprietary information, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement. Such litigation could result in substantial costs and the diversion of limited resources and could negatively affect our business, financial condition and results of operations. If we are unable to protect our proprietary rights (including aspects of our technology platform), we may find ourselves at a competitive disadvantage to others who have not incurred the same level of expense, time and effort to create and protect their intellectual property.

 

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Risks Related to this Offering and Shares of Our Common Stock

Our share price may be volatile, and you may lose some or all of your investment.

The initial public offering price for the shares of our common stock will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of the market price of our common stock following this offering. The market price of our common stock may be highly volatile and may fluctuate substantially as a result of a variety of factors, some of which are related in complex ways, including:

 

    actual or anticipated fluctuations in our financial condition and operating results;

 

    variance in our financial performance from expectations of securities analysts;

 

    changes in the prices of our products;

 

    changes in our projected operating and financial results;

 

    changes in laws or regulations applicable to our products or marketing techniques;

 

    announcements by us or our competitors of significant business developments, acquisitions or new solutions;

 

    our involvement in any litigation;

 

    our sale of our common stock or other securities in the future;

 

    changes in senior management or key personnel;

 

    trading volume of our common stock;

 

    changes in the anticipated future size and growth rate of our market; and

 

    general economic, regulatory and market conditions.

Recently, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry fluctuations, as well as general economic, political, regulatory and market conditions, may negatively impact the market price of our common stock. If the market price of our common stock after this offering does not exceed the initial public offering price, you may lose some or all of your investment. In the past, companies that have experienced volatility in the market price of their securities have been subject to securities class action litigation. We may be the target of this type of litigation in the future, which could result in substantial costs and divert our management’s attention.

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 may not develop following the completion of this offering or, if developed, may not be sustained. The 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 or technologies by using our shares as consideration.

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

The trading market for our common stock will depend, in part, on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If our

 

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financial performance fails to meet analyst estimates or one or more of the analysts who cover us downgrade our shares or change their opinion of our shares, our share price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.

We 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 common stock and do not intend to pay any cash dividends in the foreseeable future. We anticipate that we will retain all of our future earnings for use in the development of our business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.

Our future depends in part on the interests and influence of key stockholders.

Following this offering, our directors, executive officers and holders of more than 5% of our common stock, some of whom are represented on our board of directors, together with their affiliates will beneficially own     % of the voting power of our outstanding capital stock. As a result, these stockholders will, immediately following this offering, be able to determine the outcome of matters submitted to our stockholders for approval. Some of these persons or entities may have interests that are different from yours, and this ownership could affect the value of your shares of common stock if, for example, these stockholders elect to delay, defer or prevent a change in corporate control, merger, consolidation, takeover or other business combination. This concentration of ownership may also adversely affect the market price of our common stock.

We may invest or spend the proceeds of this offering in ways with which you may not agree or in ways which may not yield a return.

A portion of the net proceeds from this offering will be used to repay our outstanding indebtedness, and the remaining net proceeds may be used for general corporate purposes, including working capital. We may also use a portion of the net proceeds to acquire complementary businesses, products or technologies. However, we do not have any agreements or commitments for any acquisitions at this time. Our management will have considerable discretion in the application of the net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used effectively. The net proceeds may be invested with a view towards long-term benefits for our stockholders and this may not increase our operating results or market value. The failure by our management to apply these funds effectively may adversely affect the return on your investment.

Future sales of our common stock in the public market could cause our share price to decline.

After this offering, there will be              shares of our common stock outstanding, assuming no exercise of the underwriters’ over-allotment option. Sales of a substantial number of shares of our common stock in the public market after 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. Of our issued and outstanding shares of our common stock, all of the shares sold in this offering will be freely transferable without restrictions or further registration under the Securities Act of 1933, as amended, except for any shares acquired by our affiliates, as defined in Rule 144 under the Securities Act. The remaining              shares outstanding after this offering will be restricted as a result of securities laws, lock-up agreements or other contractual restrictions that restrict transfers for 180 days after the date of this prospectus.

 

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Additionally, following the completion of this offering, stockholders holding approximately         % of our common stock outstanding, will, after the expiration of the lock-up periods specified above, have the right, subject to various conditions and limitations, to include their shares of our common stock in registration statements relating to our securities. If the offer and sale of these shares are registered, they will be freely tradable without restriction under the Securities Act. Shares of common stock sold under such registration statements can be freely sold in the public market. In the event such registration rights are exercised and a large number of shares of common stock are sold in the public market, such sales could reduce the trading price of our common stock. See “Description of Capital Stock—Registration Rights” and “Shares Eligible for Future Sale—Lock-Up Agreements” for a more detailed description of these registration rights and the lock-up period.

We intend to file a registration statement on Form S-8 under the Securities Act to register the total number of shares of our common stock that may be issued under our equity incentive plans. See the information under the heading “Shares Eligible for Future Sale—Form S-8 Registration Statements” for a more detailed description of the shares of common stock that will be available for future sale upon the registration and issuance of such shares, subject to any applicable vesting or lock-up period or other restrictions provided under the terms of the applicable plan and/or the option agreements entered into with the option holders. In addition, in the future we may issue common stock or other securities if we need to raise additional capital. The number of new shares of our common stock issued in connection with raising additional capital could constitute a material portion of the then outstanding shares 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 will be substantially higher than the pro forma net tangible book value per share of our common stock, as of March 31, 2014, immediately after this offering. Therefore, if you purchase shares of our common stock in this offering, you will suffer immediate dilution of $             per share, or $             per share if the underwriters exercise their option in full, in net tangible book value after giving effect to the sale of common stock in this offering at an assumed public offering price of $             per share, the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus. See “Dilution.” If outstanding options to purchase our common stock are exercised in the future, you will experience additional dilution.

We are an “emerging growth company,” and the reduced disclosure requirements applicable to emerging growth companies may 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. We will remain an emerging growth company until the earlier to occur of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual gross revenues of at least $1.0 billion or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30th, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. For so long as we remain an emerging growth company, we intend to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, reduced disclosure obligations regarding executive compensation and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict whether investors will find our common stock less attractive if we rely on these exemptions. If some investors find our common stock less attractive as a result,

 

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there may be a less active trading market for our common stock and the market price of our common stock may be more volatile.

In addition, the JOBS Act permits emerging growth companies to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We are choosing to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted. This decision to opt out of the extended transition period is irrevocable.

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, and particularly after we are no longer an “emerging growth company,” we will incur significant legal, accounting and other expenses that we did not incur as a private company. 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 will need to devote a substantial amount of time to compliance with these requirements. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect that these rules and regulations may make it more difficult and more expensive for us to obtain directors’ and officers’ liability insurance, which could make it more difficult for us to attract and retain qualified members of our board of directors. We cannot predict or estimate the amount of additional costs we will incur as a public company or the timing of such costs.

As a result of becoming a public company, we will be obligated to develop and maintain proper and effective internal controls over financial reporting and any failure to maintain the adequacy of these internal controls may adversely affect investor confidence in our company and, as a result, the value of our common stock.

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 control over financial reporting for the first fiscal year beginning after the effective date of this offering. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. Our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting until our first annual report required to be filed with the SEC following the date we are no longer an “emerging growth company,” as defined in the JOBS Act. We will be required to disclose significant changes made in our internal control procedures on a quarterly basis.

We are beginning the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404, and we may not be able to complete our evaluation, testing and any required remediation in a timely fashion. Our compliance with Section 404 will require that we incur substantial accounting expense and expend significant management efforts. We currently do not have an internal audit group, and 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 control over financial reporting, we will be unable to assert that our internal control over financial reporting is effective. We cannot assure you that there will not be material weaknesses or significant deficiencies in our internal control over financial reporting in the future. Any failure to maintain internal control over financial reporting could severely inhibit our ability to accurately report our financial condition or results of operations. If we are unable to conclude that our internal control over financial reporting is

 

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effective, or if our independent registered public accounting firm determines we have a material weakness or significant deficiency in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our common stock could decline, and we could be subject to sanctions or investigations by                         , the SEC or other regulatory authorities. Failure to remedy any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict our future access to the capital markets.

Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us 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 bylaws, as will be in effect upon the completion of this offering, may have the effect of delaying or preventing a change in 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 preferred stock, without further stockholder action and with voting liquidation, dividend and other rights superior 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, and limit the ability of our stockholders to call special meetings;

 

    establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for director nominees;

 

    establish that our board of directors is divided into three classes, with directors in each class serving three-year staggered terms;

 

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

 

    prohibit cumulative voting in the election of directors; and

 

    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.

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “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 common stock in an acquisition.

 

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Our amended and restated certificate of incorporation will designate the Court of Chancery of the State of Delaware as the exclusive forum for certain litigation that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.

Pursuant to our amended and restated certificate of incorporation, as will be in effect upon the completion of this offering, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (1) any derivative action or proceeding brought on our behalf, (2) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (3) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, our amended and restated certificate of incorporation or our amended and restated bylaws or (4) any action asserting a claim governed by the internal affairs doctrine. Our amended and restated certificate of incorporation will further provide that any person or entity purchasing or otherwise acquiring any interest in shares of our common stock is deemed to have notice of and consented to the foregoing provision. The forum selection clause in our amended and restated certificate of incorporation may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve substantial risks and uncertainties. The forward-looking statements are contained principally in the sections of this prospectus titled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” but are also contained elsewhere in this prospectus. In some cases, you can identify forward-looking statements by the words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “objective,” “ongoing,” “plan,” “predict,” “project,” “potential,” “should,” “will,” or “would,” and or the negative of these terms, or other comparable terminology intended to identify statements about the future. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this prospectus, we caution you that these statements are based on a combination of facts and factors currently known by us and our expectations of the future, about which we cannot be certain. Forward-looking statements include statements about:

 

    our ability to retain and increase sales to existing customers and attract new customers on a cost-effective basis;

 

    our ability to market our products to local businesses and brand networks;

 

    our ability to manage, measure and demonstrate the effectiveness of our platform and to continue to develop or acquire new products and technologies that are appealing to our customers;

 

    our ability to develop or offer new or additional products in a timely manner that keeps pace with new technologies;

 

    our ability to attract, motivate and retain qualified sales personnel;

 

    the rate of growth of the local business market for our solutions;

 

    increased competition and the offering of new solutions by our competitors;

 

    our ability to effectively manage our growth;

 

    potential acquisition and integration of complementary businesses and technologies;

 

    our ability to monitor and comply with evolving regulations affecting out businesses;

 

    the overall economic environment in the United States and its impact on local businesses;

 

    our ability to maintain, or strengthen awareness of, our brand;

 

    perceived or actual security, integrity, reliability, quality or compatibility problems with our solutions;

 

    our expected use of proceeds; and

 

    statements regarding future revenues, hiring plans, expenses, capital requirements and stock performance.

You should refer to the “Risk Factors” section of this prospectus for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this prospectus will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. The Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended, or the Securities Act, do not protect any forward-looking statements that we make in connection with this offering.

 

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

This prospectus contains market data and industry forecasts that were obtained from industry publications. These data involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. We have not independently verified any third-party information. While we believe the market position, market opportunity and market size information included in this prospectus is generally reliable, such information is inherently imprecise.

 

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USE OF PROCEEDS

We estimate that the net proceeds from our issuance and sale of              shares of our common stock in this offering will be approximately $             million, or approximately $             million if the underwriters exercise their over-allotment option in full, based upon an assumed initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any of the proceeds from the sale of shares by the selling stockholders, although we will bear the costs, other than underwriting discounts and commissions, associated with those sales.

Each $1.00 increase or decrease in the assumed initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus, would increase or decrease the net proceeds to us from this offering by approximately $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting estimated underwriting discounts and commissions. We may also increase or decrease the number of shares we are offering. Each 1,000,000 share increase or decrease in the number of shares offered by us would increase or decrease the net proceeds to us from this offering by approximately $             million, assuming that the assumed initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions. We do not expect that a change in the initial offering price or the number of shares by these amounts would have a material effect on uses of the proceeds from this offering, although it may accelerate the time at which we will need to seek additional capital.

The principal purposes of this offering are to create a public market for our common stock and to facilitate our future access to the public equity markets, as well as to obtain additional capital. We intend to use a portion of the net proceeds from this offering to repay the following borrowings and obligations:

 

    $             of indebtedness outstanding under the term loan portion of our existing credit facility with Silicon Valley Bank, which currently accrues interest at a floating per annum rate equal to 0.75% plus the “prime rate” then in effect and matures June 1, 2017. The proceeds of this term loan were used to repay in full our outstanding obligations under our 2010 term loan with Silicon Valley Bank and the cash portion of the earn-out consideration paid to shareholders of Lighthouse Practice Management.

 

    $             of indebtedness outstanding under our term loan with Rogers Communications Inc., which currently accrues interest at a rate of 5.0% per annum and matures September 9, 2017. The proceeds from this loan were used to repay in full our outstanding obligations under our 2011 term loan with Silicon Valley Bank and for general corporate purposes.

 

    $6.2 million deferred payment obligation pursuant to the Agreement and Plan of Merger entered into in connection with our acquisition of Lighthouse Practice Management in February 2013, which currently accrues interest at a rate of 8.0% per annum and becomes due upon the earlier to occur of February 28, 2015 and the closing of this offering.

We intend to use the remainder of the net proceeds for general corporate purposes. In addition, we may use a portion of the proceeds from this offering for acquisitions of complementary businesses, technologies or other assets, although we do not currently have any plans for any acquisitions. We may allocate funds from other sources to fund some or all of these activities. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Sources of Liquidity” for more information regarding our existing and former credit facilities.

The expected use of net proceeds from this offering represents our intentions based upon our present plans and business conditions. We cannot predict with certainty all of the particular uses for the proceeds of this offering or the amounts that we will actually spend on the uses set forth above. Accordingly, our management will have significant flexibility in applying the net proceeds of this offering.

 

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The timing and amount of our actual expenditures will be based on many factors, including cash flows from operations and the anticipated growth of our business. Pending the uses set forth above, we intend to invest the net proceeds of this offering in a variety of capital-preservation investments, including short- and intermediate-term, interest-bearing, investment-grade securities.

 

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DIVIDEND POLICY

We have never declared or paid any dividends on our common stock or any other securities. We anticipate that we will retain all of our future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying cash dividends in the foreseeable future. Additionally, our ability to pay dividends on our common stock is limited by restrictions under the terms of the agreements governing our credit facilities, and will continue to be limited by such restrictions to the extent any such facilities remain outstanding after this offering. Payment of future cash dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs, the requirements of current or then-existing debt instruments and other factors our board of directors deems relevant.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization as of March 31, 2014:

 

    on an actual basis; and

 

    on a pro forma as adjusted basis to reflect (1) the conversion of the outstanding shares of our preferred stock into common stock, which will occur automatically immediately prior to the completion of this offering, (2) the reclassification of our preferred stock warrant liabilities to additional paid-in capital upon the automatic conversion of certain of our preferred stock warrants into warrants exercisable for our common stock, which will occur automatically immediately prior to the completion of this offering, (3) the automatic preferred stock warrant exercise, (4) our sale of              shares of common stock in this offering at an assumed initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, (5) a $             million deemed dividend on our Series F preferred stock, as described below, (6) the application of $             million of the net proceeds of this offering to repay indebtedness outstanding under our existing credit facilities and $6.2 million of the net proceeds of this offering to satisfy certain of our deferred payment obligations, as described in “Use of Proceeds,” and (7) the filing of our amended and restated certificate of incorporation, which will become effective immediately prior to the completion of this offering.

You should read this table together with the sections of this prospectus titled “Use of Proceeds,” “Selected Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes appearing elsewhere in this prospectus.

 

     As of March 31, 2014
     Actual     Pro Forma
as Adjusted(1)
     (in thousands, except
share and per share data)
    

(unaudited)

Cash and cash equivalents

   $ 10,274     
  

 

 

   

 

Long-term debt, including current portion(2)

     30,228     

Preferred stock warrant liabilities

     5,846     

Convertible preferred stock, $0.001 par value; 85,431,561 shares authorized, 81,781,250 shares issued and outstanding, actual(3); no shares authorized, issued or outstanding, pro forma as adjusted

     65,159     

Stockholders’ (deficit) equity:

    

Preferred stock, $0.001 per share; no shares authorized, issued or outstanding, actual; 10,000,000 shares authorized, no shares issued or outstanding, pro forma as adjusted

     —       

Common stock, $0.0002 par value; 155,000,000 shares authorized, 42,812,887 shares issued and outstanding, actual;              shares authorized,              shares issued and outstanding, pro forma as adjusted(3)

     9     

Additional paid-in capital(3)

     37,137     

Accumulated deficit

     (84,467  
  

 

 

   

 

Total stockholders’ (deficit) equity

     (47,321  
  

 

 

   

 

Total capitalization

   $ 53,912     
  

 

 

   

 

 

(1)  

Each $1.00 increase or decrease in the assumed initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus, would increase or decrease pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by approximately $             million, assuming that the number of shares

 

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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. We may also increase or decrease the number of shares we are offering. Each 1,000,000 share increase or decrease in the number of shares offered by us would increase or decrease pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by approximately $             million, assuming that the assumed initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions. The pro forma as adjusted information discussed above is illustrative only and will adjust based on the actual initial offering price and other terms of this offering determined at pricing.

 

(2)   Includes current and long-term portions of bank loan, current and long-term portions of subordinated debt, deferred consideration, $4.8 million in accrued expenses and other current liabilities and $0.3 million in other liabilities, long-term portion, which includes deferred payments of $4.5 million related to our acquisition of Lighthouse Practice Management classified as accrued compensation expense and $0.6 million related to our asset acquisition from New Service, LLC. Amounts are disclosed at full payment value and do not reflect reductions for fair value adjustments that are reflected on the condensed consolidated balance sheet.

 

(3)   The number of shares of our common stock to be issued upon the automatic conversion of all outstanding shares of our Series F preferred stock depends on the initial public offering price of our common stock. The terms of our Series F preferred stock provide that the ratio at which each share of this series of preferred stock automatically converts into shares of our common stock in connection with this offering will increase if the initial public offering price is below $             per share, which would result in additional shares of our common stock being issued upon conversion of our Series F preferred stock immediately prior to the closing of this offering. Based upon the assumed initial public offering price of $             per share, the midpoint of the price range set forth on the cover page of this prospectus, the outstanding shares of our Series F preferred stock will convert into an aggregate of approximately                         shares of our common stock immediately prior to the closing of this offering. See “Prospectus Summary—The Offering” for a description of the number of shares issuable upon conversion of our Series F preferred stock, which depends on the initial public offering price of our common stock.

The pro forma as adjusted additional paid-in capital and accumulated deficit amounts in the table above include the effects of a $             million deemed dividend for the assumed fair value of additional shares of common stock issued upon the conversion of our Series F preferred stock at the assumed initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus. See “Unaudited Pro Forma Presentation” in note 1 to our unaudited interim condensed consolidated financial statements. The deemed dividend will increase the net loss allocable to common stockholders in the calculation of pro forma basic and diluted net loss per share.

The number of shares of our common stock shown as issued and outstanding on a pro forma as adjusted basis in the table above is based on the number of shares of our common stock outstanding as of March 31, 2014 and excludes:

 

    17,574,484 shares of common stock issuable upon the exercise of options outstanding as of March 31, 2014, at a weighted-average exercise price of $1.1611 per share;

 

                 shares of our common stock reserved for future issuance pursuant to our equity incentive plans, including (1)              shares pursuant to our 2014 Plan, (2)                  shares pursuant to our 2014 ESPP, each of which will become effective prior to the completion of this offering and will include provisions that automatically increase the number of shares of common stock reserved for issuance thereunder each year and (3) 3,419,224 shares of our common stock reserved for issuance under our 2007 Plan, which shares will be added to the shares reserved under the 2014 Plan upon its effectiveness;

 

    1,242,829 shares of common stock issuable upon the exercise of certain preferred stock warrants that were outstanding as of March 31, 2014, at a weighted-average exercise price of $0.9937 per share; and

 

    200,553 shares of common stock issuable upon the exercise of certain common stock warrants that were outstanding as of March 31, 2014, at a weighted-average exercise price of $1.1676 per share.

 

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DILUTION

If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after the closing of this offering.

The pro forma net tangible book value of our common stock as of March 31, 2014 was $             million, or $             per share, based on                     shares of common stock outstanding. Pro forma net tangible book value per share represents our total tangible assets (total assets less intangible assets) less our total liabilities, divided by the total number of shares of our outstanding common stock, after giving effect to (1) the conversion of all outstanding shares of our preferred stock into                      shares of common stock immediately prior to the closing of this offering, (2) the automatic net exercise of preferred stock warrants into                      shares of our common stock and (3) the reclassification of our preferred stock warrant liabilities to additional paid-in capital immediately prior to the closing of this offering.

After giving effect to the receipt of the net proceeds from our sale of                      shares of common stock in this offering at an assumed initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of March 31, 2014 would have been $             million, or $             per share. This represents an immediate increase in pro forma as adjusted net tangible book value of $             per share to our existing stockholders and an immediate dilution of $             per share to investors purchasing common stock in this offering.

The following table illustrates this per share dilution:

 

Assumed initial public offering price per share

      $                

Pro forma net tangible book value per share as of March 31, 2014

   $                   

Increase in pro forma net tangible book value per share attributable to new investors in this offering

     
  

 

 

    

Pro forma as adjusted net tangible book value per share after giving effect to this offering

     
     

 

 

 

Dilution in pro forma as adjusted net tangible book value per share to new investors in this offering

      $     
     

 

 

 

Each $1.00 increase or decrease in the assumed initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus, would increase or decrease the pro forma net tangible book value, as adjusted to give effect to this offering, by $             per share and the dilution to new investors by $             per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions. Similarly, each increase or decrease of 1,000,000 shares in the number of shares of common stock offered by us would increase or decrease the pro forma net tangible book value, as adjusted to give effect to this offering, by approximately $             per share and the dilution to new investors by $             per share, assuming the assumed initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions.

The pro forma information discussed above is illustrative only and will adjust based on the actual initial offering price and other terms of this offering determined at pricing. See “Prospectus Summary—The Offering” for a description of the number of shares issuable upon conversion of our Series F preferred stock, which depends on the initial public offering price of our common stock.

 

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If the underwriters exercise their option to purchase additional shares in full, the pro forma as adjusted net tangible book value per share after giving effect to this offering would be $             per share, and the dilution in pro forma as adjusted net tangible book value per share to new investors in this offering would be $             per share of common stock.

The following table summarizes as of March 31, 2014, on the pro forma as adjusted basis described above, the number of shares of our common stock, the total consideration and the average price per share (1) paid to us by our existing stockholders and (2) to be paid by new investors purchasing our common stock in this offering at an assumed initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Shares Purchased           Weighted-
average price
per share
 
        Total Consideration    
     Number    Percent     Amount      Percent    

Existing stockholders

                   $                             $                

New investors

            
  

 

  

 

 

   

 

 

    

 

 

   

 

 

 

Total

        100   $           100  
  

 

  

 

 

   

 

 

    

 

 

   

 

 

 

The foregoing table does not reflect the sales by existing stockholders in connection with sales made by them in this offering. Sales by the selling stockholders in this offering will reduce the number of shares held by existing stockholders to              shares, or         % of the total number of shares of our common stock outstanding after this offering, and will increase the number of shares held by new investors to              shares, or         % of the total number of shares of our common stock outstanding after this offering.

The foregoing table and calculations are based on              shares of common stock outstanding as of March 31, 2014, after giving effect to the automatic preferred stock warrant exercise and the conversion of all outstanding shares of preferred stock into an aggregate of              shares of common stock upon the closing of this offering, and excludes:

 

    17,574,484 shares of common stock issuable upon the exercise of options outstanding as of March 31, 2014, at a weighted-average exercise price of $1.1611 per share;

 

                 shares of our common stock reserved for future issuance pursuant to our equity incentive plans, including (1)              shares pursuant to our 2014 Plan, (2)              shares pursuant to our 2014 ESPP, each of which will become effective prior to the completion of this offering and will include provisions that automatically increase the number of shares of common stock reserved for issuance thereunder each year and (2) 3,419,224 shares of our common stock reserved for issuance under our 2007 Plan, which shares will be added to the shares reserved under the 2014 Plan upon its effectiveness;

 

    1,242,829 shares of common stock issuable upon the exercise of certain preferred stock warrants that were outstanding as of March 31, 2014, at a weighted-average exercise price of $0.9937 per share; and

 

    200,553 shares of common stock issuable upon the exercise of certain common stock warrants that were outstanding as of March 31, 2014, at a weighted-average exercise price of $1.1676 per share.

To the extent that options or warrants are exercised, new options or other securities are issued under our equity incentive plans, or we issue additional shares of common stock in the future, there will be further dilution to investors participating in this offering. In addition, we may choose to raise additional capital because of market conditions or strategic considerations, even if we believe that we have sufficient funds for our current or future operating plans. If we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.

 

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The following tables set forth our selected consolidated financial and other data for, and as of the periods ended on, the dates indicated. The consolidated statements of operations and comprehensive loss data for the years ended December 31, 2011, 2012 and 2013 and the selected consolidated balance sheet data for the years ended December 31, 2012 and 2013 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated balance sheet data as of December 31, 2011 are derived from our audited financial consolidated financial statements, which are not included in this prospectus. The selected condensed consolidated statements of operations and comprehensive income (loss) data for the three months ended March 31, 2013 and 2014 and the selected condensed consolidated balance sheet data as of March 31, 2014 are derived from our unaudited interim condensed consolidated financial statements appearing elsewhere in this prospectus. Our unaudited interim condensed consolidated financial statements were prepared on a basis consistent with our audited consolidated financial statements and include, in management’s opinion, all normal recurring adjustments necessary for the fair presentation of the financial information set forth in those statements including elsewhere in this prospectus. The data should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in conjunction with the consolidated financial statements, related notes, and other financial information included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected for any future period.

 

    Year Ended December 31,     Three Months Ended
March 31,
 
    2011     2012     2013     2013     2014  
    (in thousands, except per share and customer data)  
          (unaudited)  

Consolidated Statements of Operations Data:

         

Revenues

  $ 87,584      $ 132,321      $ 161,863      $ 35,202      $ 45,746   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

         

Cost of revenues (exclusive of depreciation and amortization shown separately below)(1)

    33,876        42,760        53,843        11,925        14,446   

Selling and marketing(1)

    36,318        51,623        64,605        14,076        18,628   

Technology and product development(1)

    10,157        14,977        20,346        4,568        5,660   

General and administrative(1)

    15,305        19,591        29,271        6,085        8,349   

Depreciation and amortization

    2,328        3,721        6,419        1,248        1,845   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

    97,984        132,672        174,484        37,902        48,928   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (10,400     (351     (12,621     (2,700     (3,182

Interest expense and other

    (7,074     (4,690     (2,912     (440     (2,660
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (17,474     (5,041     (15,533     (3,140     (5,842

(Benefit) provision for income taxes

    (2,035     387        (5,131     (5,327     103   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income and comprehensive (loss) income

  $ (15,439   $ (5,428   $ (10,402   $ 2,187      $ (5,945
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income per share attributable to common stockholders(2)

         

Basic

  $ (0.48   $ (0.17   $ (0.29   $ —        $ (0.14
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ (0.48   $ (0.17   $ (0.29   $ —        $ (0.14
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used to compute net (loss) income per share attributable to common stockholders(2)

         

Basic

    31,955        32,573        35,743        34,279        41,243   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    31,955        32,573        35,743        46,876        41,243   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net (loss) income per share attributable to common stockholders—basic and diluted(3)

         
         

 

 

 

Pro forma weighted-average shares used to compute pro forma net (loss) income per share attributable to common stockholders—basic and diluted(3)

         
         

 

 

 

Other Financial and Other Data (unaudited):

         

Number of Customers(4)

    27,200        29,300        42,000        33,800        44,800   

Adjusted EBITDA(5)

  $ (5,899   $ 6,236      $ 1,819      $ 286      $ 378   

 

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     As of December 31,     As of
March 31,
 
     2011     2012     2013     2014  
    

(in thousands)

 
                       (unaudited)  

Consolidated Balance Sheet Data:

        

Cash and cash equivalents

   $ 14,606      $ 9,166      $ 12,345      $ 10,274   

Working capital (deficit)(6)

     (7,136     (20,729     (27,325     (32,721

Total assets

     67,916        66,482        93,729        93,663   

Long-term debt, including current portion(7)

     32,930        18,034        29,609        30,228   

Total liabilities

     64,070        54,513        74,456        75,825   

Convertible preferred stock

     38,515        48,733        62,411        65,159   

Total stockholders’ deficit

     (34,669     (36,764     (43,138     (47,321

 

(1)   Includes stock-based compensation expense as follows:

 

     Year Ended December 31,      Three Months Ended
March 31,
 
     2011      2012      2013      2013      2014  
    

(in thousands)

 
                          (unaudited)  

Cost of revenues

   $ 15       $ 17       $ 15       $ 4       $ 10   

Selling and marketing

     422         577         780         241         237   

Technology and product development

     235         445         675         159         218   

General and administrative

     1,160         1,827         1,161         521         214   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 1,832       $ 2,866       $ 2,631       $ 925       $ 679   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2)   See note 15 to our unaudited interim condensed consolidated financial statements and note 21 to our consolidated financial statements for an explanation of the calculations of our actual basic and diluted net (loss) income per share attributable to common stockholders.

 

(3)   Pro forma basic and diluted net (loss) income per share attributable to common stockholders represents net (loss) income and comprehensive (loss) income divided by the pro forma weighted-average shares of common stock outstanding. Pro forma weighted-average shares of common stock outstanding reflects (a) the automatic preferred stock warrant exercise and (b) the conversion of preferred stock (using the if-converted method) into common stock as though the conversion had occurred on the later of the issuance date or the first day of the relevant period (assuming a conversion ratio equal to                      common shares for each Series F preferred share based on an assumed initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus), and also reflect the issuance of shares of common stock pursuant to the automatic preferred stock warrant exercise. See the section “Prospectus Summary—The Offering” for a description of the number of shares issuable upon conversion of our Series F preferred stock, which depends on the initial public offering price of our common stock.

 

(4)   We calculate the number of customers at the end of each fiscal year as the number of unique customers with a subscription to one or more of our platform products and customers of our Yodle Ads product, rounded down to the nearest hundred. We consider as separate customers each location of a brand network that uses one of our more of our products. In cases where our customers have subscriptions to our platform obtained through resellers, we include those customers in our customer count.

 

(5)   We define Adjusted EBITDA as our net (loss) income and comprehensive (loss) income plus (minus): interest expense and other, (benefit) provision for income taxes and depreciation and amortization expense, adjusted to eliminate the impact of stock-based compensation expense, which is a non-cash item, and the effect of charges related to business combination and asset acquisition. We have included Adjusted EBITDA in this prospectus because it is a key measure used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short- and long-term operational plans. In particular, we believe that the exclusion of the expenses eliminated in calculating Adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

 

       Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under GAAP. Some of these limitations are: (a) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; (b) Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; (c) Adjusted EBITDA does not reflect the potentially dilutive impact of equity-based compensation; (d) Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and (e) other companies, including companies in our industry, may calculate Adjusted EBITDA or similarly titled measures differently, which reduces its usefulness as a comparative measure.

 

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       Because of these and other limitations, you should consider Adjusted EBITDA alongside our other GAAP-based financial performance measures, net loss and our other GAAP financial results. The following table presents a reconciliation of Adjusted EBITDA to net (loss) income and comprehensive (loss) income the most directly comparable GAAP measure, for each of the periods indicated.

 

     Year Ended December 31,     Three Months
Ended March 31,
 
     2011     2012     2013     2013     2014  
     (in thousands)  

Net (loss) income and comprehensive (loss) income

   $ (15,439   $ (5,428   $ (10,402   $ 2,187      $ (5,945

Adjustments:

          

Interest expense and other

     7,074        4,690        2,912        440        2,660   

(Benefit) provision for income taxes

     (2,035     387        (5,131     (5,327     103   

Depreciation and amortization expense

     2,328        3,721        6,419        1,248        1,845   

Charges related to business combination and asset acquisition*

     341        —          5,390        813        1,036   

Stock-based compensation expense

     1,832        2,866        2,631        925        679   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net adjustments

     9,540        11,664        12,221        (1,901     6,323   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ (5,899   $ 6,236      $ 1,819      $ 286      $ 378   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

*   Charges related to business combination and asset acquisition consists of costs (including any related transaction costs) incurred in connection with our (a) acquisition of ProfitFuel in May 2011; (b) our acquisition of Lighthouse Practice Management in February 2013, including $4.0 million and $0.5 million of a deferred payment which was classified as compensation expense under ASC 718 for the year ended December 31, 2013 and the three months ended March 31, 2014, respectively; and (c) our asset acquisition from New Service, LLC in February 2014.

 

(6)   Working capital (deficit) includes all current assets less all current liabilities.

 

(7)   Includes current and long-term portions of bank loan, current and long-term portions of subordinated debt and deferred consideration. As of March 31, 2014, it also included $4.8 million in accrued expenses and other current liabilities and $0.3 million in other liabilities, long-term portion, which includes deferred payments of $4.5 million related to our acquisition of Lighthouse Practice Management classified as accrued compensation expense and $0.6 million related to our asset acquisition from New Service, LLC. As of December 31, 2013, it also included the cash portion of contingent consideration in business combination and $4.0 million in long-term portion of other liabilities, but excluded the fair value attributable to 869,565 shares of Series E preferred stock payable as non-cash earn-out consideration. Amounts are disclosed at full payment value and do not reflect reductions for fair value adjustments that are reflected on the balance sheet.

 

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MANAGEMENT’S 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 in conjunction with our consolidated financial statements and related notes beginning on page F-1. In addition to historical information, this discussion contains forward-looking statements reflecting current expectations that involve risks and uncertainties. You should read the sections titled “Risk Factors” and “Special Note Regarding Forward-Looking Statements” for a discussion of the factors that could cause our actual results to differ materially from our expectations. Many of the amounts and percentages in this discussion have been rounded for convenience of presentation.

Overview

Yodle is a leading provider of cloud-based marketing automation solutions for local businesses that makes digital marketing easy, affordable and transparent. Our platform provides our customers with an online, mobile and social presence, as well as automates, manages and optimizes their marketing activities and other consumer interactions. We utilize our proprietary data assets and algorithms to increase the likelihood that consumers will find our customers and become their paying consumers. Our platform provides our customers with transparency into their marketing activities and business operations, thereby enabling them to evaluate their return on investment, or ROI. Our solutions are highly integrated and designed to be easy-to-use, helping local businesses navigate the rapidly evolving, technologically challenging and highly fragmented digital marketing landscape without having to invest a significant amount of time and money or needing any in-house marketing or IT expertise.

We believe the market for our local marketing automation platform is large and underserved. According to the most recent U.S. Census Bureau data, there are more than 28 million local businesses in the United States. We currently target industry verticals that include approximately 7 million local businesses, which we define as non-employer firms and businesses with up to 99 employees. We served approximately 44,800 local businesses as of March 31, 2014.

We began operations in 2005. Over nine years of focusing on the unique and constantly evolving digital marketing needs of local businesses, we have developed a differentiated approach to addressing this large and fragmented market. We use our sophisticated technology, rigorous data collection and analytics and scalable process automation in all key aspects of our business.

Our investment in technology, automation and our process-driven approach has resulted in significant reductions in our customer acquisition and onboarding costs, which helps minimize our initial investment to bring on new customers and allows us to achieve rapid payback. We define payback as occurring when the costs associated with acquiring and launching a cohort of new customers in any given quarter is offset by the ongoing cash flow from those customers, less our ongoing costs. We are typically able to generate positive cash flows within the first year after acquiring and launching a cohort of new customers, including the impact from customers who do not renew their subscriptions or service during the first year and excluding overhead costs. As a result, we believe our business model benefits from rapid payback. We refer to customers who we acquired directly (i.e., not through resellers) and who remain as customers after their initial year as our tenured customers. For the 12 months ended March 31, 2014, we experienced a monthly average revenue retention rate of 97.5% for our tenured customers. We calculate monthly average revenue retention as the revenue derived from tenured customers in the current month relative to the revenue derived from those same tenured customers in the prior month. We expect the revenue retention rate for our tenured customers to continue to improve as our mix of revenues shifts toward revenues from platform products, as revenue derived from customers who subscribe to our platform products generally exhibits a higher retention rate than revenue derived from customers who purchase our media product. We believe we have a compelling business model which is characterized by low customer acquisition and onboarding costs, rapid payback and high monthly revenue retention of tenured customers, resulting in attractive customer economics and high returns on our initial investment.

 

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We generate revenues from subscriptions to our platform and sales of our media offering. Our platform revenue is attributable to direct sales of subscriptions to our platform products, which currently include our Marketing Essentials, Centermark and Lighthouse products. Marketing Essentials is our flagship product that currently includes three modules: presence, conversion optimization and communication automation. Centermark leverages certain core capabilities of Marketing Essentials by providing a standardized source of shared data, communication and reporting to address the needs of national franchisors and other similar businesses. Lighthouse is our business practice automation product, which automates many of our customers’ daily consumer interactions or office routines. We also derive additional platform revenues from sales of our products sold through resellers. Our media revenue is attributable to direct sales of our Yodle Ads media product, which automates, manages and optimizes our customers’ media spend across mobile and desktop search engines. We refer to our offerings and the packages in which we sell them as products.

Our Product History and Business Evolution

We launched our automated SEM optimization bidding engine, now called Yodle Ads, in 2007. From 2007 through 2009, we primarily grew our customer base and increased our revenues through increasing sales of our media product and the recurring revenue generated from existing customers. Starting in 2010, we began expanding our product offerings to address a broad range of digital marketing needs for local businesses. We introduced our first platform product, Yodle Organic, in 2010. Yodle Organic provided local businesses with a digital presence that was optimized for organic traffic and formed the basis of our current conversion optimization module within Marketing Essentials. We increased our platform revenues as we increased the number of sales personnel selling Yodle Organic and by generating recurring revenue from our existing platform customers. We further increased our platform revenues as a result of our acquisition of ProfitFuel in May 2011. Starting in late 2012, we increased our investment in technology and product development with the goal of increasing the pace of our innovation and product introductions.

Our current suite of products and modules is the result of ongoing, internal product development and innovation that have been supplemented by select strategic business acquisitions. In late 2012, we converted the digital presence module included in Yodle Organic into Yodle Web. We further augmented our platform offerings in February 2013 with the acquisition of Lighthouse Practice Management. This acquisition helped expand our platform offering and enabled us to offer our customers a business practice automation product, which we call Lighthouse. In December 2013, we introduced our Centermark product for brand networks. Centermark leverages modules of our Marketing Essentials product by providing a standardized source of shared data, communication and reporting to address the unique needs of brand network owners. Prior to the introduction of Centermark, we offered brand network customers products that were primarily comprised of Yodle Organic, Yodle Web and Yodle Ads.

In the first quarter of 2014, we introduced Marketing Essentials, our flagship product, which is based on our predecessor products, including Yodle Organic and Yodle Web. Marketing Essentials currently includes three modules: presence, conversion optimization and communication automation. In March 2014, we began selling our Marketing Essentials product, with its three current modules, to new customers. In April 2014, we began providing our existing Yodle Organic customers with the features or modules of our current Marketing Essentials product that were not part of their previous offering.

We intend to continue to expand the capabilities of our platform and evolve our product offerings to address the challenges local businesses face, with an emphasis on continuing to grow our platform revenue.

In 2012, we achieved positive Adjusted EBITDA and generated cash flow from operations. After attaining these business and financial milestones, we made a strategic decision to prioritize accelerating the adoption of our platform products in the marketplace with the goal of increasing our long-term revenue and customer base. As a result, in 2013, we increased our investments in technology and product development and selling and marketing, and implemented certain pricing adjustments for our products. We increased our technology and product

 

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development expenditures by 36% and increased the number of our selling and marketing personnel by 29%. Additionally, for new customers that purchased both our platform and media product, we reduced the overall subscription price for our platform product and correspondingly increased our customers’ media budgets, with the goal of increasing their ROI and our customer retention. The primary financial effects of these changes on our 2013 results were to decrease our overall and platform revenue growth rate, increase our revenue growth rate from our media product and increase our cost of revenues, which negatively impacted our Adjusted EBITDA. Given that we did not experience increases in our customer retention at levels that would make this an attractive long-term pricing strategy, we increased the price of these platform products in the second half of 2013.

Key Metrics

We review two key business metrics to help us monitor the performance of our business and that we believe are useful to understanding the underlying trends affecting our business. These key metrics are the number of our customers and Adjusted EBITDA. The following table summarizes our key business metrics for the periods set forth below.

 

     Year Ended December 31,      Three Months Ended
March 31,
 
     2011     2012      2013      2013      2014  
     (unaudited)  

Number of Customers

     27,200        29,300         42,000         33,800         44,800   

Adjusted EBITDA (in thousands)

   $ (5,899   $ 6,236       $ 1,819       $ 286       $ 378   

Number of Customers

We calculate the number of customers at the end of any particular period as the number of unique customers with a subscription to one or more of our platform products and customers of our Yodle Ads product, rounded down to the nearest hundred. With limited exception, as of March 31, 2014, all of our customers subscribed to one or more of our platform products. We consider as separate customers each location of a brand network that uses one of our more of our products. In cases where businesses have subscriptions to our platform obtained through resellers, we include those businesses in our customer count. As of March 31, 2014, our customers were primarily located in the United States and Canada.

Adjusted EBITDA

Adjusted EBITDA represents our net (loss) income and comprehensive (loss) income plus (minus): interest expense and other, (benefit) provision for income taxes and depreciation and amortization expense, adjusted to eliminate the impact of stock-based compensation expense, which is a non-cash item. In addition, we exclude the effect of charges related to our acquisition of ProfitFuel in May 2011, Lighthouse Practice Management in February 2013 and our asset acquisition from New Service, LLC in February 2014. Adjusted EBITDA is a key measure used by our management to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short- and long-term operational plans. In particular, we believe the exclusion of the expenses eliminated in calculating Adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. Adjusted EBITDA is not a measure calculated in accordance with GAAP and has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under GAAP. Please see footnote (5) to the table in the section titled “Selected Consolidated Financial and Other Data” in this prospectus for a discussion of the limitations of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net (loss) income and comprehensive (loss) income, the most comparable GAAP measurement, for the years ended December 31, 2011, 2012 and 2013 and for the three months ended March 31, 2013 and 2014.

 

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Basis of Presentation

The key elements of our operating results include:

Revenues

We generate revenues from subscriptions to our platform and sales of our media offering. Our platform revenue is attributable to direct sales of subscriptions to our platform products, which currently include our Marketing Essentials, Centermark and Lighthouse products, as well as other products and modules of our local marketing automation platform that we historically sold under different product names, both on a standalone basis and packaged in combinations. We also derive additional platform revenues from sales of our products sold through resellers. Our media revenue is attributable to direct sales of Yodle Ads.

We sell Yodle Ads and subscriptions to our platform products primarily through our direct sales force and, to a lesser extent, through resellers. Subscriptions to Marketing Essentials and its predecessor products typically range from three- to 12-month initial subscription terms. Historically, these contracts have generally been extended on a month-to-month basis after the initial subscription term. Subscriptions to our Centermark product typically have 12-month initial subscription terms or longer. Subscriptions to our Lighthouse product are typically for month-to-month subscription terms.

Our customers typically pay a recurring monthly fixed fee for subscriptions to our platform products. For platform customers who also subscribe to our Yodle Ads media product, a portion of their monthly fee represents a monthly media budget that we establish with them at the time of their initial subscription. Our customers may adjust their monthly media budget in accordance with their needs but may not decrease their budget during the initial subscription term. Our customers typically pay their subscription fee and their media budget in advance. We record these prepayments as deferred revenue and recognize this revenue at the time our products are delivered. Revenues generated by our platform products are recognized ratably over the term during which the products are delivered. Revenues generated by our media product are recognized as local online advertising is purchased on behalf of that customer. If the entirety of the customer’s media budget is not used during the relevant period, that remaining amount will be recorded as deferred revenue and recognized when used.

We charge our resellers a fee on a per customer basis for each platform product they sell. The fees we charge our resellers are typically lower than the fees we charge our direct customers given that we incur limited selling and marketing expenses with sales made through resellers. Additionally, we collect a share of the revenue that our resellers generate from the sale of our media product. We recognize revenue in the period that we deliver our products to our resellers. Additionally, certain of our resellers have guaranteed to provide us with minimum fees, regardless of the volume of sales. Revenues derived from our resellers are included in platform revenues and are recognized on a net basis.

We expect that, over time, revenues generated by our platform products will grow more rapidly than revenues generated by our media product. However, our quarterly financial results of operations may not consistently reflect this trend given that the contribution to our revenues from our media product will likely vary more from period-to-period than revenue from our platform products.

Costs and Expenses

Our costs and expenses consist of cost of revenues, selling and marketing, technology and product development, general and administrative and depreciation and amortization expenses. Salaries, bonuses, stock-based compensation and other personnel related costs are the most significant components of each of these expense categories. We grew from 417 employees at December 31, 2010 to 1,117 employees at March 31, 2014, and we expect to continue to hire new employees in order to support our anticipated revenue growth. We include stock-based compensation expense in connection with the grant of stock options in the applicable costs and expense category based on the award recipient’s department.

 

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Cost of Revenues. Cost of revenues consists of traffic acquisition costs, net of any publisher rebates, client service account setup personnel costs including salaries, bonuses, stock-based compensation and other personnel costs, third-party costs associated with service delivery, colocation, hosting and designing websites, and credit card processing fees. No allocation of depreciation and amortization expense was made to cost of revenues.

The largest component of our cost of revenues is net traffic acquisition costs, which is only associated with our media product. Net traffic acquisition costs are the costs associated with acquiring online media for our customers from third-party publishers, primarily consisting of Google, Microsoft and Yahoo!, net of any publisher rebates. Typically, we become obligated to make payments for traffic acquisition costs in the period the advertising is delivered. Traffic acquisition costs are recognized as cost of revenues in the period in which they are incurred. From time to time, publishers may offer us rebates based on various factors, including specified advertiser count and other requirements. We record these rebates in the period in which they are earned as a reduction to the cost of revenues.

Generally, we expect our cost of revenues to increase in absolute dollars, but to remain relatively consistent as a percentage of revenues in the near term. Historically, we have experienced higher margins on our platform products as compared to our media product. In the long term, as the percentage of our total revenues attributable to our platform products increases, we expect our cost of revenues to decrease as a percentage of our total revenues.

Selling and Marketing Expense. Selling and marketing expense consists primarily of personnel costs, including salaries, bonuses, variable incentive-based compensation, stock-based compensation and other personnel costs related to sales, customer loyalty and retention, public relations, marketing, training and operations. Additional expenses in this category include travel and entertainment, advertising costs, marketing and promotional events, marketing activities, subcontracting fees and allocated overhead.

In order to grow our customer base, we expect to continue investing our resources in selling and marketing by increasing the number of sales and marketing and customer loyalty and retention personnel and expanding our marketing activities. As a result, we expect selling and marketing expense to increase in absolute dollars. However, we believe that our selling and marketing expense will decrease as a percentage of total revenues as our base of tenured customers continues to grow and represents a larger portion of our revenues.

Technology and Product Development Expense. Technology and product development expense consists primarily of personnel costs for our employees working in the development and infrastructure, information technology and product and product performance teams, including salaries, bonuses, stock-based compensation and other personnel costs. Also included are non-personnel costs such as consulting and professional fees to third-party development resources, software licensing fees and technology maintenance and other product development costs. We capitalize a portion of our technology development costs and, accordingly, include only a portion of those costs as technology and product development expense.

Our technology and product development efforts are focused on enhancing our platform and the products we offer and improving the performance of those products for our customers. We believe this investment is critical to maintaining the quality of our products and innovating to enhance our competitive position. We expect technology and product development expense to continue to increase on an absolute dollar basis and decrease as a percentage of revenue over time.

General and Administrative Expense. General and administrative expense consists primarily of personnel costs, including salaries, bonuses, stock-based compensation and other personnel costs for our administrative, legal, business development, human resources, finance and accounting employees. Additional expenses included in this category are non-personnel costs, such as real estate related expenses, building and maintenance expenses, travel related expenses, subcontracting and professional fees, audit fees, tax services and legal fees, as well as insurance and other corporate expenses. In addition, general and administrative expense includes compensation expenses related to our February 2013 acquisition of Lighthouse Practice Management. We expect our general and administrative expense to increase on an absolute dollar basis as we continue to support our growth and decrease as a percentage of revenue over time.

 

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We also anticipate that we will incur additional costs for personnel and professional services related to our preparation to become and operate as a public company. Such costs include increases in our finance and legal personnel, additional external legal and audit fees and expenses and costs associated with compliance with the Sarbanes-Oxley Act and other regulations governing public companies. We also expect to incur increased costs for directors’ and officers’ liability insurance and an enhanced investor relations function. Additionally, we intend to relocate our corporate headquarters in New York as our existing office space will not accommodate our anticipated growth in headcount and our current lease expires in April 2015. We expect that our real estate and building and maintenance expenses will increase in the near term as we expand the amount of square footage under lease. We may also incur additional expenses if we move our headquarters to a commercial space with a higher rental rate.

Depreciation and Amortization Expense. Depreciation and amortization expense primarily consists of our depreciation expense related to investments in property and equipment, amortization expense related to technology development costs and software, as well as the amortization of intangible assets originating from our acquisitions of ProfitFuel in 2011 and Lighthouse Practice Management in 2013. These acquired intangible assets included developed technology, customer relationships, domain names, non-competition agreements and trademarks and trade names.

Interest Expense and Other

Interest expense and other includes interest expense primarily consisting of interest incurred on outstanding borrowings under our debt obligations, changes in the fair value of our preferred stock warrant liabilities and interest received on our cash and cash equivalents. The fair value of our preferred stock warrant liabilities is re-measured at the end of each reporting period and any changes in fair value are recognized on our statements of operations as interest expense and other. Upon completion of this offering, other than preferred stock warrants that are subject to the automatic preferred stock warrant exercise, our preferred stock warrants will automatically, in accordance with their terms, become warrants to purchase our common stock, which will result in the reclassification of the preferred stock warrant liabilities related to these warrants to additional paid-in capital, and no further changes in fair value will be recognized in interest expense and other.

(Benefit) Provision for Income Taxes

(Benefit) provision for income taxes consists of federal and state income taxes in the United States and income taxes in a foreign jurisdiction, deferred income taxes reflecting the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and the realization of net operating loss carryforwards.

 

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Results of Operations

The following table sets forth our selected consolidated statements of operations data:

 

     Year Ended December 31,     Three Months Ended
March 31,
 
     2011     2012     2013     2013     2014  
     (in thousands)  
                       (unaudited)  

Consolidated Statements of Operations Data:

          

Revenues

   $ 87,584      $ 132,321      $ 161,863      $ 35,202      $ 45,746   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

          

Cost of revenues (exclusive of depreciation and amortization shown separately below)(1)

     33,876        42,760        53,843        11,925        14,446   

Selling and marketing(1)

     36,318        51,623        64,605        14,076        18,628   

Technology and product development(1)

     10,157        14,977        20,346        4,568        5,660   

General and administrative(1)

     15,305        19,591        29,271        6,085        8,349   

Depreciation and amortization

     2,328        3,721        6,419        1,248        1,845   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     97,984        132,672        174,484        37,902        48,928   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (10,400     (351     (12,621     (2,700     (3,182

Interest expense and other

     (7,074     (4,690     (2,912     (440     (2,660
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (17,474     (5,041     (15,533     (3,140     (5,842

(Benefit) provision for income taxes

     (2,035     387        (5,131     (5,327     103   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income and comprehensive (loss) income

   $ (15,439   $ (5,428   $ (10,402   $ 2,187      $ (5,945
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes stock-based compensation expense as follows:

 

Cost of revenues

   $ 15       $ 17       $ 15       $ 4       $ 10   

Selling and marketing

     422         577         780         241         237   

Technology and product development

     235         445         675         159         218   

General and administrative

     1,160         1,827         1,161         521         214   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 1,832       $ 2,866       $ 2,631       $ 925       $ 679   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following table sets forth our selected consolidated statements of operations data expressed as a percentage of revenues:

 

     Year Ended December 31,     Three Months Ended
March 31,
 
         2011             2012             2013             2013             2014      
    

(as a percentage of revenues)

 
                       (unaudited)  

Consolidated Statements of Operations Data:

          

Revenues

     100     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

          

Cost of revenues (exclusive of depreciation and amortization shown separately below)

     39        32        33        34        32   

Selling and marketing

     41        39        40        40        41   

Technology and product development

     12        11        13        13        12   

General and administrative

     17        15        18        17        18   

Depreciation and amortization

     3        3        4        4        4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     112        100        108        108        107   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (12     —          (8     (8     (7

Interest expense and other

     (8     (4     (2     (1     (6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (20     (4     (10     (9     (13

(Benefit) provision for income taxes

     (2     —          (3     (15     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income and comprehensive (loss) income

     (18 )%      (4 )%      (6 )%      6     (13 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comparison of Three Months Ended March 31, 2013 and 2014

Revenues

 

     Three Months Ended
March 31,
     % Change
2014 vs.
2013
 
     2013      2014     
     (in thousands)         

Platform revenues:

   $ 15,142       $ 20,549         36%   

Media revenues:

   $ 20,060       $ 25,196         26%   
  

 

 

    

 

 

    

Revenues

   $ 35,202       $ 45,746         30%   
  

 

 

    

 

 

    

Revenues for the three months ended March 31, 2014 increased $10.5 million, or 30%, compared to the same period in 2013. Platform revenues grew by $5.4 million, or 36%, and media revenues grew by $5.1 million, or 26%, for the three months ended March 31, 2014 compared to the same period in 2013. The increase in platform revenues was primarily due to a $3.1 million increase in revenues from the acceleration of sales of our Lighthouse product that we acquired in February 2013 in addition to one full quarter of revenue generated from our Lighthouse product in the three months ended March 31, 2014 compared to one month of revenue in the same period in 2013. In addition, platform revenue increased by $2.4 million as a result of a 28% increase in the number of customers subscribing to our other platform products, partially offset by lower average monthly revenue per customer from these products in the three months ended March 31, 2014 compared to the same period in 2013. The increase in media revenues was primarily attributable to an increase in the average per customer media spend of new customers who purchased our media product in addition to our platform product. This increase was primarily the result of increases of the average per customer media budget from these customers in conjunction with a corresponding decrease in their subscription price of our platform product.

 

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Cost of Revenues

     Three Months Ended
March 31,
     % Change
2014 vs.
2013
 
     2013      2014     
     (in thousands)         

Cost of revenues

   $ 11,925       $ 14,446         21%   

% of revenues

     34%         32%      

The $2.5 million increase in cost of revenues for the three months ended March 31, 2014 compared to the same period in 2013 was attributable to a $1.9 million, or 22%, increase in net traffic acquisition costs from $8.5 million in the three months ended March 31, 2013 to $10.4 million in the three months ended March 31, 2014, directly resulting from our increase in media revenues. Cost of revenues directly attributable to our platform products increased by $0.4 million primarily due to the acceleration of sales of our Lighthouse product that we acquired in February 2013 in addition to recognizing one quarter of cost of revenues from our Lighthouse product in the three months ended March 31, 2014 compared to one month of costs recognized during the three months ended March 31, 2013. Costs shared across our media and platform products increased $0.2 million, driven primarily by an increase in credit card processing fees and colocation and hosting fees. Despite an increase in the number of accounts onboarded, personnel costs associated with customer service employees, which are shared across our media and platform products, remained consistent quarter over quarter as a result of our investments in technology and automation.

Selling and Marketing Expense

     Three Months Ended
March 31,
     % Change
2014 vs.
2013
 
     2013      2014     
     (in thousands)         

Selling and marketing

   $ 14,076       $ 18,628         32%   

% of revenues

     40%         41%      

The $4.6 million increase in selling and marketing expense for the three months ended March 31, 2014 compared to the same period in 2013 was primarily attributable to a $3.8 million increase in salaries, variable incentive-based compensation, stock-based compensation and other personnel-related costs, as we increased the number of selling and marketing personnel to support our increased sales objectives and expanding customer base due, in part, to our acquisition of Lighthouse Practice Management. In addition, selling and marketing expense increased by $0.6 million as a result of increased third-party costs and increased marketing initiatives.

Technology and Product Development Expense

     Three Months
Ended March 31,
     % Change
2014 vs.
2013
 
     2013      2014     
     (in thousands)         

Technology and product development

   $ 4,568       $ 5,660         24%   

% of revenues

     13%         12%      

The $1.1 million increase in technology and product development expense for the three months ended March 31, 2014 compared to the same period in 2013 was primarily attributable to a $1.0 million increase in salaries, bonuses, stock-based compensation and other personnel costs, which was largely driven by our increased investment in technology and product development personnel to support our continued efforts to develop new products and enhance our platform and existing product offerings.

General and Administrative Expense

     Three Months
Ended March 31,
     % Change
2014 vs.
2013
 
     2013      2014     
     (in thousands)         

General and administrative

   $ 6,085       $ 8,349         37%   

% of revenues

     17%         18%      

 

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The $2.3 million increase in general and administrative expense for the three months ended March 31, 2014 compared to the same period in 2013 was primarily due to a $1.1 million increase in salaries, stock-based compensation costs and other personnel-related costs, which was largely driven by recognizing one quarter of personnel costs from general and administrative employees associated with our acquisition of Lighthouse Practice Management in the three months ended March 31, 2014 compared to one month of these costs recognized in the same period in 2013, as well as increases in accounting, finance, human resources, legal and business development personnel to support the growth of our business. In addition, we experienced a $0.4 million increase in audit fees in preparation for a potential initial public offering and a $0.3 million increase in real estate expense and building maintenance costs as we expanded our operations in New York City and Charlotte.

Depreciation and Amortization

 

     Three Months
Ended March 31,
     % Change
2014 vs.
2013
 
     2013      2014     
     (in thousands)         

Depreciation and amortization

   $ 1,248       $ 1,845         48%   

% of revenues

     4%         4%      

The $0.6 million increase in depreciation and amortization expense for the three months ended March 31, 2014 as compared to the same period in 2013 was primarily due to amortization of intangibles from the acquisition of Lighthouse Practice Management in February 2013.

Interest Expense and Other

 

     Three Months
Ended March 31,
    % Change
2014 vs.
2013
 
     2013     2014    
     (in thousands)        

Interest expense and other

   $ (440   $ (2,660     505%   

% of revenues

     (1 )%      (6 )%   

The $2.2 million increase in interest expense and other for the three months ended March 31, 2014 compared to the same period in 2013 was primarily driven by a $2.2 million expense related to the change in the fair value of our convertible preferred stock warrants. Interest expense related to indebtedness decreased $0.1 million from the three months ended March 31, 2013 to the same period in 2014 as a result of achieving lower interest rates on our outstanding debt, offset by higher levels of outstanding indebtedness.

(Benefit) Provision for Income Taxes

 

     Three Months
Ended March 31,
     % Change
2014 vs.
2013
 
     2013     2014     
     (in thousands)         

(Benefit) provision for income taxes

   $ (5,327   $ 103         102%   

% of revenues

     (15 )%      —        

The $5.4 million increase in our provision for income taxes for the three months ended March 31, 2014 compared to the same period in 2013 was due to a $5.3 million deferred tax benefit realized in February 2013 resulting from purchase accounting related to the acquisition of Lighthouse Practice Management.

 

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Comparison of Years Ended December 31, 2011, 2012 and 2013

Revenues

 

     Year Ended December 31,      % Change
2012 vs.
2011
    % Change
2013 vs.
2012
 
     2011      2012      2013       
     (in thousands)               

Platform revenues

   $ 31,568       $ 58,976       $ 71,466         87     21

Media revenues

   $ 56,016       $ 73,345       $ 90,397         31     23

Revenues

   $ 87,584       $ 132,321       $ 161,863         51     22

2013 Compared to 2012

Revenues for 2013 increased $29.5 million, or 22%, compared to 2012. Platform revenues grew by $12.5 million, or 21%, from $59.0 million in 2012 to $71.5 million in 2013. Media revenues grew by $17.1 million, or 23%, from $73.3 million in 2012 to $90.4 million in 2013. The increase in platform revenues was driven by a $8.3 million increase in revenues from sales of our Lighthouse product that we acquired in February 2013 and the allocation of additional sales personnel to accelerate revenue growth from our Lighthouse product subsequent to the acquisition. We also experienced a $4.2 million increase in revenues from sales of our other platform products due to a 24% increase in the number of customers subscribing to our other platform products, partially offset by lower average monthly revenue per customer in 2013 for the predecessor to our Marketing Essentials product as a result of changes in our pricing strategy. The increase in media revenues was primarily attributable to an increase in the number of customers purchasing both our platform and media products as well as an increase in the average per customer media spend of new customers and, to a lesser extent, to large seasonal campaigns in 2013 from a franchise network and its locations.

2012 Compared to 2011

Revenues for 2012 increased $44.7 million, or 51%, compared to 2011. Platform revenues grew by $27.4 million, or 87%, from $31.6 million in 2011 to $59.0 million in 2012. Media revenues grew by $17.3 million, or 31%, from $56.0 million in 2011 to $73.3 million in 2012. The increase in platform revenues was primarily driven by a 41% increase in the number of customers subscribing to our platform, resulting primarily from the additional direct sales of our platform products. In addition, this increase in platform revenue was driven by sales of platform products that we acquired in our May 2011 acquisition of ProfitFuel and the subsequent growth in sales of subscriptions to these products following the acquisition and, to a lesser extent, the increase in platform revenue driven by the commencement of our reseller relationship with Rogers in Canada. The increase in media revenues was primarily attributable to an increase in the number of customers of our media product, resulting in part from new customers purchasing our media product alongside a subscription to our platform product and sales personnel acquired as part of our acquisition of ProfitFuel transitioning from selling exclusively platform products to selling both platform and media products over the course of 2012 and, to a lesser extent, the addition of a franchise relationship with a large network of customers.

Cost of Revenues

 

     Year Ended December 31,     % Change
2012 vs.
2011
    % Change
2013 vs.
2012
 
     2011     2012     2013      
     (in thousands)              

Cost of revenues

   $ 33,876      $ 42,760      $ 53,843        26     26

% of revenues

     39     32     33    

 

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2013 Compared to 2012

The $11.1 million increase in cost of revenues from 2012 to 2013 was attributable to a $5.7 million, or 17%, increase in net traffic acquisition costs from $32.7 million in 2012 to $38.5 million in 2013, directly resulting from our increase in media revenues in 2013. Costs directly attributable to our platform products increased by $4.4 million, including increased costs for listings management and content creation. Costs shared across our media and platform products increased $1.4 million, driven primarily by a $1.1 million increase in credit card processing fees and colocation and hosting fees. Our increase in cost of revenues was partially offset by a decrease of $0.4 million in personnel costs associated with customer service employees, which are shared across our media and platform products, as a result of our increased investment in automation.

2012 Compared to 2011

The $8.9 million increase in cost of revenues from 2011 to 2012 was primarily attributable to a $6.5 million, or 25%, increase in net traffic acquisition costs from $26.2 million in 2011 to $32.7 million in 2012, directly resulting from an increase in our media revenues in 2012. Costs directly attributable to our platform products increased by $0.5 million, including increased costs for content creation. Costs shared across both our media and platform products increased $1.6 million, including a $0.6 million increase in credit card processing fees and colocation and hosting fees. In addition, our cost of revenues increased by $0.3 million as a result of increases in personnel costs, which are shared across our media and platform products, associated with customer service employees.

Selling and Marketing Expense

 

     Year Ended December 31,     % Change
2012 vs.
2011
    % Change
2013 vs.
2012
 
     2011     2012     2013      
     (in thousands)              

Selling and marketing

   $ 36,318      $ 51,623      $ 64,605        42     25

% of revenues

     41     39     40    

2013 Compared to 2012

The $13.0 million increase in selling and marketing expense from 2012 to 2013 was primarily attributable to a $12.4 million increase in salaries, variable incentive-based compensation, stock-based compensation and other personnel-related costs, as we increased the number of direct local sales force personnel to support our increased sales objectives. Selling and marketing expense was also impacted by a $0.6 million increase in costs related to marketing initiatives.

2012 Compared to 2011

The $15.3 million increase in selling and marketing expense from 2011 to 2012 was primarily attributable to a $14.3 million increase in salaries, variable incentive-based compensation, stock-based compensation and other personnel-related costs, as we increased the number of selling and marketing personnel to support our increased sales objectives and expanding customer base due, in part, to our acquisition of ProfitFuel. Selling and marketing expense was also impacted by a $1.0 million increase in costs related to marketing initiatives, software licenses and other selling and marketing costs.

Technology and Product Development Expense

 

 

     Year Ended December 31,     % Change
2012 vs.
2011
    % Change
2013 vs.
2012
 
     2011     2012     2013      
     (in thousands)              

Technology and product development

   $ 10,157      $ 14,977      $ 20,346        47     36

% of revenues

     12     11     13    

 

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2013 Compared to 2012

The $5.4 million increase in technology and product development expense from 2012 to 2013 was primarily attributable to a $5.0 million increase in salaries, bonuses, stock-based compensation and other personnel costs, which was largely driven by our increased investment in technology and product development personnel to support our continued efforts to develop new products and enhance our platform and existing product offerings.

2012 Compared to 2011

The $4.8 million increase in technology and product development expense from 2011 to 2012 was primarily attributable to a $4.3 million increase in salaries, bonuses, stock-based compensation and other personnel costs, which was largely driven by our increased investment in technology and product development personnel to support our continued efforts to develop new products and enhance our platform and existing product offerings.

General and Administrative Expense

 

 

     Year Ended December 31,     % Change
2012 vs.
2011
    % Change
2013 vs.
2012
 
     2011     2012     2013      
     (in thousands)              

General and administrative

   $ 15,305      $ 19,591      $ 29,271        28     49

% of revenues

     17     15     18    

2013 Compared to 2012

The $9.7 million increase in general and administrative expense from 2012 to 2013 was primarily due to a one-time $4.3 million charge for compensation expense associated with the deferred cash payment and a $0.7 million charge associated with a change in fair value of the deferred consideration, in each case incurred in connection with our acquisition of Lighthouse Practice Management, a $3.1 million increase in salaries, stock-based compensation costs and other personnel-related costs, which was largely driven by an increase in the number of accounting, finance, human resources, legal and business development personnel to support the growth of our business and a $1.0 million increase in real estate expense and building maintenance costs as we expanded our existing operations in Charlotte and New York.

2012 Compared to 2011

The $4.3 million increase in general and administrative expense from 2011 to 2012 was primarily due to a $1.9 million increase in salaries, stock-based compensation costs and other personnel-related costs, which was largely driven by an increase in the number of accounting, finance, human resources and business development personnel to support the growth of our business, a $1.1 million increase in real estate expense and building maintenance costs as we expanded our operations in Austin and a $0.3 million one-time cost incurred in connection with abandoning our Boston lease.

Depreciation and Amortization Expense

 

 

     Year Ended December 31,     % Change
2012 vs.
2011
    % Change
2013 vs.
2012
 
     2011     2012     2013      
     (in thousands)              

Depreciation and amortization

   $ 2,328      $ 3,721      $ 6,419        60     73

% of revenues

     3     3     4  

 

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2013 Compared to 2012

The $2.7 million increase in depreciation and amortization expense from 2012 to 2013 was primarily due to amortization of intangibles from the Lighthouse Practice Management acquisition in February 2013, increased depreciation and amortization expense related to our expansion in Austin in late 2012, and investments in our technology infrastructure to support our growing personnel across our offices.

2012 Compared to 2011

The $1.4 million increase in depreciation and amortization expense from 2011 to 2012 was primarily due to expense related to a full year of amortization of intangibles acquired from ProfitFuel compared to seven months of amortization in 2011, and investments in our technology infrastructure to support our growing personnel across our offices.

Interest Expense and Other

 

     Year Ended December 31,     % Change
2012 vs.
2011
    % Change
2013 vs.
2012
 
     2011     2012     2013      
     (in thousands)              

Interest expense and other

   $ (7,074   $ (4,690   $ (2,912     34     38

% of revenues

     (8 )%      (4 )%      (2 )%     

2013 Compared to 2012

The $1.8 million decrease in interest expense and other from 2012 to 2013 was primarily due to the repayment of the ProfitFuel deferred payment in late 2012, the conversion of convertible promissory notes into equity and reduced borrowing costs as a result of financing activity.

2012 Compared to 2011

The $2.4 million decrease in interest expense and other from 2011 to 2012 was primarily due to a $5.0 million reduction in interest expense due to amortization of the beneficial conversion feature of the convertible promissory notes issued pursuant to our bridge financing, partially offset by a $1.3 million increase in interest related to loans and a $1.2 million expense related to the change in the fair value of our convertible preferred stock warrants.

(Benefit) Provision for Income Taxes

 

     Year Ended December 31,     % Change
2012 vs.
2011
    % Change
2013 vs.
2012
 
     2011     2012      2013      
     (in thousands)              

(Benefit) provision for income taxes

   $ (2,035   $ 387       $ (5,131     119     *   

% of revenues

     (2 )%      —           (3 )%     

 

* not meaningful

2013 Compared to 2012

The $5.5 million decrease in our provision for income taxes from 2012 to 2013 was primarily due to a $5.4 million deferred tax benefit realized through the acquisition of intangible assets resulting from the acquisition of Lighthouse Practice Management in February 2013.

2012 Compared to 2011

The $2.4 million increase in our provision for income taxes from 2011 to 2012 was primarily due to a $2.1 million deferred tax benefit recorded in 2011 in connection with our acquisition of ProfitFuel in May 2011.

 

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Liquidity and Capital Resources

Working Capital, Operating and Capital Expenditure Requirements

As of March 31, 2014, we had cash and cash equivalents of $10.3 million. Cash and cash equivalents consist of cash and money market funds. We did not have any short-term or long-term investments. We use cash for working capital purposes, and we do not enter into investments for trading or speculative purposes. Our policy is to invest any cash in excess of our immediate capital requirements in investments designed to preserve the principal. Accordingly, our cash and cash equivalents are invested primarily in demand deposit accounts and money market funds that are currently providing only a minimal return. In 2014, we expect our capital expenditure requirements to be approximately $4.0 million to $6.0 million in the aggregate. Our future working capital, operating and capital expenditure requirements will depend on many factors, including the rate of our revenue growth, the amount and timing of our investments in personnel and capital equipment, and the timing and extent of our introduction of new products and product enhancements. We believe our existing cash and cash equivalents and our future cash flows from operating activities will be sufficient to meet our anticipated cash needs for at least the next 12 months. Thereafter, we may need to raise additional funds through bank credit arrangements or public or private equity, equity-linked or debt financings to meet our future cash requirements. We may also need to raise additional funds in the event we determine in the future to effect one or more acquisitions of businesses, technologies or products. Any additional equity financing may be dilutive to our stockholders. Moreover, if we raise additional funds through the incurrence of indebtedness, such indebtedness will likely require current payment of interest and contain covenants that restrict our operations, such as limitations on our ability to incur additional debt, and other operating restrictions that could adversely impact our ability to conduct our business. If additional funding is required, we may not be able to obtain bank credit arrangements or to effect an equity, equity-linked or debt financing on terms acceptable to us, or at all. If we are unable to raise additional funds when needed, our operations and ability to execute our business strategy could be adversely affected.

Sources of Liquidity

Since inception, we have funded our operations principally through private placements of our capital stock, issuance of debt and cash flows generated from our operations and to a lesser extent from the proceeds received from the exercise of options. We have received an aggregate of $53.7 million in net cash proceeds from the sale of our preferred stock.

In September 2013, we entered into a loan and security agreement with Rogers Communications Inc., or Rogers, to borrow $15.0 million. This facility is secured by substantially all of our assets. The security interest granted under this loan is fully subordinated to the security interest granted under our credit facility with Silicon Valley Bank, or SVB. A portion of the proceeds of this loan was used to repay in full our outstanding obligations under our 2011 term loan with SVB. This obligation has a fixed interest rate of 5.0%, which is payable monthly. Interest expense of $0.2 million related to this indebtedness was recorded in the year ending December 31, 2013. The principal and all accrued and unpaid interest under this agreement is payable at maturity, which will be September 9, 2017. We intend to use a portion of the net proceeds from this offering to repay $            million of indebtedness outstanding under our loan and security agreement with Rogers. See “Use of Proceeds.”

In December 2013, we amended and restated our existing loan and security agreement with SVB to provide for a $10.0 million term loan facility, as well as a $2.0 million revolving credit facility. As of December 31, 2013, we had approximately $3.0 million of aggregate outstanding borrowings under the term loan facility. A portion of the proceeds of our term loan facility were used to repay in full our outstanding obligations under our 2010 term loan with SVB. In March 2014, we utilized a portion of this term loan facility to repay in full the cash portion of the earn-out consideration due in connection with our acquisition of Lighthouse Practice Management, as described further in “—Contractual Obligations” below. As of March 31, 2014, we had $4.0 million of available borrowings under the term loan facility. The repayment period of our term loan facility will commence on January 2, 2015, with 30 equal monthly payments and bears interest at a per annum floating rate equal to 0.75% plus the prime rate then in effect. From January 1, 2014 to December 31, 2014, we are required to pay

 

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only interest on a monthly basis. Under the revolving credit facility, we may incur aggregate borrowings up to the lesser of $2.0 million and 80% of eligible accounts receivable. Any outstanding principal amount under the revolving credit facility and any accrued and unpaid interest must be paid at maturity in December 2015. Borrowings under our revolving credit facility accrue interest on a monthly basis at a per annum floating rate equal to 0.25% plus the prime rate then in effect. As of March 31, 2014, we had no outstanding borrowings and up to $2.0 million of available borrowing capacity under our revolving credit facility. Our SVB credit facility is secured by substantially all of our assets. We intend to use a portion of the net proceeds from this offering to repay $             of the outstanding indebtedness under the term loan facility. See “Use of Proceeds.”

Historical Cash Flows

The following table sets forth our consolidated cash flows for the periods indicated:

 

     Year Ended December 31,     Three Months Ended
March 31,
 
     2011     2012     2013     2013     2014  
    

(in thousands)

 
                       (unaudited)  

Net cash provided by (used in) operating activities

   $ 6,503      $ 5,056      $ 4,129      $ 708      $ (1,624

Net cash used in investing activities

     (19,192     (4,770     (8,958     (5,398     (1,278

Net cash provided by (used in) financing activities

     18,690        (5,727     8,008        4,166        831   

Operating Activities

Net cash provided by operating activities decreased from the first three months of 2013 compared to the first three months of 2014.

For the three months ended March 31, 2014, operating activities used $1.6 million in cash, as compared to $0.7 million provided in cash for the three months ended March 31, 2013. Net cash used in operating activities in the three months ended March 31, 2014 was a result of a net loss of $5.9 million and $1.8 million of cash used as a result of changes in operating assets and liabilities (net of effect of business combinations), partially offset by $6.1 million in adjustments for non-cash items. Non-cash items included stock-based compensation expense, depreciation and amortization expense, preferred stock warrant liabilities mark-to-market loss (gain), compensation expense in connection with the acquisition of Lighthouse Practice Management, and deferred taxes. The net change in operating assets and liabilities (net of effect of business combinations) was primarily the result of a $1.4 million decrease in accounts payable and accrued expenses and a $0.4 million increase in accounts receivable due to quarter end timing of payments as well as a $0.8 million increase in prepaid expenses due to software licensing fees and insurance prepayments, partially offset by a $1.2 million increase in deferred revenue driven by an increase in prepaid franchise contracts, media budgets, and setup fees.

For the three months ended March 31, 2013, operating activities provided $0.7 million in cash as a result of net income of $2.2 million and $0.8 million of cash provided by changes in operating assets and liabilities (net of effect of business combinations), partially offset by $2.2 million in adjustments for non-cash items. The net change in operating assets and liabilities (net of effect of business combinations) was primarily the result of a $0.6 million increase in accounts payable and accrued expenses due to normal fluctuations in the timing of trade payables and a $0.7 million increase in deferred revenues due to an increase in media budgets, partially offset by a $0.5 million increase in current assets.

For the year ended December 31, 2013, operating activities provided $4.1 million in cash, as compared to $5.1 million in cash for the year ended December 31, 2012. Net cash provided by operating activities in the year ended December 31, 2013 was a result of $2.8 million of cash provided by changes in operating assets and liabilities (net of effect of business combinations) and $11.8 million in adjustments for non-cash items, partially offset by a net loss of $10.4 million. Non-cash items included stock-based compensation expense, depreciation and

 

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amortization expense, bad debt expense, accretion/amortization of warrant liabilities, debt discounts, deferred financing fees, loss on disposal of property and equipment, accrued interest on debt, deferred taxes, deferred rent and lease abandonment, and loss on early extinguishment of debt. The net change in operating assets and liabilities (net of effect of business combinations) was primarily the result of a $3.0 million increase in accounts payable and accrued expenses due to our increase in revenue generating activities and an increase in our headcount.

For the year ended December 31, 2012, operating activities provided $5.1 million in cash, as compared to $6.5 million in cash for the year ended December 31, 2011. Net cash provided by operating activities in the year ended December 31, 2012 was a result of $1.2 million of cash provided by changes in operating assets and liabilities (net of effect of business combinations) and $9.3 million in adjustments for non-cash items, partially offset by a net loss of $5.4 million. The net change in operating assets and liabilities (net of effect of business combinations) was primarily the result of a $5.7 million increase in accounts payable driven by increased revenue generating activities and accrued expenses, partially offset by a $2.2 million increase in accounts receivable due to year end timing of credit card receipts, and increased sales to resellers.

For the year ended December 31, 2011, operating activities provided $6.5 million in cash as a result of $11.8 million of cash provided by changes in operating assets and liabilities (net of effect of business combinations) and $10.1 million in adjustments for non-cash items, partially offset by a net loss of $15.4 million. The net change in operating assets and liabilities (net of effect of business combinations) was primarily the result of a $13.7 million increase in deferred revenue driven by a $10.0 million licensing fee paid by one of our resellers.

Investing Activities

Our investing activities have consisted primarily of business combinations and the purchases of property and equipment. We have invested in property and equipment to support our headcount growth.

For the three months ended March 31, 2014, our net cash used in investing activities consisted of $0.6 million used in the purchase of property and equipment, $0.2 million used in the capitalization of technology development costs and $0.5 million used in the acquisition of capitalized software. For the three months ended March 31, 2014, net cash used in investing activities was $4.1 million lower than in the three months ended March 31, 2013 because of the cash flows associated with our acquisition of Lighthouse Practice Management in February 2013.

For the three months ended March 31, 2013, our net cash used in investing activities consisted of $5.0 million paid as part of the acquisition of Lighthouse Practice Management (net of cash acquired), $0.4 million used in the purchase of property and equipment and $0.2 million used in the capitalization of technology development costs, partially offset by a $0.1 million reduction in restricted cash as a result of the expiration of a letter of credit associated with one of our real estate leases.

For the year ended December 31, 2013, our net cash used in investing activities consisted of $3.3 million used in the purchase of property and equipment, $0.8 million used in the capitalization of technology development costs and $5.0 million paid as part of the acquisition of Lighthouse Practice Management (net of cash acquired), partially offset by a $0.1 million reduction in restricted cash as a result of the expiration of a letter of credit. Net cash used in investing activities was $4.2 million higher than in the year ended December 31, 2012, primarily because of our acquisition of Lighthouse Practice Management in 2013.

For the year ended December 31, 2012, our net cash used by investing activities consisted of $2.9 million used in the purchase of property and equipment, $0.4 million used in the capitalization of technology development costs and a $1.5 million increase in restricted cash to collateralize a letter of credit issued in connection with our Austin lease. Net cash used in investing activities was $14.4 million lower than in the year ended December 31, 2011, primarily because of the effect of our acquisition of ProfitFuel in 2011.

 

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For the year ended December 31, 2011, our net cash used in investing activities consisted of $1.2 million used in the purchase of property and equipment, $0.7 million used in the capitalization of technology development costs and $17.3 million paid as part of the business combination with ProfitFuel (net of cash acquired).

Financing Activities

Our financing activities have primarily consisted of proceeds from the issuance of convertible preferred stock and proceeds from the exercise of stock options, as well as borrowings and repayments of debt facilities.

For the three months ended March 31, 2014, our net cash provided by financing activities was $0.8 million resulting from $3.0 million in borrowings under our loan and security agreement with SVB and $0.5 million as a result of net proceeds from the issuance of convertible preferred stock and the issuance of common stock in connection with option exercises, partially offset by $2.7 million used in the payment of contingent consideration related to the acquisition of Lighthouse Practice Management.

For the three months ended March 31, 2013, our net cash provided by financing activities was $4.2 million resulting from $5.1 million as a result of net proceeds from the issuance of convertible preferred stock and the issuance of common stock in connection with option exercises, partially offset by $0.9 million in repayments, net of borrowings, related to our loan and security agreement with SVB.

For the year ended December 31, 2013, our net cash provided by financing activities was $8.0 million resulting from $1.7 million in borrowings, net of repayments, under our loan and security agreements with SVB and Rogers and $6.3 million as a result of net proceeds from the issuance of convertible preferred stock and the issuance of common stock in connection with option exercises.

For the year ended December 31, 2012, our net cash used in financing activities was $5.7 million resulting from $6.0 million in repayments, net of borrowings, primarily due to $7.5 million used to pay the deferred payment obligation incurred in connection with the ProfitFuel acquisition, partially offset by $0.3 million as a result of net proceeds from the issuance of common stock in connection with option exercises.

For the year ended December 31, 2011, our net cash provided by financing activities was $18.7 million primarily attributable to $18.4 million in borrowings, net of repayments, under our convertible promissory notes issued in connection with our bridge financing for the ProfitFuel acquisition and our loan and security agreement with SVB, as well as $0.3 million as a result of net proceeds from the issuance of common stock in connection with option exercises.

Contractual Obligations

The following table discloses aggregate information about material contractual obligations and periods in which payments were due as of December 31, 2013. Future events could cause actual payments to differ from these estimates.

 

     Less than 1
Year
     1 to 3
Years
     3 to 5
Years
     More than
5 Years
     Total  
     (in thousands)  

Long-term debt obligations(1)

   $ 5,460       $ 8,555       $ 15,594         —         $ 29,609   

Operating leases

     5,016         6,575         4,184         7,485         23,261   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 10,476       $ 15,130       $ 19,778       $ 7,485       $ 52,870   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) We intend to use a portion of the net proceeds from this offering to repay $             million of our long-term debt outstanding as of December 31, 2013. See “Use of Proceeds.”

 

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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. For a description of our financing arrangements, see “—Sources of Liquidity” above.

Long-Term Debt Obligations

Our long-term debt obligations set forth in the table above include our outstanding indebtedness to Rogers and SVB, as well as the following:

In connection with our acquisition of Lighthouse Practice Management in 2013, we incurred a deferred payment obligation of $6.2 million. This deferred payment obligation accrues interest at a rate equal to 8% per annum and will become due and payable upon the earlier of February 28, 2015 (subject to a subordination agreement with SVB) and the closing of this offering. We intend to use a portion of the net proceeds from this offering to repay this obligation in full. In connection with this acquisition, we also agreed to earn-out consideration of up to $5.0 million, based on achievement of revenue targets for the period of March 1, 2013 through February 28, 2014. On September 26, 2013, we deemed the earn-out consideration to be fully earned. The earn-out consideration, consisting of $3.0 million in cash and $2.0 million in our Series E preferred stock valued at $2.30 per share, was paid in March 2014. Upon issuance in March 2014, the Series E preferred stock had a fair value of $3.16 per share. Our long-term debt obligations exclude the portion of the earn-out consideration payable in our Series E preferred stock.

On November 18, 2011, we repurchased 3,000,000 shares of our common stock from one of our founders and issued a subordinated promissory note in the principal amount of approximately $2.5 million as payment in full for such repurchased shares. The promissory note accrues interest at a rate of 3.3% per annum and matures upon the earlier to occur of June 21, 2014 (subject to a subordination agreement with SVB) and the consummation of this offering.

On June 18, 2014, we borrowed an additional $3.0 million under our term loan facility with SVB. The proceeds of this term loan were used on June 20, 2014 to repay in full our outstanding obligations under the subordinated promissory note issued to one of our founders, as described above.

Off-Balance Sheet Arrangements

We do not have 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. We do not engage in off-balance sheet financing arrangements. In addition, we do not engage in trading activities involving non-exchange traded contracts. We therefore believe that we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with GAAP. The preparation of our consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates. We believe our estimates, assumptions and judgments associated with revenue recognition, business combinations, goodwill and acquired intangible assets and stock-based compensation have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our most critical accounting policies and have summarized them below. See note 2 to our consolidated financial statements included in this prospectus for a description of our other significant accounting policies.

 

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Revenue Recognition

We recognize revenue when (1) there is persuasive evidence of an agreement or arrangement, (2) services have been rendered, (3) the price to the buyer is fixed or determinable and (4) collectability is reasonably assured.

We apply ASC 605-25, Revenue Recognition—Multiple-Element Arrangements, to account for such arrangements. When an arrangement involves multiple elements and it is determined that the elements should be accounted for as separate units of accounting under ASC 605-25, the entire fee from the arrangement is allocated to each respective element based on its relative fair value and recognized when the revenue recognition criteria for each element are met. For all offerings provided, we determine the selling price using either vendor specific objective evidence (VSOE) or, if VSOE is not available, best estimated selling price, as there is no reliable third-party evidence available. The significant factors, inputs and assumptions included in our determination are: actual selling prices, established price lists and other company-specific considerations. We regularly review the factors, inputs and assumptions that we use to determine VSOE and estimated selling price. Changes in these factors, inputs and assumptions or changes to elements in the arrangements could cause a material increase or decrease in the amount of revenue we report in a particular period.

Our primary sources of revenue are from Yodle Ads, our media offering, and sales of our platform offerings, which have historically included our Lighthouse, Yodle Organic and Yodle Web products, and now also includes Marketing Essentials and Centermark as a result of their recent introduction. We charge a recurring monthly fee for our platform products, which is recognized over the relevant month of service. For Yodle Ads, if a customer’s entire media budget is not used during the relevant period, the outstanding amount remains recorded as deferred revenue and is recognized when used. We are the principal in these transactions because we are the primary obligor, perform a significant portion of the services, set the pricing, retain credit risk and have discretion in the supplier selection. As a result, we recognize this revenue on a gross basis. We also derive revenue from set up and web design fees which are recognized over the expected customer life.

We also sell our products through resellers. We earn a per customer fee for our resellers’ sales of our platform products. We also collect a share of the revenue our resellers generate from sales of Yodle Ads. We recognize this revenue in the period we deliver our products to our resellers. Additionally, certain of our resellers have a minimum fee structure with us, regardless of the volume of their sales. Historically, our resellers have exceeded the minimum guaranteed fee. We are not the principal in these transactions because we are not the primary obligor and do not retain credit risk. As a result, we recognize this revenue on a net basis.

We have entered into a licensing agreement with a reseller who paid a $10.0 million licensing fee, which is being recognized ratably over the estimated life of this relationship, estimated to be the term of the contract, which currently ends December 31, 2018. In addition to this licensing fee, we may earn milestone payments if certain revenue targets are met by this reseller. These milestone payments, if earned, would be recognized ratably over the estimated life of this reseller relationship with a cumulative catch up recognized for the elapsed portion of such estimated life. In 2012 and 2013, we attained the first and second milestones, respectively; one additional milestone remains unearned. We also earn per customer fee revenues from this reseller on sales of our products, as well as revenues from assisting this reseller in executing its operations.

Business Combinations

When we acquire businesses, we allocate the purchase price to tangible assets and liabilities and identifiable intangible assets acquired. Any residual purchase price is recorded as goodwill. The allocation of the purchase price requires management to make significant estimates in determining the fair values of assets acquired and liabilities assumed, especially with respect to intangible assets. These estimates are based on information obtained from management of the acquired companies and historical experience. These estimates can include, but are not limited to, the cash flows that an asset is expected to generate in the future. These estimates are inherently uncertain and unpredictable and, if different estimates were used, the purchase price for the acquisition could be allocated to the

 

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acquired assets and liabilities differently from the allocation that we have made. Furthermore, a change in the estimated fair value of an asset or liability often has a direct impact on the amount we recognize as goodwill, an asset that is not amortized. In addition, unanticipated events and circumstances may occur which may affect the accuracy or validity of such estimates and, if such events occur, we may be required to record a charge against the value ascribed to an acquired asset or an increase in the amounts recorded for assumed liabilities.

Impairment of Goodwill and Acquired Intangible Assets

We test goodwill for impairment at least annually as of October 1, or more frequently if events or changes in circumstances indicate that this asset may be impaired. The analysis is done at the reporting unit level, and we have determined that we have one reporting unit. This is consistent with our one operating segment value for all years presented (see note 14 to our unaudited interim condensed consolidated financial statements and note 19 to our audited consolidated financial statements). Therefore, we use our enterprise value as our fair value.

Impairment testing for goodwill is performed utilizing either a qualitative assessment or a two-step process. If we decide that it is appropriate to perform a qualitative assessment, management first assesses qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If we conclude that the fair value of the reporting unit more likely than not exceeds its carrying value, no further evaluation is necessary. If we conclude that it is not more likely than not that the fair value exceeds its carrying value, management is required to perform the two-step process. If management performs the two-step process, then we estimate the fair value of the reporting unit and compare that to the carrying value of the reporting unit. If the fair value of the reporting unit exceeds its carrying value, the goodwill is not considered impaired and no further evaluation is necessary. If the carrying value is higher than the estimated fair value, there is an indication that impairment may exist and the second step is required. In the second step, the implied fair value of goodwill is calculated as the excess of the fair value of the reporting unit over the fair values assigned to its assets and liabilities. If the implied fair value of goodwill is less than the carrying value of the reporting unit’s goodwill, the difference is recognized as an impairment charge.

Under the qualitative assessment, we consider a variety of qualitative factors, including general economic conditions, industry and market specific conditions, customer behavior, cost factors, our financial performance and trends, our strategies and business plans, capital requirements, management and personnel issues and stock price, among others. Under the two step process, we estimate the fair value based on a number of factors, including: (1) appropriate consideration of valuation approaches (income approach, comparable public company approach, and comparable transaction approach), (2) estimates of future growth rates, (3) estimates of our future cost structure, (4) discount rates for our estimated cash flows, (5) selection of peer group companies for the public company and the market transaction approaches, (6) required levels of working capital, (7) assumed terminal value and (8) time horizon of cash flow forecasts. Changes in these estimates and assumptions could materially affect the determination of fair value of the one reporting unit and cause an impairment of the recorded goodwill.

The determination of reporting units also requires judgment. We assess whether a reporting unit exists within a reportable segment by identifying the unit, determining whether the unit qualifies as a business under GAAP, and assessing the availability and regular review by segment management of discrete financial information for the unit. Our chief operating decision maker does not review discrete financial information below the consolidated results except for revenues, which are reviewed by media and platform. The review of revenues (and not complete operating results) is not considered to be discrete financial information and we have therefore concluded that we have one reporting unit.

We review acquired intangible assets that have finite useful lives when an event occurs indicating the potential for impairment. If any indicators are present, we perform a recoverability test by comparing the sum of the estimated undiscounted future cash flows attributable to the acquired intangibles in question to their carrying amounts. If the undiscounted cash flows used in the tests for recoverability are less than the carrying amount of

 

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the acquired intangibles, then we determine the fair value of the acquired intangibles and recognizes an impairment loss if the carrying amount of the acquired intangibles exceeds its fair value. The impairment loss recognized is the amount by which the carrying amount of the acquired intangibles exceeds its fair value.

For all of our goodwill and acquired intangible asset impairment reviews, the assumptions and estimates used in the process are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy or our internal forecasts. Although we believe the assumptions, judgments, and estimates we have used in our assessments are reasonable and appropriate, a material change in any of our assumptions or external factors could lead to future goodwill or acquired intangible asset impairment charges. Based upon our October 1, 2013 goodwill impairment review, we concluded that the estimated fair value of our reporting unit significantly exceeded its carrying value.

We did not record any impairments of goodwill for the years ended December 31, 2011, 2012 or 2013.

Stock-Based Compensation

We account for stock-based compensation awards issued to our employees and directors in accordance with authoritative guidance on stock compensation. We measure stock-based compensation expense at the grant date based on the estimated fair value of the award and recognize compensation expense, net of estimated forfeitures, on a straight-line basis over the requisite service period, which is generally the vesting period of the respective award.

Determining the fair value of stock-based awards at the grant date requires judgment. We use the Black-Scholes-Merton option-pricing model to estimate the fair value of stock option awards. 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.

The Black-Scholes-Merton option-pricing model requires the use of highly subjective and complex assumptions, which determine the fair value of stock-based awards. Our assumptions are as follows:

 

    Fair Value of Our Common Stock. Because our common stock is not publicly traded, we must estimate the fair value of our common stock, as discussed under “—Common Stock Valuations” below.

 

    Expected Term. The expected term represents the period that the stock-based awards are expected to be outstanding and is determined using the simplified method which is based on the average of the time-to-vesting and the contractual life of the options.

 

    Expected Volatility. The expected volatility is derived from the historical stock volatilities of comparable publicly listed peers over a period approximately equal to the expected term of the awards because we have limited information on the volatility of our common stock since we have no trading history. When selecting the peers to be used in the volatility calculation, we considered the size, operational and economic similarities to our principal business operation.

 

    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 equal to the option’s expected term.

 

    Expected Dividend Yield. The expected dividend yield was assumed to be zero as we have not paid and do not anticipate paying dividends.

In addition to the assumptions used in the Black-Scholes-Merton option-pricing model, we also estimate a forfeiture rate to calculate the stock-based compensation for our equity awards. We will continue to use judgment in evaluating the expected volatility, expected term and forfeiture rate utilized for our stock-based compensation calculations on a prospective basis. If any of the assumptions used in the Black-Scholes-Merton model changes significantly, stock-based compensation for future awards may differ materially compared with the awards granted previously.

 

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We recorded stock-based compensation expense of $1.8 million, $2.9 million, $2.6 million and $0.7 million in 2011, 2012, 2013 and the three months ended March 31, 2014, respectively. We expect to continue to grant stock options and other equity-based awards in the future, and to the extent that we do, our stock-based compensation expense recognized in future periods will likely increase.

As of March 31, 2014, we had approximately $5.1 million of total unrecognized compensation expense, net of related forfeiture estimates, which we expect to recognize over a weighted-average period of 3.61 years.

The following table presents the assumptions used to estimate the fair value of options granted during the periods presented:

 

     Year-Ended December 31,      Three Months
Ended
March 31,
 
     2011      2012      2013      2014  

Risk-free interest rate (%)

     1.05 - 2.40         0.88 -1.24         1.02 - 2.02         1.78 - 1.84   

Expected term (in years)

     5.50 - 6.20         5.80 -6.30         5.55 - 6.32         6.03 - 6.08   

Expected dividend yield (%)

     —           —           —           —     

Expected volatility (%)

     53.68 - 64.90         52.31 - 53.84         52.34 - 56.71         56.86 - 56.89   

Common Stock Valuations

The fair value of the common stock underlying our stock options was determined by our board of directors, which intended all options granted to be exercisable at a price per share not less than the per share fair value of our common stock underlying those options on the date of grant. 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. The assumptions we used in the valuation model are based on future expectations combined with management judgment. 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 an independent third-party valuation firm as of February 28, 2013, June 30, 2013, September 30, 2013, December 31, 2013 and March 31, 2014;

 

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

 

    secondary sales of our common stock;

 

    our operating and financial performance;

 

    our business plans and financial forecasts;

 

    the market performance of publicly traded companies in the same or similar industry;

 

    the likelihood of achieving an exit event, such as an initial public offering or a strategic merger or acquisition of the company;

 

    general U.S. market conditions; and

 

    the illiquidity of the common stock underlying stock options.

 

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The following table summarizes information for all stock awards since January 1, 2013:

 

Grant Date

   Shares Underlying
Options
     Exercise Price Per
Share
     Estimated
Common
Stock Fair Value
Per Share at Grant Date
     Option Fair
Value Per Share
at Grant Date
 

May 14, 2013

     2,708,500       $ 1.64       $ 1.64       $ 0.82   

July 27, 2013

     113,000       $ 1.64       $ 1.64       $ 0.84   

August 30, 2013

     400,000       $ 1.75       $ 1.75       $ 0.96   

September 16, 2013

     215,000       $ 1.75       $ 1.75       $ 0.94   

October 4, 2013

     78,000       $ 1.75       $ 1.75       $ 0.94   

October 8, 2013

     2,846,850       $ 1.75       $ 1.75       $ 0.95   

November 14, 2013

     180,000       $ 1.75       $ 1.75       $ 0.94   

December 11, 2013

     45,000       $ 2.01       $ 2.01       $ 1.05   

December 16, 2013

     44,000       $ 2.01       $ 2.01       $ 1.08   

February 4, 2014

     415,000       $ 2.01       $ 2.25       $ 1.29   

February 5, 2014

     997,000       $ 2.01       $ 2.25       $ 1.29   

May 28, 2014

     440,000       $ 2.96       $
2.96
  
   $ 1.86   
May 29, 2014      851,600       $ 2.96       $ 2.96       $ 1.85   
May 30, 2014      3,580,000       $ 2.96       $ 2.96       $ 1.87   

In determining the estimated fair value of our common stock underlying our option grants, our board of directors, with the assistance of management and a third-party valuation firm, used various methods to estimate the enterprise value of our company including: (1) the probability weighted expected return method, or PWERM, (2) the company transaction method, (3) the multi-period discounting method and (4) the discounted cash flow method.

The PWERM is a scenario-based analysis that estimates the value per share based on the probability-weighted present value of expected future investment returns, considering each of the possible outcomes available to us, as well as the rights of each share class. PWERM estimates the common stock value to our stockholders under possible future scenarios. The value per share under each scenario is then probability weighted and the resulting weighted values per share are summed to determine the fair value per share of our common stock. Over time, as we achieve certain company-related milestones, the probability of each scenario is evaluated and adjusted accordingly.

The company transaction method seeks valuation guidance from actual transactions in the market. This methodology utilizes the most recent negotiated arm’s-length transactions involving the sale or transfer of our stock or equity interests.

The multi-period discounting approach values the business based on the future benefits that will accrue to it, with the value of future benefits discounted back to a present value at a discount rate equal to the company’s cost of capital.

 

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The discounted cash flow method is based on the premise that our enterprise value as of the respective valuation date is equal to the projected future free cash flows and expected terminal value of our business, discounted by a required rate of return that investors would demand given the risks of ownership and the risks associated with achieving the stream of projected future free cash flows. The following table outlines the enterprise value methodologies we utilized on the relevant valuation dates:

 

  Valuation Date

   Enterprise Value Method

  February 28, 2013

   PWERM and Company Transaction

  June 30, 2013

   PWERM and Multi-period Discounting

  September 30, 2013

   PWERM, Discounted Cash Flow and Company Transaction

  December 31, 2013

   PWERM, Discounted Cash Flow and Company Transaction

  March 31, 2014

   PWERM and Company Transaction

In determining the estimated fair value of our common stock, our board of directors also considered the fact that our common stock is not freely tradable in the public market. The estimated fair value of our common stock at each grant date reflects a discount for lack of marketability partially based on the anticipated likelihood and timing of a future liquidity event. The increase in equity value of the company from the February 28, 2013 valuation to the June 30, 2013 valuation reflects the decrease in the estimated time to liquidity. The increase in the equity value of the company from the June 30, 2013 valuation to the September 30, 2013 valuation was primarily due to our continued performance to plan and the increased likelihood of an initial public offering transaction. The increase in equity value of the company from the September 30, 2013 valuation to the December 31, 2013 valuation and from the December 31, 2013 valuation to the March 31, 2014 valuation, was in each case primarily due to our continued progress toward a potential initial public offering transaction. Following the closing of this offering, the fair value of our common stock will be determined based on the closing price of our common stock on the                    . The difference between the estimated common stock fair value and exercise price per share on the February 2014 option grants is captured within the option fair value per share and has been recognized as a component of compensation expense.

Based upon an assumed initial public offering price of $                 per share, the midpoint of the price range set forth on the cover of this prospectus, the intrinsic value of all outstanding options as of March 31, 2014 was $                 million of which approximately $                 million related to vested options and approximately $                 million related to unvested options.

Qualitative and Quantitative Disclosures about Market Risk

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 primarily the result of fluctuations in interest rates, as well as, to a lesser extent, foreign exchange rates and inflation.

Interest Rate Risk

We are exposed to market risks in the ordinary course of our business. We are subject to interest rate risk in connection with potential borrowings available under our loan and security agreement with SVB. Borrowings under the revolving portion of our SVB facility bear interest at a floating rate equal to 0.25% plus the prime rate, and borrowings under the term loan portion of our SVB facility bear interest at a floating rate equal to 0.75% plus the prime rate. As of December 31, 2013, the interest rates applicable to the revolving and term loan portions of our SVB facility were 3.5% and 4.0%, respectively. Increases in the prime rate would increase the amount of interest payable on any borrowings outstanding under our SVB facility. Through the date of this prospectus, there are no outstanding borrowings under the revolving portion of our SVB facility. As of December 31, 2013, an increase or decrease in the interest rate on the term loan portion of our SVB facility by 100 basis points would increase or decrease our interest expense by $30,000, respectively.

 

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Foreign Currency Exchange Risk

Substantially all of our revenues and operating expenses are denominated in U.S. dollars. As a result, we do not believe that our exposure to foreign currency exchange risk is material to our business, financial condition or results of operations. In 2013, approximately 1.0% of our revenues were exposed to fluctuations in the exchange rate with respect to the Canadian dollar. If a significant portion of our revenues and operating expenses were to become denominated in currencies other than U.S. dollars, we may not be able to effectively manage this risk, and our business, financial condition and results of operations could be adversely affected.

Inflation Risk

We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.

Recently Issued Accounting Guidance

In 2012, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2012-02, which provides guidance and amendments related to testing indefinite-lived intangible assets for impairment. Under the amendments in this update, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to determine the fair value. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test. An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. We adopted this standard on January 1, 2013, and the adoption did not have a material impact on our consolidated financial statements.

In July 2013, FASB issued ASU No. 2013-11, which requires entities to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward when settlement in this manner is available under the tax law. This ASU was effective for us beginning January 1, 2014. We are evaluating the potential impact of this adoption on our consolidated financial statements.

In May 2014, FASB issued ASU No. 2014-09, which supersedes the revenue recognition requirements in ASC 605. This guidance is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. This ASU is effective for us for reporting periods beginning after December 15, 2016. We are evaluating the potential impact of this adoption on our consolidated financial statements.

Emerging Growth Company Status

Section 107 of the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

 

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BUSINESS

Overview

Yodle is a leading provider of cloud-based marketing automation solutions for local businesses that makes digital marketing easy, affordable and transparent. Our platform provides our customers with an online, mobile and social presence, as well as automates, manages and optimizes their marketing activities and other consumer interactions. We utilize our proprietary data assets and algorithms to increase the likelihood that consumers will find our customers and become their paying consumers. Our platform provides our customers with transparency into their marketing activities and business operations, thereby enabling them to evaluate their return on investment, or ROI. Our solutions are highly integrated and designed to be easy-to-use, helping local businesses navigate the rapidly evolving, technologically challenging and highly fragmented digital marketing landscape without having to invest a significant amount of time and money or needing any in-house marketing or IT expertise.

Consumers are increasingly changing the way they discover and interact with local businesses, shifting away from traditional media such as yellow pages directories, newspapers, radio and television, and interactions in person and over the telephone, to various digital resources, including desktop and mobile search, online directories, review sites, email and other mobile applications. As a result, businesses are challenged to navigate and manage an increasingly complex marketing landscape. Businesses need a comprehensive digital presence that includes a professional quality website that is easily discoverable and optimized for mobile devices, exposure on leading online directories and ratings and reviews sites, and tools to communicate with customers via email, text messages and social media. Large enterprises address this complexity by using sophisticated third-party software solutions that are expensive and require significant internal expertise to manage. However, local businesses generally lack the resources and expertise to access the benefits of enterprise-level solutions. Instead, they are left to choose from a number of disparate point solutions that only address a limited set of their challenges, are not integrated and require local businesses to pay for and manage multiple vendors.

We have built our company to serve the unique, complex and constantly evolving digital marketing needs of local businesses. We believe the market for our local marketing automation platform is large and underserved. According to the most recent U.S. Census Bureau data, there are more than 28 million local businesses in the United States. We currently target industry verticals with approximately 7 million local businesses, the largest categories of which include legal and professional, dental and medical and contractor and other home services. We served approximately 44,800 local businesses as of March 31, 2014. In addition, AMI-Partners, an independent market research firm, estimates that there are approximately 74 million local businesses globally. While we believe this provides us with further opportunities to grow over the long term, our focus in the near term is growing our business in the United States and Canada.

Over nine years of focusing on the unique and constantly evolving digital marketing needs of local businesses, we have developed a differentiated approach to addressing this large and fragmented market. We use our sophisticated technology, rigorous data collection and analytics and scalable process automation in all key aspects of our business. Our solutions are highly integrated and optimized using our proprietary algorithms and the data assets we have built by tracking billions of consumer interactions. We have also developed highly automated customer onboarding and service processes for all of our products that enable us to rapidly create and launch the digital presence of our customers. We also offer some customization for our brand network customers that enables them to tailor our products for their specific business objectives.

We generate revenues from subscriptions to our platform and sales of our media offering. Our platform revenue is attributable to direct sales of subscriptions to our platform products, which currently include our Marketing Essentials, Centermark and Lighthouse products. Marketing Essentials is our flagship product that includes three modules: presence, conversion optimization and communication automation. Centermark leverages certain core capabilities of Marketing Essentials by providing a standardized source of shared data, communication and reporting to address the needs of national franchisors and other similar businesses. Lighthouse is our business practice automation product, which automates many of our customers’ daily

 

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consumer interactions or office routines. We also derive additional platform revenues from sales of our products sold through resellers. Our media revenue is attributable to direct sales of our Yodle Ads media product, which automates, manages and optimizes our customers’ media spend across mobile and desktop search engines. We refer to our offerings and the packages in which we sell them as products.

Our ability to efficiently acquire local business customers and effectively address their needs by leveraging our technology platform and data assets has enabled us to grow rapidly. We generated revenue of $87.6 million, and $161.9 million, in 2011 and 2013, respectively, representing a compound annual growth rate of 36%. Over this same period, our cost of revenues as a percentage of revenues has decreased from 39% in 2011 to 33% in 2013 while our net loss has decreased from $15.4 million to $10.4 million. For the three months ended March 31, 2014, we had revenues of $45.7 million and net losses of $5.9 million. The number of customers subscribing to our platform offerings increased from approximately 6,000 as of December 31, 2009 to approximately 44,800 as of March 31, 2014.

Our Industry

The way consumers discover and interact with local businesses is changing rapidly

Consumers have historically discovered local businesses though traditional media—such as yellow pages directories, newspapers, radio and television—and interacted with businesses in person and over the telephone. Today, consumers rely on a wide array of digital resources, including desktop and mobile web search, online directories, ratings and reviews sites, email and other mobile applications, to discover, research and engage with local businesses. As a result, consumers increasingly expect local businesses to be readily discoverable and accessible online and to maintain a digital presence that includes:

 

    A professional-quality website that is easily discoverable. In order to attract and engage potential consumers, a local business must have a website that is optimized for discovery and that provides accurate and relevant information about the business and its products or services. Despite this growing expectation, according to a survey we commissioned and conducted by Research Now, as of June 2013, more than half of local businesses in the United States did not have a website.

 

    Readily accessible information that is easy to use on mobile devices. Consumers are increasingly relying on their mobile devices to inform their decisions about what products and services to buy and where to buy them. According to BIA/Kelsey, a local media research and advisory service company, more than 50% of local search will occur on mobile devices by 2015. However, according to a survey we commissioned and conducted by Research Now, as of June 2013, approximately 90% of local businesses in the United States did not have a website that was optimized for use on mobile devices.

 

    Online reviews and an active social media presence that inform purchase decisions. According to a survey conducted by the Ipsos Open Thinking Exchange, an independent research company, 78% of U.S. consumers’ purchasing decisions are impacted by online reviews. However, according to a survey we commissioned, conducted by Research Now, as of December 2013, approximately 87% of local business owners in the United States did not ask consumers for online reviews. In addition, according to a survey conducted by Market Force, a customer intelligence company, 78% of U.S. consumers’ purchasing decisions are impacted by the posts made by businesses they follow on social media. We have found that most local businesses do not maintain an active presence on widely-used social media platforms.

 

    Tools that enable digital interaction with consumers. Consumers increasingly expect to interact with businesses digitally. For example, consumers expect to communicate with businesses through email and to be able to book and manage appointments and reservations electronically through the Internet and via email or text messages on mobile devices. Despite these changes in consumer behavior, most local businesses do not adequately address these demands for digital communications because they lack the requisite resources to do so.

 

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Creating and managing a digital presence is increasingly complex

As consumers increasingly use online and mobile channels to discover and interact with businesses, and as new technologies and trends emerge, businesses need to keep pace. As their digital presence and activities expand, businesses are faced with the increasingly complicated and time-consuming task of managing information on their own sites, across dozens of online directories and numerous social media platforms, in order to:

 

    keep their content up-to-date and relevant;

 

    maintain the consistency and accuracy of their business information and content;

 

    optimize their discoverability in search results from leading search engines; and

 

    optimize their website for ease of use on mobile devices.

Additionally, businesses are increasingly seeking to communicate with consumers via email, text messages and social media and allow consumers to book appointments and make reservations electronically.

Local businesses generally lack the resources to create and manage a comprehensive digital presence

Large enterprises address these challenges by using sophisticated third-party software solutions that are expensive and require significant internal expertise to manage. However, local businesses generally lack the resources and expertise to employ enterprise-level software solutions to address their digital marketing needs. Instead, local businesses are left to choose from a number of vendors that have developed a disparate set of point solutions. These point solutions, while more affordable than the enterprise software alternatives, only address a limited set of the challenges faced by local businesses. As a result, we believe that most local business owners are seeking a comprehensive solution that addresses their unique challenges, which include:

 

    Lack of marketing sophistication and technical expertise. Local businesses typically do not have dedicated marketing resources or IT personnel. As a result, many local business owners are often not aware of the tools and technologies that exist in the marketplace and typically lack the expertise to effectively deploy and manage these tools and technologies themselves. Further, the digital landscape is dynamic and rapidly changing, making it even more difficult for local businesses to keep pace with the latest trends and technologies.

 

    Lack of time. Local business owners typically do not have the time to seek out and assemble multiple point solutions to build, manage and optimize their digital presence, marketing activities and customer interactions.

 

    Limited budget. Local businesses typically have a limited budget for marketing and technology solutions. They seek to spend these limited resources with partners that can provide them with significant and measurable value at an affordable price.

 

    Limited visibility into performance. As local businesses embrace digital marketing, they seek clear evidence that their marketing expenditures are effective and validated by a demonstrable ROI.

Brand networks face additional, unique challenges

Many national franchisors, manufacturers and multi-location businesses operate networks of individually-operated franchises, dealerships and offices that sell products or provide services at a local level. We refer to these businesses as brand networks. We believe that the challenges faced by individual locations within a brand network are very similar to those of independent local businesses. In addition, brand network owners have additional unique challenges that include ensuring that individual network locations have a robust local digital presence that is consistent with their brand identity and facilitating their individual locations to maximize their investments in local marketing solutions in order to increase sales across the network. To accomplish this, a brand network owner requires clear visibility and analytics into the performance of its marketing programs across its network and an ability to enable the individual locations within its network to achieve the brand network owner’s marketing objectives.

 

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Our market opportunity

According to the most recent U.S. Census Bureau data, there are more than 28 million local businesses in the United States. Moreover, AMI-Partners, an independent market research firm, estimates that there are approximately 74 million local businesses worldwide. Local businesses operate in many different industry verticals. We estimate that there are approximately 7 million local businesses in the United States operating in the industry verticals we currently address, the largest categories of which include legal and professional, dental and medical and contractor and other home services.

Local businesses are increasingly purchasing cloud-based technologies and services to operate and grow. According to a report by Parallels, a hosting and cloud services company, small- and medium-sized businesses, or SMBs, in the United States spent $8.5 billion in 2013 on cloud services related to web presence, web applications and business applications, and are expected to spend $15.1 billion in 2017. Moreover, despite the rapid shift of consumer behavior to digital channels, the majority of local marketing is still spent on traditional, offline channels. According to BIA/Kelsey, businesses spent approximately $105 billion on traditional local advertising in 2013. However, as consumer behavior continues to shift, local marketing is expected to shift to digital channels. BIA/Kelsey estimates that spending on local digital advertising will increase from $28 billion in 2013 to $53 billion in 2018.

Our Solution

We provide a comprehensive, cloud-based marketing automation platform for local businesses that makes marketing easy, affordable and transparent. We are seeking to transform the way that local businesses create and manage their online and mobile presence, and how they attract and engage with consumers. Our platform helps local businesses navigate the rapidly evolving, technically challenging and highly fragmented digital marketing landscape without having to invest a significant amount of time and money or needing in-house marketing or IT expertise. Because our platform is built to solve the marketing needs of a local business owner, we refer to it as their “CMO in a box.”

Our cloud-based marketing automation platform provides local businesses with the following key benefits:

 

    Comprehensive, intuitive and easy-to-use platform for attracting and engaging consumers. Our comprehensive, intuitive and easy-to-use local marketing automation platform provides the essential features that local businesses need to attract, manage and retain consumers. Through our platform, we provide a local business with a mobile, online and social digital presence that is algorithmically optimized to increase the likelihood that consumers will find and transact with them. We further automate the syndication of our customers’ business listings, description and photo content to approximately 50 online directories to ensure a consistent, professional and up-to-date presence across the Internet. We also provide our customers with the ability to easily communicate with their existing or prospective clients through social media platform management, email, text message and digital post cards. For customers who seek greater exposure for their business, we automate the buying of local online advertising. In addition, we integrate with some customers’ operational systems such as office management, scheduling or billing. For these customers, we are able to automate many of their daily client interactions or office routines. We have bundled these products into an integrated and easy-to-use platform, thereby liberating a local business from the confusion and complexity of deciding which point solutions to utilize and avoiding the expense and challenges of managing multiple vendors. Because our products are integrated into a common platform and are designed to work together, our solution provides a local business owner with an enhanced experience and better performance.

 

    Increased revenues from new and existing consumers. Our platform is designed to help our customers to efficiently acquire and retain consumers, as well as improve the effectiveness of their marketing efforts and help them meet their marketing and business objectives.

 

   

Mobile solutions optimized for consumers and local business owners. We optimize our customers’ websites for use on mobile devices in order to make their websites easier for consumers to discover and use. In addition, our mobile dashboard allows our customers to monitor performance metrics and manage their

 

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content from their mobile devices, which enhances the local business owner’s ability to work remotely. For example, our customers can upload photos and collect online reviews from their mobile devices.

 

    Transparency. Our platform allows our customers to easily monitor and manage their digital presence and marketing activities through a unified dashboard. We present relevant, real-time performance metrics, such as website visitor tracking and conversion, which enable our customers to better understand and evaluate their ROI. Moreover, when our platform is integrated into our customers’ operational systems, we also provide visibility into actual revenue generated through the use of our solution, thereby further validating our customers’ ROI.

 

    Affordable pricing. Based on data from BIA/Kelsey, we believe the average SMB spends approximately $400 per month on marketing. We are focused on providing affordable solutions that deliver effective results to local businesses. We have generally priced our flagship product, Marketing Essentials, including all three of its current modules, at less than $300 per month since its introduction in March 2014. We believe, based on publicly available market pricing information, that re-creating the functionality of our Marketing Essentials product by purchasing multiple point solutions would cost a local business at least twice that amount.

We also address the unique requirements of brand networks with our Centermark product, which leverages the core capabilities of our platform by providing a standardized source of shared data, communication and reporting to address the unique needs of brand network owners. Centermark enables brand network owners to extend many of the same benefits enjoyed by our local business customers to the individual locations in their network. Additionally, Centermark incorporates powerful communication, monitoring, analytics and call to action tools, which help brand network owners increase the value of their networks by:

 

    increasing the likelihood that individual locations are discovered by consumers;

 

    encouraging individual locations to spend more on marketing with the goal of generating additional revenue across their network;

 

    driving higher brand consistency across the network; and

 

    providing access to actionable business intelligence by giving them visibility into the marketing performance of the network.

Our Competitive Strengths

As a core part of our strategy, we have developed a differentiated business model for providing comprehensive, easy-to-use and affordable solutions to our customers and have also developed the capability to acquire, onboard and service our customers in a highly efficient manner. Sophisticated technology, rigorous data collection and analytics and scalable process automation are the foundation of our approach. They are key aspects of every part of our business and enable our competitive strengths. These competitive strengths include:

 

    Comprehensive, integrated and easy-to-use platform. Our local marketing automation platform provides local business owners with a comprehensive suite of digital marketing capabilities designed to meet all of their essential online and mobile marketing and engagement needs. The breadth, depth and highly integrated nature of our platform offer significant advantages to our customers who would otherwise be required to aggregate multiple point solutions at a higher cost, with greater complexity and without the performance benefits of being designed to work together. We have also designed our platform to be intuitive and easy-to-use, resulting in its rapid adoption and usage. We believe that these attributes provide our customers with superior value and performance.

 

   

Proprietary data assets. Over our nine-year operating history, we have built a large repository of data, based on tracking billions of consumer interactions, including online and mobile website visits, phone calls and emails and online search results. We utilize this data to algorithmically optimize our customers’ online and mobile content, email campaigns, website and ad copy templates, and keywords for SEO and

 

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SEM purposes. We believe our proprietary data assets allow us to more effectively measure and improve the marketing performance of websites, digital advertising and communications for our customers. For example, our customers’ website conversion rate, which we calculate on an aggregate basis as the number of phone calls or emails received by our customers divided by the number of visits to our customers’ websites, has increased by 84% over the four years ended December 31, 2013.

 

    Powerful data-driven network effects. As we continue to add more local business customers to our platform, we are able to collect and analyze more data about our customers’ business operations and the performance of our digital marketing solutions. As the richness and depth of our data is enhanced, we are able to improve the performance of our platform and ultimately drive higher value to our current and future customers by further improving their marketing ROI. For example, from 2009 to 2013, we decreased our direct customers’ average price per lead, which we define as the aggregate amount of revenue derived from them divided by the aggregate number of leads we generated for them, by 48%. We believe this network effect provides a substantial competitive advantage over our existing and potential competitors.

 

    Vertical expertise. The value we bring to our customers in specific verticals grows as we add more customers in those verticals and develop additional expertise in gathering data and optimizing marketing performance using that data. We currently target local businesses in the following key categories of industry verticals: legal and professional, dental and medical and contractor and other home services. As we grow our presence in these industry verticals and integrate and become operationally embedded with business management systems in these industry verticals, we are able to provide further benefits to our customers. For example, from 2009 to 2013, we decreased the average price per lead for new dental customers that we acquired directly by 50% in their first 90 days as our customers. We believe that our scale, data advantage and operational integration in specific verticals provide us with a competitive advantage in gathering data and optimizing marketing performance and business operations for our customers in those industry verticals.

 

    Low customer acquisition costs. Our highly automated, technology- and data-driven approach to sales promotes efficiency and scalability in our business model and enables us to efficiently acquire customers. We have developed a proprietary prospect database of over 11 million unique business profiles. We have also developed proprietary analytics and sales force automation technology, which helps us determine the most effective sales strategy for each prospective customer, other than a prospective brand network customer. Between 2011 and 2013, we reduced our average cost to acquire a customer while at the same time more than doubling the headcount of our sales force.

 

    Rapid and scalable customer onboarding and service driven by process automation. We have made technology investments in process automation that allows us to scale rapidly and onboard customers of all of our products without adding significant incremental costs or impacting the level of quality. For example, despite an increase in the number of customers onboarded in the first three months of 2014 compared to the same period in 2013, personnel costs associated with employees responsible for onboarding customers remained consistent as a result of our investments in technology and automation. Moreover, we launch the digital presence of 99% of our customers sold through our inside sales channel within one business day of sale with limited involvement from our personnel. We also offer some customization for our brand network customers that enables them to tailor our products for their specific business objectives. Although we have designed our products to be highly intuitive, we provide our customers access to our highly responsive, technology-enabled customer service team.

 

   

Track record of innovation. We believe that we have a strong track record of innovation in the local digital marketing industry, identifying and interpreting emerging technology and trends on behalf of our customers to enable them to benefit from our innovation. For example, we recognized the potential impact of mobile and social trends on local businesses early on and we integrated mobile-enabled solutions and social management tools seamlessly into our platform. For our innovative work in mobile, CIO Magazine named Yodle as one of the top 100 companies around the world exemplifying the highest level of operational and strategic excellence in information technology. In addition, we believe we were

 

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the first to directly address the unique marketing challenges of brand networks by creating our Centermark product. Our focus on innovation allows us to quickly adapt to the evolving landscape and provide our customers with valuable solutions, often before they identify a need for such solutions.

Our competitive strengths result in what we believe is an attractive business model. Our low customer acquisition and onboarding costs minimize our initial investment to bring on new customers and allow us to achieve rapid payback. We define payback as occurring when the costs associated with acquiring and launching a cohort of new customers in any given quarter is offset by the ongoing cash flow from those customers, less our ongoing costs. We are typically able to generate positive cash flows within the first year after acquiring and launching a cohort of new customers, including the impact from customers who do not renew their subscriptions or service during the first year and excluding overhead costs. As a result, we believe our business model benefits from rapid payback. We refer to customers who we acquired directly (i.e., not through resellers) and who remain as customers after their initial year as our tenured customers. For the 12 months ended March 31, 2014, we experienced a monthly average revenue retention rate of 97.5% for our tenured customers. We expect the revenue retention rate for our tenured customers to continue to improve as our mix of revenues shifts toward revenues from platform products, as revenue derived from customers who subscribe to our platform products generally exhibits a higher retention rate than revenue derived from customers who purchase our media product. We believe that our low customer acquisition and onboarding costs, rapid payback and high monthly revenue retention of our tenured customers results in a business model that generates attractive customer economics and high returns on our initial investment.

Our Growth Strategy

We believe that we are in the very early stages of a large and long-term business opportunity. Our growth strategy for pursuing this opportunity includes the following key components:

 

    Further penetrate our existing industry verticals. We believe the market for our local marketing automation platform is large and underserved. Of the estimated 28 million local businesses in the United States, we currently target industry verticals that include approximately 7 million local businesses. We served approximately 44,800 customers as of March 31, 2014. We plan to further penetrate these verticals by leveraging our existing sales infrastructure, investing in our direct sales teams and expanding our sales through partnerships with resellers.

 

    Increase the number of customers that are operationally integrated with our platform. We believe that Lighthouse, our business practice automation product, and Centermark provide us with a unique opportunity to become operationally integrated with our customers. We intend to expand the adoption of Lighthouse and Centermark by increasing the number of salespeople selling these products and increasing the number of industry verticals that we are targeting with our Lighthouse product. For example, we recently expanded our Lighthouse product to chiropractic practices as a newly supported industry vertical. By integrating into a customer’s systems, we are able to automate many daily consumer interactions or office routines, leading to improved operational efficiency and business results. As a result of this integration, we enjoy higher customer retention and are able to more accurately measure the benefits of our other products.

 

    Expand our distribution channels. To accelerate our market penetration, we intend to pursue opportunities to sell our products through organizations that already have relationships with local businesses. Leveraging our Centermark product, we intend to increasingly pursue opportunities with brand network owners and to penetrate their networks of local businesses. In addition, we intend to selectively partner with resellers who sell our products to quickly and cost-efficiently reach a larger number of local businesses. For example, in Canada we work with Rogers, a leading Canadian communications and media company, which has enabled us to expand our addressable market.

 

   

Expand into new industry verticals and geographies. We intend to further penetrate the more than 28 million local businesses throughout the United States. We see significant opportunity in continuing to expand our footprint beyond our current industry verticals across a broad spectrum of local businesses. We recently began penetrating several new verticals, including mortgage brokers, accounting and tax professionals and chiropractor services. In addition, we believe that the global market of approximately

 

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74 million local businesses provides us with further growth opportunities over the long term, however, our focus in the near term is growing our business in the United States and Canada.

 

    Continue to introduce new products and enhance the functionality of our platform. We plan to continue to take advantage of our culture of innovation to introduce new products, continually develop new functionality for our platform and address the latest marketing opportunities and challenges facing local businesses. We will endeavor to sell these new products to both existing and new customers, which we expect will yield an increase in revenue and improved customer retention as the breadth and depth of our platform expands.

 

    Pursue selective strategic acquisitions. We intend to selectively acquire businesses that can provide us with complementary technologies and products as we did in February 2013 with the acquisition of Lighthouse Practice Management. In addition, we plan to evaluate opportunities that will provide us with access to new customers, industry verticals or geographies.

Our Products

The products we offer through our platform currently include: Marketing Essentials, Lighthouse, Yodle Ads and Centermark. Marketing Essentials, our flagship product, currently includes three modules: presence, conversion optimization and communication automation. Lighthouse provides business practice automation for those customers where we have integrated into their business management systems. Yodle Ads automates, manages and optimizes the buying of local online advertising for customers who seek greater exposure for their business. Centermark leverages certain core capabilities of Marketing Essentials by providing a standardized source of shared data, communication and reporting to address the unique needs of brand network owners. We refer to our offerings and the packages in which we sell them as products.

LOGO

Over the last nine years, we have expanded our product offerings to address a broad range of digital marketing needs for local businesses. Our current suite of products and modules is the result of ongoing, internal

 

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product development and innovation that we have supplemented with strategic business acquisitions. Prior to introducing Marketing Essentials in the first quarter of 2014, we offered the presence and conversion optimization modules under different product names. In early 2014, we introduced the communication automation module. Our acquisition of Lighthouse Practice Management in February 2013 helped expand our platform through the addition of our business practice automation product, which we call Lighthouse. In December 2013, we introduced our Centermark product for brand networks owners. We intend to continue to expand the capabilities of our platform and evolve our product offerings to address the challenges local businesses face, with an emphasis on growing our platform revenue.

Marketing Essentials

Marketing Essentials provides local business owners with a comprehensive suite of easy-to-use products that includes establishing an online, mobile, desktop and social presence, as well as powerful tools to attract, manage and retain consumers. The three key modules currently included in our Marketing Essentials product are:

    Presence Module. Our presence module includes a website, mobile-optimized website and business Facebook and Google+ pages. We develop this presence using algorithmically optimized and relevant content designed to increase the likelihood that visitors will find and transact with our customers. In addition, this module includes a mobile and desktop dashboard that allows our customers to monitor consumer interaction with their digital presence.

    Conversion Optimization Module. In order to improve the discoverability of our customers’ digital presence and the conversion of website visitors into paying consumers, we optimize their digital presence through a number of strategies, including listings and photo syndication, review management and SEO automation. We automate the syndication of our customers’ business listings, description and photo content to approximately 50 online directories. This ensures a consistent, professional and up-to-date presence across the Internet to drive more visitors to our customers’ websites. We regularly test new content and format permutations in order to improve website conversion rates. Last year, for example, we tracked over 50 million visits to our customers’ websites and used that data to continually improve the layouts and features of our website templates to increase conversion rates. We also provide local businesses with the ability to easily collect, manage, respond to and syndicate consumer reviews to their website and Facebook pages through their desktops or mobile devices. Finally, we optimize the performance of our customers’ websites by using our proprietary SEO algorithms and automation tools to monitor our customers’ performance and adopt methodologies that are designed to yield better results consistent with search engine best practices.

    Communication Automation Module. We provide our customers with the ability to easily communicate with and provide offers to their existing or prospective clients through social media platforms and email.

 

    Social Media Platform Management. To simplify social engagement for a local business, we provide social management tools with which a customer’s social media presence is consolidated into and managed from a single, simple interface. This feature is fully integrated into our other product features such as email automation, offer management, review management and photo syndication. Therefore, any relevant additions to a customer’s content repositories are automatically syndicated to social media platforms, enabling the customer to improve social engagement with its consumers.

 

    Email Campaign Automation. We provide our customers with the ability to conduct highly customized email campaigns. Our platform leverages our proprietary algorithms, performance data and deep knowledge across our industry verticals to provide our customers with suggestions on email automation parameters such as message content, timing and frequency.

 

   

Offer Management. We provide our local business customers with the ability to use offers to attract new, and engage existing, clients via multiple channels such as websites, online directories, email,

 

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social outlets and postcards. Our scale and access to large volumes of offer performance data enables us to also provide our customers with specific and concrete offer suggestions to drive better results.

Lighthouse

For local businesses that utilize business management systems with which we can integrate, we offer a business practice automation product called Lighthouse. This product automates many of our customers’ daily consumer interactions or office routines, leading to improved operational efficiency and business results. For example, one feature of the Lighthouse product is appointment automation, which improves appointment attendance rates by sending email, postcard, phone or text message reminders to the consumer about an upcoming appointment.

Yodle Ads

We complement our Marketing Essentials product with Yodle Ads, our online advertising product. Yodle Ads automates, manages and optimizes our customers’ media spend across mobile and desktop search engines such as Google, Yahoo! and Bing, as well as other relevant consumer sites. Yodle Ads is sold with Marketing Essentials in an integrated package called Yodle Max. We leverage our significant data assets, along with proprietary predictive modeling and machine-learning algorithms, to make optimal and automated media allocations and bidding decisions on behalf of our customers. In addition, if we are integrated with a customer’s business management system, we can access transaction data to further optimize their media spend and demonstrate their ROI.

Centermark

Our Centermark product is designed for brand networks and is intended to meet the unique challenges of brand network owners. Centermark leverages our Marketing Essentials product by providing functionality relevant to brand network owners, including:

Business Intelligence and Compliance. We provide brand network owners with real-time information about the marketing activity of their individual network locations. Centermark also allows the brand network owner to monitor and optimize marketing performance across the network. This includes the ability to take immediate action to prompt individual locations to adhere to the brand network owner’s marketing guidelines, visibility into the digital brand strength of the brand network in comparison to its competition and detailed information for each network location, including lead type and conversion information.

Network Adoption Portal. Through our network adoption portal, we enable the brand network owner to customize communications to each of its locations about the potential value of our solutions. In addition, the brand network owner can make digital marketing recommendations to the locations and facilitate the network location in executing on the recommended digital marketing strategy.

Customer Case Studies

Plumber, Indiana

This recently established family plumbing business quickly needed to grow awareness in its local community. The company wanted a better website and to be found online by potential consumers searching for local plumbers on their mobile devices. The business also wanted to build credibility by being able to easily collect and showcase customer reviews online.

Yodle has made marketing easy and effective for this customer in that we have:

 

    created a highly professional and effective digital presence;

 

    built a robust reviews section on its website that highlighted five star ratings (out of a possible five stars) from 10 satisfied customers in less than three weeks; and

 

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    generated approximately 20 quality phone calls and emails over just one month, with half of them resulting in jobs.

As of March 31, 2014, we had approximately 4,500 plumbing, heating and air conditioning contractors as customers, of the approximately 226,500 local plumbing, heating and air-conditioning contractor businesses in the United States, according to the most recent U.S. Census Bureau data.

Landscaper, Kentucky

This local landscaping business was relying on word of mouth marketing, and was also doing its own marketing, to maintain and grow its customer base. The company found this approach was not generating a sufficient quantity or quality of jobs. It needed an affordable solution to increase awareness of the business. The company required a more impactful website and a fully optimized desktop and mobile digital presence.

Yodle has greatly enhanced the local presence and customer reach for this customer in that we have:

 

    obtained first page ranking for the business for more than 550 keywords on major search engines;

 

    helped to dramatically increase sales over the last year—including a corporate contract worth over $35,000; and

 

    helped secure more profitable accounts, like lakeside vacation homes that require year-round maintenance.

As of March 31, 2014, we had approximately 1,200 landscapers as customers, of the approximately 459,600 local landscaping service businesses in the United States, according to the most recent U.S. Census Bureau data.

Lawyer, Virginia

This sole practitioner needed to grow his client base. He recognized the importance of being found on the Web and had tried numerous digital marketing companies. However, none of them delivered meaningful results. His practice needed an effective solution for establishing a strong digital presence and generating new clients.

Yodle has accomplished these objectives for this customer in that we have:

 

    generated an average of more than 90 phone calls and emails per month;

 

    delivered high quality leads that have resulted in an attractive return on his marketing investment; and

 

    achieved immediate results during the latter part of the calendar year—a previously difficult time for him to bring in new clients.

As of March 31, 2014, we had approximately 3,400 lawyers as customers, of the approximately 165,000 local lawyers’ offices in the United States, according to the most recent U.S. Census Bureau data.

Dental Practice, Pennsylvania

This dental practice’s front desk staff was spending a significant amount of its time calling patients to remind them about their appointments and improve their appointment show rate. However, the majority of patients did not like to receive these phone calls. The dental practice needed a business practice automation solution to improve efficiencies and patient communications as well as improve their appointment show rate.

Yodle’s Lighthouse product automated our customer’s appointment management and reminder system and had a positive impact on the practice by:

 

    freeing up front desk employees to assist patients that are in the office and to spend time on other responsibilities;

 

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    delivering an improved show rate for patients that had not canceled more than 24 hours prior to their scheduled appointment, typically attaining a rate of 95%; and

 

    improving relationships with most patients who like receiving appointment reminders via text message or email.

As of March 31, 2014, we had approximately 6,400 dentists as customers, of the approximately 166,500 local dentists’ offices in the United States, according to the most recent U.S. Census Bureau data.

Miracle-Ear

Miracle-Ear, the national hearing solutions brand network, had limited insight into the marketing performance across its independent franchise system of over 1,200 locations. The network also had a limited and inconsistent digital marketing presence consisting of just a corporate website and a handful of landing pages. The brand network owner wanted to develop a strong and cohesive digital marketing presence across all locations, which also needed to be optimized for mobile devices.

Yodle’s solutions have enabled Miracle-Ear to:

 

    develop a consistent, coordinated brand and marketing effort across all locations;

 

    launch over 1,200 integrated desktop and mobile websites in 60 days, along with maps and directory listing optimization;

 

    accurately measure the effectiveness of marketing campaigns across the network’s locations; and

 

    help potential consumers more easily find locations, resulting in the network and its franchisees delivering hearing solutions to more people and increased sales.

Sales and Marketing

We sell subscriptions to our platform products, and sell our Yodle Ads product, through three primary channels, including:

 

    Inside Sales: We have approximately 500 inside sales representatives who use our proprietary data, processes and technology to acquire customers throughout the U.S. cost effectively.

 

    Enterprise Sales: We have an enterprise sales team that focuses on brand network owners and their corporate marketing departments. This team also works with brand network owners to promote the purchase of our products by individual network locations.

 

    Resellers: We have entered into relationships with resellers for the sale and distribution of our marketing automation products. Our resellers distribute these products under their brand name, otherwise referred to as white-label resellers, as well as under the Yodle brand. Our strategy to partner with white-label resellers allows us to expedite our penetration of the market using the sales forces of large partners to help distribute our product under their brand. The largest of these partnerships is with Rogers, who distributes our products in Canada.

Our inside sales are enabled by our proprietary and sophisticated customer prospecting system. It consists of a proprietary prospect database, a lead scoring algorithm and a sales representative lead distribution toolset. We generate leads by collecting information about local businesses from various sources. We enhance these records with a broad set of data inputs to evaluate a prospect’s lead score, which is our measure of the prospect’s likelihood of becoming a customer. We then apply statistical response modeling to predict the ideal time and the ideal sales representative to call a particular prospect, as well as the optimal suite of products. Once we score the leads, we distribute them to a specific sales representative at the correct time through our automated assignment tool.

Our compensation system for sales representatives is integrated into our system, which adjusts sales commissions in real time based on certain actions taken by the sales representative. With these variables, we are aligning the incentives for the sales representatives to maximize certain outcomes favorable to us, such as profit

 

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or penetration of certain markets. This sophisticated system enables a highly dynamic sales approach whereby each individual representative has the latitude to make an assessment of his or her skills and comparative advantage versus other representatives and puts their effort where they can maximize outcomes for themselves, while also driving favorable outcomes for us.

Competition

The local digital marketing landscape is highly fragmented, intensely competitive and constantly evolving. With the introduction of new technologies and market entrants, we expect the competitive environment to remain intense going forward. Our competitors include:

 

    traditional yellow pages directories, direct mail campaign providers, and advertising and listings services on local newspapers, magazines, television and radio, such as Dex Media, Gannett, Hearst and YP.com;

 

    online search engines, such as, Google, Yahoo! and Bing and online business directories, such as, Yelp and Angie’s List;

 

    providers of digital presence offerings, such as domain name registrars, shared hosting providers and website creation and reputation management companies, including Endurance, GoDaddy, Main Street Hub, Web.com and Wix;

 

    providers of digital marketing solutions, such as search engine marketing companies and search engine optimization companies; and

 

    productivity and office management tools, such as email, scheduling and practice management systems, including Constant Contact, Demandforce, MailChimp and Solutionreach.

We compete on the basis of a number of factors, including:

 

    brand name, reputation and customer satisfaction;

 

    cost-effective customer acquisition;

 

    scope, scalability, flexibility and compatibility of offerings;

 

    ease of implementation, use and maintenance;

 

    pricing and effectiveness of solutions;

 

    breadth of sales organization; and

 

    reliability and security.

We believe that we compete favorably with respect to all of these factors and that we are well positioned as a leading provider of cloud-based marketing automation solutions for local businesses.

Our Technology

Our development strategy is to leverage proprietary data and technology to empower our internal sales, customer service, marketing and financial teams to efficiently run our business. We aim to deliver value to our customers through rapid turnaround cycles, typically releasing new features at least once per week. Our methodology allows us to respond quickly to changing circumstances, as well as produce accurate delivery estimates for our software release dates.

We utilize a combination of hosted and cloud-based providers to maintain our service delivery infrastructure. Our hosted infrastructure is based in third-party colocation facilities in New York, New York and Phoenix, Arizona. The dual location design provides both load balancing capabilities as well as the ability to manage disaster recovery. The two locations are tied to all of our offices via dual telecommunications providers with redundant Internet Protocol backbones, local loop and network facilities. We also utilize Amazon Web Services for some aspects of our file storage and computational needs.

We have a technology and product development team that builds and maintains the technologies to support our business and is focused on product research, development, optimization and innovation. Our technology team is comprised of individuals with experience in web development, server development, system integration, system

 

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design, data management, statistical analysis and mathematical algorithms. Our technology personnel focus primarily on developing new applications, evolving our product and service offerings, maintenance, and quality assurance. Our research and development team includes a group dedicated to user experience and interface design.

Our technology and product development expense was $10.2 million in 2011, $15.0 million in 2012, $20.3 million in 2013 and $5.7 million in the three months ended March 31, 2014.

Intellectual Property

Our intellectual property rights are a key component of our success. We rely on a combination of patent, trademark, copyright and trade secret laws, as well as confidentiality procedures and contractual restrictions, to establish, maintain and protect our proprietary rights. We generally require employees, consultants, publishers, suppliers and partners to execute confidentiality agreements with us that restrict the disclosure of our intellectual property. We also generally require our employees and consultants to execute invention assignment agreements with us that protect our intellectual property rights.

Intellectual property laws, together with our efforts to protect our proprietary rights, provide only limited protection, and any of our intellectual property rights may be challenged, invalidated, circumvented, infringed or misappropriated. The laws of certain countries do not protect proprietary rights to the same extent as the laws of the United States and, therefore, in certain jurisdictions, we may be unable to protect our proprietary technology. Further, agreements with our employees and consultants may be breached, and we may not have adequate remedies to redress any breach. Further, to the extent that our employees or consultants use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions. Finally, our trade secrets may otherwise become known or be independently discovered by competitors and unauthorized parties may attempt to copy aspects of our solution or obtain and use information that we regard as proprietary.

As of March 31, 2014, we held one issued U.S. patent, which expires in September 2030. We also own and use registered and unregistered trademarks on or in connection with our products and services. In addition, we have also registered numerous internet domain names.

Our industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patent and other intellectual property rights. In particular, leading companies in the technology industry have extensive patent portfolios. From time to time, third parties have asserted copyright, trademark and other intellectual property rights against us or our customers. Litigation and associated expenses may be necessary to enforce our proprietary rights.

Government Regulation

This section describes the key laws, regulations and industry standards that affect our business. Some of the aspects described below affect us directly. Other aspects do not apply to us directly, but may have a significant effect on the way our resellers and customers can operate. The regulatory environment in which we or our customers operate, particularly in the areas of privacy, data security, marketing, advertising and healthcare, are often complex and relatively new. As such, they are subject to varying interpretations by courts and governmental authorities and often require subjective interpretation. We cannot be certain that our efforts, or our customers’ efforts, to comply with these laws and regulations will be deemed sufficient by the relevant governmental authorities. In addition, the use of consumer information and health information are areas on which the public, legislators and regulators are currently focused. It is possible that the laws, regulations and industry standards that affect our business will change in the future, and we are not able to predict the effect that future changes will have on our business. Although our customer agreements typically contain obligations requiring our

 

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customers to comply with applicable laws, not all of our customers execute a standard customer agreement or if our customers fail to adhere to these obligations, we may be subject to adverse publicity, and related possible inquiries, investigations, or other regulatory activities in connection with our practices or those of our customers.

Privacy. Our collection, storage and use of information regarding our customers’ clients, customers or patients is governed by various U.S. federal and state laws, regulations and standards, as well as comparable Canadian laws and regulations. Enforcement by regulators, including the FTC, State Attorneys General and comparable Canadian authorities, impose notice, choice, security and access requirements with respect to such information. The standards are subject to interpretation by courts and other governmental authorities. A determination by a governmental agency, court or other governmental authority that any of our practices do not meet local standards or regulations could result in liability and adversely affect our business. In addition, inquiries or proceedings involving data protection may be expensive or time consuming, and their outcome is uncertain.

Marketing and Advertising. Our and our customers’ marketing and advertising practices are governed by a variety of federal and state laws and regulations. In addition, a variety of industry groups have developed voluntary codes of conduct related to marketing and advertising, particularly online advertising, which have developed into best practices. The applicable laws and regulations include the United States Telephone Consumer Protection Act, or TCPA, which broadly regulates outbound calls, including live operator calls, and restricts the use of automated telephone dialing equipment to call certain telephone numbers unless prior express consent has been obtained. The TCPA also prohibits companies from initiating telephone solicitations to consumers on the national Do-Not-Call list, and restricts the hours when such messages may be sent. Violations of the TCPA can result in statutory damages of $500 per violation (i.e., for each individual text message). U.S. state laws impose additional regulations on telephone calls and text messages and many states also include their own Do-Not-Call lists. Failure to comply with the TCPA in our marketing efforts, or the failure or inability of our customers to obtain necessary consents for the messaging features of our products, may damage our reputation, subject us to liability and require us to change certain of our product offerings. In addition, our and our customers’ email marketing is governed by the CAN-SPAM Act, which regulates commercial e-mails. The CAN-SPAM Act provides a right on the part of the recipient to request the sender to stop sending messages, and establishes penalties for the sending of e-mail messages that are intended to deceive the recipient as to source or content. Recipients must be furnished with an electronic method of informing the sender of the recipient’s decision to not receive further commercial e-mails. In addition, we face the risk that an action could be brought against us under various state spam laws, which are not entirely preempted by CAN-SPAM. An action alleging our or our customers’ failure to comply with CAN-SPAM or a state spam law and the adverse publicity associated with any such action could result in loss of customers or failure to bring on new customers. The TCPA, CAN-SPAM Act, related laws and industry codes of conduct are subject to varying interpretations by courts, governmental authorities and the advertising and marketing industry and often require subjective interpretation. We cannot be certain that our and our customers’ efforts to comply with these laws will be deemed sufficient by the relevant parties.

HIPAA Privacy Standards and Security Standards. The Privacy Standards and Security Standards under the Health Insurance Portability and Accountability Act of 1996, or HIPAA, establish a set of basic national privacy and security standards for the protection of certain individually identifiable health information by health plans, healthcare clearinghouses and healthcare providers, referred to as covered entities, and the business associates with whom such covered entities contract for services. The Health Information for Economic and Clinical Health Act of 2009, or HITECH, makes certain of HIPAA’s privacy and security standards also directly applicable to covered entities’ business associates. As a result, business associates are now subject to significant civil and criminal penalties for failure to comply with applicable privacy and security rule requirements. Moreover, HITECH creates a new requirement to report certain breaches of unsecured, individually identifiable health information and imposes penalties on entities that fail to do so. Additionally, certain states have adopted comparable privacy and security laws and regulations, some of which may be more stringent than HIPAA. HIPAA and HITECH will be subject to interpretation by various courts and other governmental authorities, thus creating potentially complex compliance issues for us and our customers and resellers. If our data practices do

 

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not comply with the requirements of HIPAA or HITECH, we may be directly subject to liability under HIPAA or HITECH. Any liability from failure to comply with the requirements of HIPAA or HITECH, to the extent such requirements are deemed to apply to our operations, or contractual obligations, could adversely affect our financial condition. The costs of complying with privacy and security related legal and regulatory requirements are burdensome and could have a material adverse effect on our results of operations.

Data Protection Regulation. Many states have passed laws regulating the actions that a business must take if it experiences a data breach. A handful of other states have passed data security laws regulating the administrative, technical and physical safeguards that businesses must take in connection with the storage, transmission and disposal of consumer information. Congress has also contemplated federal legislation relating to data breaches and HITECH requires breaches of certain unsecured, individually identifiable health information to be reported. In the past, the FTC has prosecuted some data breach cases as unfair and deceptive acts or practices under the FTC Act and State Attorneys General are focused on data security. We intend to continue to protect all customer data and to comply with all applicable laws regarding the protection of customer data. If we have a data security breach and we don’t comply with applicable laws, it could create liability for us, damage our reputation and result in a loss of customers.

Credit Card Protections. We collect credit card data in processing the fees paid to us by our customers. Several major credit card companies have formed the Payment Card Industry Council, or PCI Council, in order to establish and implement security standards for companies that transmit, store or process credit card data. The PCI Council has created the Payment Card Industry Data Security Standard, or PCI DSS. Though the PCI DSS is not law, merchants using PCI Council members to process transactions are required to comply with the PCI DSS, with associated fines and penalties for non-compliance. Further, elements of the PCI DSS have begun to emerge as law in some states, and we expect the trend to continue as to additional laws and restrictions in collecting and using credit card information. We engage a third-party credit card processor to store our customers’ credit card data and process our customers’ credit card payments.

Telephone Call Recording Laws. We are subject to laws affecting telephone call recording. Under the federal Wiretap Act, and most state laws, at least one party taking part in a call must be notified if the call is being recorded; therefore, one of the parties to a telephone call may record the conversation. However, the law of twelve states (i.e., California, Connecticut, Florida, Illinois, Maryland, Massachusetts, Michigan, Montana, Nevada, New Hampshire, Pennsylvania and Washington) require that all parties consent when one party wants to record a telephone conversation. These laws are subject to varying interpretations by courts and governmental authorities and often require subjective interpretation. We cannot be certain that our efforts to comply with these laws will be deemed sufficient by the relevant courts and governmental authorities. Volitions of the Wiretap Act, as well as state telephone call recording laws, can result in significant fines and criminal sanctions, may damage our reputation and require us to change certain of our product offerings.

Anti-Kickback Laws. There are federal and state laws that govern patient referrals, physician financial relationships and inducements to healthcare providers and patients. The federal healthcare program’s anti-kickback law prohibits any person or entity from offering, paying, soliciting or receiving anything of value, directly or indirectly, for the referral of patients covered by Medicare, Medicaid and other federal healthcare programs. Many states also have similar fee splitting laws that are not necessarily limited to items or services for which payment is made by a federal healthcare program. The laws in this area are broad and we may not be able to determine how the laws will be applied to our business practices. Any determination by a state or federal regulatory agency that any of our practices violate any of these laws could subject us to liability and require us to change some portions of our business.

Employees

As of March 31, 2014, we had 1,117 employees. Substantially all of these employees are located in the United States. None of our employees are represented by a labor union or covered by a collective bargaining agreement. We consider our relationship with our employees to be good.

 

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Facilities

Our principal offices occupy approximately 47,000 square feet of leased office space in New York, New York pursuant to a lease agreement that expires in 2015. We also lease offices in Atlanta, Georgia; Austin, Texas; Charlotte, North Carolina and Scottsdale, Arizona.

Legal Proceedings

From time to time we are involved in legal proceedings or subject to claims arising in the ordinary course of our business. Although the results of litigation and claims cannot be predicted with certainty, we do not believe we are a party to any legal proceedings that, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, financial condition or cash flows. 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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MANAGEMENT

Directors and Executive Officers

The following table sets forth the names, ages and positions of our directors and executive officers as of June 15, 2014:

 

Name

   Age     

Position

Executive Officers:

     

Court Cunningham

     45       Chief Executive Officer, President and Director

Michael Gordon

     44       Chief Operating Officer, Chief Financial Officer, Treasurer and Secretary

Erin Brockman

     39       Chief Human Resources Officer

Eric Raab

     53       Chief Information Officer

Fred Voccola

     39       General Manager, Yodle for Brand Networks

Paul Bascobert

     50       President of Local

Directors:

     

Michael Adler(1)

     50       Director

Rick Faulk(1)

     64       Director

Tom Mawhinney

     46       Director

David Rubin

     45       Director

Rob Stavis(2)

     51       Director

Andreas Stavropoulos(2)

     44       Director

 

(1)   Member of the audit committee. Mr. Adler serves as the chairman of the audit committee.
(2)   Member of the compensation committee. Mr. Stavis serves as the chairman of the compensation committee.

Executive Officers

Court Cunningham joined Yodle in April 2007 and has served as our Chief Executive Officer and a member of our board of directors since May 2007. Prior to joining Yodle, Mr. Cunningham held the position of Chief Operating Officer at Community Connect, a niche social networking company, from April 2005 to April 2007. Prior to Community Connect, Mr. Cunningham served as Senior Vice President & General Manager of the Marketing Automation group at DoubleClick. Mr. Cunningham holds a B.A. in English from Princeton University and an M.B.A. from Harvard Business School. We believe that Mr. Cunningham’s extensive knowledge of our business and operations, as well as his consumer marketing, product development and business development experience, allow him to make valuable contributions to our board of directors.

Michael Gordon has served as our Chief Financial Officer since May 2009 and as our Chief Operating Officer since March 2014. Prior to joining Yodle, Mr. Gordon was a Managing Director in the Media and Telecom investment banking group at Merrill Lynch, Pierce, Fenner and Smith Incorporated where he worked from 1996 to 2009. Previously, Mr. Gordon worked in brand management at Procter & Gamble. Since March 2013, Mr. Gordon has served on the board of directors of Tracx Systems, Ltd., a privately-held company that focuses on social media management software. He also serves on the board of directors of Share Our Strength, a non-profit, anti-hunger organization. Mr. Gordon holds an A.B. from Harvard College and an M.B.A. from Harvard Business School.

Erin Brockman joined Yodle in June 2009 as Vice President of Client Services, served as our Senior Vice President of Client Services from February 2012 through May 2014 and, since June 2014, has served as our Chief Human Resources Officer. Prior to joining Yodle, Ms. Brockman worked at Yahoo! from February 2002 to May 2009, where she most recently served as the Vice President of Operations and Customer Service. Prior to Yahoo!, Ms. Brockman served in management positions at HotJobs, GotSchool Market and Kozmo.com. She started her career in Change Management consulting at Accenture. Ms. Brockman holds a B.S. in Industrial and Labor Relations from Cornell University.

 

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Eric Raab has served as our Chief Information Officer since April 2013. Prior to joining Yodle, he was Chief Technology Officer at M5 Networks from July 2010 to March 2013. Prior to M5 Networks, Mr. Raab served as Chief Technology Officer of Line2 for Toktumi, Inc. from November 2008 to July 2010. He was also Vice President of Engineering and Operations at Teleplace, Inc. in 2008 and Chief Technology Officer and Vice President of Engineering at Epana Networks, Inc. from April 2003 to January 2008. Mr. Raab has also served as Chief Executive Officer of AIG Telecom and in the capacity of Chief Technology Officer at IDT Corporation, a telecommunications carrier based in Newark, New Jersey. Earlier in his career, Mr. Raab developed atomic, optical and computer technologies for AT&T Bell Labs. Mr. Raab holds a B.A. in Physics and Mathematics from Columbia University and a Ph.D. in Atomic and Molecular Physics from MIT.

Fred Voccola has served as our General Manager, Yodle for Brand Networks since April 2013. Prior to joining Yodle, Mr. Voccola served as the President of Nolio, Inc., an enterprise software company, from 2012 to 2013, when Nolio was acquired by Computer Associates (NYSE: CA). Prior to Nolio, from 2008 to 2012, Mr. Voccola co-founded and served as the President and Chief Executive Officer of Trust Technology Corp. In 2012, Trust Technology Corp. was sold to FGI Finance. Earlier, Mr. Voccola co-founded and served as Chief Operating Officer of Identify Software from 2001 to 2006, when Identify Software was acquired by BMC Software. Mr. Voccola then served as Vice President of Worldwide Sales and Services at BMC Software until 2008. Prior to Identify Software, Mr. Voccola served in various management and executive roles at Intira, which was sold to Divine Systems, and Prism Solutions, which was sold to Ardent Software/Informix/IBM. Mr. Voccola holds a B.S. in Finance from the Carroll School of Management at Boston College.

Paul Bascobert has served as our President of Local since May 2014. Prior to joining Yodle, Mr. Bascobert worked at Bloomberg LP from 2009 to 2014, where he served as Chief Operating Officer of Bloomberg Media Group since 2011 and President of Bloomberg Businessweek since 2009. Prior to Bloomberg, Mr. Bascobert served as Chief Marketing Officer of Dow Jones & Co. from 2007 to 2009 and as Senior Vice President of Operations from 2006 to 2007. Earlier in his career, Mr. Bascobert served as Executive Vice President of Braun Consulting and as Co-Founder and Partner of Vertex Partners, which was acquired by Braun Consulting in 1998. Mr. Bascobert holds a B.S. in Electrical Engineering from Kettering University and an M.B.A. from The Wharton School of the University of Pennsylvania.

Directors

Michael Adler has served as a member of our board of directors since November 2012. He joined SquareTrade as their Chief Financial Officer in November 2012. Prior to joining SquareTrade, Mr. Adler was the Executive Vice President and Chief Financial Officer of Expedia Inc. from April 2006 to September 2011. Before that, he held several roles at IAC/InterActiveCorp from April 2001 to March 2006, including SVP of Financial Planning and Analysis. While at IAC/InterActiveCorp he also served as the Chief Executive Officer and Chairman of the third party e-commerce platform provider, Styleclick, Inc. Previously, Mr. Adler held senior positions at SchoolSports (now known as ESPN Rise) and Cheyenne Software, an enterprise storage software company. Earlier in his career, Mr. Adler practiced corporate law with Feldman, Waldman & Kline in San Francisco. Mr. Adler holds a B.S. in Economics from The Wharton School of the University of Pennsylvania and a J.D. from the University of Pennsylvania Law School. We believe that Mr. Adler’s extensive experience in accounting, financial management and operations management allows him to make valuable contributions to our board of directors.

Rick Faulk has served as a member of our board of directors since July 2008. Mr. Faulk has been the Chief Executive Officer of Intronis since March 2013. Prior to Intronis, Mr. Faulk was General Manager for the Campaigner® brand at j2 Global® from 2012 to 2013. Prior to j2 Global®, Mr. Faulk was President and Chief Executive Officer of Landslide Technologies from 2010 to 2012, and he was President and Chief Executive Officer of Mzinga from 2007 to 2009. He also served as Chief Marketing Officer for WebEx Communications and President of WebEx Small Business. Prior to WebEx, he was Chief Executive Officer of Intranets.com. Mr. Faulk holds a degree in Business Administration from Bowling Green State University. We believe that Mr. Faulk’s experience with executive management, sales and marketing at SaaS and technology companies allows him to make valuable contributions to our board of directors.

 

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Tom Mawhinney has served as a member of our board of directors since January 2010. Mr. Mawhinney joined Jafco Ventures as a general partner in 2003. Prior to joining Jafco, Mr. Mawhinney worked with Canaan Partners, an early-stage venture capital firm, from 2001 to 2003. Earlier in his career, Mr. Mawhinney co-founded and served as President and Chief Operating Officer of North Systems, a venture-backed software company, and worked at Summit Partners, a venture capital firm. Mr. Mawhinney holds a B.A. from Harvard College and an M.B.A. from the Stanford Graduate School of Business. We believe that Mr. Mawhinney’s deep roots in the technology industry as both a venture capitalist and an operating executive allow him to make valuable contributions to our board of directors.

David Rubin joined Yodle in May 2011, served as our Chief Revenue Officer from May 2012 through May 2014 and, since June 2014, has served as a strategic advisor and member of our board of directors. Mr. Rubin was previously Chief Executive Officer of ProfitFuel from November 2002 to May 2011, and joined Yodle as part of our acquisition of ProfitFuel in May 2011. Prior to ProfitFuel, Mr. Rubin was founder and Chief Executive Officer of HomeCity, an online real estate brokerage firm, from February 2000 to November 2002. Before founding HomeCity, Mr. Rubin served as Vice President of New Services Development at Intraware, and prior to its acquisition by Intraware, as founder and Chief Executive Officer of BITSource. We believe that Mr. Rubin’s strong background in operations management and his comprehensive understanding of our business will allow him to make valuable contributions to our board of directors.

Rob Stavis has served as a member of our board of directors since November 2011, and first served on our board of directors from November 2006 to November 2007. Mr. Stavis has been a partner at Bessemer Venture Partners, a venture capital firm, since 2000. Prior to joining Bessemer, Mr. Stavis was an independent private equity investor. Earlier in his career, he served in various positions at Salomon Smith Barney, including as co-head of global arbitrage trading. Mr. Stavis also serves on the board of directors of 2U, Inc., an education technology company. Mr. Stavis holds a B.A.S. in Engineering from the University of Pennsylvania’s School of Engineering and Applied Sciences and a B.S. in Economics from The Wharton School of the University of Pennsylvania. We believe Mr. Stavis’s experience, both investing in the emerging software technology industry and serving as a board member for numerous private companies, allows him to make valuable contributions to our board of directors.

Andreas Stavropoulos has served as a member of our board of directors since November 2007. Mr. Stavropoulos has been a partner at DFJ, a venture capital firm, since 2000. Prior to joining DFJ, he was at McKinsey & Company from 1997 to 1999. Earlier in his career, he worked at Cornerstone Research, a financial and economic consulting firm. Mr. Stavropoulos holds a B.A. in Computer Science, summa cum laude from Harvard College, an M.S. in Computer Science from Harvard University and an M.B.A. with high distinction from Harvard Business School. We believe Mr. Stavropoulos’s extensive experience in the fields of consulting and finance allows him to make valuable contributions to our board of directors.

Family Relationships

There are no family relationships among any of our directors or executive officers.

Board Composition

Our board of directors currently consists of six members. Each director is currently elected to the board of directors for a one-year term, to serve until the election and qualification of a successor director at our annual meeting of stockholders, or until the director’s earlier removal, resignation or death.

All of our directors currently serve on the board of directors pursuant to the voting provisions of an amended and restated voting agreement between us and several of our stockholders. This agreement will terminate upon the completion of this offering, after which there will be no further contractual obligations regarding the election of our directors. See the section titled “Related Party Transactions” for a description of this agreement.

 

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In accordance with our certificate of incorporation, which will become effective immediately prior to completion of 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:

 

    Class I, which will consist of Court Cunningham, Andreas Stavropoulos and Michael Adler, and whose term will expire at our first annual meeting of stockholders to be held after the completion of this offering;

 

    Class II, which will consist of Rick Faulk and Rob Stavis, and whose term will expire at our second annual meeting of stockholders to be held after the completion of this offering; and

 

    Class III, which will consist of Tom Mawhinney and David Rubin, and whose term will expire at our third annual meeting of stockholders to be held after the completion of this offering.

Our bylaws, which will become effective upon completion of this offering, will provide that the authorized number of directors may be changed only by resolution approved by a majority of our board of directors. 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 the directors and considered whether any director has a material relationship with us that could compromise his or her ability to exercise independent judgment in carrying out his or her responsibilities. Based upon information requested from and provided by each director concerning such director’s background, employment and affiliations, including family relationships, our board of directors determined that Messrs. Adler, Faulk, Mawhinney, Stavis and Stavropoulos, representing five of our six directors, are “independent directors” as defined under applicable stock exchange rules and Messrs. Adler, Faulk and Mawhinney meet the independence requirements contemplated by Rule 10A-3 under the Securities Exchange Act of 1934, as amended, or the Exchange Act. 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 that our board of directors deemed relevant in determining their independence, including the beneficial ownership of our capital stock by each non-employee director and the transactions involving them described in the section of this prospectus titled “Certain Relationships and Related Party Transactions.”

Board Committees

Our board of directors has established an audit committee and a compensation committee and intends to form a nominating and corporate governance committee in connection with this offering, each of which has the composition and responsibilities described below. From time to time, the board may establish other committees to facilitate the management of our business.

Audit Committee

Our audit committee consists of three directors, Messrs. Adler, Faulk and Mawhinney. The composition of our audit committee meets the requirements for independence under current                  listing standards and SEC rules and regulations. Each member of our audit committee meets the financial literacy requirements of the                  listing standards. Mr. Adler is the chairman of the audit committee and our board of directors has determined that

 

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Mr. Adler is an audit committee “financial expert” as defined by Item 407(d) of Regulation S-K under the Securities Act. The principal duties and responsibilities of our audit committee include, among other things:

 

    selecting a qualified firm to serve as the independent registered public accounting firm to audit our consolidated financial statements;

 

    helping to ensure the independence and performance of the independent registered public accounting firm;

 

    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 our policies on risk assessment and risk management;

 

    reviewing related party transactions;

 

    reviewing and monitoring accounting principles, accounting policies, financial and accounting controls and compliance with legal and regulatory requirements;

 

    obtaining and reviewing a report by the independent registered public accounting firm at least annually, that describes our internal 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) all audit and all permissible non-audit services, other than de minimis 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 immediately prior to the completion of this offering that satisfies the applicable rules of the SEC and the listing standards of                 .

Compensation Committee

Our compensation committee consists of two directors, Messrs. Stavis and Stavropoulos, each of whom is a non-employee member of our board of directors as defined in Rule 16b-3 under the Exchange Act and an outside director as that term is defined in Section 162(m) of the Internal Revenue Code of 1986, or the Code. Mr. Stavis is the chairman of the compensation committee. The composition of our compensation committee meets the requirements for independence under current                 listing standards and SEC rules and regulations. The principal duties and responsibilities of our compensation committee include, among other things:

 

    reviewing and approving, or recommending that our board of directors approve, the compensation of our executive officers;

 

    reviewing and recommending to our board of directors the compensation of our directors;

 

    reviewing and approving, or recommending that our board of directors approve, the terms of compensatory arrangements with our executive officers;

 

    administering our stock and equity incentive plans;

 

    reviewing and approving, or recommending that our board of directors approve, incentive compensation and equity plans; and

 

    reviewing and establishing general policies relating to compensation and benefits of our employees and reviewing our overall compensation philosophy.

Our compensation committee will operate under a written charter, to be effective immediately prior to the completion of this offering, that satisfies the applicable rules of the SEC and the listing standards of the                 .

 

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Nominating and Corporate Governance Committee

The nominating and corporate governance committee, which will be established prior to the completion of this offering, will consist of two directors, Messrs. Stavis and Stavropoulos. Mr. Stavis is the chairman of the nominating and corporate governance committee. The composition of our nominating and governance committee meets the requirements for independence under current                 listing standards and SEC rules and regulations. The nominating and corporate governance committee’s responsibilities include, among other things:

 

    identifying, evaluating and selecting, or recommending that our board of directors approve, nominees for election to our board of directors and its committees;

 

    evaluating the performance of our board of directors and of individual directors;

 

    considering and making recommendations to our board of directors regarding the composition of our board of directors and its committees;

 

    reviewing developments in corporate governance practices;

 

    evaluating the adequacy of our corporate governance practices and reporting;

 

    developing and making recommendations to our board of directors regarding corporate governance guidelines and matters; and

 

    overseeing an annual evaluation of the board’s performance.

Our nominating and governance committee will operate under a written charter, to be effective immediately prior to the completion of this offering, that satisfies the applicable rules of the SEC and the listing standards of the                 .

Code of Business Conduct and Ethics

In connection with this offering, we intend to adopt a Code of Business Conduct and Ethics, or the Code of Conduct, applicable to all of our employees, executive officers and directors. Following the completion of this offering, the Code of Conduct will be available on our website at www.yodle.com. The nominating and corporate governance committee of our board of directors will be responsible for overseeing the Code of Conduct and must approve any waivers of the Code of Conduct for employees, executive officers and directors. We expect that any amendments to the Code of Conduct, or any waivers of its requirements, will be disclosed on our website. Information contained in or accessible through our website does not constitute a part of, and is not incorporated into, this prospectus.

Compensation Committee Interlocks and Insider Participation

Our compensation committee currently consists of Messrs. Stavis and Stavropoulos, each of whom has served on the compensation committee during the last year. Neither of these committee members has at any time been one of our officers or employees. None of our executive officers currently serves, or in the past year has served, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our board of directors or compensation committee. We are a party to certain transactions with entities affiliated with Bessemer Venture Partners and Draper Fisher Jurvetson, as described in the section titled “Certain Relationships and Related Party Transactions.”

Non-Employee Director Compensation

Historically, we have provided a combination of cash and equity-based compensation to our independent directors who are not employees or affiliated with our venture capital investors for the time and effort necessary to serve as a member of our board of directors. Accordingly, Messrs. Adler and Faulk have been granted equity-

 

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based compensation in connection with their service. We granted options to each upon joining our board of directors and to Mr. Faulk from time to time thereafter, subject in each case to monthly vesting over two years.

Other than the cash compensation and option grants referenced above, our directors are not currently entitled to receive any compensation in connection with their service on our board of directors, except for reimbursement of direct expenses incurred in connection with attending meetings of the board or committees thereof.

We expect that our board of directors will adopt a director compensation policy for non-employee directors to be effective upon the closing of this offering.

2013 Director Compensation Table

The following table sets forth information regarding the compensation earned for service on our board of directors during the year ended December 31, 2013 by our directors who were not also our employees. Court Cunningham, our Chief Executive Officer, is also a director, but does not receive any additional compensation for his service as a director. Mr. Cunningham’s compensation as an executive officer is set forth in the section of this prospectus titled “Executive and Director Compensation—2013 Summary Compensation Table.”

 

Name

   Fees
Earned or
Paid in
Cash ($)
     Option
Awards

($)(1)(2)
     All Other
Compensation
($)(3)
     Total
($)
 

Michael Adler

     16,000         —           2,488         18,488   

Rick Faulk

     8,000         41,525         3,044         52,569   

Tom Mawhinney

     —           —           23,942         23,942   

Rob Stavis

     —           —           —           —     

Andreas Stavropoulos

     —           —           4,256         4,256   

 

(1)   This column reflects the full grant date fair value for options granted during the year as measured pursuant to Accounting Standards Codification, or ASC, Topic 718 as stock-based compensation in our financial statements. Unlike the calculations contained in our financial statements, this calculation does not give effect to any estimate of forfeitures related to service-based vesting, but assumes that the director will perform the requisite service for the award to vest in full. The assumptions we used in valuing options are described in note 15 to our consolidated financial statements included in this prospectus.

 

(2)   The table below shows the aggregate number of option awards outstanding for each of our non-employee directors as of December 31, 2013:

 

Name    Options Awards
(#)
 

Michael Adler

     40,000 (a) 

Rick Faulk

     120,000 (b) 

Tom Mawhinney

     —     

Rob Stavis

     —     

Andreas Stavropoulos

     —     

 

  (a) Includes 21,671 shares underlying options exercisable as of December 31, 2013. The remainder of the shares underlying Mr. Adler’s options vest in equal monthly installments over the next 11 months.
  (b) Includes 80,000 shares underlying options exercisable as of December 31, 2013. The remainder of the shares underlying Mr. Faulk’s options vest in equal monthly installments over the next 24 months.

 

(3)   Includes airfare, hotel and transportation expenses to attend meetings of our board of directors and, with respect to Mr. Mawhinney, includes $20,735 of airfare, $2,331 of hotel and $876 of transportation expenses.

 

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EXECUTIVE AND DIRECTOR COMPENSATION

2013 Summary Compensation Table

The following table sets forth information regarding compensation earned during the year ended December 31, 2013 by our named executive officers, which include our principal executive officer and the next two most highly compensated executive officers for 2013.

 

Name and Principal Position

   Salary ($)      Option
Awards ($)(1)
     Non-Equity
Incentive Plan
Compensation ($)(2)
     Total ($)  

Court Cunningham

Chief Executive Officer

     388,550         913,437         236,455         1,538,442   

Eric Raab

Chief Information Officer

     177,273         626,826         52,400         856,498   

Fred Voccola

General Manager, Yodle for Brand Networks

     164,489         530,631         133,497         828,616   

 

(1)   This column reflects the full grant date fair value for options granted during the year as measured pursuant to ASC Topic 718 as stock-based compensation in our consolidated financial statements. Unlike the calculations contained in our financial statements, this calculation does not give effect to any estimate of forfeitures related to service-based vesting, but assumes that the named executive officer will perform the requisite service for the award to vest in full. The assumptions we used in valuing options are described in note 15 to our consolidated financial statements included in this prospectus.
(2)   See “—Employment Arrangements—Bonus Plans” below for a description of the material terms of the plan pursuant to which this compensation was awarded.

Outstanding Equity Awards at December 31, 2013

The following table provides information about outstanding stock options held by each of our named executive officers at December 31, 2013. Our named executive officers did not hold any restricted stock or other stock awards as of December 31, 2013.

 

            Number of Securities
Underlying Unexercised

Options (#)
              

Name

   Option
Grant Date
     Exercisable(1)      Unexercisable     Option
Exercise

Price ($)
     Option
Expiration
Date
 

Court Cunningham

    
 
 

 

06/06/07
07/24/09
03/12/12

10/08/13

  
  
  

  

    
 
 
 
45,342
500,000
208,333
—  
  
  
  
  
    

 

 

 

—  

—  

291,667

950,000

  

  

(2) 

(2) 

   
 
 
 
0.06
0.38
0.95
1.75
  
  
  
  
    
 
 
 
06/05/17
07/23/19
03/11/22
10/07/23
  
  
  
  

Eric Raab

    
 
05/14/13
10/08/13
  
  
    

 

—  

—  

  

  

    

 

600,000

100,000

(2) 

(2) 

   
 
1.64
1.75
  
  
    
 
05/13/23
10/07/23
  
  

Fred Voccola

     05/14/13         —           600,000 (2)      1.64         05/13/23   

 

(1)   These stock options were fully vested as of March 31, 2014.
(2)   These stock options vest over a five-year period: 20% of the shares underlying the options vest on the first anniversary of the option grant date, and the remainder of the shares underlying the option vest in equal monthly installments over the next 48 months.

Employment Arrangements

The initial terms and conditions of employment for each of our named executive officers are set forth in employee offer letters. These offer letters provide for accelerated vesting of specified equity awards following an acquisition and following termination within a specified period of time following an acquisition. Each letter also provides for 90 days’ notice of termination without cause or severance equal to 90 days’ of the employee’s base salary in lieu thereof. Each of our named executive officers is an at-will employee.

 

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The amount and terms of these benefits reflect the negotiations of each of our named executive officers with us. We consider these severance and change in control benefits critical to attracting and retaining high caliber executives. We believe that appropriately structured severance benefits, including accelerated vesting provisions, minimize the distractions and reduce the risk that an executive voluntarily terminates his or her employment with us during times of uncertainty, such as before an acquisition is completed. We believe that our existing arrangements allow each named executive officer to focus on continuing normal business operations and, for change in control benefits, on the success of a potential business combination, rather than on how business decisions that may be in the best interest of our stockholders will impact his or her own financial security.

The following table sets forth the current base salaries and fiscal year 2014 bonus targets of, and a summary of the material severance and acquisition arrangements with, our named executive officers:

 

Named Executive Officer

  

Fiscal Year 2014 Salary and
Bonus Target

  

Severance and Acquisition Benefits

Court Cunningham

   Salary: $391,400;
2014 Bonus Plan Target: $313,120
   Severance: If we terminate Mr. Cunningham’s employment for any reason other than for cause, then in lieu of three months’ notice, we may pay him three months of his base salary.
      Acquisition: If Mr. Cunningham is employed by Yodle immediately prior to the closing of a change of control transaction and, within one year, Mr. Cunningham’s employment is terminated without cause or Mr. Cunningham terminates his employment for good reason, then all unvested shares underlying his options will vest.

Eric Raab

   Salary: $240,000;
2014 Bonus Plan Target: $72,000
   Severance: If we terminate Mr. Raab’s employment for any reason other than for cause, then in lieu of three months’ notice, we may pay him three months of his base salary.
      Acquisition: If Mr. Raab is employed by Yodle immediately prior to the closing of a change of control transaction and, within one year, Mr. Raab’s employment is terminated without cause or Mr. Raab terminates his employment for good reason, then all unvested shares underlying his options will vest.

Fred Voccola

  

Salary: $225,000;
2014 Bonus Plan Target: $99,990

Brand Network Bonus Plan Target: $100,000

   Severance: If we terminate Mr. Voccola’s employment for any reason other than for cause, then in lieu of three months’ notice, we may pay him three months of his base salary.
      Acquisition: If Mr. Voccola is employed by Yodle immediately prior to the closing of a change of control transaction and, within one year, Mr. Voccola’s employment is terminated without cause or Mr. Voccola terminates his employment for good reason, then all unvested shares underlying his options will vest.

The definitions of “cause,” “good reason” and “change of control transaction” referenced above are defined in the individual offer letters with each of the named executive officers, respectively, or the applicable equity incentive plan under which the stock option was granted.

 

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Bonus Plans

Each of our named executive officers was or is, as the case may be, eligible to participate in our 2013 and 2014 bonus plans. The bonus plans are designed to incentivize and reward outstanding individual achievement, subject to the performance of Yodle. Bonuses under the 2013 bonus plan were measured semi-annually on June 30, 2013 and December 31, 2013 and paid on August 15, 2013 and February 15, 2014. Bonuses under the 2014 bonus plan will be measured annually on December 31, 2014 and paid on February 15, 2015, with a portion to be paid on August 15, 2014 based on performance through June 30, 2014. The annual target for the 2014 bonus plan is a percentage of each eligible employee’s base salary (prorated for any portion of a bonus period if the employee joined Yodle during the bonus period), 100% of which, in the case of our named executive officers, is subject to the achievement of certain corporate objectives, including revenue growth and Adjusted EBITDA targets.

Mr. Voccola is also eligible to earn an additional bonus under our General Manager, Yodle for Brand Networks Bonus Plan. This plan is designed to incentivize and reward achievement of revenue and contribution margin targets. Bonuses under this plan are measured semi-annually on June 30 and December 31 and paid 45 days thereafter. The semi-annual target is $50,000, subject to manager discretion.

Equity Incentive Plans

2014 Equity Incentive Plan

We expect that our board of directors will adopt and our stockholders will approve prior to the closing of this offering our 2014 Equity Incentive Plan, or our 2014 Plan. We do not expect to utilize our 2014 Plan until after the closing of this offering, at which point no further grants will be made under our 2007 Plan, as described below in the section of this prospectus titled “2007 Equity Incentive Plan.” No awards have been granted and no shares of our common stock have been issued under our 2014 Plan.

Stock Awards. The 2014 Plan will provide for the grant of incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, or the Code, nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance-based stock awards, and other forms of equity compensation (collectively, stock awards). Additionally, the 2014 Plan provides for the grant of performance cash awards. Incentive stock options may be granted only to employees. All other awards may be granted to employees, including officers, and to non-employee directors and consultants.

Share Reserve. Initially, the aggregate number of shares of our common stock that may be issued pursuant to stock awards under the 2014 Plan after the 2014 Plan becomes effective is the sum of (1)                 shares, (2) the number of shares reserved for issuance under our 2007 Plan at the time our 2014 Plan becomes effective, and (3) any shares subject to stock options or other stock awards granted under our 2007 Plan that would have otherwise returned to our 2007 Plan (such as upon the expiration or termination of a stock award prior to vesting). Additionally, the number of shares of our common stock reserved for issuance under our 2014 Plan will automatically increase on January 1 of each year, beginning on January 1, 2015 (assuming the 2014 Plan becomes effective before such date) and continuing through and including January 1, 2023, by         % of the total number of shares of our capital stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares determined by our board of directors. The maximum number of shares that may be issued upon the exercise of incentive stock options under our 2014 Plan is                      shares.

No person may be granted stock awards covering more than                 shares of our common stock under our 2014 Plan during any calendar year pursuant to stock options, stock appreciation rights and other stock awards whose value is determined by reference to an increase over an exercise or strike price of at least 100% of the fair market value on the date the stock award is granted. Additionally, no person may be granted in a calendar year a performance stock award covering more than             shares or a performance cash award having a maximum value in excess of $            . Such limitations are designed to help assure that any deductions to which

 

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we would otherwise be entitled with respect to such awards will not be subject to the $1.0 million limitation on the income tax deductibility of compensation paid to any covered executive officer imposed by Section 162(m) of the Code.

If a stock award granted under the 2014 Plan expires or otherwise terminates without being exercised in full, or is settled in cash, the shares of our common stock not acquired pursuant to the stock award again will become available for subsequent issuance under the 2014 Plan. In addition, the following types of shares under the 2014 Plan may become available for the grant of new stock awards under the 2014 Plan: (1) shares that are forfeited to or repurchased by us prior to becoming fully vested; (2) shares withheld to satisfy income or employment withholding taxes; or (3) shares used to pay the exercise or purchase price of a stock award. Shares issued under the 2014 Plan may be previously unissued shares or reacquired shares bought by us on the open market. As of the date hereof, no awards have been granted and no shares of our common stock have been issued under the 2014 Plan.

Administration. Our board of directors, or a duly authorized committee thereof, has the authority to administer the 2014 Plan. Our board of directors may also delegate to one or more of our officers the authority to (1) designate employees (other than other officers) to be recipients of certain stock awards, and (2) determine the number of shares of common stock to be subject to such stock awards. Subject to the terms of the 2014 Plan, our board of directors or the authorized committee, referred to herein as the plan administrator, determines recipients, dates of grant, the numbers and types of stock awards to be granted and the terms and conditions of the stock awards, including the period of their exercisability and vesting schedule applicable to a stock award. Subject to the limitations set forth below, the plan administrator will also determine the exercise price, strike price or purchase price of awards granted and the types of consideration to be paid for the award.

The plan administrator has the authority to modify outstanding awards under our 2014 Plan. Subject to the terms of our 2014 Plan, the plan administrator has the authority to reduce the exercise, purchase or strike price of any outstanding stock award, cancel 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, with the consent of any adversely affected participant.

Stock Options. Incentive and nonstatutory stock options are granted pursuant to stock option agreements adopted by the plan administrator. The plan administrator determines the exercise price for a stock option, within the terms and conditions of the 2014 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. Options granted under the 2014 Plan vest at the rate specified by the plan administrator.

The plan administrator determines the term of stock options granted under the 2014 Plan, up to a maximum of 10 years. Unless the terms of an option holder’s stock option agreement provide otherwise, if an option holder’s service relationship with us, or any of our affiliates, ceases for any reason other than disability, death or cause, the option holder may generally exercise any vested options for a period of three months following the cessation of service. The option term may be extended in the event that exercise of the option following such a termination of service is prohibited by applicable securities laws or our insider trading policy. If an option holder’s service relationship with us or any of our affiliates ceases due to disability or death, or an option holder dies within a certain period following cessation of service, the option holder or a beneficiary may generally exercise any vested options 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, options generally terminate immediately. 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) proceeds from a broker-assisted exercise, (3) the tender of shares of our common stock previously owned by the option holder, (4) a net exercise of the option if it is an nonqualified stock option, and (5) other legal consideration approved by the plan administrator.

 

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Unless the plan administrator provides otherwise, options generally are not transferable except by will, the laws of descent and distribution, or pursuant to a domestic relations order. An option holder may designate a beneficiary, however, who may exercise the option following the option holder’s death.

Tax Limitations on Incentive Stock Options. The aggregate fair market value, determined at the time of grant, of our common stock with respect to incentive stock options that are exercisable for the first time by an option 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 nonqualified stock options. No incentive stock option 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 affiliates 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 incentive stock option does not exceed five years from the date of grant.

Restricted Stock Awards. Restricted stock awards are granted pursuant to restricted stock award agreements adopted by the plan administrator. Restricted stock awards may be granted in consideration for (1) cash, check, bank draft or money order, (2) services rendered to us or our affiliates, or (3) any other form of legal consideration. Common stock acquired under a restricted stock award may, but need not, be subject to a share repurchase option in our favor in accordance with a vesting schedule to be determined by the plan administrator. Rights to acquire shares under a restricted stock award may be transferred only upon such terms and conditions as set by the plan administrator. Except as otherwise provided in the applicable award agreement, restricted stock unit awards that have not vested will be forfeited upon the participant’s cessation of continuous service for any reason.

Restricted Stock Unit Awards. Restricted stock unit awards are granted pursuant to restricted stock unit award agreements adopted by the plan administrator. Restricted stock unit awards may be granted in consideration for any form of legal consideration. A restricted stock unit 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 restricted stock unit award agreement. Additionally, dividend equivalents may be credited in respect of shares covered by a restricted stock unit award. Except as otherwise provided in the applicable award agreement, restricted stock units that have not vested will be forfeited upon the participant’s cessation of continuous service for any reason.

Stock Appreciation Rights. Stock appreciation rights are granted pursuant to stock appreciation grant agreements adopted by the plan administrator. The plan administrator determines the strike price for a stock appreciation right, which generally cannot be less than 100% of the fair market value of our common stock on the date of grant. Upon the exercise of a stock appreciation right, we will pay the participant an amount equal to (1) the excess of the per share fair market value of our common stock on the date of exercise over the strike price, multiplied by (2) the number of shares of common stock with respect to which the stock appreciation right is exercised. A stock appreciation right granted under the 2014 Plan vests at the rate specified in the stock appreciation right agreement as determined by the plan administrator.

The plan administrator determines the term of stock appreciation rights granted under the 2014 Plan, up to a maximum of ten years. Unless the terms of a participant’s stock appreciation right agreement provides otherwise, if a participant’s 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. The stock appreciation right term 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 participant’s 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.

 

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Performance Awards. If certain material terms of the 2014 Plan are approved by our stockholders after we are publicly traded, the 2014 Plan permits the grant of performance-based stock and cash awards that may qualify as performance-based compensation that is not subject to the $1.0 million limitation on the income tax deductibility of compensation paid to a covered executive officer imposed by Section 162(m) of the Code. To help assure that the compensation attributable to performance-based awards will so qualify, our compensation committee can structure such awards so that stock or cash will be issued or paid pursuant to such award only after the achievement of certain pre-established performance goals during a designated performance period.

The performance goals that may be selected include one or more of the following: (1) earnings (including earnings per share and net earnings); (2) earnings before interest, taxes and depreciation; (3) earnings before interest, taxes, depreciation and amortization; (4) total stockholder return; (5) return on equity or average stockholders’ equity; (6) return on assets, investment, or capital employed; (7) stock price; (8) margin (including gross margin); (9) income (before or after taxes); (10) operating income; (11) operating income after taxes; (12) pre-tax profit; (13) operating cash flow; (14) sales or revenue targets; (15) increases in revenue or product revenue; (16) expenses and cost reduction goals; (17) improvement in or attainment of working capital levels; (18) economic value added (or an equivalent metric); (19) market share; (20) cash flow; (21) cash flow per share; (22) share price performance; (23) debt reduction; (24) implementation or completion of projects or processes; (25) customer satisfaction; (26) stockholders’ equity; (27) capital expenditures; (28) debt levels; (29) operating profit or net operating profit; (30) workforce diversity; (31) growth of net income or operating income; (32) billings; and (33) to the extent that an award is not intended to comply with Section 162(m) of the Code, other measures of performance selected by our board of directors.

The performance goals may be based on a company-wide basis, with respect to one or more business units, divisions, affiliates, or business segments, and in either absolute terms or relative to the performance of one or more comparable companies or the performance of one or more relevant indices. Unless specified otherwise (1) in the award agreement at the time the award is granted or (2) in such other document setting forth the performance goals at the time the goals are established, we will appropriately make adjustments in the method of calculating the attainment of performance goals as follows: (a) to exclude restructuring and/or other nonrecurring charges; (b) to exclude exchange rate effects, as applicable, for non-U.S. dollar denominated goals; (c) to exclude the effects of changes to generally accepted accounting principles; (d) to exclude the effects of any statutory adjustments to corporate tax rates; and (e) to exclude the effects of any “extraordinary items” as determined under generally accepted accounting principles. In addition, we retain the discretion to reduce or eliminate the compensation or economic benefit due upon attainment of the goals. The performance goals may differ from participant to participant and from award to award.

Other Stock Awards. The plan administrator may 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 and all other terms and conditions of such awards.

Changes to Capital Structure. In the event that there is a specified type of change in our capital structure, such as a stock split or recapitalization, appropriate adjustments will be made to (1) the class and maximum number of shares reserved for issuance under the 2014 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 upon the exercise of incentive stock options, (4) the class and maximum number of shares subject to stock awards that can be granted in a calendar year (as established under the 2014 Plan pursuant to Section 162(m) of the Code) and (5) 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 certain specified significant corporate transactions, the plan administrator has the discretion to take any of the following actions with respect to stock awards:

 

    arrange for the assumption, continuation or substitution of a stock award by a surviving or acquiring entity or parent company;

 

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    arrange for the assignment of any reacquisition or repurchase rights held by us to the surviving or acquiring entity or parent company;

 

    accelerate the vesting of the stock award and provide for its termination prior to the effective time of the corporate transaction;

 

    arrange for the lapse of any reacquisition or repurchase right held by us;

 

    cancel or arrange for the cancellation of the stock award in exchange for such cash consideration, if any, as our board of directors may deem appropriate; or

 

    make a payment equal to the excess of (1) the value of the property the participant would have received upon exercise of the stock award over (2) the exercise price otherwise payable in connection with the stock award.

Our plan administrator is not obligated to treat all stock awards, even those that are of the same type, in the same manner.

Under the 2014 Plan, a corporate transaction is generally the consummation of (1) a sale or other disposition of all or substantially all of our consolidated assets, (2) a sale or other disposition of at least 90% of our outstanding securities, (3) a merger, consolidation or similar transaction following which we are not the surviving corporation, or (4) a merger, consolidation or similar transaction following which we are the surviving corporation but the shares of our common stock outstanding immediately prior to such transaction are converted or exchanged into other property by virtue of the transaction.

Change in Control. The plan administrator may provide, in an individual award agreement or in any other written agreement between a participant and us that the stock award will be subject to additional acceleration of vesting and exercisability in the event of a change in control. Under the 2014 Plan, a change in control is generally (1) the acquisition by a person or entity of more than 50% of our combined voting power other than by merger, consolidation or similar transaction; (2) a consummated merger, consolidation or similar transaction immediately after which our stockholders cease to own more than 50% of the combined voting power of the surviving entity; or (3) a consummated sale, lease or exclusive license or other disposition of all or substantially all of our consolidated assets.

Amendment and Termination. Our board of directors has the authority to amend, suspend, or terminate our 2014 Plan, provided that such action does not materially impair the existing rights of any participant without such participant’s written consent. No incentive stock options may be granted after the tenth anniversary of the date our board of directors adopted our 2014 Plan.

2014 Employee Stock Purchase Plan

We expect that our board will adopt and our stockholders will approve prior to the closing of this offering our 2014 Employee Stock Purchase Plan, or our 2014 ESPP. We do not expect to grant purchase rights under our 2014 ESPP until after the closing of this offering.

The maximum number of shares of our common stock that may be issued under our 2014 ESPP is                 shares. Additionally, the number of shares of our common stock reserved for issuance under our 2014 ESPP will automatically increase on January 1 of each year, beginning on January 1 of the year after the closing of this offering and ending on and including January 1, 2024, by the lesser of (1)         % of the total number of shares of our common stock outstanding on December 31 of the preceding calendar year, (2)                 shares of our common stock, or (3) such lesser number of shares of common stock as determined by our board of directors. Shares subject to purchase rights granted under our 2014 ESPP that terminate without having been exercised in full will not reduce the number of shares available for issuance under our 2014 ESPP.

Our board of directors, or a duly authorized committee thereof, will administer our 2014 ESPP. Our board of directors has delegated its authority to administer our 2014 ESPP to our compensation committee under the terms of the compensation committee’s charter.

 

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Employees, including executive officers, of ours or any of our designated affiliates may have to satisfy one or more of the following service requirements before participating in our 2014 ESPP, as determined by the administrator: (1) customary employment with us or one of our affiliates for more than 20 hours per week and more than five months per calendar year, or (2) continuous employment with us or one of our affiliates for a minimum period of time, not to exceed two years, prior to the first date of an offering. An employee may not be granted rights to purchase stock under our 2014 ESPP if such employee (a) immediately after the grant would own stock possessing 5% or more of the total combined voting power or value of all classes of our common stock, and (b) holds rights to purchase stock under our 2014 ESPP that would accrue at a rate that exceeds $25,000 worth of our stock for each calendar year that the rights remain outstanding.

Our 2014 ESPP is intended to qualify as an employee stock purchase plan under Section 423 of the Code. The administrator may specify offerings with a duration of not more than 27 months, and may specify one or more 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 the employees who are participating in the offering. The administrator, in its discretion, will determine the terms of offerings under our 2014 ESPP.

Our 2014 ESPP permits participants to purchase shares of our common stock through payroll deductions up to 15% of their earnings. Unless otherwise determined by the administrator, the purchase price of the shares will be 85% of the lower of the fair market value of our common stock on the first day of an offering or on the date of purchase. Participants may end their participation at any time during an offering and will be paid their accrued contributions that have not yet been used to purchase shares. Participation ends automatically upon termination of employment with us.

A participant may not transfer purchase rights under our 2014 ESPP other than by will, the laws of descent and distribution or as otherwise provided under our 2014 ESPP.

In the event of a specified corporate transaction, such as a merger or change in control, a successor corporation may assume, continue or substitute each outstanding purchase right. If the successor corporation does not assume, continue or substitute for the outstanding purchase rights, the offering in progress will be shortened and a new exercise date will be set. The participants’ purchase rights will be exercised on the new exercise date and such purchase rights will terminate immediately thereafter.

Our board of directors has the authority to amend, suspend or terminate our 2014 ESPP, at any time and for any reason. Our 2014 ESPP will remain in effect until terminated by our board of directors in accordance with the terms of the 2014 ESPP.

2007 Equity Incentive Plan

Our board of directors and our stockholders approved our 2007 Equity Incentive Plan, or 2007 Plan, which became effective in May 2007, and was further amended by our board of directors and stockholders, most recently in October 2013. As of May 31, 2014, there were 1,170,473 shares remaining available for the grant of stock awards under our 2007 Plan and there were outstanding stock awards covering a total of 21,929,642 shares that were granted under our 2007 Plan. Following this offering, no further grants will be made under our 2007 Plan and all outstanding stock awards granted under our 2007 Plan will continue to be governed by the terms of our 2007 Plan.

Stock Awards. Our 2007 Plan provides for the grant of incentive stock options to our employees, and for the grant of nonstatutory stock options, bonus shares, stock awards, performance shares and the right to purchase restricted stock to our employees, non-employee directors and consultants, collectively, “stock awards.”

Share Reserve. The aggregate number of shares of our common stock reserved for issuance pursuant to stock awards under the 2007 Plan is 34,353,663 shares, subject to adjustment as provided in the 2007 Plan.

 

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Administration. Our board of directors, or a duly authorized committee thereof, each referred to herein as the plan administrator, has the authority to administer the 2007 Plan. Our board of directors may also delegate to an officer the authority to (1) designate employees (other than other officers) to be recipients of certain stock awards, and (2) determine the number of shares of common stock to be subject to such stock awards. Subject to the terms of the 2007 Plan, the plan administrator determines recipients, dates of grant, the numbers and types of stock awards to be granted and the terms and conditions of the stock awards, including the period of their exercisability and vesting schedule applicable to a stock award. Subject to the limitations set forth below, the plan administrator will also determine the exercise price, strike price or purchase price of awards granted and the types of consideration to be paid for the award. The plan administrator has the authority to modify outstanding awards under our 2007 Plan. Subject to the terms of the 2007 Plan, the plan administrator has full authority and discretion to interpret the plan and prescribe and rescind rules and regulations related to it.

Stock Options. Incentive and nonstatutory stock options are granted pursuant to stock option agreements adopted by the plan administrator. The plan administrator determines the exercise price for a stock option, within the terms and conditions of the 2007 Plan, provided that the exercise price of an option generally cannot be less than 100% of the fair market value of our common stock on the date of grant. Options granted under the 2007 Plan vest at the rate specified by the plan administrator.

The plan administrator determines the term of stock options granted under the 2007 Plan, up to a maximum of 10 years. Unless the terms of an option holder’s stock option agreement provide otherwise, if an option holder’s service relationship with us, or any of our affiliates, ceases for any reason other than disability or death, the option holder may generally exercise any vested options for a period of 90 days following the cessation of service. If an option holder’s service relationship with us or any of our affiliates ceases due to disability or death, the option holder or a beneficiary may generally exercise any vested options for a period of 12 months. 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 cash or, at the discretion of the plan administrator, by (1) delivery of a promissory note, (2) proceeds from a broker-assisted exercise and (3) any combination of such forms.

Unless the plan administrator provides otherwise, options generally are not transferable or assignable except by will or the laws of descent and distribution.

Tax Limitations on Incentive Stock Options. The aggregate fair market value, determined at the time of grant, of our common stock with respect to incentive stock options that are exercisable for the first time by an option 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 nonqualified stock options. No incentive stock option 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 affiliates 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 incentive stock option does not exceed five years from the date of grant.

Restricted Stock Awards. Restricted stock awards are granted pursuant to restricted stock award agreements adopted by the plan administrator. Restricted stock award agreements conform to the terms and conditions of the 2007 Plan to the extent applicable, and may contain such other provisions as the plan administrator deems advisable that are consistent with the terms of the 2007 Plan, including but not limited to transfer restrictions, rights of refusal, vesting provisions, repurchase rights, lock-up provisions, drag-along rights and such other restrictions as the plan administrator deems appropriate.

Changes to Capital Structure. In the event that there is a specified type of change in our capital structure, such as a stock split or recapitalization, appropriate adjustments will be made to (1) the number of shares available for future grants under the 2007 Plan, and (2) the number of shares covered by, and the exercise price of, each outstanding option.

 

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Corporate Transactions. In the event of a consolidation, merger or sale of assets or stock of the company, the plan administrator may take one or more of the following actions with respect to outstanding stock awards: (1) make appropriate provision for the continuation or substitution of such options; (2) accelerate the date of exercise of such options or of any installment of any such options; (3) upon written notice to the optionees, provide that all options must be exercised, to the extent then exercisable, within a specified number of days of the date of such notice, at the end of which period the options shall terminate; (4) terminate all vested options in exchange for a cash payment equal to the excess of the fair market value of the shares subject to such options (to the extent then exercisable) over the exercise price thereof; or (5) in the event of a stock sale, require that the optionee sell to the purchaser to whom such stock sale is to be made, all shares previously issued to such optionee upon exercise of any option, at a price equal to the portion of the net consideration from such sale which is attributable to such shares.

Amendment and Termination. The 2007 Plan will terminate in May 2017. However, our board of directors has the authority to amend, suspend or terminate our 2007 Plan. As noted above, in connection with this offering, our 2007 Plan will be terminated and no further awards will be granted thereunder. All outstanding awards under the 2007 Plan will continue to be governed by their existing terms.

401(k) Plan

We maintain a tax-qualified retirement plan that provides eligible U.S. employees with an opportunity to save for retirement on a tax advantaged basis. Eligible employees are able to defer eligible compensation subject to applicable annual Code limits. Currently, we do not make matching contributions or discretionary contributions to the 401(k) plan. Employees’ pre-tax contributions are allocated to each participant’s individual account and are then invested in selected investment alternatives according to the participants’ directions. Employees are immediately and fully vested in their contributions. The 401(k) plan is intended to be qualified under Section 401(a) of the Code with the 401(k) plan’s related trust intended to be tax exempt under Section 501(a) of the Code. 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.

Limitations on Liability and Indemnification Matters

Upon completion of this offering, our 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 director’s 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 as provided in Section 174 of the Delaware General Corporation Law; or

 

    any transaction from which the director derived an improper personal benefit.

This 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 certificate of incorporation and our bylaws will provide that we are required to indemnify our directors to the fullest extent permitted by Delaware law. Our bylaws will also provide that, upon satisfaction of certain conditions, we are required to advance expenses incurred by a director 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

 

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be permitted to indemnify him or her under the provisions of Delaware law. Our bylaws will also provide our board of directors with discretion to indemnify our officers and employees when determined appropriate by the board. 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, among other things, attorneys’ fees, judgments, fines and settlement amounts incurred by any of these individuals in any action or proceeding. We believe that these 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 certificate of incorporation and 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 stockholder’s 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. At present, there is no pending litigation or proceeding involving any of our directors, officers or employees for which indemnification is sought and we are not aware of any threatened litigation that may result in claims for indemnification.

Rule 10b5-1 Sales Plans

Our directors, executive officers and certain of our other employees 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 pursuant to parameters established by the director, executive officer or other employee when entering into the plan, without further direction from them. The director, executive officer or other employee may amend a Rule 10b5-1 plan in some circumstances and may terminate a plan at any time. Our directors, executive officers and certain of our other employees also may buy or sell additional shares outside of a Rule 10b5-1 plan when they are not in possession of material nonpublic information subject to compliance with the terms of our insider trading policy. Prior to 180 days after the date of this offering, subject to potential extension or early termination, the sale of any shares under such plan would be subject to any lock-up agreement that such director, executive officer or other employee has entered into.

 

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

The following is a summary of transactions since January 1, 2011 to which we were a participant, in which the amount involved exceeded or will exceed $120,000, and in which any of our then directors, executive officers or holders of more than 5% of any class of our capital stock at the time of such transaction, or any members of their immediate family, had or will have a direct or indirect material interest, other than compensation arrangements which are described under the sections of this prospectus titled “Management—Non-Employee Director Compensation” and “Executive and Director Compensation.”

Sales of Series F Preferred Stock

In February 2013, we sold an aggregate of 1,666,667 shares of our Series F preferred stock at a price of $3.00 per share for an aggregate price of approximately $5.0 million. The following table summarizes purchases of shares of our Series F preferred stock by our directors, executive officers and holders of more than 5% of any class of our capital stock as of the date of such transaction:

 

Related Party

   Shares of
Series F
Preferred Stock
Purchased (#)
     Aggregate
Purchase
Price ($)
 

Entities affiliated with Bessemer Venture Partners(1)

     786,307         2,358,921   

Entities affiliated with Draper Fisher Jurvetson(2)

     644,916         1,934,748   

JAFCO Technology Partners III, L.P.(3)

     224,913         674,739   
  

 

 

    

 

 

 

Total

     1,656,136       $ 4,968,408   
  

 

 

    

 

 

 

 

(1) Includes 589,730 shares purchased by Bessemer Venture Partners VI L.P. and 196,577 shares purchased by Bessemer Venture Partners Co-Investment L.P. Rob Stavis, a partner at Bessemer Venture Partners, is a member of our board of directors.
(2) Includes 473,725 shares purchased by Draper Fisher Jurvetson Fund IX, L.P., 12,837 shares purchased by Draper Fisher Jurvetson Partners IX, LLC, 130,906 shares purchased by Draper Fisher Jurvetson Growth Fund 2006, L.P., 10,583 shares purchased by Draper Fisher Jurvetson Partners Growth Fund 2006, LLC and 16,865 shares purchased by Draper Associates Riskmasters Fund III, LLC. Andreas Stavropoulos, a partner at DFJ, is a member of our board of directors.
(3) Tom Mawhinney, a member of our board of directors, is affiliated with JAFCO Technology Partners III, L.P.

ProfitFuel Acquisition and Financing

On May 23, 2011, we acquired 100% of ProfitFuel, Inc., or ProfitFuel, a privately held search-engine optimization firm. As consideration for this acquisition, we (1) paid approximately $15.3 million in cash at closing, (2) issued an aggregate of 13,000,000 shares of our common stock at a fair value of $1.51 per share and (3) promised to pay a deferred cash payment of $7.5 million, which was paid in 2012.

Issuance of Common Stock, Restricted Stock, Convertible Promissory Notes and Warrants

In connection with this acquisition, we also issued $9.0 million aggregate principal amount of convertible promissory notes, as well as warrants to purchase an aggregate of $900,000 of our capital stock (initially equal to 10% of the aggregate principal amount of the convertible promissory notes) to certain of our preferred stockholders, as listed below. Proceeds from this bridge financing were used to fund the acquisition.

In connection with our acquisition of ProfitFuel, directors, executive officers and holders of more than 5% of any class of our capital stock as of the date of such transaction received the following:

 

    Pursuant to the terms of the merger agreement, David Rubin, our Chief Revenue Officer and former Chief Executive Officer and shareholder of ProfitFuel, received (1) 6,037,392 shares of our common stock in exchange for his equity ownership in ProfitFuel and (2) 1,078,200 shares of restricted stock that, as of December 31, 2013, were fully vested, in exchange for his agreement to become a Yodle employee upon the closing of the acquisition.

 

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    The warrants issued in connection with the bridge financing were amended and restated as of September 21, 2012 to account for certain adjustments, as provided by the terms of the original warrants. As of December 31, 2013, the warrants were exercisable for an aggregate of 1,537,917 shares of our Series D preferred stock at an exercise price of $1.4045 per share. The following table summarizes the warrants held, as of December 31, 2013, by our directors, executive officers and holders of more than 5% of any class of our capital stock as of the date of original issuance of the warrants:

 

Related Party

   Shares of
Series D
Preferred Stock
Issuable Upon
Exercise (#)
 

Entities affiliated with Bessemer Venture Partners(1)

     736,631   

Entities affiliated with Draper Fisher Jurvetson(2)

     577,833   

JAFCO Technology Partners III, L.P.(3)

     213,458   
  

 

 

 

Total

     1,527,922   
  

 

 

 

 

  (1)   Includes a warrant to purchase 552,473 shares held by Bessemer Venture Partners VI L.P. and a warrant to purchase 184,158 shares held by Bessemer Venture Partners Co-Investment L.P. Rob Stavis, a partner at Bessemer Venture Partners, is a member of our board of directors.
  (2)   Includes a warrant to purchase 426,757 shares held by Draper Fisher Jurvetson Fund IX, L.P., a warrant to purchase 11,565 shares held by Draper Fisher Jurvetson Partners IX, LLC, a warrant to purchase 115,019 shares held by Draper Fisher Jurvetson Growth Fund 2006, L.P., a warrant to purchase 9,299 shares held by Draper Fisher Jurvetson Partners Growth Fund 2006, LLC and a warrant to purchase 15,193 shares held by Draper Associates, L.P. Andreas Stavropoulos, a partner at DFJ, is a member of our board of directors.
  (3)   Tom Mawhinney, a member of our board of directors, is affiliated with JAFCO Technology Partners III, L.P.

Issuance of Series D Preferred Stock

In September 2012, we issued an aggregate of 7,274,827 shares of our Series D preferred stock upon the full conversion of the notes described above, including all accrued and unpaid interest thereon. The following table summarizes the number of shares of our Series D preferred stock received as a result of such conversion by our directors, executive officers and holders of more than 5% of any class of our capital stock as of the date of such conversion:

 

Related Party

   Shares of
Series D
Preferred Stock
Received (#)
 

Entities affiliated with Bessemer Venture Partners(1)

     3,484,497   

Entities affiliated with Draper Fisher Jurvetson(2)

     2,733,330   

JAFCO Technology Partners III, L.P.(3)

     1,009,724   
  

 

 

 

Total

     7,227,551   
  

 

 

 

 

(1)   Includes 871,124 shares received by Bessemer Venture Partners Co-Investment L.P. and 2,613,373 shares received by Bessemer Venture Partners VI L.P. Rob Stavis, a partner at Bessemer Venture Partners, is a member of our board of directors.
(2)   Includes 2,018,697 shares received by Draper Fisher Jurvetson Fund IX, L.P., 54,704 shares purchased by Draper Fisher Jurvetson Partners IX, LLC, 71,866 shares received by Draper Associates Riskmasters Fund, LLC, 544,076 shares received by Draper Fisher Jurvetson Growth Fund 2006, L.P. and 43,987 shares received by Draper Fisher Jurvetson Partners Growth Fund 2006, LLC. Andreas Stavropoulos, a partner at DFJ, is a member of our board of directors.
(3)   Tom Mawhinney, a member of our board of directors, is affiliated with JAFCO Technology Partners III, L.P.

Agreement with Nathaniel V. Stevens and related Subordinated Promissory Note

In September 2011, we entered into an agreement with Nathaniel V. Stevens, one of our founders, a former holder of more than 5% of our common stock and a former member of our board of directors, for the purchase

 

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and sale of up to 5,000,000 shares of our common stock at a price per share equal to $0.82. Pursuant to the terms of the agreement, Mr. Stevens resigned from our board of directors. We also agreed to assist Mr. Stevens with the sale of additional shares of our common stock held by him, which obligation terminated on June 21, 2014.

On November 18, 2011, we purchased 3,000,000 shares of our common stock from Mr. Stevens and delivered a subordinated promissory note in the principal amount of approximately $2.5 million, or the promissory note, to Stevens Ventures, LP (an entity wholly owned and controlled by Mr. Stevens) as payment in-full for such purchased shares. The promissory note accrued interest at a rate of 3.3% per annum and matured upon the earlier to occur of June 21, 2014 and the consummation of this offering. On June 20, 2014, we repaid all of our outstanding obligations under the promissory note in full.

Family Relationships

Jerry Franklin, a Director of Sales for Yodle, is the brother-in-law of David Rubin, a strategic advisor and member of our board of directors. Compensation, including salary, bonus, commissions, perquisites and other compensation, earned by Mr. Franklin for the years ended December 31, 2011, 2012 and 2013 was $132,842, $225,788 and $225,675, respectively. He was also granted 102,000 shares of restricted stock on May 23, 2011, 5,000 stock options on September 14, 2011 with an exercise price of $0.95, 7,500 stock options on September 19, 2012 with an exercise price of $1.19 and 30,000 stock options on October 8, 2013 with an exercise price of $1.75.

Investors’ Rights Agreement

We have entered into a fourth amended and restated investors’ rights agreement with our preferred stockholders, including entities affiliated with Bessemer Venture Partners, entities affiliated with Draper Fisher Jurvetson, JAFCO Technology Partners III, L.P., Court Cunningham and Michael Gordon. The fourth amended and restated investors’ rights agreement, among other things:

 

    grants these stockholders specified registration rights with respect to shares of our common stock issued or issuable upon conversion of the shares of preferred stock held by them;

 

    obligates us to deliver periodic financial statements to certain of these stockholders;

 

    grants certain of these stockholders inspection rights; and

 

    grants certain of these stockholders a right of first refusal with respect to sales of our shares by us, subject to specified exclusions, which exclusions include the sale of the shares pursuant to this prospectus, to the stockholders who are parties to the fourth amended and restated investors’ rights agreement.

For more information regarding the registration rights provided in this agreement, please refer to the section of this prospectus titled “Description of Capital Stock—Registration Rights.” The provisions of this agreement, other than those relating to registration rights, will terminate immediately before the consummation of this offering. This summary discusses certain material provisions of the fourth amended and restated investors’ rights agreement and is qualified by the full text of the fourth amended and restated investors’ rights agreement filed as an exhibit to the registration statement of which this prospectus is a part.

Voting Agreement

We have entered into a fourth amended and restated voting agreement with certain of our stockholders, including entities affiliated with Bessemer Venture Partners, entities affiliated with Draper Fisher Jurvetson, JAFCO Technology Partners III, L.P., Court Cunningham, Michael Gordon, David Rubin and Fred Voccola. The fourth amended and restated voting agreement, among other things:

 

    provides for the voting of shares with respect to the constituency of our board of directors; and

 

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    provides for the voting of shares with respect to specified transactions approved by our board of directors and the requisite majority of holders of our outstanding preferred stock.

The fourth amended and restated voting agreement, except for the market stand-off provision contained therein, will terminate upon the consummation of this offering.

Right of First Refusal and Co-Sale Agreement

We have entered into a fourth amended and restated right of first refusal and co-sale agreement with certain of our stockholders, including entities affiliated with Bessemer Venture Partners, entities affiliated with Draper Fisher Jurvetson, JAFCO Technology Partners III, L.P., Court Cunningham, Michael Gordon, David Rubin and Fred Voccola. The fourth amended and restated right of first refusal and co-sale agreement, among other things:

 

    grants us rights of first refusal with respect to proposed transfers of our securities by specified stockholders; and

 

    grants secondary rights of refusal and right of co-sale to certain of these stockholders with respect to proposed transfers of our securities by specified stockholders.

The fourth amended and restated right of first refusal and co-sale agreement will terminate immediately prior to and subject to the consummation of this offering.

Employment Offer Letters

We have entered into employment offer letters with our executive officers that, among other things, provide for certain severance and acquisition benefits. For more information regarding these agreements with our named executive officers, see the section of this prospectus titled “Executive and Director Compensation—Employment Arrangements.”

Stock Option Grants to Executive Officers and Directors

We have granted stock options to certain of our directors and executive officers. For more information regarding the stock options granted to our directors and named executive officers see the section of this prospectus titled “Management—Non-Employee Director Compensation” and “Executive and Director Compensation—Outstanding Equity Awards at December 31, 2013.”

Indemnification Agreements

In connection with this offering, we will enter into indemnification agreements with each of our directors, executive officers and certain of our other employees as determined by the board in its discretion. These agreements will provide that we will indemnify each of our directors, executive officers and certain of our other employees against any and all expenses incurred by that director, executive officer or other employee because of his or her status as one of our directors, executive officers or other employees to the fullest extent permitted by Delaware law, our amended and restated certificate of incorporation and our amended and restated bylaws, as will be in effect upon the completion of this offering, except in a proceeding initiated by such director, executive officer or other employee without board of director approval. In addition, the agreements will generally provide that, to the fullest extent permitted by Delaware law, we will advance all expenses incurred by our directors, executive officers and other employees in connection with a legal proceeding.

Related Person Transaction Policy

Prior to this offering, we have not had a formal policy regarding approval of transactions with related parties. Prior to the completion of this offering, we expect to adopt a related person transaction policy that sets forth our procedures for the identification, review, consideration and approval or ratification of related person

 

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transactions. The policy will become effective immediately upon the execution of the underwriting agreement for this offering. For purposes of our policy only, a related person transaction is a transaction, arrangement or relationship, or any series of similar transactions, arrangements or relationships, in which we and any related person are, were or will be participants in which the amount involves exceeds $120,000. Transactions involving compensation for services provided to us as an employee or director are not covered by this policy. A related person is any executive officer, director or beneficial owner of more than 5% of any class of our voting securities, including any of their immediate family members and any entity owned or controlled by such persons.

Under the policy, if a transaction has been identified as a related person transaction, including any transaction that was not a related person transaction when originally consummated or any transaction that was not initially identified as a related person transaction prior to consummation, our management must present information regarding the related person transaction to our audit committee, or, if audit committee approval would be inappropriate, to another independent body of our board of directors, for review, consideration and approval or ratification. The presentation must include a description of, among other things, the material facts, the interests, direct and indirect, of the related persons, the benefits to us of the transaction and whether the transaction is on terms that are comparable with the terms available to or from, as the case may be, an unrelated third party or to or from employees generally. Under the policy, we will collect information that we deem reasonably necessary from each director, executive officer and, to the extent feasible, significant stockholder to enable us to identify any existing or potential related person transactions and to effectuate the terms of the policy.

In addition, under our Code of Business Conduct and Ethics, which we intend to adopt in connection with this offering, our employees and directors have an affirmative responsibility to disclose any transaction or relationship that reasonably could be expected to give rise to a conflict of interest.

In considering related person transactions, our audit committee, or other independent body of our board of directors, will take into account the relevant available facts and circumstances including, but not limited to:

 

    the risks, costs and benefits to us;

 

    the impact on a director’s independence in the event that the related person is a director, immediate family member of a director or an entity with which a director is affiliated;

 

    the availability of other sources for comparable offerings; and

 

    the terms available to or from, as the case may be, unrelated third parties or to or from employees generally.

The policy requires that, in determining whether to approve, ratify or reject a related person transaction, our audit committee, or other independent body of our board of directors, must consider, in light of known circumstances, whether the transaction is in, or is not inconsistent with, our best interests and those of our stockholders, as our audit committee, or other independent body of our board of directors, determines in the good faith exercise of its discretion.

All of the transactions described above were entered into prior to the adoption of the written policy, but all were approved by our board of directors considering similar factors to those described above.

 

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PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth the beneficial ownership of our common stock as of May 31, 2014, as adjusted to reflect the sale of common stock offered by us and the selling stockholders in this offering, for:

 

    each person, or group of affiliated persons, who is known by us to beneficially own more than 5% of our common stock;

 

    each of our named executive officers;

 

    each of our directors;

 

    all of our executive officers and directors as a group; and

 

    each of the selling stockholders.

The percentage ownership information shown in the table prior to this offering is based upon                      shares of common stock outstanding as of May 31, 2014, after giving effect to the conversion of all outstanding shares of preferred stock into                      shares of our common stock (assuming a conversion ratio equal to                      common shares for each Series F preferred share based on an assumed initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus), as well as the automatic net exercise of preferred stock warrants into                      shares of our common stock, each of which will occur automatically upon the closing of this offering. See “Prospectus Summary—The Offering” for a description of the number of shares issuable upon conversion of our Series F preferred stock, which depends on the initial public offering price of our common stock. The percentage ownership information shown in the table after this offering is based upon shares, assuming the sale of shares of our common stock by us in the offering and no exercise of the underwriters’ over-allotment option. The percentage ownership information shown in the table after this offering if the underwriters’ over-allotment option is exercised in full is based upon                      shares, assuming the sale of shares of our common stock by us pursuant to the underwriters’ option.

We have determined beneficial ownership in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities. In addition, the rules include shares of common stock issuable pursuant to the exercise of stock options or warrants that are either immediately exercisable or exercisable on or before July 30, 2014, which is 60 days after May 31, 2014. These shares are deemed to be outstanding and beneficially owned by the person holding those options or warrants for the purpose of computing the percentage ownership of that person, but they are not treated as outstanding for the purpose of computing the percentage ownership of any other person. Unless otherwise indicated, the persons or entities identified in this table have sole voting and investment power with respect to all shares shown as beneficially owned by them, subject to applicable community property laws.

 

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Except as otherwise noted below, the address for persons listed in the table is c/o Yodle, Inc., 50 West 23rd Street, Suite 401, New York, NY 10010.

 

    Shares Beneficially
Owned Prior to this
Offering
    Number
of
Shares
Offered
  Shares Beneficially
Owned After this
Offering
  Number of Shares
to be Sold if
Underwriters’
Option is
Exercised in Full
  Shares Beneficially
Owned After
this Offering if
Underwriters’ Option
is Exercised in Full

Name of Beneficial Owner

  Shares     Percentage       Shares   Percentage     Shares   Percentage

5% Stockholders:

               

Entities affiliated with Bessemer Venture Partners(1)

    37,512,743        29.7            

Entities affiliated with Draper Fisher Jurvetson(2)

    30,767,343        24.4               

JAFCO Technology
Partners III, L.P. (3)

    10,974,051        8.7               

David Rubin(4)

    6,373,507        5.0               

Named Executive Officers and Directors:

               

Court Cunningham(5)

    5,164,710        4.1               

Eric Raab(6)

    152,083        *               

Fred Voccola(7)

    262,500        *               

Michael Adler(8)

    33,340        *               

Rick Faulk(9)

    90,002        *               

Tom Mawhinney(3)

    10,974,051        8.7               

Rob Stavis(1)

    37,512,743        29.7               

Andreas Stavropoulos

    —          *               

All current directors and executive officers as a group (11 persons)(10)

    62,679,681        48.0            

Other Selling Stockholders:

               

 

*   Represents beneficial ownership of less than 1%.
(1)   Includes (a) 9,159,717 shares held by, and 184,158 shares issuable upon the exercise of a warrant held by, Bessemer Venture Partners Co-Investment L.P. (“Bessemer Co-Investment”), (b) 343,108 shares held by Bessemer Venture Partners VI Institutional L.P. (“Bessemer VI Institutional”) and (c) 27,273,287 shares held by, and 552,473 shares issuable upon the exercise of a warrant held by, Bessemer Venture Partners VI L.P. (“Bessemer VI” and, together with Bessemer Co-Investment and Bessemer VI Institutional, the “Bessemer Funds”). Deer VII & Co. L.P. is the general partner of each of the Bessemer Funds, and Deer VII & Co. Ltd. is the general partner of Deer VII & Co. L.P. Each of Deer VII & Co. L.P. and Deer VII & Co. Ltd. may be deemed to have voting and dispositive power over the shares held by the Bessemer Funds. Robert M. Stavis, a member of our board of directors, J. Edmund Colloton, David J. Cowan, Byron B. Deeter, Robert P. Goodman and Jeremy S. Levine are the directors of Deer VII & Co. Ltd. Investment and voting decisions with respect to shares held by the Bessemer Funds are made by the directors of Deer VII & Co. Ltd. acting as an investment committee. No stockholder, partner, director, officer, manager, member or employee of Deer VIII & Co. L.P. or Deer VII & Co. Ltd. has beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of any shares held by the Bessemer Funds. The principal business address for the Bessemer Funds is 1865 Palmer Avenue, Suite 104, Larchmont, NY 10538.

 

(2)   Includes (a) 11,964 shares held by Draper Associates Riskmasters Fund II, LLC (“DARF II”), (b) 34,619 shares held by Draper Associates Riskmasters Fund III, LLC (“DARF III”), (c) 71,866 shares held by Draper Associates Riskmasters Fund, LLC (“DARF”), (d) 670,937 shares held by, and 15,193 shares issuable upon the exercise of a warrant held by, Draper Associates, L.P. (“DALP”), (e) 22,173,476 shares held by, and 426,757 shares issuable upon the exercise of a warrant held by, Draper Fisher Jurvetson Fund IX, L.P. (“DFJ Fund IX”), (f) 6,130,166 shares held by, and 115,019 shares issuable upon the exercise of a warrant held by, Draper Fisher Jurvetson Growth Fund 2006, L.P. (“DFJ Growth Fund”), (g) 495,607 shares held by, and 9,299 shares issuable upon the exercise of a warrant held by, Draper Fisher Jurvetson Partners Growth Fund 2006, LLC (“DFJ Partners Growth”) and (h) a 600,875 shares held by, and 11,565 shares issuable upon the exercise of a warrant held by, Draper Fisher Jurvetson Partners IX, LLC (“DFJ Partners IX”).

 

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Timothy C. Draper, John H.N. Fisher, and Stephen T. Jurvetson, as the managing directors of the general partner entities of DFJ Fund IX and managing members of DFJ Partners IX, share voting and dispositive power with respect to the shares held by DFJ Fund IX and DFJ Partners IX. Mark W. Bailey, Mr. Fisher and Barry M. Schuler, as the managing directors of the general partner of DFJ Growth Fund, share voting and dispositive power with respect to the shares held by DFJ Growth Fund. Any three of Messrs. Bailey, Draper, Fisher, Jurvetson and Schuler, as the managing members of DFJ Partners Growth, share voting and dispositive power with respect to the shares held by DFJ Partners Growth. Mr. Draper, the managing member of DARF, DARF II and DARF III and as President and majority shareholder of Draper Associates, Inc., the general partner of DALP, has voting and dispositive power with respect to the shares held by DARF, DARF II, DARF III and DALP. Each of the foregoing individuals disclaims beneficial ownership with respect to such shares except to the extent of their pecuniary interest therein. The address of each of the entities affiliated with Draper Fisher Jurvetson is 2882 Sand Hill Road, Suite 150, Menlo Park, California 94025.

 

(3)   Includes 10,760,593 shares held by, and 213,458 shares issuable upon the exercise of warrants held by, JAFCO Technology Partners III, L.P. (“JTP III”). JTP Management Associates III, L.L.C. (“JTPMA III”) is the general partner of JTP III. Joseph Horowitz, Tom Mawhinney, Jeb Miller and Tsunesaburo Sugaya are the managing members of JTPMA III and may be deemed to share voting and investment power with respect to the shares held of record by JTP III. The address for each of these entities is 505 Hamilton Avenue, Palo Alto, CA 94301.

 

(4)   Includes (a) 723,125 shares subject to options that are exercisable within 60 days of May 31, 2014 and (b) 53,467 shares held by Melissa Rubin, Mr. Rubin’s wife.

 

(5)   Includes (a) 832,841 shares subject to options that are exercisable within 60 days of May 31, 2014 and (b) 120,000 shares subject to an irrevocable trust for the benefit of Mr. Cunningham’s minor children.

 

(6)   Includes 152,083 shares subject to options that are exercisable within 60 days of May 31, 2014.

 

(7)   Includes 162,500 shares subject to options that are exercisable within 60 days of May 31, 2014.

 

(8)   Includes 33,340 shares subject to options that are exercisable within 60 days of May 31, 2014.

 

(9)   Includes 90,002 shares subject to options that are exercisable within 60 days of May 31, 2014.

 

(10)   Includes 3,811,806 shares subject to options that are exercisable within 60 days of May 31, 2014 and 950,089 shares issuable upon the exercise of warrants held by entities related to Bessemer Venture Partners and JTP III.

 

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DESCRIPTION OF CAPITAL STOCK

The following description of our capital stock, certain provisions of our certificate of incorporation and bylaws, as each will be in effect upon the completion of this offering, and certain provisions of Delaware law are summaries. You should also refer to the certificate of incorporation and the bylaws, which are filed as exhibits to the registration statement of which this prospectus is part. We refer in this section to our certificate of incorporation and bylaws that we intend to adopt in connection with this offering as our certificate of incorporation and bylaws, respectively.

General

Upon the completion of this offering, our certificate of incorporation will authorize us to issue up to                      shares of common stock, $0.0002 par value per share, and 10,000,000 shares of preferred stock, $0.001 par value per share, all of which shares of preferred stock will be undesignated. Our board of directors may establish the rights and preferences of the preferred stock from time to time. As of May 31, 2014, after giving effect to the automatic preferred stock warrant exercise and the automatic conversion of all outstanding preferred stock into shares of our common stock in connection with the completion of the offering, there would have been                      shares of common stock issued and outstanding, held of record by 244 stockholders.

The number of shares of our common stock to be issued upon the automatic conversion of all outstanding shares of our Series F preferred stock depends in part on the initial public offering price of our common stock. The terms of our Series F preferred stock provide that the ratio at which each share of this series of preferred stock automatically converts into shares of our common stock in connection with this offering will increase if the initial public offering price is below $             per share, which would result in additional shares of our common stock being issued upon conversion of our Series F preferred stock immediately prior to the closing of this offering. Based upon the assumed initial public offering price of $             per share, the midpoint of the price range set forth on the cover page of this prospectus, the outstanding shares of our Series F preferred stock will convert into an aggregate of approximately                      shares of our common stock immediately prior to the closing of this offering.

Common Stock

Voting Rights

Each holder of our common stock is entitled to one vote for each share on all matters submitted to a vote of the stockholders, including the election of directors. Under our certificate of incorporation and bylaws, our stockholders will not have cumulative voting rights. Because of this, the holders of a majority of the shares of common stock entitled to vote in any election of directors can elect all of the directors standing for election, if they should so choose.

Dividends

Subject to preferences that may be applicable to any then-outstanding preferred stock, holders of common stock are entitled to receive ratably those dividends, if any, as may be declared from time to time by the board of directors out of legally available funds.

Liquidation

In the event of our liquidation, dissolution or winding up, holders of common stock will be entitled to share ratably in the net assets legally available for distribution to stockholders after the payment of all of our debts and other liabilities and the satisfaction of any liquidation preference granted to the holders of any then-outstanding shares of preferred stock.

 

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Rights and Preferences

Holders of common stock have no preemptive, conversion or subscription rights and there are no redemption or sinking fund provisions applicable to the common stock. The rights, preferences and privileges of the holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock that we may designate in the future.

Preferred Stock

All currently outstanding shares of preferred stock will be converted automatically to common stock upon the completion of this offering.

Following the completion of this offering, our board of directors will have the authority, without further action by our stockholders, to issue up to                      shares of preferred stock in one or more series, to establish from time to time the number of shares to be included in each such series, to fix the rights, preferences and privileges of the shares of each wholly unissued series and any qualifications, limitations or restrictions thereon, and to increase or decrease the number of shares of any such series, but not below the number of shares of such series then outstanding.

Our board of directors may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of our common stock. The purpose of authorizing our board of directors to issue preferred stock and determine its rights and preferences is to eliminate delays associated with a stockholder vote on specific issuances. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, have the effect of delaying, deferring or preventing a change in control of us and may adversely affect the market price of our common stock and the voting and other rights of the holders of our common stock. It is not possible to state the actual effect of the issuance of any shares of preferred stock on the rights of holders of common stock until the board of directors determines the specific rights attached to that preferred stock.

We have no present plans to issue any shares of preferred stock.

Options

As of May 31, 2014, options to purchase an aggregate of 21,929,642 shares of common stock were outstanding under our 2007 Plan. For additional information regarding the terms of our 2007 Plan, see the section of this prospectus titled “Executive and Director Compensation—Equity Incentive Plans—2007 Equity Incentive Plan.”

Warrants

As of May 31, 2014, 15 warrants for the purchase of an aggregate of 2,981,299 shares of our common stock were outstanding, on an as-converted-to-common basis and subject to the net exercise provision described below, including (1) warrants to purchase an aggregate of 200,553 shares of our common stock at a weighted average exercise price of $1.1676 per share, expiring as early as March 9, 2019 and as late as September 3, 2022 and (2) warrants to purchase an aggregate of 2,780,746 shares of our preferred stock at a weighted average exercise price of $1.2209 per share, expiring as early as May 22, 2017 and as late as May 22, 2021.

All of our outstanding preferred stock warrants become exercisable for shares of our common stock on a one-for-one basis upon the closing of this offering, and 1,537,917 of these warrants that were issued in connection with the bridge financing for our acquisition of ProfitFuel will, subject to certain conditions, automatically be deemed exercised in full pursuant to a net exercise provision upon the closing of this offering. The net exercise provision contained in certain of our outstanding warrants provides that the holder may, in lieu of payment of the exercise price in cash, surrender the applicable warrant and receive a net amount of shares based on the fair market value of our stock at the time of exercise of the applicable warrant after deduction of the

 

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aggregate exercise price. The warrants also contain a provision for the adjustment of the exercise price and the number of shares issuable upon the exercise of the applicable warrant in the event of certain stock dividends, stock splits, reorganizations, reclassifications and consolidations.

Registration Rights

After our initial public offering, certain holders of shares of our common stock, including those shares of our common stock that will be issued upon conversion of our preferred stock in connection with this offering, and those shares of our common stock that are issuable pursuant to our outstanding preferred stock warrants, or the warrant shares, will be entitled to certain rights with respect to registration of such shares under the Securities Act. These shares are collectively referred to herein as registrable securities. The holders of these registrable securities possess registration rights pursuant to the terms of the fourth amended and restated investors’ rights agreement, or investors’ rights agreement, and are described in additional detail below.

The registration rights provisions of our investors’ rights agreement provide these holders of registrable securities with demand (other than the warrant shares), piggyback and S-3 registration rights as described more fully below.

Demand Registration Rights

At any time beginning upon the expiration of the lock-up period following this offering, as described in the section of this prospectus titled “Shares Eligible for Future Sale—Lock-Up Agreements,” the holders of a majority of our registrable securities then outstanding in the aggregate, have the right to demand that we file a registration statement under the Securities Act covering the registration of at least 20% of the then outstanding registrable securities (or such lesser percentage of registrable securities having an anticipated offering price of at least $5.0 million). These registration rights are subject to specified conditions and limitations, including the right of the underwriters, if any, to limit the number of shares included in any such registration under specified circumstances. Upon such a request, we will be required to file the registration within 60 days. As of March 31, 2014, an aggregate of                  registrable securities are entitled to these demand registration rights.

Piggyback Registration Rights

At any time after the completion of this offering, if we propose to register any of our securities under the Securities Act in connection with the public offering of our securities solely for cash, either for our own account or for the account of other stockholders, the holders of our registrable securities then outstanding will each be entitled to notice of the registration and will be entitled to include their shares of common stock in any such registration statement. These piggyback registration rights are subject to specified conditions and limitations, including the right of the underwriters to limit the number of shares included in any such registration under specified circumstances. As of March 31, 2014, an aggregate of                      registrable securities are entitled to these piggyback registration rights.

Registration on Form S-3

At any time we are qualified to file a registration statement on Form S-3, any holder of our registrable securities then outstanding are entitled to request to have such shares registered by us on a Form S-3 registration statement, provided that such requested registration has an anticipated aggregate offering price, net of any underwriting discounts, selling commissions, applicable stock transfer taxes and fees and disbursements of counsel, of at least $3.0 million and we have not already effected two registrations on Form S-3 within the preceding 12-month period. The right to have such shares registered on Form S-3 is further subject to other specified conditions and limitations. As of March 31, 2014, an aggregate of                      registrable securities are entitled to these Form S-3 registration rights.

 

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Expenses of Registration

We will pay all expenses relating to any demand, piggyback or Form S-3 registration, other than underwriting discounts and commissions, subject to specified conditions and limitations.

Termination of Registration Rights

All registration rights of any holder granted under the investors’ rights agreement will terminate no later than five years following the consummation of this offering. The registration rights will terminate as to any shares of registrable securities when those shares (1) have been (a) registered under the Securities Act pursuant to an effective registration statement filed thereunder and disposed of in accordance with the registration statement covering them or (b) publicly sold pursuant Rule 144 of the Securities Act or (2) could be sold without restriction under Rule 144 of the Securities Act during any 90-day period.

Anti-Takeover Provisions

Anti-Takeover Statute

We are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a publicly held 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, with the following exceptions:

 

    before such date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder;

 

    upon completion of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction began, excluding for purposes of determining the voting stock outstanding, but not the outstanding voting stock owned by the interested stockholder, those shares owned (1) by persons who are directors and also officers and (2) employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or

 

    on or after such date, the business combination is approved by the board of directors and authorized at an annual or special meeting of the stockholders, and not by written consent, by the affirmative vote of at least 66 23% of the outstanding voting stock that is not owned by the interested stockholder.

 

    In general, Section 203 defines a “business combination” to include the following:

 

    any merger or consolidation involving the corporation and the interested stockholder;

 

    any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder;

 

    subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder;

 

    any transaction involving the corporation that has the effect of increasing the proportionate share of the stock or any class or series of the corporation beneficially owned by the interested stockholder; or

 

    the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits by or through the corporation.

In general, Section 203 defines an “interested stockholder” as an entity or person who, together with the person’s affiliates and associates, beneficially owns, or within three years prior to the time of determination of interested stockholder status did own, 15% or more of the outstanding voting stock of the corporation.

 

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Anti-Takeover Effects of Certain Provisions of our Certificate of Incorporation and Bylaws to be in Effect Upon the Completion of this Offering

Our certificate of incorporation will provide for our board of directors to be divided into three classes with staggered three-year terms. Only one class of directors will be elected at each annual meeting of our stockholders, with the other classes continuing for the remainder of their respective three-year terms. Because our stockholders do not have cumulative voting rights, stockholders holding a majority of the shares of common stock outstanding will be able to elect all of our directors. Our certificate of incorporation and bylaws will also provide that directors may be removed by the stockholders only for cause upon the vote of 662/3% or more of our outstanding common stock. Furthermore, the authorized number of directors may be changed only by resolution of the board of directors, and vacancies and newly created directorships on the board of directors may, except as otherwise required by law or determined by the board, only be filled by a majority vote of the directors then serving on the board, even though less than a quorum.

Our certificate of incorporation and bylaws will also provide that all stockholder actions must be effected at a duly called meeting of stockholders and will eliminate the right of stockholders to act by written consent without a meeting. Our bylaws will also provide that only our chairman of the board, chief executive officer or the board of directors pursuant to a resolution adopted by a majority of the total number of authorized directors may call a special meeting of stockholders.

Our bylaws will also provide that stockholders seeking to present proposals before our annual meeting of stockholders or to nominate candidates for election as directors at a meeting of stockholders must provide timely advance notice in writing, and, subject to applicable law, will specify requirements as to the form and content of a stockholder’s notice.

Our certificate of incorporation and bylaws will provide that the stockholders cannot amend many of the provisions described above except by a vote of 66 23% or more of our outstanding common stock.

The combination of these provisions will make it more difficult for our existing stockholders to replace our board of directors as well as 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 enhance the likelihood of continued stability in the composition of our board of directors and its policies and to discourage coercive takeover practices and inadequate takeover bids. These provisions are also designed to reduce our vulnerability to hostile takeovers 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 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. We believe that the benefits of these provisions, including increased protection of our potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure our company, outweigh the disadvantages of discouraging takeover proposals, because negotiation of takeover proposals could result in an improvement of their terms.

Choice of Forum

Our certificate of incorporation to be in effect upon the completion of this offering will provide that the Court of Chancery of the State of Delaware will be the exclusive forum for any derivative action or proceeding brought on our behalf; any action asserting a breach of fiduciary duty owed by and of our directors, officers or employees to us or our stockholders; any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our certificate of incorporation or our bylaws; or any action asserting a claim against

 

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us that is governed by the internal affairs doctrine. Several lawsuits have been filed in Delaware challenging the enforceability of similar choice of forum provisions and it is possible that a court determines such provisions are not enforceable.

Transfer Agent and Registrar

The transfer agent and registrar for our common stock is                     . The transfer agent’s address is             .

Listing

We intend to apply for listing of our common stock on the                          under the trading symbol “YO.”

 

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SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, no public market existed for our common stock, and although we expect that our common stock will be approved for listing on                     , we cannot assure investors that there will be an active public market for our common stock following this offering. We cannot predict what effect, if any, sales of our shares in the public market or the availability of shares for sale will have on the market price of our common stock. Future sales of substantial amounts of common stock in the public market, including shares issued upon exercise of outstanding options or warrants, or the perception that such sales may occur, however, could adversely affect the market price of our common stock and also could adversely affect our future ability to raise capital through the sale of our common stock or other equity-related securities at times and prices we believe appropriate.

Upon completion of this offering, based on our shares outstanding as of                 ,                 shares of our common stock will be outstanding, or                 shares of common stock if the underwriters exercise their over-allotment option in full.

All of the shares of common stock sold in this offering will be freely tradable without restrictions or further registration under the Securities Act, except for any shares sold to our “affiliates,” as that term is defined under Rule 144 under the Securities Act. The remaining                 outstanding shares of common stock held by existing stockholders are “restricted securities,” as that term is defined in Rule 144 under the Securities Act. Restricted securities may be sold in the public market only if the offer and sale is registered under the Securities Act or if the offer and sale of those securities qualifies for exemption from registration, including exemptions provided by Rules 144 and 701 promulgated under the Securities Act.

As a result of lock-up agreements and market standoff provisions described below and the provisions of Rules 144 and 701, shares of our common stock will be available for sale in the public market as follows:

 

    the                 shares sold in this offering will be eligible for immediate sale upon the completion of this offering; and

 

    approximately                         shares of our common stock will be eligible for sale upon expiration of lock-up agreements and market stand-off provisions described below, beginning 180 days after the date of this prospectus, subject in certain circumstances to the volume, manner of sale and other limitations under Rule 144 and Rule 701.

We may issue shares of our common stock from time to time for a variety of corporate purposes, including in capital-raising activities through future public offerings or private placements, in connection with exercise of stock options and warrants, vesting of restricted stock units and other issuances relating to our employee benefit plans and as consideration for future acquisitions, investments or other purposes. The number of shares of our common stock that we may issue may be significant, depending on the events surrounding such issuances. In some cases, the shares we issue may be freely tradable without restriction or further registration under the Securities Act; in other cases, we may grant registration rights covering the shares issued in connection with these issuances, in which case the holders of the common stock will have the right, under certain circumstances, to cause us to register any resale of such shares to the public.

Rule 144

In general, persons who have beneficially owned restricted shares of our common stock for at least six months, and any affiliate of the company who owns either restricted shares of our common stock, are entitled to sell their securities without registration with the SEC under an exemption from registration provided by Rule 144 under the Securities Act.

 

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Non-Affiliates

Any person who is not deemed to have been one of our affiliates at the time of, or at any time during the three months preceding, a sale may sell an unlimited number of restricted securities under Rule 144 if:

 

    the restricted securities have been held for at least six months, including the holding period of any prior owner other than one of our affiliates;

 

    we have been subject to the Exchange Act periodic reporting requirements for at least 90 days before the sale; and

 

    we are current in our Exchange Act reporting at the time of sale.

Any person who is not deemed to have been an affiliate of ours at the time of, or at any time during the three months preceding, a sale and has held the restricted securities for at least one year, including the holding period of any prior owner other than one of our affiliates, will be entitled to sell an unlimited number of restricted securities without regard to the length of time we have been subject to Exchange Act periodic reporting or whether we are current in our Exchange Act reporting.

Affiliates

Persons seeking to sell restricted securities who are our affiliates at the time of, or any time during the three months preceding, a sale, would be subject to the restrictions described above. They are also subject to additional restrictions, by which such person would be required to comply with the manner of sale and notice provisions of Rule 144 and would be entitled to sell within any three-month period only that number of securities that does not exceed the greater of either of the following:

 

    1% of the number of shares of our common stock then outstanding, which will equal approximately                 shares immediately after the completion of this offering based on the number of shares outstanding as of May 31, 2014; 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 the sale.

Rule 701

In general, under Rule 701 a person who purchased shares of our common stock pursuant to a written compensatory plan or contract and who is not deemed to have been one of our affiliates during the immediately preceding 90 days may sell these shares in reliance upon Rule 144, but without being required to comply with the notice, manner of sale or public information requirements or volume limitation provisions of Rule 144. Rule 701 also permits affiliates 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 to wait until 90 days after the date of this prospectus before selling such shares pursuant to Rule 701. As of May 31, 2014, 12,253,548 shares of our outstanding common stock had been issued in reliance on Rule 701 as a result of exercises of stock options and issuance of restricted stock. However, substantially all Rule 701 shares are subject to lock-up agreements as described below and in the section of this prospectus titled “Underwriting” and will become eligible for sale upon the expiration of the restrictions set forth in those agreements.

Form S-8 Registration Statements

As of May 31, 2014 options to purchase an aggregate 21,929,642 shares of our common stock were outstanding. As soon as practicable after the completion of this offering, we intend to file with the SEC one or more registration statements on Form S-8 under the Securities Act to register the shares of our common stock that are issuable pursuant to our equity incentive plans. See the section of this prospectus titled “Executive and Director Compensation—Equity Incentive Plans” for a description of our equity incentive plans. These

 

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registration statements will become effective immediately upon 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 Agreements

In connection with this offering, we, our directors and officers, and substantially all of the holders of equity securities outstanding immediately prior to this offering, including all of the selling stockholders, have agreed, subject to certain exceptions, not to offer, sell, or transfer any common stock or securities convertible into or exchangeable for our common stock for 180 days after the date of this prospectus without the prior written consent of Credit Suisse Securities (USA) LLC and Deutsche Bank Securities Inc. on behalf of the underwriters.

The agreements do not contain any pre-established conditions to the waiver by Credit Suisse Securities (USA) LLC and Deutsche Bank Securities Inc. on behalf of the underwriters of any terms of the lock-up agreements. Any determination to release shares subject to the lock-up agreements would be based on a number of factors at the time of determination, including but not necessarily limited to the market price of the common stock, the liquidity of the trading market for the common stock, general market conditions, the number of shares proposed to be sold, contractual obligations to release certain shares subject to the lock-up agreements in the event any such shares are released, subject to certain specific limitations and thresholds, and the timing, purpose and terms of the proposed sale.

In addition to the restrictions contained in the lock-up agreements described above, we have entered into agreements with certain of our security holders, including our investors rights agreement, our voting agreement and our standard forms of option agreements under our equity incentive plans, 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 180 days following the date of this prospectus.

Registration Rights

Upon the completion of this offering, the holders of                 shares of our common stock issuable upon the conversion of our preferred stock (assuming a conversion ratio equal to                 common shares for each Series F preferred share based on an assumed initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus) and 2,780,746 shares of our common stock issuable upon the exercise of outstanding warrants, or their transferees, will be entitled to specified rights with respect to the registration of the offer and sale of their shares under the Securities Act. Registration of the offer and sale of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. See the section of this prospectus titled “Description of Capital Stock—Registration Rights” for additional information.

 

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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS

The following is a general discussion of the material U.S. federal income tax consequences of the acquisition, ownership and disposition of our common stock by “Non-U.S. Holders” (as defined below). This discussion is a summary for general information purposes only and does not consider all aspects of U.S. federal income taxation that may be relevant to particular Non-U.S. Holders in light of their individual circumstances or to certain types of Non-U.S. Holders subject to special tax rules, including partnerships or other pass-through entities for U.S. federal income tax purposes, banks, financial institutions or other financial services entities, broker-dealers, insurance companies, tax-exempt organizations, regulated investment companies, real estate investment trusts, controlled foreign corporations, passive foreign investment companies, corporations that accumulate earnings to avoid U.S. federal income tax, persons who use or are required to use mark-to-market accounting, persons that hold our shares as part of a “straddle,” a “hedge,” a “conversion transaction,” or other integrated transaction, certain former citizens or permanent residents of the United States, persons who hold or receive our common stock pursuant to the exercise of any employee stock option or otherwise as compensation, investors in pass-through entities, or persons subject to the alternative minimum tax. In addition, this summary does not address, except to the extent discussed below, the effects of any applicable gift or estate tax, and this summary does not address the potential application of Medicare contribution tax or any tax considerations that may apply to Non-U.S. Holders of our common stock under state, local or non-U.S. tax laws and any other U.S. federal tax laws.

This summary is based on the Internal Revenue Code of 1986, as amended, or the Code, applicable U.S. Treasury Regulations, rulings, administrative pronouncements and decisions as of the date of this registration statement, all of which are subject to change or differing interpretations at any time with possible retroactive effect. We have not sought, and will not seek, any ruling from the Internal Revenue Service, or the IRS, with respect to the tax consequences discussed herein, and there can be no assurance that the IRS will not take a position contrary to the tax consequences discussed below or that any position taken by the IRS would not be sustained. This discussion assumes that a Non-U.S. Holder will hold our common stock as a capital asset within the meaning of the Code (generally, property held for investment). For purposes of this discussion, the term “Non-U.S. Holder” means, for U.S. federal tax purposes, a beneficial owner of our shares that is not a partnership (or entity or arrangement treated as a partnership for U.S. federal income tax purposes) and is not:

 

    an individual who is a citizen or resident of the United States;

 

    a corporation (or other entity taxable as a corporation) created or organized in the United States or under the laws of the United States or of 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 if (1) a U.S. court can exercise primary supervision over the trust’s administration and one or more U.S. persons have the authority to control all of the trust’s substantial decisions or (2) the trust has a valid election in effect under applicable U.S. Treasury Regulations to be treated as a U.S. person.

If a partnership (or entity or arrangement treated as a partnership for U.S. federal income tax purposes) is a beneficial owner of our common stock, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. If you are a partner of a partnership holding our shares, you should consult your tax advisor regarding the tax consequences of the purchase, ownership, and disposition of our common stock.

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.

 

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Distributions on Our Common Stock

As described in the section entitled “Dividend Policy,” we do not anticipate declaring or paying dividends to holders of our common stock in the foreseeable future. However, if we make distributions of cash or property on our common stock, such distributions paid to a Non-U.S. Holder (to the extent paid out of our current or accumulated earnings and profits, as determined under U.S. federal income tax principles) will constitute dividends and be subject to U.S. federal withholding tax at a rate equal to 30% of the gross amount of the dividend, or a lower rate prescribed by an applicable income tax treaty, unless the dividends are effectively connected with a trade or business carried on by the Non-U.S. Holder within the United States. Any distribution not constituting a dividend (because such distribution exceeds our current and accumulated earnings and profits) will be treated first as reducing the Non-U.S. Holder’s adjusted tax basis in its shares of common stock, but not below zero, and to the extent it exceeds the Non-U.S. Holder’s basis, as capital gain (see “Gain on Sale, Exchange or Other Taxable Disposition of Common Stock” below).

A Non-U.S. Holder who claims the benefit of an applicable income tax treaty generally will be required to satisfy certain certification and other requirements prior to the distribution date. Such Non-U.S. Holders must generally provide the withholding agent with a properly executed IRS Form W-8BEN (or other applicable documentation) claiming an exemption from or reduction in withholding under an applicable income tax treaty. If tax is withheld in an amount in excess of the amount applicable under an income tax treaty, a refund of the excess amount may generally be obtained by timely filing an appropriate claim for refund with the IRS. Non-U.S. Holders should consult their tax advisors regarding their entitlement to benefits under an applicable income tax treaty.

Dividends that are effectively connected with a Non-U.S. Holder’s conduct of a U.S. trade or business (and, if required by an applicable income tax treaty, attributable to a U.S. permanent establishment or fixed base of the Non-U.S. Holder) generally will not be subject to U.S. federal withholding tax if the Non-U.S. Holder files the required forms, generally IRS Form W-8ECI, with the withholding agent, but instead generally will be subject to U.S. federal income tax on a net income basis at the regular graduated rates in the same manner as if the Non-U.S. Holder were a resident of the United States. A corporate Non-U.S. Holder that receives effectively connected dividends may also be subject to a branch profits tax at a rate of 30%, or a lower rate prescribed by an applicable income tax treaty. Non-U.S. Holders should consult their tax advisors regarding any applicable tax treaties that may provide for different rules.

Gain on Sale, Exchange or Other Disposition of Our Common Stock

In general, a non-U.S. holder will not be subject to any U.S. federal income tax or withholding tax on any gain realized upon such holder’s sale, exchange or other disposition of shares of our common stock unless:

 

  (1) the gain is effectively connected with a trade or business carried on by the Non-U.S. Holder within the United States (and, if required by an applicable income tax treaty, attributable to a U.S. permanent establishment or fixed base of the Non-U.S. Holder);

 

  (2) the Non-U.S. Holder is an individual who is present in the United States for 183 days or more in the taxable year of disposition and certain other conditions are met; or

 

  (3) we are or have been a “United States real property holding corporation” for U.S. federal income tax purposes at any time during the shorter of the five-year period ending on the date of disposition or the period that the Non-U.S. Holder held the common stock, and, in the case where shares of our common stock are regularly traded on an established securities market, the Non-U.S. Holder owns, or is treated as owning, more than five percent of our common stock at any time during the foregoing period.

Net gain realized by a Non-U.S. Holder described in clause (1) above generally will be subject to U.S. federal income tax in the same manner as if the Non-U.S. Holder were a resident of the United States. Any gains of a

 

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corporate Non-U.S. Holder described in clause (1) above may also be subject to a “branch profits tax” at a 30% rate, or such lower rate as may be specified by an applicable income tax treaty.

Gain realized by an individual Non-U.S. Holder described in clause (2) above will be subject to a flat 30% tax, which gain may be offset by certain U.S. source capital losses, even though the individual is not considered a resident of the United States.

For purposes of clause (3) above, a corporation is a United States real property holding corporation if the fair market value of its United States real property interests equals or exceeds 50% of the sum of the fair market value of its worldwide real property interests plus its other assets used or held for use in a trade or business. We believe that we are not, and we do not anticipate that we will become, a United States real property holding corporation.

Non-U.S. Holders should consult their tax advisors regarding potentially applicable income tax treaties that may provide for different rules.

U.S. Federal Estate Tax

The estate of an individual Non-U.S. Holder is generally subject to U.S. federal estate tax on property having a U.S. situs. Because we are a U.S. corporation, our common stock will be U.S. situs property and therefore will be included in the taxable estate of an individual Non-U.S. Holder decedent, unless an applicable estate tax treaty between the United States and the decedent’s country of residence provides otherwise.

Information Reporting and Backup Withholding

Generally, we or the applicable withholding agent must report annually to the IRS and to each Non-U.S. Holder the amount of dividends paid, the name and address of the recipient, and the amount, if any, of tax withheld. These information reporting requirements apply even if withholding was not required because the dividends were effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States or withholding was reduced by an applicable income tax treaty. Under applicable income tax treaties or other agreements, the IRS may make its reports available to the tax authorities in the Non-U.S. Holder’s country of residence.

Dividends paid to a Non-U.S. Holder that is not an exempt recipient generally will be subject to backup withholding, currently at a rate of 28%, unless the Non-U.S. Holder certifies to the applicable withholding agent as to its foreign status, which certification may generally be made on IRS Form W-8BEN or other appropriate version of IRS Form W-8.

Proceeds from the sale or other disposition of common stock by a Non-U.S. Holder effected by or through a U.S. office of a broker will generally be subject to information reporting and backup withholding, currently at a rate of 28%, unless the Non-U.S. Holder certifies to the withholding agent under penalties of perjury as to, among other things, its name, address and status as a Non-U.S. Holder or otherwise establishes an exemption. Payment of disposition proceeds effected outside the United States by or through a non-U.S. office of a non-U.S. broker generally will not be subject to information reporting or backup withholding if the payment is not received in the United States. Information reporting, but generally not backup withholding, will apply to such a payment if the broker has certain connections with the United States unless the broker has documentary evidence in its records that the beneficial owner thereof is a Non-U.S. Holder and specified conditions are met or an exemption is otherwise established.

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules from a payment to a Non-U.S. Holder that results in an overpayment of taxes generally will be refunded, or credited against the holder’s U.S. federal income tax liability, if any, provided that the required information is timely furnished to the IRS.

 

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Foreign Account Tax Compliance Act (“FATCA”)

A U.S. federal withholding tax of 30% may apply to dividends on and the gross proceeds of a sale or other disposition of our common stock paid to a “foreign financial institution” (as specially defined under applicable rules) unless such institution enters into an agreement with the U.S. Department of Treasury 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 holders of such institution, as well as certain account holders that are foreign entities with U.S. owners). This U.S. federal withholding tax of 30% will also apply to payments of dividends and the gross proceeds of a disposition of our common stock paid to a non-financial foreign entity unless such entity either certifies it does not have any substantial U.S. owners or provides the withholding agent with a certification identifying substantial direct and indirect U.S. owners of the entity. The withholding tax described above will not apply if the foreign financial institution or non-financial foreign entity otherwise qualifies for an exemption from the rules. Under certain circumstances, a Non-U.S. Holder might be eligible for refunds or credits of such taxes. The U.S. has entered into agreements with certain countries that modify these general rules for entities located in those countries. 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.

The withholding provisions described above will generally apply to payments of dividends made on or after July 1, 2014 and to payments of gross proceeds from a sale or other disposition of common stock on or after January 1, 2017.

Prospective investors should consult their tax advisors regarding the potential application of withholding under FATCA to their investment in our common stock.

 

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UNDERWRITING

Under the terms and subject to the conditions contained in an underwriting agreement dated, we and the selling stockholders have agreed to sell to the underwriters named below, for whom Credit Suisse Securities (USA) LLC and Deutsche Bank Securities Inc. are acting as representatives, the following respective numbers of shares of common stock:

 


Underwriter

   Number
of Shares

Credit Suisse Securities (USA) LLC

  

Deutsche Bank Securities Inc.

  

Jefferies LLC

  

Piper Jaffray & Co. 

  

Canaccord Genuity Inc. 

  

Needham & Company, LLC

  

Oppenheimer & Co. Inc. 

  
  

 

Total

  
  

 

The underwriting agreement provides that the underwriters are obligated to purchase all the shares of common stock in the offering if any are purchased, other than those shares covered by the over-allotment option described below. The underwriting agreement also provides that if an underwriter defaults the purchase commitments of non-defaulting underwriters may be increased or the offering may be terminated.

We and the selling stockholders have granted to the underwriters a 30-day option to purchase on a pro rata basis up to              additional shares from                              at the initial public offering price less the underwriting discounts and commissions. The option may be exercised only to cover any over-allotments of common stock.

The underwriters propose to offer the shares of common stock initially at the public offering price on the cover page of this prospectus and to selling group members at that price less a selling concession of $             per share. After the initial public offering the representatives may change the public offering price and concession.

The following table summarizes the compensation we and the selling stockholders will pay:

 

     Per Share      Total  
     Without
Over-allotment
     With
Over-allotment
     Without
Over-allotment
     With
Over-allotment
 

Underwriting Discounts and Commissions paid by us

   $                   $                   $                   $               

Underwriting Discounts and Commissions paid by selling stockholders

   $        $        $        $    

We estimate that our out-of-pocket expenses for this offering will be approximately $            .

We have agreed to reimburse the underwriters for expenses of approximately $             related to clearance of this offering with the Financial Industry Regulatory Authority, Inc., or FINRA.

The underwriters have informed us that they do not expect sales to accounts over which the underwriters have discretionary authority to exceed 5% of the shares of common stock being offered.

We have agreed that we will not, directly or indirectly, offer, sell, issue, contract to sell, pledge or otherwise dispose of or file with the SEC a registration statement under the Securities Act relating to, any shares of our

 

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common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, or publicly disclose the intention to take any such action, without the prior written consent of Credit Suisse Securities (USA) LLC and Deutsche Bank Securities Inc. for a period of 180 days after the date of this prospectus.

Our officers, directors and substantially all of our stockholders and option holders have agreed, subject to certain exceptions, that they will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, enter into a transaction that would have the same effect, or enter into any swap, hedge or other arrangement that transfers, in whole or in part, any of the economic consequences of ownership of our common stock, whether any of these transactions are to be settled by delivery of our common stock or such other securities, in cash or otherwise, or publicly disclose the intention to make any offer, sale, pledge or disposition, or to enter into any such transaction, swap, hedge or other arrangement, without, in each case, the prior written consent of Credit Suisse Securities (USA) LLC and Deutsche Bank Securities Inc. for a period of 180 days after the date of this prospectus.

Credit Suisse Securities (USA) LLC and Deutsche Bank Securities Inc., on behalf of the underwriters, in their sole discretion, may release our common stock and other securities subject to the lock-up agreements described above in whole or in part at any time with or without notice.

We and the selling stockholders have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments that the underwriters may be required to make in that respect.

We will apply to list the shares of common stock on             under the symbol “YO.”

In connection with the offering the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the Exchange Act.

 

    Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum.

 

    Over-allotment involves sales by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares over-allotted by the underwriters is not greater than the number of shares that they may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment option. The underwriters may close out any covered short position by either exercising their over-allotment option and/or purchasing shares in the open market.

 

    Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. If the underwriters sell more shares than could be covered by the over-allotment option, a naked short position, the position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering.

 

    Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions.

 

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These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of the common stock. As a result the price of our common stock may be higher than the price that might otherwise exist in the open market. These transactions may be effected on                     or otherwise and, if commenced, may be discontinued at any time.

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. In determining the initial public offering price, we and the representatives 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.

A prospectus in electronic format may made available on the websites maintained by one or more of the underwriters, or selling group members, if any, participating in this offering and one or more of the underwriters participating in this offering may distribute prospectuses electronically. The representatives 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 underwriters and selling group members that will make internet distributions on the same basis as other allocations.

Other relationships

The underwriters and their respective affiliates are full-service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, investment research, principal investment, hedging, financing and brokerage activities. In the past, the underwriters and their affiliates have not rendered underwriting services to us.

We expect that the underwriters and their respective affiliates will continue to perform various financial advisory, investment banking and lending services for us or our affiliates, from time to time in the future, for which they may receive customary fees and commissions. In the ordinary course of their various business activities, the underwriters and their respective affiliates may also make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers and may at any time hold long and short positions in such securities and instruments. Such investment and securities activities may involve our securities and instruments (directly, as collateral securing other obligations or otherwise). The underwriters and their respective affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or instruments and may at any time hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.

Selling restrictions

Notice to Investors in the European Economic Area

In relation to each Member State of the European Economic Area that has implemented the Prospectus Directive, each, a Relevant Member State, each underwriter represents and agrees that with effect from and

 

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including the date on which the Prospectus Directive is implemented in that Relevant Member State, or the Relevant Implementation Date, it has not made and will not make an offer of our common stock to the public in that Relevant Member State prior to the publication of a prospectus in relation to our common stock that has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the Prospectus Directive, except that it may, with effect from and including the Relevant Implementation Date, make an offer of our common stock to the public in that Relevant Member State at any time:

 

    to any legal entity which is a qualified investor as defined in the Prospectus Directive;

 

    to fewer than 100 or, if the Relevant Member State has implemented the relevant provision of the PD Amending Directive, 150, natural or legal persons (other than qualified investors as defined in the Prospectus Directive) subject to obtaining the prior consent of the manager for any such offer; or

 

    in any other circumstances falling within Article 3(2) of the Prospectus Directive;

provided that no such offer of our common stock shall require the publication by the Issuer or any underwriter of a prospectus pursuant to Article 3 of the Prospectus Directive.

For the purposes of this provision, the expression an “offer to the public” in relation to any shares of our common stock in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and our common stock to be offered so as to enable an investor to decide to purchase or subscribe our common stock, as the same may be varied in that Relevant Member State by any measure implementing the Prospectus Directive in that Member State and the expression Prospectus Directive means Directive 2003/71/EC and (and amendments thereto, including Directive 2010/73/EU, to the extent implemented in each Relevant Member State) includes any relevant implementing measure in each Relevant Member State.

Notice to Investors in Switzerland

Our common stock will not be publicly offered in Switzerland and will not be listed on the SIX Swiss Exchange (“SIX”) or on any other stock exchange or regulated trading facility in Switzerland. This prospectus has been prepared without regard to the disclosure standards for issuance prospectuses under art. 652a or art. 1156 of the Swiss Code of Obligations or the disclosure standards for listing prospectuses under art. 27 ff. of the SIX Listing Rules or the listing rules of any other stock exchange or regulated trading facility in Switzerland.

Neither this prospectus nor any other offering or marketing material relating to our company or our common stock has been or will be filed with or approved by any Swiss regulatory authority. In particular, this prospectus will not be filed with, and the offer of our common stock will not be supervised by, the Swiss Financial Market Supervisory Authority, and the offer of our common stock has not been and will not be authorized under the Swiss Federal Act on Collective Investment Schemes (the “CISA”). The investor protection afforded to acquirers of interests in collective investment schemes under the CISA does not extend to acquirers of our common stock.

Notice to Investors in the United Kingdom

Each underwriter:

 

    has only communicated or caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of section 21 of FSMA) in connection with the sale or issue of common stock in circumstances in which section 21 of FSMA does not apply to such underwriter; and

 

    has complied with, and will comply with all applicable provisions of FSMA with respect to anything done by it in relation to the shares of common stock in, from or otherwise involving the United Kingdom.

 

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This prospectus is directed solely at persons who (i) are outside the United Kingdom or (ii) have professional experience in matters relating to investments or (iii) are persons falling within Article 49(2)(a) to (d) of The Financial Services and Markets Act (Financial Promotion) Order 2005 (all such persons together being referred to as “relevant persons”). This prospectus must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this prospectus relates is available only to relevant persons and will be engaged in with relevant persons only.

 

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LEGAL MATTERS

The validity of the shares of common stock being offered by this prospectus will be passed upon for us by Cooley LLP, New York, New York. Latham  & Watkins LLP, New York, New York is representing the underwriters in connection with this offering.

EXPERTS

The consolidated financial statements of Yodle, Inc. at December 31, 2012 and 2013 and for each of the three years in the period ended December 31, 2013 appearing in this prospectus and the registration statement, of which this prospectus forms a part, have been audited by Deloitte & Touche LLP, our 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 being offered by this prospectus. This prospectus, which constitutes part of the registration statement, does not contain all of the information in the registration statement and its exhibits. For further information with respect to us and the common stock offered by this prospectus, we refer you to the registration statement and its exhibits. Statements contained in this prospectus as to the contents of any contract or any other document referred to are not necessarily complete, and in each instance, we refer you to the copy of the contract or other document filed as an exhibit to the registration statement. Each of these statements is qualified in all respects by this reference.

You can read our SEC filings, including the registration statement, over the internet at the SEC’s website at www.sec.gov. You may also read and copy any document we file with the SEC at its public reference facilities at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may also obtain copies of these documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facilities.

Upon 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 for inspection and copying at the public reference room and web site of the SEC referred to above. We also maintain a website at www.yodle.com, at which you may access these materials free of charge as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. However, the information contained in or accessible through our website is not part of this prospectus or the registration statement of which this prospectus forms a part, and investors should not rely on such information in making a decision to purchase our common stock in this offering.

 

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Audited Financial Statements:

  

Report of Independent Registered Public Accounting Firm

     F-2   

Consolidated Balance Sheets

     F-3   

Consolidated Statements of Operations and Comprehensive Loss

     F-4   

Consolidated Statements of Stockholders’ Deficit

     F-5   

Consolidated Statements of Cash Flows

     F-6   

Notes to Consolidated Financial Statements

     F-7   

Unaudited Interim Financial Statements:

  

Condensed Consolidated Balance Sheet

     F-45   

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

     F-46   

Condensed Consolidated Statement of Stockholders’ Deficit

     F-47   

Condensed Consolidated Statements of Cash Flows

     F-48   

Notes to Unaudited Interim Condensed Consolidated Financial Statements

     F-49   

 

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

Yodle, Inc.

New York, New York

We have audited the accompanying consolidated balance sheets of Yodle, Inc. and subsidiaries (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of operations and comprehensive loss, stockholders’ deficit and cash flows for each of the three years in the period ended December 31, 2013. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Yodle Inc. and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

New York, New York

May 14, 2014

 

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Yodle, Inc. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share and per share data)

 

              
     December 31,  
     2012     2013  

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 9,166      $ 12,345   

Accounts receivable, net

     3,790        3,405   

Prepaid expenses

     1,154        953   

Other current assets

     603        1,316   
  

 

 

   

 

 

 

Total current assets

     14,713        18,019   

Property and equipment, net

     3,757        5,277   

Restricted cash

     2,363        2,228   

Goodwill

     42,671        55,227   

Intangible assets, net

     1,988        11,608   

Capitalized technology development costs, net

     895        1,103   

Other assets, net

     95        267   
  

 

 

   

 

 

 

Total assets

   $ 66,482      $ 93,729   
  

 

 

   

 

 

 

Liabilities, convertible preferred stock and stockholders’ deficit

    

Current liabilities:

    

Accounts payable

   $ 9,936      $ 11,613   

Accrued expenses and other current liabilities

     5,944        9,383   

Deferred revenue

     13,399        13,037   

Preferred stock warrant liabilities

     2,655        3,561   

Contingent consideration in business combination

     —          5,290   

Current portion of bank loan

     3,508        —     

Current portion of subordinated debt

     —          2,460   
  

 

 

   

 

 

 

Total current liabilities

     35,442        45,344   

Other liabilities, long-term portion

     878        5,505   

Deferred revenue, long-term portion

     3,667        4,000   

Deferred consideration

     —          1,637   

Bank loan, long-term portion

     12,066        2,970   

Subordinated debt, long-term portion

     2,460        15,000   
  

 

 

   

 

 

 

Total liabilities

     54,513        74,456   
  

 

 

   

 

 

 

Commitments and contingencies (see note 16)

    

Convertible preferred stock (see note 13)

     48,733        62,411   
  

 

 

   

 

 

 

Stockholders’ deficit:

    

Common stock; par value $.0002 per share—142,000,000 and 155,000,000 shares authorized; 34,367,464 and 38,316,173 issued and outstanding as of December 31, 2012 and 2013, respectively

     7        8   

Additional paid-in capital

     31,349        35,376   

Accumulated deficit

     (68,120     (78,522
  

 

 

   

 

 

 

Total stockholders’ deficit

     (36,764     (43,138
  

 

 

   

 

 

 

Total liabilities, convertible preferred stock and stockholders’ deficit

   $ 66,482      $ 93,729   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Yodle, Inc. and Subsidiaries

Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except share and per share data)

 

     Year Ended December 31,  
     2011     2012     2013  

Revenues

   $ 87,584      $ 132,321      $ 161,863   
  

 

 

   

 

 

   

 

 

 

Costs and expenses:

      

Cost of revenues (exclusive of depreciation and amortization shown separately below)

     33,876        42,760        53,843   

Selling and marketing

     36,318        51,623        64,605   

Technology and product development

     10,157        14,977        20,346   

General and administrative

     15,305        19,591        29,271   

Depreciation and amortization

     2,328        3,721        6,419   
  

 

 

   

 

 

   

 

 

 

Total costs and expenses

     97,984        132,672        174,484   
  

 

 

   

 

 

   

 

 

 

Loss from operations

     (10,400     (351     (12,621
  

 

 

   

 

 

   

 

 

 

Interest expense and other

     (7,074     (4,690     (2,912
  

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (17,474     (5,041     (15,533

Provision (benefit) for income taxes

     (2,035     387        (5,131
  

 

 

   

 

 

   

 

 

 

Net loss and comprehensive loss

   $ (15,439   $ (5,428   $ (10,402
  

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders:

      

Basic and diluted

   $ (15,439   $ (5,428   $ (10,402
  

 

 

   

 

 

   

 

 

 

Weighted-average shares used to compute net loss per share attributable to common stockholders:

      

Basic and diluted

     31,954,766        32,572,644        35,743,067   
  

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders:

      

Basic and diluted

   $ (0.48   $ (0.17   $ (0.29
  

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Yodle, Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Deficit

(in thousands, except share and per share data)

 

    Common Stock    

 

Treasury Stock

          Accumulated
deficit
    Total
Stockholders’

deficit
 
    Shares     Amount     Shares     Amount     APIC      

Balance as of January 1, 2011

    28,008,229      $ 6        8,196,897      $ (3,706   $ 1,304      $ (41,089   $ (43,485

Common stock issued upon exercise of stock options

    1,355,513        —          —          —          277        —          277   

Restricted stock issued

    2,000,000        1        —          —          —          —          1   

Stock issued in connection with acquisition

    13,000,000        2        —          —          19,627        —          19,630   

Purchase of treasury stock from employees

    —          —          3,000,000        (2,460     —          —          (2,460

Retirement of treasury stock

    (11,196,897     (2     (11,196,897     6,166        —          (6,164     —     

Stock-based compensation

    —          —          —          —          1,832        —          1,832   

Debt discount on conversion feature

    —          —          —          —          4,975        —          4,975   

Net loss

    —          —          —          —          —          (15,439     (15,439
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2011

    33,166,845        7        —          —          28,015        (62,692     (34,669

Common stock issued upon exercise of stock options and warrants

    1,200,629        —          —          —          269        —          269   

Stock-based compensation

    —          —          —          —          2,866        —          2,866   

Issuance of warrants with debt issuance

    —          —          —          —          199        —          199   

Conversion of bridge financing

    —          —          —          —          —          —          —     

Net loss

    —          —          —          —          —          (5,428     (5,428
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2012

    34,367,474        7        —          —          31,349        (68,120     (36,764

Common stock issued upon exercise of stock options and warrants

    3,987,810        1        —          —          1,396        —          1,397   

Treasury stock acquired from ProfitFuel escrow

    —          —          39,111        (117     —          —          (117

Retirement of treasury stock

    (39,111     —          (39,111     117        —          —          117   

Stock-based compensation

    —          —          —          —          2,631        —          2,631   

Net loss

    —          —          —          —          —          (10,402     (10,402
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2013

    38,316,173      $ 8        —        $ —        $ 35,376      $ (78,522   $ (43,138
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Yodle, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

 

     Year Ended December 31,  
     2011     2012     2013  

Cash Flows from Operating Activities

      

Net loss

   $ (15,439   $ (5,428   $ (10,402

Adjustments to reconcile net loss to net cash provided by/(used in) operating activities:

      

Depreciation of property and equipment

     907        1,373        2,000   

Amortization of acquired intangible assets and capitalized technology development costs

     1,421        2,348        4,419   

Stock-based compensation expense

     1,832        2,866        2,631   

Chargebacks expense

     1,477        1,059        1,108   

Accretion/amortization of debt discounts

     5,609        621        354   

Deferred rent and lease abandonment

     780        (639     724   

Preferred stock warrant liabilities mark-to-market loss/(gain)

     (373     917        906   

Fair value change in contingent consideration—Lighthouse business combination

     —          —          712   

Compensation expense in connection with Lighthouse business combination

     —          —          4,000   

Deferred taxes on business combination

     (2,100     —          (5,399

Other

     562        751        314   

Changes in operating assets and liabilities, net of effect of business combinations:

      

Prepaid expenses

     (169     (544     259   

Other current assets

     —          (307     (693

Accounts receivable

     (765     (2,186     588   

Other assets

     (321     17        (33

Accounts payable

     1,447        4,042        1,515   

Accrued expenses and other current liabilities

     (2,035     1,698        1,495   

Deferred revenue

     13,670        (1,532     (369
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     6,503        5,056        4,129   
  

 

 

   

 

 

   

 

 

 

Cash Flows from Investing Activities

      

Cash paid for business combination, net of cash acquired

     (17,282     —          (4,997

Purchase of property and equipment

     (1,222     (2,889     (3,281

Capitalization of technology development costs

     (688     (381     (815

Change in restricted cash

     —          (1,500     135   
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (19,192     (4,770     (8,958
  

 

 

   

 

 

   

 

 

 

Cash Flows from Financing Activities

      

Proceeds from bank loan

     10,000        3,806        561   

Repayment of bank loan

     (556     (2,163     (13,652

Proceeds from subordinated debt

     9,000        —          15,000   

Payment of deferred payment for ProfitFuel business combination

     —          (7,500     —     

Repayment of vendor financing

     (31     (139     —     

Issuance costs from borrowings related to bank and subordinated loans

     —          —          (226

Proceeds from issuance of preferred stock, net

     —          —          4,928   

Proceeds from issuance of common stock, net

     277        269        1,397   
  

 

 

   

 

 

   

 

 

 

Net cash provided by/(used in) financing activities

     18,690        (5,727     8,008   
  

 

 

   

 

 

   

 

 

 

Net increase/(decrease) in cash and cash equivalents

     6,001        (5,441     3,179   

Cash and cash equivalents as of beginning of year

     8,606        14,607        9,166   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents as of end of year

   $ 14,607      $ 9,166      $ 12,345   
  

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Table of Contents

Yodle, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of December 31, 2012 and 2013 and for the

years ended December 31, 2011, 2012 and 2013

(in thousands, except share and per share data)

1.    DESCRIPTION OF BUSINESS

Yodle, Inc. and subsidiaries (“Yodle” or the “Company”) is a provider of cloud-based marketing automation solutions for local businesses that makes digital marketing easy, affordable and transparent. Yodle’s platform provides its customers with an online, mobile and social presence, as well as automates, manages and optimizes their marketing activities and other consumer interactions. Yodle’s solutions are highly integrated and designed to be easy-to-use, helping local businesses navigate the rapidly evolving, technologically challenging, and highly fragmented digital marketing landscape without having to invest a significant amount of time and money or needing any in-house marketing or IT expertise.

Certain Significant Risks and Uncertainties—Yodle operates in a rapidly changing environment that involves a number of risks, some of which are beyond the Company’s control that could have a material adverse effect on the Company’s business, operating results, and financial condition. These risks include, among others, Yodle’s history of losses and ability to achieve profitability in the future, highly competitive environment, ability to maintain and increase usage rate of the Company’s platform, and ability to increase demand for its solutions. Yodle purchases the majority of its media from Google, and the business could be adversely affected if Google takes actions that are adverse to Yodle’s interests. Similar actions from Yahoo!, Microsoft, and other media providers could adversely affect the business to a lesser degree. The media purchases represent traffic acquisition costs, net, and are recorded in cost of revenues in the consolidated financial statements.

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation—The consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

Use of Estimates—The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and 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 reported period. Significant estimates include fair value of the Company’s common stock, stock based compensation, preferred stock warrant liability, purchase price allocation, revenue recognition, expected customer lives, and recoverability of goodwill and acquired intangible assets. These estimates are based on information available as of the date of the consolidated financial statements. Therefore, actual results could differ from those estimates.

Principles of Consolidation—The accompanying consolidated financial statements include the accounts of Yodle, Inc. and its wholly-owned subsidiaries, ProfitFuel, Inc., Lighthouse Practice Management Group, Inc., and Yodle Canada Inc. All intercompany balances and transactions have been eliminated in consolidation.

Business Combinations—Yodle’s consolidated financial statements include the operations of acquired businesses from the date of their acquisition. Yodle records business combinations under the acquisition method of accounting. All acquired assets and liabilities assumed are recorded at fair value on the date of acquisition. Transaction costs of $0.3 million related to the acquisition of ProfitFuel, Inc. in 2011 and $0.4 million related to the acquisition of Lighthouse Practice Management Group, Inc. in 2013 were expensed as incurred and recorded in general and administrative expenses in the consolidated statements of operations. Any excess of the purchase price over the assigned values of the net assets acquired is recorded as goodwill and is allocated to the reporting unit(s) expected to benefit from the business combination. Contingent consideration is included within the

 

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Yodle, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of December 31, 2012 and 2013 and for the

years ended December 31, 2011, 2012 and 2013

(in thousands, except share and per share data)

 

acquisition cost and is recognized at its fair value on the acquisition date. A liability resulting from contingent consideration is remeasured to fair value at each reporting date until the contingency is resolved and changes in fair value are recorded in the consolidated statements of operations within general and administrative expenses.

Foreign Currency Translation—Yodle and its subsidiaries are U.S. based except for Yodle Canada which began operations in 2012 and uses the U.S. Dollar as its functional currency since the income and expenses of the subsidiary are in U.S. Dollars. Since almost all of Yodle’s transactions are in U.S. dollars, the Company is not subject to material foreign currency translation adjustments in its consolidated financial statements.

Cash and Cash Equivalents—Yodle considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Included in cash and cash equivalents is approximately $6.7 million and $5.3 million invested in a money market account at December 31, 2012 and 2013, respectively (see note on Fair Value Measurements).

Accounts Receivable, net—Yodle bills the majority of its customers by credit card or e-check. Some larger customers and resellers are invoiced. Accounts receivable are recorded at the billed amount and no interest is charged. Yodle reviews the accounts receivable which are past due to identify specific customers with known disputes or collectability issues. The allowance for doubtful accounts is insignificant as of December 31, 2012 and 2013.

Refunds and Chargebacks—The majority of Yodle customers are billed in advance via credit card or e-check.

Refunds occur when a customer approaches Yodle directly and requests all or a portion of amounts paid to be returned. We apply these refunds to amounts Yodle has collected but not yet recognized as revenue, as a reduction to Deferred revenue. To the extent that a refund exceeds amounts Yodle has collected but not yet recognized as revenue, Yodle reduces revenue accordingly. Refunds of $0.8 million, $1.3 million and $1.4 million reduced revenues for the years ended December 31, 2011, 2012 and 2013, respectively.

Chargebacks occur when a customer requests their credit card provider to take back payment previously made to Yodle after services have been rendered. Yodle records estimates for probable losses from chargebacks based on historical experience. Expenses related to chargebacks totaled $1.8 million, $1.3 million and $1.1 million for the years ended December 31, 2011, 2012, and 2013, respectively, and are recorded in general and administrative expense in the consolidated statements of operations. Accrued chargebacks were $0.2 million and $0.4 million as of December 31, 2012 and 2013, respectively and recorded in accrued expenses and other current liabilities in the consolidated balance sheets.

Restricted Cash—Restricted cash represents deposits made to fully collateralize certain standby letters of credit issued in connection with office lease arrangements. The restrictions will lapse when the letters of credit expire at the end of the respective lease terms from 2015 through 2021.

Long-lived Assets—Yodle reviews long-lived assets that have finite useful lives when an event occurs indicating the potential for impairment. If any indicators are present, Yodle performs a recoverability test by comparing the sum of the estimated undiscounted future cash flows attributable to the assets in question to their carrying amounts. If the undiscounted cash flows used in the test for recoverability are less than the long-lived assets carrying amount, Yodle determines the fair value of the long-lived asset and recognizes an impairment loss if the carrying amount of the long-lived asset exceeds its fair value. The impairment loss recognized is the amount by which the carrying amount of the long-lived asset exceeds its fair value. Management determined that there was no impairment charge for long-lived assets during the years ended December 31, 2011, 2012 and 2013.

 

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Yodle, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of December 31, 2012 and 2013 and for the

years ended December 31, 2011, 2012 and 2013

(in thousands, except share and per share data)

 

Property and Equipment, net—Property and equipment consists of office furniture, office and computer equipment and leasehold improvements and is recorded at cost, with the exception of the long-lived assets acquired in the ProfitFuel and Lighthouse business combinations, which were recorded at fair value at the time of the business combination. Depreciation is computed using the straight-line method over five years for all office furniture and over three years for office and computer equipment. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or their estimated useful lives. Improvements that extend the useful lives of property and equipment are capitalized while expenditures for maintenance and repairs are charged to expense as incurred.

Goodwill and Acquired Intangible Assets, net—Yodle records goodwill when the purchase price of net tangible and acquired intangible assets acquired exceeds their fair value. Acquired intangible assets include identifiable acquired technologies, trade names and trade marks, customer relationships and non-competition agreements. Yodle amortizes the cost of finite-lived acquired intangible assets over their estimated useful lives, which are periods of five years or less. Amortization is based on the pattern in which the economic benefits of the intangible asset are expected to be realized.

Yodle tests goodwill for impairment at least annually as of October 1, or more frequently if events or changes in circumstances indicate that this asset may be impaired. The analysis is done at the reporting unit level, and the Company has determined it has one reporting unit. This is consistent with its one operating segment value for all years presented (see note on Segment, Geographic, and Significant Customer Information). Therefore, the Company’s uses it enterprise value as its fair value.

Impairment testing for goodwill is performed utilizing either a qualitative assessment or a two-step process. If the Company decides that it is appropriate to perform a qualitative assessment, management first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we conclude that the fair value of a reporting unit more likely than not exceeds its carrying value, no further evaluation is necessary. If we conclude that it is not more likely than not that the fair value exceeds its carrying value, management is required to perform the two-step process. If management performs the two-step process, then we estimate the fair value of the reporting unit and compare that to the carry value of the reporting unit. If the fair value of the reporting unit exceeds its carrying value, the goodwill is not considered impaired and no further evaluation is necessary. If the carrying value is higher than the estimated fair value, there is an indication that impairment may exist and the second step is required. In the second step, the implied fair value of goodwill is calculated as the excess of the fair value of a reporting unit over the fair values assigned to its assets and liabilities. If the implied fair value of goodwill is less than the carrying value of the reporting unit’s goodwill, the difference is recognized as an impairment charge.

Under the qualitative assessment, the Company considers a variety of qualitative factors, including general economic conditions, industry and market specific conditions, customer behavior, cost factors, the Company’s financial performance and trends, its strategies and business plans, capital requirements, management and personnel issues, and stock price, among others. Under the two step process, the Company estimates the fair value based on a number of factors, including: (a) appropriate consideration of valuation approaches (income approach, comparable public company approach, and comparable transaction approach), (b) estimates of future growth rates, (c) estimates of the Company’s future cost structure, (d) discount rates for its estimated cash flows, (e) selection of peer group companies for the public company and the market transaction approaches, (f) required levels of working capital, (g) assumed terminal value, and (h) time horizon of cash flow forecasts. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment of the one reporting unit.

Yodle reviews acquired intangible assets that have finite useful lives when an event occurs indicating the potential for impairment. If any indicators are present, Yodle performs a recoverability test by comparing the

 

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Yodle, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of December 31, 2012 and 2013 and for the

years ended December 31, 2011, 2012 and 2013

(in thousands, except share and per share data)

 

sum of the estimated undiscounted future cash flows attributable to the acquired intangibles in question to their carrying amounts. If the undiscounted cash flows used in the tests for recoverability are less than the acquired intangibles carrying amount, the Company determines the fair value of the acquired intangibles and recognizes an impairment loss if the carrying amount of the acquired intangibles exceeds its fair value. The impairment loss recognized is the amount by which the carrying amount of the acquired intangibles exceeds its fair value.

Capitalized Technology Development Costs, net—Yodle follows the guidance of the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 350-40, Intangibles-Internal Use Software, to account for capitalized technology development costs. The Company capitalizes payroll and payroll-related costs incurred by employees involved in developing new or additional functionality essential to Yodle’s platform during the development stage. Costs incurred during the preliminary project and post-implementation stages are expensed as incurred and included in technology and product development in the consolidated statements of operations. Once the technology has reached technological feasibility, internal and external costs, if direct and incremental, are capitalized until it is substantially complete and ready for intended use. Capitalized technology development costs are amortized on a straight-line basis over their estimated useful life of three years.

Deferred Revenue—Deferred revenue consists of billings or payments received in advance of revenue recognition and is recognized when the revenue recognition criteria are met. Deferred revenue that is expected to be recognized during the subsequent 12-month period is classified as current and the remainder is classified long-term.

Deferred Rent—Yodle is subject to operating leases that contain predetermined fixed escalations of the minimum rental payments to be made during the original term of the lease (which includes “rent free” periods and construction periods). For these leases, the Company recognizes the related expense on a straight-line basis over the life of the lease, commencing on the date it takes possession of the premises.

Concentrations of Credit Risk—Financial instruments which potentially subject Yodle to concentrations of credit risk consist primarily of cash and cash equivalents and bank loans. Yodle has investment policies that limit the amount of credit exposure to any one issuer.

Cash and cash equivalents and restricted cash are deposited with major financial institutions and, at times, such balances with any one financial institution may be in excess of the Federal Deposit Insurance Company’s (FDIC) insured limits of $250,000. At December 31, 2012 and 2013, approximately $11.3 million and $14.3 million, respectively, in cash and cash equivalents and restricted cash were deposited in excess of FDIC-insured limits.

Fair Value of Financial Instruments—The carrying amount of cash and cash equivalents except for money market funds, accounts receivable, accounts payable, and accrued expenses and other current liabilities approximate fair value because of the short maturity of these instruments. Money market funds are stated at fair value. The carrying amount of restricted cash approximates fair value because as the restrictions expire, the carrying value represents the amount that the Company will receive. Amounts outstanding under bank loans and other debt instruments are shown net of any discounts, including beneficial conversion and warrant discounts (see notes on Bank Loans, Warrants, and Subordinated Debt). Yodle has not elected the fair value measurement option for its financial instruments, assets, or liabilities under ASC 825, Financial Instruments. For example, Yodle’s loan principal balances are not marked to market in each reporting period. Instead they are shown net of any discount (primarily from issuance of warrants) and the debt discount is amortized using an effective interest method. All preferred stock warrants were recorded as derivative liabilities at fair value upon issuance and subsequently recorded at fair value in each reporting period, with changes in fair value recorded as interest expense and other in the consolidated statements of operations in accordance with ASC 815, Derivatives and

 

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Yodle, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of December 31, 2012 and 2013 and for the

years ended December 31, 2011, 2012 and 2013

(in thousands, except share and per share data)

 

Hedging (see notes on Bank Loans, Preferred Stock Warrants, and Subordinated Debt). Inputs used to measure the fair value of warrants issued in connection with debt are disclosed in the note on Preferred Stock Warrants.

Treasury Stock—Shares of Yodle’s common stock that are repurchased are recorded as treasury stock at cost and are included as a component of stockholders’ deficit. In 2011, the Company retired all of its then outstanding treasury stock. In August 2013, Yodle acquired additional treasury stock in connection with shares of stock held in escrow related to the ProfitFuel business combination; these shares were retired in December 2013.

Convertible Preferred Stock—Yodle follows the guidance of ASC 480, Distinguishing Liabilities from Equity and ASC 815, Derivatives and Hedging Instruments in determining the treatment of its preferred shares.

The convertible preferred stock is classified in mezzanine/temporary equity under the terms of ASC 480-10-S99-A3, as it represents a contingently redeemable security due to the holders’ right to redeem upon the occurrence of a deemed liquidation event. The convertible preferred stock is initially measured at their fair value at the issuance date and the carrying amount of convertible preferred stock is not remeasured as long as it is not probable of becoming redeemable. Costs directly associated with the issuance of the convertible preferred stock (e.g., legal costs, etc.) were recorded at issuance as a reduction to the redeemable preferred stock amount. At the time when a deemed liquidation event is considered probable, the convertible preferred stock balance will be re-measured to its redemption value (i.e., liquidation preference) and then will adjust the carrying amount of the instrument to equal the redemption value at the end of each reporting period. As of December 31, 2013, Yodle concluded that a deemed liquidation event was not probable and therefore preferred stock is presented net of issuance costs.

Preferred Stock Warrants Liabilities—The preferred stock warrants are exercisable into Series A, B, or D Preferred Stock, which includes certain redemption rights that are considered outside of the control of the Company, in accordance with ASC 480 – Distinguishing Liabilities from Equity, the Warrants are accounted for as a liability at their fair value and are re-measured at fair value on each reporting date with the change reported as interest expense and other on the consolidated statements of operations. Fair values for the preferred stock warrants are determined using the Black-Scholes-Merton valuation technique. The Black-Scholes-Merton valuation model provides for dynamic assumptions regarding volatility and risk-free interest rates within the total period to maturity. Accordingly, within the contractual term, the Company provided multiple date intervals over which multiple volatilities and risk free interest rates were used. These intervals allow the Black-Scholes-Merton model valuation to project outcomes along specific paths which consider volatilities and risk free rates that would be more likely in an early exercise scenario (see note on Fair Value Measurements). Upon the consummation of an IPO, the preferred stock warrants, except for Series D preferred bridge financing warrants which expire or will net exercise upon an IPO, will convert into warrants to purchase common stock. Upon conversion, the liability recorded for the preferred stock warrants will be reclassified to additional paid-in capital.

Segments—Operating segments are components of an enterprise about which separate financial information is available and evaluated regularly by the enterprise’s chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing performance. Yodle’s Chief Executive Officer is its CODM. Yodle’s operations constitute one operating and reportable segment.

Revenue Recognition—Revenue is recognized when there is persuasive evidence of an agreement or arrangement, services have been rendered, the price to the buyer is fixed or determinable and collectability is reasonably assured. Yodle’s primary sources of revenue are from sales related to Yodle Ads, and sales of its platform offerings, including Yodle Organic, Yodle Web, Lighthouse, and set up and website design fees.

 

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Yodle, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of December 31, 2012 and 2013 and for the

years ended December 31, 2011, 2012 and 2013

(in thousands, except share and per share data)

 

Revenue from Yodle Ads is generated from online advertising, including search engine marketing (“SEM”). Revenue is recognized as local online advertising is purchased for that customer. Under the Yodle Ads offering, customers agree in advance to a monthly media budget. If the entirety of the customer’s media budget is not used during the relevant period, the outstanding amount remains recorded as deferred revenue and is recognized when used. Yodle acts as a principal in these transactions as the Company is the primary obligor in the arrangement, performs a significant portion of the services, sets the pricing, retains credit risk and has discretion in the supplier selection.

Revenue from Yodle Organic is generated from subscriptions for search engine optimization (“SEO”) whereby Yodle uses it proprietary algorithm technology to enable our customers to be more easily found through various internet search engines. Yodle charges a monthly subscription fee which is recognized ratably over the period of service.

Revenue from Yodle Web is generated from subscriptions to our digital presence offering, which encompasses the maintenance of a professional quality website that is easily discoverable and optimized for mobile devices and connected to online directories and rating and review sites. Yodle charges a monthly subscription fee which is recognized ratably over the period of service.

Revenue from Lighthouse is generated from subscriptions to our business practice automation software service that is used by customers to manage many of their customer interactions and administrative office routines such as appointment management. Yodle charges a monthly subscription fee which is recognized ratably over the period of service.

Set up and website design fees are one-time and are recognized over the expected customer life, which is based on historical experience.

Yodle applies ASC 605-25, Revenue Recognition—Multiple Element Arrangements, to account for the revenue arrangements with customers that involve multiple deliverables. When an arrangement involves multiple elements and it is determined that the elements should be accounted for as separate units of accounting, the entire fee from the arrangement is allocated to each respective element based on relative fair value and recognized when the revenue recognition criteria for each element is met. For all services provided, Yodle determines the selling price using either vendor specific objective evidence (“VSOE”) or if VSOE is not available, estimated selling price. The significant factors, inputs and assumptions used in estimating selling price include actual selling prices, historical information and other entity specific considerations.

Yodle also provides its offerings through resellers. Yodle earns a per customer fee for offerings of Yodle Organic and Yodle Web sold by resellers. Additionally, Yodle collects a share of the revenue that resellers generate from sales of Yodle Ads. Yodle recognizes revenue in the period that it delivers its offerings to the customer on behalf of the resellers. Additionally, certain of Yodle’s resellers have guaranteed to provide the Company with a minimum fee structure, regardless of the volume of their sales. Historically resellers have exceeded the minimum guarantee. For sales through resellers, Yodle is not the primary obligor and is not subject to credit risk, and therefore revenue is recognized on a net basis.

In 2011, effective for the 2012 fiscal year, Yodle entered into a multi-year licensing agreement to distribute its offerings in Canada through a reseller. The reseller paid a $10.0 million licensing fee upon signing the

 

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Table of Contents

Yodle, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of December 31, 2012 and 2013 and for the

years ended December 31, 2011, 2012 and 2013

(in thousands, except share and per share data)

 

agreement. The licensing fee is being recognized ratably over the estimated life of the reseller relationship, which approximates the term of the contract, commencing in January 2012 and originally ending December 31, 2014. On September 9, 2013, Yodle and the reseller agreed to modify the agreement, including extending the term until December 31, 2018. At that time, Yodle updated its estimated life of the reseller relationship to consider the remaining contract term and amortizes the remaining license fee over the remaining estimated life of the reseller relationship. In addition to this licensing fee, Yodle may also earn milestone payments if certain revenue targets are met by the reseller. These milestone payments, if earned, would be recognized ratably over the estimated life of the reseller relationship with a cumulative catch up recognized for the elapsed portion of the estimated life of the reseller relationship. In 2012 and 2013, the first and second milestones were obtained, and therefore the reseller paid the Yodle an additional $1.0 million for each milestone. As of December 31, 2013, one additional milestone remained unearned. Yodle also earns per customer fee revenue from its Canadian reseller on sales of Yodle offerings to its customers as well as revenues from assisting its reseller in executing its operations.

Cost of Revenues—Cost of revenues consists of traffic acquisition costs, net of provider rebates, client service account setup personnel costs including salaries, bonuses, stock-based compensation and other personnel costs, third party costs associated with service delivery, co-location, hosting and designing websites, and credit card processing fees. No allocation of depreciation and amortization expense was made to cost of revenues.

Three vendors accounted for approximately 89 percent of Yodle’s net traffic acquisition costs net of $26.2 million, $32.7 million and $38.5 million in 2011, 2012 and 2013, respectively. Traffic acquisition costs are the expenses charged by search engines when a consumer clicks on a sponsored link. Yodle has agreements with all three vendors, which either party may terminate through written notice.

Advertising expense—Advertising expense is recorded in Selling and Marketing in the consolidated statements of operations and was approximately $3.8 million, $3.3 million and $5.1 million for the years ended December 31, 2011, 2012 and 2013, respectively.

Income Taxes—Yodle uses the asset and liability method of accounting for income taxes as prescribed by ASC Topic 740, Income Taxes, which recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using existing enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Yodle follows the provisions of ASC 740-10, Accounting for Uncertainty in Income Taxes, and includes in the consolidated financial statements only those tax positions that are more-likely-than-not to be sustained.

Stock-Based Compensation—Yodle accounts for stock-based compensation awards issued to its employees and members of its Board of Directors (the “Board”) in accordance with ASC 718, Compensation—Stock Compensation. ASC 718 requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. This statement establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair value-based measurement method in accounting for these transactions with employees.

 

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Yodle, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of December 31, 2012 and 2013 and for the

years ended December 31, 2011, 2012 and 2013

(in thousands, except share and per share data)

 

Stock-based compensation is measured at grant date based on the estimated fair value of the award and is expensed on a straight-line basis over the requisite service period. Fair values of share-based payment awards are determined on the date of grant using the Black-Scholes-Merton option pricing model to estimate the fair value of its stock options awards to employees.

Since there is no public market for Yodle’s common stock, the Company uses the “calculated value method,” which relies on comparable company historical volatility and uses the average of i) the weighted-average vesting period and ii) the contractual life of the option, calculated using the “simplified method”. The simplified method allows for estimating the expected life based on an average of the option vesting term and option life, provided that all options meet certain criteria of “plain vanilla” options. Yodle bases its estimates of expected volatility on the median historical volatility of a group of publicly traded companies it believes are comparable to the Company based on the criteria set forth in ASC 718, Compensation-Stock Compensation, considering factors such as line of business, stage of development, size and financial leverage. The risk-free rate of interest for periods within the contractual life of the stock option award is based on the yield of U.S. Treasury bonds on the date the award is granted with a maturity equal to the expected term of the award. Since Yodle makes grants throughout the year, there will be a range of risk-free rates and average expected lives used during the year. The Company uses historical data to estimate forfeitures. Additionally, Yodle has assumed that dividends will not be paid.

The Company accounts for stock awards issued to consultants other than members of the Board in accordance with the provisions of ASC 505-50, Equity-Based Payments to Non-Employees. Restricted stock awards are measured based on the fair market values of the underlying common stock on the dates of grant and expensed on a straight-line basis over the requisite service period.

Other Comprehensive Loss—Yodle did not have any items of other comprehensive income or loss during the years ended December 31, 2011, 2012 or 2013.

Subsequent Events—Yodle follows ASC 855-10, Subsequent Events, which contains general standards of accounting for and disclosure of events that occur after the balance sheet date but before the consolidated financial statements are available to be issued. Management has considered subsequent events through May 14, 2014, the date the consolidated financial statements were available to be issued (see note on Subsequent Events).

Recently Issued Accounting Guidance—During the fiscal third quarter of 2012, the FASB issued ASU No. 2012-02, Intangibles—Goodwill and Other (Topic 350), Testing Indefinite-Lived Intangible Assets for Impairment, which provides guidance and amendments related to testing indefinite-lived intangible assets for impairment. Under the amendments in this update, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to determine the fair value. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test. An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. This update became effective for impairment tests performed for fiscal years beginning after September 15, 2012. However, early adoption was permitted. Yodle adopted this standard on January 1, 2013, and the adoption did not have a material impact on the Company’s consolidated results of operations, cash flows, or financial position.

 

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Yodle, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of December 31, 2012 and 2013 and for the

years ended December 31, 2011, 2012 and 2013

(in thousands, except share and per share data)

 

In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or Tax Credit Carryforward Exists. ASU 2013-11 requires entities to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward when settlement in this manner is available under the tax law. This ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. Yodle is evaluating the potential impact of this adoption on its consolidated financial statements.

3.    BUSINESS COMBINATIONS

Lighthouse Practice Management Group, Inc.

On February 28, 2013, Yodle acquired 100% of Lighthouse Practice Management Group, Inc. (“Lighthouse”), a provider of dental appointment reminder and practice automation software services, based in Georgia. This business combination resulted in Yodle adding a strong practice automation capability to its existing offerings.

Under the terms of the merger agreement, Yodle (i) paid Lighthouse shareholders $5.0 million in cash at closing; (ii) issued 3,804,348 shares of its Series E Preferred Stock at a fair value of $2.30 per share to the shareholders of Lighthouse that qualified as accredited investors (of which 2,065,217 shares remain in escrow as of December 31, 2013); (iii) promised to pay the Lighthouse shareholders deferred payment consideration of $6.2 million in cash at a later time (the “Deferred Payment”); and (iv) agreed to pay the shareholders an earn-out consideration (the “Earn-out”), the amount of which is based on revenue performance over the measurement period (commencing March 1, 2013 and ending February 28, 2014), not to exceed $3.0 million in cash and 869,565 shares. A portion (40%) of the Earn-out will be paid by the issuance of additional Series E Preferred Stock, calculated by dividing the amount of share based Earn-out earned by the initial fair value of $2.30 per share, and the balance (60%) will be paid in cash to the shareholders. Fair value of the Earn-out at the acquisition date was $4.6 million.

The Deferred Payment is due on the earlier of (a) the second anniversary of the effective date (February 28, 2015), (b) the closing of an initial public offering that nets proceeds to Yodle of at least $20.0 million (“Qualifying Public Offering”), and (c) the closing of a sale of Yodle. The Deferred Payment was subject to a post-close working capital adjustment and was reduced by $0.1 million. The Deferred Payment, subject to the terms of the agreement, accrues a simple interest rate of 8% per annum from the effective date and is payable to shareholders quarterly in arrears. The Company has an option to extend the due date to February 28, 2017 which would result in the interest rate increasing from 8% to 12%.

Under the terms of the Deferred Payment, $1.7 million is accounted for as consideration in the business combination, and $4.5 million is compensation expense under ASC 710. The $1.7 million had a fair value at acquisition of $1.6 million, and is adjusted to fair value at each reporting date. As of December 31, 2013, the fair value of the consideration remained $1.6 million and is recorded in deferred consideration in the consolidated balance sheets.

The $4.5 million of compensation expense is being expensed on a straight-line basis over a period of one year from acquisition date, which is the required service period per the agreement and is reflected in the consolidated statements of operations in general and administrative expenses. In September, the merger

 

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Table of Contents

Yodle, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of December 31, 2012 and 2013 and for the

years ended December 31, 2011, 2012 and 2013

(in thousands, except share and per share data)

 

agreement was amended and the terms of the Deferred Payment were modified, which accelerated expenses for services related to one key employee. For the year ended December 31, 2013, $4.0 million was charged to and classified as general and administrative expense in the consolidated statements of operations and to other liabilities, long-term portion in the consolidated balance sheets.

The fair value of the Earn-out at the acquisition date was $4.6 million and was recorded as a liability as of the purchase date. In September 2013, the merger agreement was amended to recognize that the Earn-out targets had been met in full; and that in March 2014, the shareholders would be paid 869,565 shares of Series E Preferred Stock, and $3.0 million in cash. Subsequent to the amendment, the Company continued to record the fair value of the Earn-out as a liability under ASC 480. As of December 31, 2013, the Earn-out liability is recorded at a fair value of $5.3 million and is recorded in contingent consideration in business combination in the consolidated balance sheets. The $0.7 million change in fair value of the Earn-out is recorded to general and administrative expense in the consolidated statements of operations. In March 2014, Yodle settled its Earn-out liability in accordance with the terms of September 2013 amendment to the Lighthouse purchase agreement.

The following table summarizes the components of purchase price that constitutes the consideration transferred:

 

     February 28, 2013  

Cash

   $ 5,000   

Fair value of Series E Preferred Stock issued

     8,750   

Fair value of Deferred Payment

     1,615   

Fair value of Earn-out consideration

     4,600   
  

 

 

 

Total

   $ 19,965   
  

 

 

 

At each reporting date, Yodle remeasures the Deferred Payment and Earn-out consideration obligations to their fair values. Changes in the fair value of the Deferred Payment and Earn-out consideration obligations result from changes in probability assumptions with respect to the likelihood of achieving the Earn-out targets, changes in the fair value of the Series E Preferred Stock, and changes in the time to payment.

Interest on the Deferred Payment has a stated interest rate of 8% and is payable quarterly in arrears. Interest expense is bifurcated between the consideration amount and the compensation expense. The interest related to the consideration is recorded to interest expense and other in the consolidated statements of operations, and interest related to the compensation cost is recorded in general and administrative expense in the consolidated statements of operations. The table below summarizes the interest costs related to the Deferred Payment for the year ended December 31, 2013:

 

     Year Ended
December 31,
2013
 

Accrued interest on deferred consideration

   $ 113   

Accrued interest on compensation expense

     302   
  

 

 

 

Total accrued interest on deferred payment

   $ 415   
  

 

 

 

 

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Table of Contents

Yodle, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of December 31, 2012 and 2013 and for the

years ended December 31, 2011, 2012 and 2013

(in thousands, except share and per share data)

 

The effective interest rate for the consideration, based upon changes in fair value and stated interest, is 9.59%.

The transaction is considered a merger for federal and relevant state tax purposes. The financial results of Lighthouse have been included in Yodle’s consolidated financial statements from February 28, 2013. Immediately subsequent to the transaction, the operations of Lighthouse were merged with the operations of Yodle and the combined company operated as one reporting unit and one operating segment.

The pro-forma impact of this business combination is not material to Yodle’s historical consolidated operating results and is therefore not presented.

The purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the business combination date, with the remaining unallocated purchase price recorded to goodwill. The fair values assigned were determined using the market approach, the income approach and the cost approach. Additional models of probability trees were utilized in deriving the fair values of the Deferred Payment and Earn-out. The acquired identifiable intangible assets are being amortized on a straight-line basis, which Yodle believes approximates the pattern in which the assets are utilized, over their estimated useful lives.

The following table summarizes the allocation of the purchase price for the Lighthouse business combination:

 

     February 28, 2013  

Net tangible liabilities:

  

Cash

   $ 3   

Accounts receivable

     221   

Property and equipment

     97   

Other assets

     52   

Accounts payable and accrued expenses

     (353

Deferred revenue

     (123

Other current liabilities

     (521

Deferred tax liability

     (5,399
  

 

 

 

Net tangible liabilities acquired

     (6,023
  

 

 

 

Identifiable intangible assets:

  

Developed technology

   $ 8,510   

Customer relationships

     2,675   

Tradenames and trademarks

     1,472   

Non-competition agreements

     775   

Total identifiable intangible assets

     13,432   

Goodwill

     12,556   
  

 

 

 

Total purchase price

   $ 19,965   
  

 

 

 

 

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Table of Contents

Yodle, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of December 31, 2012 and 2013 and for the

years ended December 31, 2011, 2012 and 2013

(in thousands, except share and per share data)

 

ProfitFuel, Inc.

On May 23, 2011, Yodle acquired 100% of ProfitFuel, Inc. (“ProfitFuel”), a privately held search engine optimization firm based in Austin, Texas. As consideration for the business combination, Yodle (i) paid the ProfitFuel shareholders approximately $17.3 million in cash at closing ($17.5 million net of cash acquired), (ii) issued 13,000,000 shares of its common stock at a fair value of $1.51 per share (of which an insignificant amount of shares remain in escrow as of December 31, 2013), and (iii) promised to pay the ProfitFuel shareholders $7.5 million in cash at a future date (the “Deferred Payment”). The Deferred Payment was (a) due on the earlier of (x) 10 days after the closing of a qualified financing yielding gross proceeds to Yodle of at least $29.0 million (including conversion of the Bridge Financing) or (y) May 23, 2013 and (b) subject to a subordination agreement with Silicon Valley Bank (“SVB”).

The transaction was considered a merger for federal and relevant state tax purposes.

During 2012, Yodle repaid the Deferred Payment and all accrued interest in cash (see note on Subordinated Debt). The financial results of ProfitFuel have been included in Yodle’s consolidated financial statements from May 23, 2011. Immediately subsequent to the transaction, the operations of ProfitFuel were merged with the operations of Yodle and the combined company operated as one reporting unit and one operating segment.

The following table is a pro-forma presentation of Yodle’s unaudited results of operations had the ProfitFuel transaction occurred on January 1, 2011:

 

     Combined Pro-forma
Results of Operations
Unaudited

2011
 

Revenue

   $ 94,369   
  

 

 

 

Net loss

   $ (15,328
  

 

 

 

Net loss attributable to common stockholders:

  

Basic and diluted

   $ (15,328
  

 

 

 

Weighted-average shares used to compute net loss per share attributable to common stockholders:

  

Basic and diluted

     31,954,766   
  

 

 

 

Net loss per share attributable to common stockholders:

  

Basic and diluted

   $ (0.48
  

 

 

 

The following table summarizes the components of purchase price:

 

     May 23, 2011  

Cash

   $ 17,500   

Fair value of common stock issued

     19,630   

Fair value of Deferred Payment

     7,500   
  

 

 

 

Total

   $ 44,630   
  

 

 

 

 

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Table of Contents

Yodle, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of December 31, 2012 and 2013 and for the

years ended December 31, 2011, 2012 and 2013

(in thousands, except share and per share data)

 

The purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the business combination date, with the remaining unallocated purchase price recorded to goodwill. The fair values assigned were determined using the income approach, the market approach and the cost approach. The acquired identifiable intangible assets are being amortized on a straight-line basis, which Yodle believes approximates the pattern in which the assets are utilized, over their estimated useful lives.

The following table summarizes the allocation of the purchase price for the ProfitFuel business combination:

 

     May 23, 2011  

Net tangible liabilities:

  

Cash

   $ 218   

Accounts receivable

     119   

Property and equipment

     519   

Other assets

     186   

Accounts payable and accrued expenses

     (850

Other non-current liabilities

     (262

Deferred tax liabilities

     (2,100

Deferred revenue

     (855
  

 

 

 

Net tangible liabilities acquired

     (3,025
  

 

 

 

Identifiable intangible assets:

  

Non-competition agreements

   $ 3,640   

Customer relationships

     1,290   

Tradenames and trademarks

     54   
  

 

 

 

Total identifiable intangible assets

     4,984   
  

 

 

 

Goodwill

     42,671   
  

 

 

 

Total purchase price

   $ 44,630   
  

 

 

 

 

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Table of Contents

Yodle, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of December 31, 2012 and 2013 and for the

years ended December 31, 2011, 2012 and 2013

(in thousands, except share and per share data)

 

4.    SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information for the years ended December 31, 2011, 2012 and 2013 is as follows:

 

     Year Ended December 31,  
     2011      2012      2013  

Supplemental disclosures of cash flow information

        

Cash paid for interest

   $ 880       $ 2,777       $ 1,514   

Cash paid for taxes

     16         221         298   

Non-cash investing and financing activities

        

SVB 2012 Loan exchanged for SVB 2013 Loan

   $ —         $ —         $ 2,435   

SVB 2010 Loan exchanged for SVB 2012 Loan

     —           3,194         —     

Stock issued as consideration in business combinations

     19,630         —           8,750   

Deferred Payment obligation issued as consideration in business combinations

     7,500         —           1,615   

Lighthouse Earn-out liability

     —           —           4,600   

Restricted stock issuance

     3,020         —           —     

Conversion of Bridge Financing to Series D Preferred Stock

        10,217         —     

Vendor financed equipment purchase

     170         —           —     

Issuance of debt to purchase treasury stock

     2,460         —           —     

Treasury stock acquired from ProfitFuel escrow

     —           —           (117

Retirement of treasury stock

     6,166         —           117   

Property and equipment acquired that are unpaid in accounts payable

     —           —           281   

Proceeds of debt issuances were allotted to:

        

Fair value of preferred stock warrant liabilities in connection with debt

     1,165         270         —     

Beneficial conversion feature on debt

     4,975         —           —     

Fair value of equity warrants in connection with debt issuance

     —           199         —     

5.    PROPERTY AND EQUIPMENT, NET

Property and equipment, net is shown by major classifications as follows:

 

     As of December 31,  
     2012     2013  

Office furniture

   $ 1,633      $ 2,224   

Office and computer equipment

     4,293        5,507   

Leasehold improvements

     1,429        1,827   
  

 

 

   

 

 

 

Total

     7,355        9,558   

Less accumulated depreciation and amortization

     (3,598     (4,281
  

 

 

   

 

 

 

Property and equipment, net

   $ 3,757      $ 5,277   
  

 

 

   

 

 

 

Depreciation expense was $0.9 million, $1.4 million and $2.0 million in 2011, 2012 and 2013 respectively.

Yodle disposed of office furniture with a cost of $0.2 million, office and computer equipment with a cost of $1.1 million, and leasehold improvements with a cost of $0.1 million during 2013. The items were essentially fully depreciated with a combined insignificant net book value.

 

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Table of Contents

Yodle, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of December 31, 2012 and 2013 and for the

years ended December 31, 2011, 2012 and 2013

(in thousands, except share and per share data)

 

6.    GOODWILL AND ACQUIRED INTANGIBLE ASSETS, NET

The changes in the carrying amount of goodwill as of December 31, 2012 and 2013 are as follows:

 

     2012      2013  

Goodwill, gross, at January 1,

   $ 42,671       $ 42,671   

Accumulated impairment losses through January 1,

     —           —     
  

 

 

    

 

 

 

Balance as of January 1

     42,671         42,671   

Goodwill from business combination

     —           12,556   
  

 

 

    

 

 

 

Balance as of December 31

   $ 42,671       $ 55,227   
  

 

 

    

 

 

 

Goodwill as of December 31, 2012 related to the purchase of ProfitFuel. The $12.6 million addition to goodwill in 2013 relates to Lighthouse (see note on Business Combinations). There was no impairment charge for goodwill or acquired intangible assets, during the years ended December 31, 2011, 2012 and 2013.

Information regarding acquired intangible assets, net that are being amortized is as follows:

 

     Customer
Relationships
    Non -
competition
agreements
    Tradenames
&
Trademarks
    Developed
Technology
    Total
Intangible
Assets
 

Balance January 1, 2012

   $ 914      $ 2,932      $ 23      $ —        $ 3,869   

Amortization 2012

     (645     (1,213     (23     —          (1,881
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net carrying value December 31, 2012

     269        1,719        —          —          1,988   

Business combination, Lighthouse

     2,675        775        1,472        8,510        13,432   

Amortization 2013

     (715     (1,429     (250     (1,418     (3,812
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net carrying value December 31, 2013

   $ 2,229      $ 1,065      $ 1,222      $ 7,092      $ 11,608   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ProfitFuel-related customer relationships were determined to have a useful life of two years. Customer relationships and trademarks and tradenames are fully amortized as of December 31, 2013. Non-competition agreements are being amortized over three years. Total amortization was $1.1 million for the year ended December 31, 2011. Non-competition agreements have a remaining useful life of less than six months as of December 31, 2013.

Lighthouse-related developed technology, customer relationships, and trademarks and tradenames were all determined to have a useful life of five years. Non-competition agreements are being amortized over three years. Developed technology, customer relationships and trademarks and tradenames have remaining useful lives of approximately four years and non-competition agreements have a remaining useful life of two years.

The weighted average remaining useful life of the acquired intangible assets is 3.91 years.

 

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Yodle, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of December 31, 2012 and 2013 and for the

years ended December 31, 2011, 2012 and 2013

(in thousands, except share and per share data)

 

Estimated remaining amortization of the acquired intangible assets is as follows:

 

2014

   $ 3,295   

2015

     2,788   

2016

     2,573   

2017

     2,530   

2018

     422   
  

 

 

 

Total

   $ 11,608   
  

 

 

 

7.    CAPITALIZED TECHNOLOGY DEVELOPMENT COSTS, NET

 

     2012     2013  

Capitalized technology development costs

   $ 1,666      $ 2,481   

Less accumulated amortization

     (771     (1,378
  

 

 

   

 

 

 

Capitalized technology development costs, net

   $ 895      $ 1,103   
  

 

 

   

 

 

 

Amortization of capitalized technology development costs was approximately $0.3 million, $0.5 million and $0.6 million in 2011, 2012 and 2013, respectively.

8.    ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

The following table details the outstanding accrued expenses and other current liabilities of Yodle as of December 31, 2012 and December 31, 2013:

 

     As of December 31,  
     2012      2013  

Accrued payroll expenses

   $ 3,015       $ 4,496   

Accrued expenses, other

     1,289         1,876   

Accrued traffic acquisition costs

     827         1,288   

Accrued taxes

     404         1,099   

Accrued interest expense

     213         363   

Deferred rent

     196         261   
  

 

 

    

 

 

 

Total

   $ 5,944       $ 9,383   
  

 

 

    

 

 

 

 

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Table of Contents

Yodle, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of December 31, 2012 and 2013 and for the

years ended December 31, 2011, 2012 and 2013

(in thousands, except share and per share data)

 

9.    BANK LOANS

The principal amounts, unamortized discounts, and net carrying amounts are as follows:

 

            December 31, 2012      December 31, 2013  

Bank Loans

   Initial
Principal
     Principal
Outstanding
     Unamortized
Discount
    Net Carrying
Amount
     Principal
Outstanding
     Unamortized
Discount
    Net Carrying
Amount
 

2013 Loan

   $ 3,000       $ —         $ —        $ —         $ 3,000       $ (30   $ 2,970   

2012 Loan

     7,000         6,087         (174     5,913         —           —          —     

2011 Loan

     10,000         10,000         (338     9,662         —           —          —     
     

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total Bank Debt

      $ 16,087       $ (512   $ 15,575       $ 3,000       $ (30   $ 2,970   
     

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Current portion

      $ 3,652       $ (144   $ 3,508       $ —         $ —        $ —     

Long-term portion

      $ 12,435       $ (369   $ 12,066       $ 3,000       $ (30   $ 2,970   

2011 Loan

In May 2011, Yodle modified the Loan and Security Agreement (“LSA”) with SVB (“2011 Loan”). Based on the new modification, SVB agreed to lend Yodle $10.0 million. The loan had a maturity date of May 31, 2014; payment is due in full at that time and bears a stated interest rate of 11%.

In connection with the 2011 Loan, SVB was granted warrants to purchase shares of Yodle’s Series D preferred stock worth $1.0 million. Yodle recorded the value of this preferred stock warrant as a liability based on the fair value as of the date of issuance, $0.7 million, and as a reduction of the stated value of the loan, which will be accreted into the loan over its maturity as additional interest expense. The warrant issued in connection with the 2011 Loan is presented as a reduction of the related debt outstanding and reduces the debt by $0.3 million as of December 31, 2012. During the years ended December 31, 2011 and 2012, $0.1 million and, $0.2 million respectively, was accreted and recorded as additional interest expense and other in the consolidated statements of operations.

In September 2013, Yodle entered into an agreement to borrow $15.0 million (see note on Subordinated Debt), and used a portion of those proceeds to pay off the $10.0 million balance of the 2011 Loan; an early extinguishment of debt in the amount of $0.2 million was recorded related to the unamortized loan warrants associated with the loan.

2012 Loan

In September 2012, Yodle modified the LSA with SVB and borrowed a total of $7.0 million (“2012 Loan”). $3.8 million was used to partially pay down the ProfitFuel Deferred Payment (see note on Subordinated Debt). The remaining $3.2 million was used to pay off the previous existing LSA from 2010 (“2010 Loan”) in contemporaneous debt exchange. Yodle incurred an insignificant amount in fees in connection with amending the LSA, all of which were expensed in 2012.

As part of the September 2012 loan amendment, SVB received common stock warrants to purchase 195,000 shares of common stock at a purchase price of $1.19 per share. Yodle recorded the fair value of the common stock warrants, determined using a binomial pricing model, on the date of the grant as a reduction of the stated

 

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Table of Contents

Yodle, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of December 31, 2012 and 2013 and for the

years ended December 31, 2011, 2012 and 2013

(in thousands, except share and per share data)

 

value of the loan, which will be accreted into the loan over its maturity as additional interest expense. The warrants issued in connection with the 2012 Loan is presented as a reduction of the related debt outstanding and reduces the debt by $0.3 million, with an offset to equity, which includes the remaining unamortized warrant discount of less than $0.1 million from the 2010 Loan. During the year ended December 31, 2012, $0.1 million was accreted and recorded as additional interest expense and other in the consolidated statements of operations.

During 2013, Yodle made principal payments of $3.7 million which reduced the outstanding loan balance to $2.4 million. In December 2013, Yodle used the proceeds from the 2013 Loan to pay off the remaining principal and interest due on the 2012 Loan. Since the 2013 Loan was considered a modification of the 2012 Loan, the unamortized warrants of the 2012 Loan will be amortized over the life of the 2013 Loan. During the year ended December 31, 2013, $0.2 million of loan warrant discounts were accreted and recorded as additional interest expense in interest expense and other in the consolidated statements of operations.

2013 Loan

In December 2013, Yodle modified its LSA with SVB. Under the LSA, SVB agreed to loan Yodle up to $10.0 million under a term loan facility (the “Term Loan Facility”), as well as the lesser of $2.0 million and 80% of eligible accounts receivable under a revolving credit facility (the “Revolving Credit Facility” and together with the “Term Loan Facility”, the “2013 Loan”). The 2013 Loan was considered a modification of the 2012 Loan and is secured by substantially all of Yodle’s assets. A condition of the LSA was that a portion of the loan amount would be used to pay in full the outstanding balances of Yodle’s existing 2012 Loan.

The repayment period of the Term Loan Facility will commence on January 2, 2015, with 30 equal monthly payments, and bears interest at 0.75% above prime. From January 1, 2014 to December 31, 2014, Yodle will be required only to pay interest monthly. The Term Loan Facility matures on June 1, 2017, but the draw period for the Term Loan Facility ends on December 31, 2014. On December 12, 2013, Yodle made its first drawdown of $3.0 million and used $2.4 million of the proceeds to pay off the balance of the outstanding 2012 Loan in a contemporaneous debt exchange. As of December 31, 2013, $7.0 million was available for future drawdowns against the Term Loan Facility.

Any outstanding principal amount under the Revolving Credit Facility and any accrued and unpaid interest must be paid in full by December 12, 2015. Borrowings under our Revolving Credit Facility accrue interest on a monthly basis and bears interest at 0.25% above prime. As of December 31, 2013, Yodle has not borrowed any amounts under the Revolving Credit Facility.

At December 31, 2013, $3.0 million was classified as long term in the consolidated balance sheets. The fair value of 2013 Loan as of December 31, 2013 approximates the recorded value since the loan was made on December 18, 2013.

Scheduled repayments of the loans outstanding under the LSA at December 31, 2013 are as follows:

 

2014

   $ —     

2015

     1,200   

2016

     1,200   

2017

     600   
  

 

 

 
   $ 3,000   
  

 

 

 

 

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Table of Contents

Yodle, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of December 31, 2012 and 2013 and for the

years ended December 31, 2011, 2012 and 2013

(in thousands, except share and per share data)

 

The schedule of stated interest rates, effective interest rates, interest expense, discount amortization amounts, and loss on early extinguishment of debt are as follows:

 

     Stated
interest rate
    Effective
interest
rate
    Interest
expense
     Discount
amortization
     Loss on early
extinguishment
of debt
 

Year ended December 31, 2011

            

2011 Loan

     11.00     12.54   $ 654       $ 109       $ —     

2010 Loan

     prime + 1.25     5.72     258         20         —     

Year ended December 31, 2012

            

2012 Loan

     prime + 1.25     8.75   $ 113       $ 54       $ —     

2011 Loan

     11.00     13.34     1,115         219         —     

2010 Loan

     prime + 1.25       136         18         —     

Year ended December 31, 2013

            

2013 Loan

     prime + 0.75     3.94   $ 6       $ —         $ —     

2012 Loan

     prime + 1.25     8.43     213         144         —     

2011 Loan

     11.00     13.75     767         149         216   

In connection with the LSA, Yodle is subject to certain covenants with which it must comply. On December 12, 2013, Yodle amended the financial covenants relating to Capital Expenditures, and Minimum Adjusted EBITDA/Maximum Adjusted EBITDA Loss. As of December 31, 2013, Yodle was in compliance with all such covenants.

10.    SUBORDINATED DEBT

Yodle has entered into debt agreements which are subordinated to the SVB loans. The schedule of principal amounts and net carrying amounts are as follows:

 

            December 31, 2012      December 31, 2013  

Subordinated Debt

   Initial
principal
     Principal
outstanding
     Net
carrying
amount
     Principal
outstanding
     Net
carrying
amount
 

Subordinated Loan

   $ 15,000       $ —         $ —         $ 15,000       $ 15,000   

Promissory Note

     2,460         2,460         2,460         2,460         2,460   
     

 

 

    

 

 

    

 

 

    

 

 

 

Total Subordinated Debt

      $ 2,460       $ 2,460       $ 17,460       $ 17,460   

Current portion

      $ —         $ —         $ 2,460       $ 2,460   

Long-term portion

      $ 2,460       $ 2,460       $ 15,000       $ 15,000   

Subordinated Loan

In September 2013, Yodle borrowed $15.0 million from a reseller. The loan has a fixed interest rate of 5%, payable monthly. A portion of the proceeds from this loan was used to repay the SVB 2011 Loan of $10.0 million (see note on Bank Loans). The Subordinated Loan is due on September 9, 2017. Interest expense of $0.2 million was recorded in the consolidated statements of operations for the year ended December 31, 2013. The carrying value of the subordinated loan as of December 31, 2013 approximates fair value as the interest rate is relative when compared to the Company’s interest rate from the 2013 Loan obtained in December 2013.

 

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Table of Contents

Yodle, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of December 31, 2012 and 2013 and for the

years ended December 31, 2011, 2012 and 2013

(in thousands, except share and per share data)

 

Promissory Note

On November 18, 2011, Yodle purchased 3,000,000 shares of its common stock from one of the Company’s founders. As consideration for the purchase, Yodle issued a promissory note in the amount of $2.5 million, of which the principal accrues interest at 3.3% per annum. The note is due on the earlier of (i) the closing of an acquisition of Yodle or (ii) June 21, 2014. For the years ended December 31, 2011, 2012, and 2013, $0.01 million, $0.1 million and $0.1 million, respectively, was recorded in interest expense and other on the consolidated statements of operations. As of December 31, 2013, the note was recorded as current debt, and the fair value approximates the carrying value as the Note’s interest rate is, consistent with the rates available in market.

ProfitFuel Deferred Payment

The ProfitFuel business combination in 2011 included a deferred payment obligation of $7.5 million. During 2012, Yodle paid the Deferred Payment by (a) $1.0 million on each of April 10, 2012 and July 3, 2012, (b) $4.0 million on September 7, 2012 and (c) $2.9 million on November 20, 2012 which reduced the outstanding principal balance to zero. Payments included accrued interest of $1.4 million. As of December 31, 2011, and 2012, interest expense of $0.3 million and $1.1 million was recorded, respectively, in interest expense and other on the consolidated statements of operations.

Bridge Financing

On May 23, 2011, Yodle issued convertible promissory notes totaling $9.0 million to a group of existing holders of its convertible preferred stock (the “Bridge Financing”). Proceeds from this issuance were used for the ProfitFuel business combination (see note on Business Combinations). The Bridge Financing was due on the earlier of (i) completion of a preferred stock equity financing yielding gross proceeds of at least $30.0 million to Yodle or (ii) on demand any time after six months by the “Requisite Majority” of shareholders, which was defined as holders who hold greater than 50% of the outstanding balances. Interest accrued on the note at a rate of 10%. On May 23, 2011, Yodle issued warrants to the holders of the notes to purchase Series D Preferred Stock of 10% of the face value of the notes, or $0.9 million. After July 23, 2011, the value of the warrants increased by 1% of the face value of notes of $9.0 million (i.e. $90,000) each month the convertible promissory notes remained outstanding. All convertible promissory notes were converted in September 2012 and no more warrants were issued after August 2012.

Yodle recorded the value of this warrant as a liability based on the fair value as of the date of issuance, $0.5 million, and as a reduction of the stated value of the loan, which will be accreted into the loan over its maturity as additional interest expense. The warrant issued in connection with Bridge Financing is presented as a reduction of the related debt outstanding and reduces the debt by $0.3 million as of December 31, 2012.

The Bridge Financing contained terms enabling the holders to convert their notes into equity shares, that, when tested under ASC 470-20, Debt with Conversion and Other Options, are beneficial to the holders of the notes. The beneficial conversion feature had value that was required to be allocated and was recorded as a discount to the debt, with an offsetting entry to additional paid-in capital. This amount was $4.9 million, and was fully amortized to interest expense and other in the year ended December 31, 2011. The expense from the beneficial conversion feature was not deductible for tax purposes.

 

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Table of Contents

Yodle, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of December 31, 2012 and 2013 and for the

years ended December 31, 2011, 2012 and 2013

(in thousands, except share and per share data)

 

In September 2012, the Bridge Financing holders converted all the outstanding notes into 7,274,827 shares of Series D Preferred Stock, including accrued interest of $1.2 million. The conversion price of the shares was $1.4045 per share as per the terms of the warrants. As of December 31, 2011, and 2012, recorded interest expense was $0.5 million and $0.7 million respectively. No additional consideration was paid by the holders for the conversion.

In 2012, prior to conversion, additional warrants with a grant date fair value totaling $0.3 million were issued in connection with the Bridge Financing. As of December 31, 2011 and 2012, $0.5 million and $0.3 million, respectively, was accreted to interest expense and other in the consolidated statements of operations as debt discount in connection with the warrants.

The schedule of stated interest rates, effective interest rates, interest expense and discount amortization amounts are as follows:

 

     Stated
interest
rate
    Effective
interest rate
    Interest
expense
     Discount
amortization
 

Year ended December 31, 2011

         

Promissory Note

     3.30     3.35   $ 10       $ —     

2011 Deferred Payment

     *        7.59     346         —     

Bridge Financing

     10.00     110.12     553         5,475   

Year ended December 31, 2012

         

Promissory Note

     3.30     3.35   $ 82       $ —     

2011 Deferred Payment

     18.00     18.00     1,054         —     

Bridge Financing

     10.00     14.37     665         270   

Year ended December 31, 2013

         

Subordinated Loan

     5.00     5.11   $ 238       $ —     

Promissory Note

     3.30     3.35     82         —     

 

* 6.00% for May 23, 2011 through November 23, 2011, then 18.00% thereafter

Scheduled repayments of subordinated debt as of December 31, 2013 is as follows:

 

2014

   $ 2,460   

2015

     —     

2016

     —     

2017

     15,000   
  

 

 

 
   $ 17,460   
  

 

 

 

11.    WARRANTS

Yodle examines the terms of each warrant instrument at issuance, along with the terms and conditions of any other instruments issued in conjunction with the warrants, such as debt agreements, to determine the proper accounting treatment.

 

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Table of Contents

Yodle, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of December 31, 2012 and 2013 and for the

years ended December 31, 2011, 2012 and 2013

(in thousands, except share and per share data)

 

Preferred Stock Warrants

2010 Loan

In connection with the 2010 Loan, SVB was granted a warrant to purchase 78,320 warrants to purchase shares of Yodle’s Series D Preferred Stock with an exercise price of $1.4045 per share. Yodle initially recorded the value of these warrants based on the fair value on the date of grant of $0.1 million as a reduction of the stated value of the loan, which was accreted into the loan over its maturity as additional interest expense. As of December 31, 2013, the fair value of these warrants to purchase 78,320 shares of the Series D Preferred Stock, in the amount of $0.1 million, was included within the preferred stock warrant liabilities on the consolidated balance sheets.

As the warrants are exercisable into Series D Preferred Stock, which includes certain redemption rights that are considered outside of the control of the Company, in accordance with ASC 480—Distinguishing Liabilities from Equity, the warrants are accounted for as a liability and are revalued at each balance sheet date. The change in fair value upon being re-measured is recorded in interest expense and other within the Company’s consolidated statements of operations. The warrants were fully vested at issuance. The warrants were valued at $0.1 million as of December 31, 2013 using a Black-Scholes-Merton option pricing model. 

2011 Loan

In November 2011, in accordance with terms of the 2011 Loan, the warrants converted to warrants to purchase 711,997 shares of Series D Preferred Stock. The warrants were transferable without restriction by the holder. Yodle recorded the value of these warrants based on the fair value on the date of issuance, $0.7 million, and as a reduction of the stated value of the loan, which will be accreted into the loan over its maturity as additional interest expense. As of December 31, 2013, the fair value of these warrants to purchase 711,997 shares of the Series D Preferred Stock, in the amount of $1.0 million, was included within the preferred stock warrant liabilities on the consolidated balance sheets.

As the warrants are exercisable into Series D Preferred Stock, which includes certain redemption rights that are considered outside of the control of the Company, in accordance with ASC 480 – Distinguishing Liabilities from Equity, the warrants are accounted for as a liability and are revalued at each balance sheet date. The change in fair value upon being re-measured is recorded in interest expense and other within the consolidated statements of operations. The warrants were fully vested at issuance. The warrants were valued at $1.0 million as of December 31, 2013 using a Black-Scholes-Merton option pricing model.

Bridge Financing

On May 23, 2011, in conjunction with the Bridge Financing, Yodle issued 640,797 warrants to the holders of the convertible promissory notes “Bridge Financing Warrants” based on the terms of the Bridge Financing. 897,120 additional Bridge Financing Warrants were issued between July 23, 2011 and August 23, 2012. In September 2012, in accordance with the terms of the Bridge Financing, the Bridge Financing Warrants matured and were converted to warrants for the purchase of shares of Series D Preferred Stock. The initial fair value of warrants issued in 2011 and 2012 was $0.5 million and $0.3 million, respectively. The warrants were fully vested at issuance.

 

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Table of Contents

Yodle, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of December 31, 2012 and 2013 and for the

years ended December 31, 2011, 2012 and 2013

(in thousands, except share and per share data)

 

As the warrants are exercisable into Series D Preferred Stock, which includes certain redemption rights that are considered outside of the control of the Company, in accordance with ASC 480 – Distinguishing Liabilities from Equity, the warrants are accounted for as a liability and are revalued at each balance sheet date. The change in fair value upon being re-measured is recorded in interest expense and other within the Company’s consolidated statements of operations. As of December 31, 2013, the fair value of these warrants to purchase a total of 1,537,917 shares of the Series D Preferred Stock, in the amount of $1.6 million, and was included within the preferred stock warrant liabilities on the consolidated balance sheets.

Series A Preferred Stock and Series B Preferred Stock warrants relate to debt issued prior to 2011. As the warrants are exercisable into Series A and Series B Preferred Stock, which includes certain redemption rights that are considered outside of the control of the Company, in accordance with ASC 480 – Distinguishing Liabilities from Equity, the warrants are accounted for as a liability and are revalued at each balance sheet date. The change in fair value upon being re-measured is recorded in interest expense and other within the Company’s consolidated statements of operations. The warrants were fully vested at issuance. The Series A and Series B Preferred Stock warrants were valued at $0.7 million and $0.2 million, respectively, as of December 31, 2013 using a Black-Scholes-Merton option pricing model.

The below table summarizes the outstanding preferred stock warrant liabilities as of December 31, 2012 and 2013:

 

Preferred Stock Warrants

  Issue Date   Expiration
Date
  Exercise
Price
    Shares
Outstanding
    Fair
value at
issue
date
    Fair value
as of
December 31,
2012
    Fair value
as of
December 31,
2013
 

Series A

  5/1/2007   5/31/2017     0.1445        311,419        —          442        657   

Series B

  7/18/2008   7/17/2018     0.5670        141,093        74        168        247   

Series D—Bridge Financing

  5/23/2011
7/23/11-8/23/12
  5/23/2018
5/23/2018
   
 
1.4045
1.4045
  
  
   
 
640,797
897,120
  
  
   
 
326
444
  
  
   
 
482
656
  
  
   
 
659
894
  
  

Series D—2011 Loan

  5/23/11-11/23/11   5/22/2021     1.4045        711,997        666        819        997   

Series D—2010 Loan

  10/1/2010   10/1/2020     1.4045        78,320        76        88        107   
       

 

 

   

 

 

   

 

 

   

 

 

 
          2,780,746      $ 1,586      $ 2,655      $ 3,561   
       

 

 

   

 

 

   

 

 

   

 

 

 

The changes in fair value of the warrants recorded to interest expense and other represents income for the year ended December 31, 2011 of $0.4 million and expense of $0.9 million and $0.9 million for the years ended December 31, 2012, and 2013, respectively.

All of Yodle’s outstanding Preferred Stock warrants become exercisable for shares of common stock on a one-for-one basis upon the closing of an IPO, and 1,537,917 of these warrants that were issued in connection with the Bridge Financing for our acquisition of ProfitFuel will, subject to certain conditions, automatically be deemed exercised in full pursuant to a net exercise provision upon its closing. The net exercise provision contained in certain of the Company’s outstanding warrants provides that the holder may, in lieu of payment of the exercise price in cash, surrender the applicable warrant and receive a net amount of shares based on the fair market value of the Company’s stock at the time of exercise of the applicable warrant after deduction of the aggregate exercise price. The warrants also contain a provision for the adjustment of the exercise price and the number of shares issuable upon the exercise of the applicable warrant in the event of certain stock dividends, stock splits, reorganizations, reclassifications and consolidations.

 

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Table of Contents

Yodle, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of December 31, 2012 and 2013 and for the

years ended December 31, 2011, 2012 and 2013

(in thousands, except share and per share data)

 

Common Stock Warrants

As part of the 2012 Loan, SVB received a warrant to purchase 195,000 shares of common stock at a purchase price of $1.19 per share. Yodle recorded the fair value of the warrants, determined using a binomial pricing model, on the date of the grant as a reduction of the stated value of the loan, which will be accreted into the loan over its maturity as additional interest expense (see note on Bank Loans for details of 2012 Loan).

In March 2009, a recruiting firm received warrants to purchase 37,500 shares of common stock at a purchase price of $0.38 per share. As of December 31, 2012 and December 31, 2013, 16,393 and 5,553 of these warrants remained outstanding, respectively.

The common warrants issued and outstanding were assessed under ASC 815 and were determined to initially not meet the definition of a derivative, but will require evaluation on an on-going basis. As of December 31, 2013, the warrants still did not meet the definition of a derivative and were therefore classified in stockholders’ equity.

The table below summarizes the inputs to determine the fair value of the common warrants issued in connection with the 2012 Loan:

 

     2012  

Common stock warrants—2012 Loan

  

Risk-free interest rate (percentage)

     1.59   

Expected term (in years)

     10.00   

Expected dividend yield (percentage)

     —     

Expected volatility (percentage)

     54.80   

12.    INCOME TAXES

The provision (benefit) for income taxes is as follows:

 

     Year Ended December 31,  
         2011             2012              2013      

Current

       

Federal

   $ —        $ 149       $ 3   

State

     65        238         265   
  

 

 

   

 

 

    

 

 

 

Total current

     65        387         268   
  

 

 

   

 

 

    

 

 

 

Deferred

       

Federal

   $ (1,863   $ —         $ (4,600

State

     (237     —           (799
  

 

 

   

 

 

    

 

 

 

Total deferred

     (2,100     —           (5,399
  

 

 

   

 

 

    

 

 

 

Total income tax expense/(benefit)

   $ (2,035   $ 387       $ (5,131
  

 

 

   

 

 

    

 

 

 

 

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Table of Contents

Yodle, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of December 31, 2012 and 2013 and for the

years ended December 31, 2011, 2012 and 2013

(in thousands, except share and per share data)

 

The reconciliation between the effective income tax rate and the federal statutory income tax rate is as follows:

 

     Year Ended December 31,  
         2011             2012             2013      

Federal statutory income tax rate

     (34.00 )%      (34.00 )%      (34.00 )% 

Non-deductible portion of Lighthouse deferred payment

     —          —          11.02   

State income taxes, net of federal benefit

     0.25        3.11        1.21   

Valuation allowances on deferred tax assets

     13.86        25.71        (5.63

Stock compensation

     0.73        4.79        (5.56

Preferred stock warrants / debt

     8.95        11.30        2.01   

Other permanent differences

     1.39        (0.97     (2.20

Other

     (2.83     (2.26     0.12   
  

 

 

   

 

 

   

 

 

 

Effective income tax rate

     (11.65 )%      7.68     (33.03 )% 
  

 

 

   

 

 

   

 

 

 

The significant components of Yodle’s deferred tax assets and liabilities are as follows:

 

     December 31,  
     2012     2013  

Current deferred tax assets

    

Accrued expenses

   $ 249      $ 238   
  

 

 

   

 

 

 

Total current deferred tax assets

     249        238   
  

 

 

   

 

 

 

Non-current deferred tax assets

    

Operating loss and credit carryforwards

   $ 15,137      $ 18,731   

Deferred revenue

     2,660        1,759   

Deferred rent

     428        690   

Stock-based compensation

     363        441   

Depreciation

     77        88   

Other

     333        161   
  

 

 

   

 

 

 

Total non-current deferred tax assets

     18,998        21,870   
  

 

 

   

 

 

 

Total deferred tax assets

     19,247        22,108   
  

 

 

   

 

 

 

Non-current deferred tax liabilities

    

Amortization of intangibles

     (793     (4,521
  

 

 

   

 

 

 

Total non-current deferred tax liabilities

     (793     (4,521

Net deferred tax assets before valuation allowances

     18,454        17,587   

Valuation allowances

     (18,454     (17,587
  

 

 

   

 

 

 

Net deferred tax assets after valuation allowances

   $ —        $ —     
  

 

 

   

 

 

 

ASC 740-10 requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax assets will not be realized based on all available positive and negative evidence. Based on Yodle’s history of generating net operating losses, management has concluded that it is more

 

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Table of Contents

Yodle, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of December 31, 2012 and 2013 and for the

years ended December 31, 2011, 2012 and 2013

(in thousands, except share and per share data)

 

likely than not that Yodle will not be able to generate sufficient taxable income in future periods to utilize the net operating losses and other deferred tax assets. Therefore, Yodle has established a full valuation against net deferred tax assets.

The ProfitFuel and Lighthouse business combinations were both nontaxable reorganizations. In accordance with ASC 805 and 740, the intangible assets recorded as part of the business combinations of both Lighthouse and ProfitFuel were considered finite lived, and a deferred tax liability was recorded as part of the purchase price allocation for the additional future taxable income caused by not being able to deduct the intangible asset amortization expense on the Company’s tax returns. In addition, as Yodle had recorded a full valuation allowance against its net deferred tax assets previously, it reassessed the amount of the valuation allowance as a result of the additional deferred tax liabilities. This reassessment reduced the valuation allowance by $2.1 million and $5.4 million at December 31, 2011 and 2013, respectively.

As of December 31, 2013, Yodle has net operating loss carryforwards (“NOLs”) available to offset future taxable income of approximately $49.1 million. The NOLs expire in varying years beginning 2028 through 2033. In accordance with Section 382 of the Internal Revenue code, the ability to utilize Yodle’s net operating loss carryforwards could be limited in the event of a change in ownership. Yodle has reviewed the impact of Section 382 on its net operating losses and has determined that although it has experienced one or more changes in ownership, the resulting limitations should not significantly restrict its ability to utilize its net operating losses in the future.

A reconciliation of the gross amounts of unrecognized tax benefits, excluding interest and penalties is as follows:

 

Balance as at January 1, 2013

   $ —     

Additions for prior year tax positions

     286   
  

 

 

 

Balance as at December 31, 2013

   $ 286   
  

 

 

 

There were no unrecognized tax benefits recorded in the year ended December 31, 2011 and 2012.

Approximately $0.3 million of unrecognized benefits at December 31, 2013 would affect Yodle’s effective tax rate if recognized. Yodle does not expect a material change in the amount of unrecognized benefits in the next 12 months. Yodle accrued interest and penalties related to unrecognized tax benefits as part of the provision for income taxes. As of December 31, 2013, accrued interest and penalties included in unrecognized tax benefits were insignificant.

Yodle is subject to federal and state income tax examinations for years subsequent to 2009.

 

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Table of Contents

Yodle, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of December 31, 2012 and 2013 and for the

years ended December 31, 2011, 2012 and 2013

(in thousands, except share and per share data)

 

13.    CONVERTIBLE PREFERRED STOCK

Yodle has issued six series of convertible preferred stock: Series A, Series B, Series C, Series D, Series E, and Series F collectively “Convertible Preferred Stock”.

 

Convertible
Preferred

  Issue
Date
    Issued     Outstanding     Authorized     Original
issue
price
    Original
proceeds
at
issuance
    Issuance
Costs
    Proceeds
net of
issuance
costs
    Liquidation
preference
    Carrying
value as of
December 31,
2012
    Carrying
value as of
December 31,
2013
 

Series A

    Nov-06        21,453,287        21,453,287        21,453,287      $ 0.1444      $ 3,098      $ 110      $ 2,988      $ 0.1444      $ 2,988      $ 2,988   

Series A

    Jun-07        3,460,208        3,460,208        25,224,914      $ 0.1445        500        —          500      $ 0.1445        500        500   

Series B

    Nov-07        21,164,021        21,164,021        21,305,114      $ 0.5670        12,000        68        11,932      $ 0.5670        11,932        11,932   

Series C

    Jan-09        15,539,089        15,539,089        15,837,919      $ 0.8366        13,000        90        12,910      $ 0.8366        12,910        12,910   

Series C

    Aug-09        298,830        298,830        15,837,919      $ 0.8366        250        —          250      $ 0.8366        250        250   

Series D

    May-11        7,119,973        7,119,973        7,119,973      $ 1.4045        10,000        65        9,935      $ 1.4045        9,935        9,935   

Series D

    Sep-12        7,274,827        7,274,827        16,723,034      $ 1.4045        10,218        —          10,218      $ 1.4045        10,218        10,218   

Series E

    Feb-13        3,804,348        3,804,348        4,673,913      $ 2.3000        8,750        72        8,678      $ 2.3000        —          8,678   

Series F

    Feb-13        1,666,667        1,666,667        1,666,667      $ 3.0000        5,000        —          5,000      $ 3.7500        —          5,000   
   

 

 

         

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 
      81,781,250            $ 62,816      $ 405      $ 62,411        $ 48,733      $ 62,411   
   

 

 

         

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 

Voting Rights—The number of votes that a share of preferred stock is entitled to vote is calculated by converting the preferred series share into a share of common at a 1:1 ratio. Preferred stock classes A, B and D each elect one board of director. The Company’s voting agreement sets the size of the board of directors.

Conversion Option—Holders of Series A, B, C, D, E, and F Preferred Stock have the option of converting their shares into shares of common stock at any time, at a conversion ratio of 1:1, adjusted for any dilutive transactions such as stock splits, certain dividends, mergers or acquisitions.

The conversion ratio of Series F Preferred shares is 1:1, with the potential exception in an IPO transaction. In accordance with the Fifth Amendment and Restated Certificate of Incorporation, if the per share offering price to the public in Yodle’s initial public offering of Common Stock is less than the amount to which shares of Series F Preferred Stock is entitled as a liquidation preference, and the proceeds available for distribution to the holders of the Company’s capital stock were equal to the pre-IPO valuation of the Company, then immediately prior to the conversion of the shares of Series F Preferred Stock in connection with the IPO (mandatory conversion), the Series F Preferred Stock conversion price shall be reduced to a price equal to (i) the Series F Conversion price in effect immediately prior to such conversion ($3.00 per share) multiplied by (ii) a fraction, the numerator of which is the IPO offering price and the denominator of which is the per share price which a share of Series F Preferred Stock would be entitled to as a liquidation preference (as described below in Liquidation Preference).

Mandatory Conversion—Upon a qualifying public offering, which results in net cash proceeds of at least $20.0 million to Yodle, Series A, B, C, D, E, and F are mandatorily converted into shares of common stock, at the then prevailing conversion ratio, unless holders of at least 55% of shareholders of Series A, B, C, D, and F object to the conversion.

DividendsDividends are payable only when declared by Yodle. The holders of convertible preferred stock shall first receive or simultaneously receive a dividend on each outstanding share of convertible preferred stock in an amount at least equal to $0.0116 per share for Series A Preferred, $0.0454 per share for Series B Preferred, $0.0669 per share for Series C Preferred, $0.1124 for Series D Preferred, $0.184 per share for Series E Preferred, and $0.2400 per share for Series F Preferred. No dividends have been declared for any of the periods presented in these consolidated

 

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Yodle, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of December 31, 2012 and 2013 and for the

years ended December 31, 2011, 2012 and 2013

(in thousands, except share and per share data)

 

financial statements. The Company is precluded from paying cash dividends pursuant to the terms and conditions in the 2013 Loan and the Subordinated Loan.

Liquidation PreferenceIn the event of a voluntary or involuntary liquidation, the holders of convertible preferred stock outstanding shall be entitled to be paid out of assets of Yodle available for distribution to the Company’s shareholders, before any payment shall be made to the holders of common stock in relation to the convertible preferred stock’s original issue price (Series A $0.1445, Series B $0.5670, Series C $0.8366, Series D $1.4045, Series E $2.30, Series F, (a) $3.75 if the event occurs before the first anniversary of Original Issue Date (The Original Issue Date is February 28, 2013), (b) $4.50 if event occurs after the first anniversary but before second anniversary of Original Issue Date, (c) $6.00 if event occurs after the second anniversary of the Original Issue Date). If there is not enough to satisfy the entire payout, the liquidation amount will be ratably divided among all convertible preferred stock shareholders based on the convertible preferred stock’s original issue price. Finally, holders of commons stock share in liquidation proceeds, if any remain available.

Yodle’s amended Certificate of Incorporation states that upon the occurrence of certain deemed liquidation events, such as certain merger, consolidation, reorganization or other transactions, the majority of preferred stockholders, specifically, 55% of the holders of Series A, B, C, D, and F Preferred Stock, can require the Company to redeem their shares of preferred stock upon the occurrence of a Deemed Liquidation Event. Since the preferred stockholders control the Board, the occurrence of a Deemed Liquidation Event is not solely within Yodle’s control. Further, since the Certificate of Incorporation does not explicitly require that common stockholders and Preferred stockholders receive the same form of consideration upon the occurrence of a Deemed Liquidation Event, the shares of preferred stock do not meet the limited exception in ASC 480-10-S99-3A(3)(F) that would allow the shares of preferred stock to be classified in permanent equity. Therefore, the preferred stock has been classified as temporary equity on the consolidated balance sheets.

Participation RightsSeries A, B, C, D, E, and F preferred stockholders of at least 4,000,000 preferred shares have participation rights which are calculated on a fully diluted basis and allow each convertible preferred stockholder to purchase a pro-rata portion of any offering of new securities of the enterprise in line with their then current ownership. Participation rights give the convertible preferred stockholders the ability to maintain their respective ownership percentages and restrict the ability of common stockholders to diversify the shareholdings of the enterprise.

Financing CostsIn connection with the issuance of shares of Series A, B, C, D, E, and F Preferred Stock, Yodle incurred aggregate financing costs of approximately $0.4 million. The preferred stock issuance costs are recorded at issuance as a reduction to redeemable preferred stock amount.

14.    STOCKHOLDERS’ DEFICIT

In October 2013, Yodle amended its certificate of incorporation to allow an increase in the number of authorized shares of common stock from 147,000,000 to 155,000,000 at $0.0002 par value. The authorized shares had previously been increased from 133,000,000 to 142,000,000 in February 2012 and from 142,000,000 to 147,000,000 in February 2013. Common stock shareholders are entitled to one vote for each share of common stock held and may only receive dividends only the payment in full of all the preferred. Yodle has agreements in place with common stockholders which gives Yodle the first right of refusal in the event common stockholders intend to sell their holdings.

 

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Yodle, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of December 31, 2012 and 2013 and for the

years ended December 31, 2011, 2012 and 2013

(in thousands, except share and per share data)

 

The following shares of common stock are reserved for the future issuance of stock options and warrants:

 

     As of December 31,  
     2012      2013  

Conversion of Convertible Preferred stock

     76,310,235         81,781,250   

Conversion of Stock options

     20,257,105         20,960,745   

Conversion of Preferred stock warrants

     2,780,746         2,780,746   

Conversion of Common stock warrants

     211,393         200,553   
  

 

 

    

 

 

 

Total

     99,559,479         105,723,294   
  

 

 

    

 

 

 

15.    STOCK-BASED COMPENSATION

Under the Equity Incentive Plan (the “Plan”) for directors, employees, and consultants of Yodle, in 2007, the Board authorized the grant of nonqualified and incentive stock options. In February 2013, the Board increased the number of options available to be issued under the plan to 30,953,663 from 26,853,663. In October 2013, the Board increased the number of options available to be issued to 34,953,663 from 30,953,663. Such options become exercisable subject to vesting schedules up to five years from the date of the grant.

The fair market value of each option granted for the periods presented has been estimated on the grant date using the Black-Scholes-Merton option-pricing model with the following assumptions:

 

     2011    2012    2013

Risk-free interest rate (percentage)

   1.05 – 2.40    0.88 – 1.24    1.02 – 2.02

Expected term (in years)

   5.50 – 6.20    5.80 – 6.30    5.55 –6.32

Expected dividend yield (percentage)

   —      —      —  

Expected volatility (percentage)

   53.68 – 64.90    52.31 – 53.84    52.34 – 56.71

As of December 31, 2013, there remains approximately $3.8 million of unrecognized compensation cost from stock options granted under the plan, which is expected to be recognized over a period of 3.75 years.

During the years ended December 31, 2011, 2012 and 2013, no stock–based compensation expense for non-employee consultants was recognized as no grants were issued to consultants.

 

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Yodle, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of December 31, 2012 and 2013 and for the

years ended December 31, 2011, 2012 and 2013

(in thousands, except share and per share data)

 

A summary of stock option activity as of and for the year ended December 31, 2013 is as follows:

 

     Number of
Shares
    Weighted
Average
Exercise
Price
     Average
Remaining
Contract
Life
     Aggregate
Intrinsic
Value
 

Options outstanding as of January 1, 2013

     20,257,105      $ 0.55         6.88 years       $ 19,556   

Granted

     6,630,350        1.71         

Exercised

     (3,976,595     0.35         

Forfeited—unvested

     (1,750,699     1.28         

Forfeited—vested and cancelled

     (199,416     0.72         
  

 

 

         

Options outstanding as of December 31, 2013

     20,960,745        0.89         7.04 years         23,401   
  

 

 

         

Options expected to vest as of December 31, 2013

     17,050,139        0.78         6.60 years      

Options exercisable as of December 31, 2013

     11,638,776        0.46         5.43 years         18,106   

The weighted-average grant date fair value of options granted during the years ended December 31, 2011, 2012, and 2013 was, $0.53, $0.52 and $0.91 respectively. The total intrinsic value of options exercised in the years December 31, 2011, 2012, and 2013 was $0.9 million, $0.9 million and $5.3 million respectively.

A summary of the status of Yodle’s unvested options as of December 31, 2013, and changes during the year are as follows:

 

     Number Of
Options
    Weighted
Average
Grant-
Date Fair
Value
 

Non-vested as of January 1, 2013

     7,630,353      $ 0.51   

Granted

     6,630,350        0.91   

Vested

     (3,188,035  

Forfeited

     (1,750,699     0.68   
  

 

 

   

Non-vested as of December 31, 2013

     9,321,969        0.77   
  

 

 

   

On May 23, 2011, the Board authorized the Company to make restricted stock grants of 2,000,000 shares of the Company’s common stock with a fair value of $1.51 per share. The restricted stock grant vests over a two year period; 50% of the shares vest at the one-year anniversary and the remainder vest monthly thereafter. Total fair value of the awards was $3.0 million. Stock-based compensation expense related to restricted stock for 2011, 2012 and 2013 was $0.9 million, $1.5 million and $0.6 million, respectively. As of December 31, 2011, none of the shares were vested. During 2012, 1,583,000 shares vested, and the remaining 417,000 shares vested in 2013. There were no other grants of restricted stock units during the three years ended December 31, 2013.

 

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Yodle, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of December 31, 2012 and 2013 and for the

years ended December 31, 2011, 2012 and 2013

(in thousands, except share and per share data)

 

Stock-based compensation expense was included in the following costs and expenses:

 

     Year ended December 31,  
     2011      2012      2013  

Cost of revenue

   $ 15       $ 17       $ 15   

Selling and marketing

     422         577         780   

Technology and product development

     235         445         675   

General and administrative

     1,160         1,827         1,161   
  

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 1,832       $ 2,866       $ 2,631   
  

 

 

    

 

 

    

 

 

 

16.    COMMITMENTS AND CONTINGENCIES

Operating Leases—As of December 31, 2013, the fixed minimum rentals on operating leases for office space, furniture, and equipment are as follows:

 

Years Ending December 31,

  

2014

   $ 5,016   

2015

     3,808   

2016

     2,767   

2017

     2,218   

2018

     1,966   

Thereafter

     7,486   
  

 

 

 
   $ 23,261   
  

 

 

 

The fixed minimum rental total includes $1.5 million related to offices no longer in use as of December 31, 2013.

Yodle’s rent expense for the years ended December 31, 2011, 2012 and 2013 was approximately $2.4 million, $3.3 million and $3.9 million, respectively.

Lease Abandonment—Yodle announced the closure of its Boston office in 2012 and its Indianapolis office in 2013. In addition, Yodle vacated an office location in Austin in 2012. The cost for these offices, which is included in general and administrative expenses in the consolidated statements of operations, for the year ended December 31, 2012 was $0.3 million and was insignificant for the year ended December 31, 2013. The leases terminate by June 2016.

Legal Matters—From time to time Yodle or its subsidiaries may be involved in legal proceedings and/or litigation arising in the ordinary course of business. While the outcome of these matters cannot be predicted with certainty, Yodle does not believe that the outcome of any current claims, individually and in aggregate, will have a material effect on its consolidated financial position, results of operations, or cash flows.

17.    EMPLOYEE BENEFIT PLAN

Yodle maintains a defined contribution retirement plan qualifying under Section 401(k) of the Internal Revenue Code of 1986, with a salary deferral feature for all eligible employees. Under the plan, eligible employees may make pretax contributions subject to limitations imposed by the Internal Revenue Service. Yodle has not made any matching contributions during the years ended December 31, 2011, 2012, or 2013.

 

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Yodle, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of December 31, 2012 and 2013 and for the

years ended December 31, 2011, 2012 and 2013

(in thousands, except share and per share data)

 

18.    FAIR VALUE MEASUREMENTS

In accordance with ASC 820, Fair Value Measurements, Yodle has categorized its assets and liabilities recorded at fair value based upon the fair value hierarchy. The levels of fair value hierarchy are as follows:

 

    Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that Yodle has the ability to access.

 

    Level 2 inputs utilize other-than-quoted prices that are observable, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

 

    Level 3 inputs are unobservable and are typically based on Yodle’s own assumptions, including situations where there is little, if any, market activity.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, Yodle categorizes such assets or liabilities based on the lowest level input that is significant to the fair value measurement in its entirety. Yodle’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset. Both observable and unobservable inputs may be used to determine the fair value of positions that are classified within the Level 3 category. As a result, the unrealized gains and losses for assets within the Level 3 category presented below may include changes in fair value that were attributable to both observable (e.g. changes in market interest rates) and unobservable (e.g. changes in historical company data) inputs. The major categories of assets and liabilities measured on a recurring basis, at fair value, as of December 31, 2012 and 2013 are as follows:

 

          At December 31, 2012  
          Level 1      Level 2      Level 3      Total  

Asset

   Money market funds    $ 6,718       $ —         $ —         $ 6,718   

Asset

   Certificates of deposit      —           2,363         —           2,363   

Liability

   Preferred stock warrant liabilities      —           —           2,655         2,655   
          At December 31, 2013  
          Level 1      Level 2      Level 3      Total  

Asset

   Money market funds    $ 5,294       $ —         $ —         $ 5,294   

Asset

   Certificates of deposit      —           2,228         —           2,228   

Liability

   Preferred stock warrant liabilities      —           —           3,561         3,561   

Liability

   Contingent consideration in business combination      —           2,977         2,313         5,290   

Liability

   Deferred consideration      —           1,637         —           1,637   

Money market funds—Yodle values its money market funds using quoted active market prices for such funds at each reporting date.

Certificates of deposit (“CD”)—Yodle compares its CD rates with active market prices of comparable CDs at each reporting date. The certificates of deposit are classified as restricted cash and have a maturity date of March 2015 or sooner.

 

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Yodle, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of December 31, 2012 and 2013 and for the

years ended December 31, 2011, 2012 and 2013

(in thousands, except share and per share data)

 

Preferred stock warrant liabilities—The valuation technique used to measure fair value for Yodle’s Level 3 warrant liabilities was a Black Scholes-Merton option pricing model at each reporting date. A rollforward of the fair value measurements of the warrant liability categorized with Level 3 inputs as of December 31, 2012 and 2013 is as follows:

 

     December 31,  
     2012      2013  

Balance as at January 1

   $ 1,468       $ 2,655   

Issuance of warrants

     270         —     

Change in fair value of warrant liability

     917         906   
  

 

 

    

 

 

 

Balance as at December 31

   $ 2,655       $ 3,561   
  

 

 

    

 

 

 

Contingent consideration in business combination—Yodle agreed to pay the shareholders an Earn-out, the amount of which is based on gross revenue performance over the measurement period (commencing March 1, 2013 and ending February 28, 2014), not to exceed $3.0 million in cash and 869,565 preferred stock shares of Series E Preferred Stock (see Business Combinations footnote).

The fair value of the Earn-out at the acquisition date was $4.6 million and was recorded as a liability as of the purchase date. In September 2013, the merger agreement was amended to recognize that the Earn-out targets had been met in full; and that in March 2014, the shareholders would be paid 869,565 shares of Series E Preferred Stock, and $3.0 million in cash. On the amendment date, the removal of the revenue contingency caused the cash portion of the liability to transfer out of Level 3 and into Level 2. The valuation technique used to measure fair value for Yodle’s Level 2 Earn-out consideration was the present value of expected future cash flows, using a discount rate equivalent to the Company’s cost of debt. Yodle used an adjusted option pricing model to derive the fair value of the Level 3 Earn-out consideration. The option pricing model was calibrated to the Company’s estimated probability of being above the Earn-out cap. Level 3 inputs into the adjusted option pricing model to determine the fair value of the Earn-out included forecasts, the fair value of the underlying Series E Preferred Stock, time to payment and probabilities for achieving revenue targets. As of December 31, 2013 the fair value of contingent consideration for the Earn-out amounted to $3.0 million of Level 2 and $2.3 million of Level 3.

A rollforward of the fair value measurements of the contingent consideration in business combination categorized with Level 3 inputs as of December 31, 2012 and 2013 is as follows:

 

     December 31,  
     2012      2013  

Balance as at January 1

   $ —         $ —     

Fair value at date of business combination

     —           4,600   

Change in fair value

     —           479   

Transfer from Level 3 to Level 2 at September 2013

     —           (2,940

Change in fair value of contingent consideration

     —           174   
  

 

 

    

 

 

 

Balance as at December 31

   $ —         $ 2,313   
  

 

 

    

 

 

 

 

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Yodle, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of December 31, 2012 and 2013 and for the

years ended December 31, 2011, 2012 and 2013

(in thousands, except share and per share data)

 

Yodle reviews the fair value hierarchy classification of its applicable assets and liabilities at each reporting period. Changes in the observability of valuation inputs may result in transfers within the fair value measurement hierarchy. The Company’s policy is to record transfers between levels, if any, in the month in which the transfer occurs.

Deferred consideration—The valuation technique used to measure fair value for Yodle’s Level 2 deferred consideration was the present value of expected future cash flows.

The fair value of the deferred consideration was determined using the present value of expected cash payments, including interest, over the term of the liability. The discount rate used, 7.03%, was consistent with the discount rate used to calculate the fair value at the acquisition date.

 

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Yodle, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of December 31, 2012 and 2013 and for the

years ended December 31, 2011, 2012 and 2013

(in thousands, except share and per share data)

 

The fair market value of each warrant granted for the periods presented has been estimated on each reporting period using a Black Scholes-Merton pricing model with the following assumptions. There were no warrants issued in the year 2013.

 

     2011    2012    2013
Series A Preferred               

Risk-free interest rate (percentage)

   0.93    0.56 – 1.08    0.37 – 0.99

Expected term (in years)

   5.39    4.39 – 5.14    3.39 – 4.14

Expected dividend yield (percentage)

   —      —      —  

Expected volatility (percentage)

   71.60    64.10 – 69.5    49.50 – 67.50
     2011    2012    2013
Series B Preferred               

Risk-free interest rate (percentage)

   1.23    0.79 – 1.40    0.55 – 1.42

Expected term (in years)

   6.55    5.55 – 6.30    4.55 – 5.30

Expected dividend yield (percentage)

   —      —      —  

Expected volatility (percentage)

   62.40    59.90 – 62.7    48.80 – 64.70
     2011    2012    2013
Series D Preferred—Bridge Financing               

Risk-free interest rate (percentage)

   0.30 – 0.73    0.25 – 0.46    0.17 – 0.23

Expected term (in years)

   2.25 – 2.50    2.00 – 2.50    1.26 – 1.55

Expected dividend yield (percentage)

   —      —      —  

Expected volatility (percentage)

   36.70 –39.40    39.70 – 47.10    42.10 – 52.10
     2011    2012    2013
Series D Preferred—2010 Loan               

Risk-free interest rate (percentage)

   1.67    1.25 – 1.92    1.00 – 2.02

Expected term (in years)

   8.81    7.81 – 8.56    6.81 – 7.56

Expected dividend yield (percentage)

   —      —      —  

Expected volatility (percentage)

   41.3    44.20 – 44.50    42.10 – 52.10
     2011    2012    2013
Series D Preferred—2011 Loan               

Risk-free interest rate (percentage)

   1.82 – 3.13    1.37 – 2.04    1.12 – 2.14

Expected term (in years)

   9.40 – 10.00    8.39 – 9.14    7.39 – 8.14

Expected dividend yield (percentage)

   —      —      —  

Expected volatility (percentage)

   36.70 – 39.40    44.20 – 44.50    42.10 – 52.10

 

     2013
Earn-out consideration     

Risk-free interest rate (percentage)

   0.06 – 0.13

Expected term (in years)

   0.20 – 1.00

Expected dividend yield (percentage)

   —  

Expected volatility (percentage)

   52.50 – 52.80

Cost of Debt (percentage)

   5.00 – 8.00

Risk adjusted discount rate (percentage)

   14.32 – 14.70

 

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Yodle, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of December 31, 2012 and 2013 and for the

years ended December 31, 2011, 2012 and 2013

(in thousands, except share and per share data)

 

19.    SEGMENT, GEOGRAPHIC AND SIGNIFICANT CUSTOMER INFORMATION

The CODM reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. Yodle has concluded that its operations constitute one operating and reportable segment. Substantially all assets were held in the United States as of each year ended December 31, 2012 and 2013.

Yodle’s geographic revenues by country of customer residence, and percentage of total revenue by location, are as follows:

 

     2011     2012     2013  

United States

   $ 87,584         100.00   $ 125,513         94.85   $ 151,571         93.64

International

     —             6,808         5.15     10,292         6.36
  

 

 

      

 

 

      

 

 

    
   $ 87,584         100.00   $ 132,321         100.00   $ 161,863         100.00
  

 

 

      

 

 

      

 

 

    

No single customer exceeds ten percent of Yodle’s revenue for all years presented above. As of December 31, 2012, a customer accounted for 29% of accounts receivable, net. As of December 31, 2013, a different customer accounted for 38% of accounts receivable, net.

20.    RELATED PARTY TRANSACTIONS

As a result of the Lighthouse business combination, Yodle became a party to an office lease in a building owned by an employee of Lighthouse. Yodle currently utilizes that office space located in Sugar Hill, Georgia and the building owner remains employed at Yodle. Rent expense paid for the office space for the year ended December 31, 2013 totaled $0.1 million.

21.    NET LOSS PER SHARE

Basic and diluted net loss per share attributable to common stockholders are presented in conformity with the two-class method required for participating securities.

In the event a dividend is paid on common stock, convertible preferred stock participates as if they were holders of common shares (on an if-converted basis). To date no dividends have been declared.

Under the two-class method for periods with net income, basic net income per share attributable to common stockholders is computed by dividing the net income attributable to common stockholders by the weighted average number of common shares outstanding during the period. Net income attributable to common stockholders is determined by allocating undistributed earnings among common stock and convertible preferred stock. For periods with a net loss, an allocation of the undistributed losses to the holders of convertible preferred stock and unvested restricted stock is not made, as the holders have no obligation to fund losses.

Diluted net income (loss) per share attributable to common stockholders is computed by using the weighted average number of common shares outstanding, plus, for periods with net income attributable to common stockholders, the potential dilutive effect of outstanding stock options and warrants using the treasury stock

 

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Yodle, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of December 31, 2012 and 2013 and for the

years ended December 31, 2011, 2012 and 2013

(in thousands, except share and per share data)

 

method. In addition, the Company analyzes the potential effect of the outstanding participating securities under the “if-converted” method when calculating diluted earnings per share, in which it is assumed that the outstanding participating securities convert into common stock at the beginning of the period. The Company reports the more dilutive of the approaches (two-class or “if-converted”) as its diluted net income per share during the period. Due to net losses for the years ended December 31, 2011, 2012 and 2013, basic and diluted per share were the same.

 

     For the year ended December 31,  
     2011     2012     2013  

Net loss attributable to common stockholders:

      

Basic and diluted

   $ (15,439   $ (5,428   $ (10,402
  

 

 

   

 

 

   

 

 

 

Weighted-average shares used to compute net loss per share attributable to common stockholders:

      

Basic and diluted

     31,954,796        32,572,544        35,743,067   
  

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders:

      

Basic and diluted

   $ (0.48   $ (0.17   $ (0.29
  

 

 

   

 

 

   

 

 

 

Yodle excluded the following weighted-average common shares underlying stock-based securities from the calculations of diluted net income per common share because their inclusion would have been anti-dilutive:

 

     Year Ended December 31  
     2011     

 

   2012      2013  

Common share equivalents excluded from calculation:

           

Dilutive effect of assumed conversion of Preferred Stock

     69,035,408            71,042,942         80,896,894   

Dilutive effect of employee stock options

     16,453,269            19,738,003         20,733,313   

Dilutive effect of Preferred Stock Warrants

     1,497,920            2,631,927         2,780,747   

Dilutive effect of Common Stock Warrants

     37,500            100,712         203,226   

Dilutive effect of Convertible Promissory Notes

     4,395,208            5,456,120         —     
  

 

 

    

 

  

 

 

    

 

 

 
     91,419,305            98,969,704         104,614,180   
  

 

 

    

 

  

 

 

    

 

 

 

 

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Yodle, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

As of December 31, 2012 and 2013 and for the

years ended December 31, 2011, 2012 and 2013

(in thousands, except share and per share data)

 

22.    SUBSEQUENT EVENTS

On February 27, 2014, Yodle drew down $3.0 million against the Term Loan Facility and used the funds to satisfy the Earn-out consideration related to the Lighthouse business combination.

On February 28, 2014, Yodle acquired certain assets of New Service, LLC. Consideration for the assets acquired was (a) $0.5 million in cash, which was paid at the closing and (b) 87,000 common shares, valued at $2.01 per share, and a note for $0.7 million, each of which are paid 50% on the first anniversary and 50% on the second anniversary of the closing. The assets acquired are an early stage software product. Yodle expects to complete the accounting for the New Service, LLC asset acquisition by the end of 2014.

 

 

Unaudited Interim Condensed Consolidated Financial Statements for the Three Months Ended March 31, 2013 and 2014, follow.

 

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Yodle, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

(Unaudited)

 

     December 31,     March 31,     Pro-forma
March 31,
     2013     2014     2014

Assets

      

Current assets:

      

Cash and cash equivalents

   $ 12,345      $ 10,274     

Accounts receivable, net

     3,405        3,762     

Prepaid expenses

     953        1,705     

Other current assets

     1,316        1,486     
  

 

 

   

 

 

   

Total current assets

     18,019        17,227     

Property and equipment, net

     5,277        5,325     

Restricted cash

     2,228        2,228     

Goodwill

     55,227        55,227     

Intangible assets, net

     11,608        10,610     

Capitalized technology development costs, net

     1,103        2,455     

Other assets, net

     267        591     
  

 

 

   

 

 

   

Total assets

   $ 93,729      $ 93,663     
  

 

 

   

 

 

   

Liabilities, convertible preferred stock and stockholders’ deficit

      

Current liabilities:

      

Accounts payable

   $ 11,613      $ 11,085     

Accrued expenses and other current liabilities

     9,383        13,760     

Deferred revenue

     13,037        14,518     

Preferred stock warrant liabilities

     3,561        5,846     

Contingent consideration in business combination

     5,290        —       

Current portion of deferred consideration

     —          1,679     

Current portion of bank loan

     —          600     

Current portion of subordinated debt

     2,460        2,460     
  

 

 

   

 

 

   

 

Total current liabilities

     45,344        49,948     

Other liabilities, long-term portion

     5,505        1,754     

Deferred revenue, long-term portion

     4,000        3,750     

Deferred consideration, long-term portion

     1,637        —       

Bank loan, long-term portion

     2,970        5,373     

Subordinated debt, long-term portion

     15,000        15,000     
  

 

 

   

 

 

   

 

Total liabilities

     74,456        75,825     
  

 

 

   

 

 

   

 

Commitments and contingencies (see note 12)

      

Convertible preferred stock (see note 10)

     62,411        65,159     
  

 

 

   

 

 

   

 

Stockholders’ deficit:

      

Common stock; par value $.0002 per share—155,000,000 shares authorized; 38,316,173 and 42,812,887 issued and outstanding as of December 31, 2013 and March 31, 2014, respectively

     8        9     

Additional paid-in capital

     35,376        37,137     

Accumulated deficit

     (78,522     (84,467  
  

 

 

   

 

 

   

 

Total stockholders’ deficit

     (43,138     (47,321  
  

 

 

   

 

 

   

 

Total liabilities, convertible preferred stock and stockholders’ deficit

   $ 93,729      $ 93,663     
  

 

 

   

 

 

   

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Yodle, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

(in thousands, except share and per share data)

(Unaudited)

 

     Three months ended March 31,  
     2013     2014  

Revenues

   $ 35,202      $ 45,746   
  

 

 

   

 

 

 

Costs and expenses:

    

Cost of revenues (exclusive of depreciation and amortization shown separately below)

     11,925        14,446   

Selling and marketing

     14,076        18,628   

Technology and product development

     4,568        5,660   

General and administrative

     6,085        8,349   

Depreciation and amortization

     1,248        1,845   
  

 

 

   

 

 

 

Total costs and expenses

     37,902        48,928   
  

 

 

   

 

 

 

Loss from operations

     (2,700     (3,182
  

 

 

   

 

 

 

Interest expense and other

     (440     (2,660
  

 

 

   

 

 

 

Loss before income taxes

     (3,140     (5,842

(Benefit) provision for income taxes

     (5,327     103   
  

 

 

   

 

 

 

Net income (loss) and comprehensive income (loss)

   $ 2,187      $ (5,945
  

 

 

   

 

 

 

Net income (loss)

   $ 2,187      $ (5,945

Less: Income attributable to participating preferred stock

     (2,187     —     
  

 

 

   

 

 

 

Net income (loss) attributable to common stockholders

   $ —        $ (5,945
  

 

 

   

 

 

 

Net income (loss) per share attributable to common stockholders:

    

Basic

   $ —        $ (0.14
  

 

 

   

 

 

 

Diluted

   $ —        $ (0.14
  

 

 

   

 

 

 

Weighted-average shares used to compute net income (loss) per share attributable to common stockholders:

    

Basic

     34,279,294        41,242,673   
  

 

 

   

 

 

 

Diluted

     46,875,884        41,242,673   
  

 

 

   

 

 

 

Unaudited pro-forma net loss per share attributable to common stockholders

    

Basic

    
    

 

 

 

Diluted

    
    

 

 

 

Unaudited pro-forma weighted average shares used in computing net loss per share attributable to common stockholders

    

Basic

    
    

 

 

 

Diluted

    
    

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Yodle, Inc. and Subsidiaries

Condensed Consolidated Statement of Stockholders’ Deficit

(in thousands, except share and per share data)

(Unaudited)

 

     Common Stock      APIC      Accumulated
deficit
    Total
Stockholders’

deficit
 
     Shares      Amount          

Balance as of December 31, 2013

     38,316,173       $ 8       $ 35,376       $ (78,522   $ (43,138

Common stock issued upon exercise of stock options and warrants

     4,496,714         1         836         —          837   

Stock-based compensation

     —           —           679         —          679   

Stock used to acquire software asset

     —           —           246         —          246   

Net loss

     —           —           —           (5,945     (5,945
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Balance as of March 31, 2014

     42,812,887       $ 9       $ 37,137       $ (84,467   $ (47,321
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Yodle, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

     Three months ended
March 31,
 
     2013     2014  

Cash Flows from Operating Activities

    

Net income (loss)

   $ 2,187      $ (5,945

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

     —          —     

Depreciation of property and equipment

     406        608   

Amortization of acquired intangible assets and capitalized technology development costs

     842        1,237   

Stock-based compensation expense

     925        679   

Chargebacks expense

     220        349   

Accretion/amortization of debt discounts

     117        23   

Deferred rent and lease abandonment

     223        (38

Preferred stock warrant liabilities mark-to-market (gain) loss

     (53     2,285   

Fair value change in contingent consideration – Lighthouse business combination

     42        458   

Compensation expense in connection with Lighthouse business combination

     375        500   

Deferred taxes on business combination

     (5,399     —     

Other

     58        41   

Changes in operating assets and liabilities, net of effect of business combination:

     —          —     

Accounts receivable

     160        (357

Prepaid expenses

     (66     (752

Other current assets

     (590     (171

Other assets

     (19     (16

Accounts payable

     883        (631

Accrued expenses and other current liabilities

     (236     (737

Deferred revenue

     651        1,171   

Other liabilities, long-term

     (18     —     

Payment of contingent consideration

     —          (328
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     708        (1,624
  

 

 

   

 

 

 

Cash Flows from Investing Activities

    

Cash paid for business combination, net of cash acquired

     (4,997     —     

Purchase of property and equipment

     (386     (553

Capitalization of technology development costs

     (150     (191

Acquired capitalized software and other intangible assets

     —          (534

Change in restricted cash

     135        —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (5,398     (1,278
  

 

 

   

 

 

 

Cash Flows from Financing Activities

    

Payment of contingent consideration

     —          (2,672

Proceeds from bank loan

     —          3,000   

Repayment of bank loan

     (913     —     

Proceeds from issuance of preferred stock, net

     4,928        —     

Proceeds from issuance of common stock, net

     151        837   

Deferred issuance costs

     —          (334
  

 

 

   

 

 

 

Net cash provided by financing activities

     4,166        831   
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (524     (2,071

Cash and cash equivalents as of beginning of period

     9,166        12,345   
  

 

 

   

 

 

 

Cash and cash equivalents as of end of period

   $ 8,642      $ 10,274   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Yodle, Inc. and Subsidiaries

Notes to Unaudited Interim Condensed Consolidated Financial Statements

As of December 31, 2013 and March 31, 2014 and

for the three months ended March 31, 2013 and 2014

(in thousands, except share and per share data)

1.    DESCRIPTION OF BUSINESS

Yodle, Inc. and subsidiaries (“Yodle” or the “Company”) is a provider of cloud-based marketing automation solutions for local businesses that makes digital marketing easy, affordable, and transparent. Yodle’s platform provides its customers with an online, mobile, and social presence, as well as automates, manages and optimizes their marketing activities and other consumer interactions. Yodle’s solutions are highly integrated and designed to be easy-to-use, helping local businesses navigate the rapidly evolving, technologically challenging, and highly fragmented digital marketing landscape without having to invest a significant amount of time and money or needing any in-house marketing or IT expertise.

Certain Significant Risks and Uncertainties—Yodle operates in a rapidly changing environment that involves a number of risks, some of which are beyond the Company’s control that could have a material adverse effect on the Company’s business, operating results, and financial condition. These risks include, among others, Yodle’s history of losses and ability to achieve profitability in the future, highly competitive environment, ability to maintain and increase usage rate of the Company’s platform, and ability to increase demand for its solutions. Yodle purchases the majority of its media from Google, and the business could be adversely affected if Google takes actions that are adverse to Yodle’s interests. Similar actions from Yahoo!, Microsoft, and other media providers could adversely affect the business to a lesser degree. The media purchases represent traffic acquisition costs, net, and are recorded in cost of revenues in the condensed consolidated financial statements.

Unaudited Pro Forma Presentation—Yodle has filed a Registration Statement on Form S-1 with the United States Securities and Exchange Commission (the SEC) for the proposed initial public offering of its common stock (the “IPO”). If consummated, 82,650,815 shares of convertible preferred stock will automatically convert into common stock based on 1:1 basis. In the event that the IPO price is below $4.50 per common share, then 1,666,667 Series F convertible preferred stock will convert at such ratio to give effect to a price of $4.50 per common share.

Warrants to purchase 1,242,829 shares of preferred stock will automatically convert into warrants to purchase common stock, and $3.1 million of the preferred stock warrant liabilities will be reclassified to additional paid-in capital. Warrants held by our shareholders to purchase 1,537,917 shares of preferred stock will automatically be exercised on a net basis for shares of Series D Preferred Stock if the fair market value per share exceeds the $1.4045 per share exercise price and, if the exercise occurs, $2.7 million of the preferred stock warrant liabilities will be reclassified to convertible preferred stock.

If the IPO is effective and the net exercise of warrants occurs, approximately $71 million will be reclassified into additional paid-in capital from convertible preferred stock and preferred stock warrant liabilities. Unaudited pro forma stockholders’ deficit, to adjust for the assumed conversion of the convertible preferred stock and reclassification of the preferred stock warrants outstanding, will be set forth on the unaudited condensed consolidated March 31, 2014 pro forma balance sheet.

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation—The accompanying unaudited interim condensed consolidated balance sheets as of March 31, 2014 and December 31, 2013, the condensed consolidated statements of operations and comprehensive income (loss) and cash flows for the three months ended March 31, 2014 and 2013, and the condensed consolidated statement of stockholders’ deficit for the three months ended March 31, 2014 are

 

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Yodle, Inc. and Subsidiaries

Notes to Unaudited Interim Condensed Consolidated Financial Statements

As of December 31, 2013 and March 31, 2014 and

for the three months ended March 31, 2013 and 2014

(in thousands, except share and per share data)

 

unaudited but reflect all adjustments that are of a normal recurring nature and that are considered necessary for a fair presentation of the results for the periods shown in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the applicable rules and regulations of the SEC for interim financial reporting. Accordingly, certain information and footnote disclosures have been condensed or omitted pursuant to SEC rules that would ordinarily be required by GAAP for complete financial statements. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto for the fiscal year ended December 31, 2013 included in the Company’s Registration Statement on Form S-1 as an integral part of this filing.

Use of Estimates—The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reported period. Significant estimates include fair value of the Company’s common stock, stock based compensation, preferred stock warrant liability, purchase price allocation, revenue recognition, expected customer lives, and recoverability of goodwill and acquired intangible assets. These estimates are based on information available as of the date of the condensed consolidated financial statements. Therefore, actual results could differ from those estimates.

Multi-year licensing agreement—In 2011, effective for the 2012 fiscal year, Yodle entered into a multi-year licensing agreement to distribute its offerings in Canada through a reseller. The reseller paid a $10.0 million licensing fee upon signing the agreement. The licensing fee is being recognized ratably over the estimated life of the reseller relationship, which approximates the term of the contract, commencing in January 2012 and originally ending December 31, 2014. On September 9, 2013, Yodle and the reseller agreed to modify the agreement, including extending the term until December 31, 2018. At that time, Yodle updated its estimate of the life of the reseller relationship to consider the remaining contract term and amortizes the remaining license fee over the remaining estimated life of the reseller relationship. In addition to this licensing fee, Yodle may also earn milestone payments if certain revenue targets are met by the reseller. These milestone payments, if earned, would be recognized ratably over the estimated life of the reseller relationship with a cumulative catch up recognized for the elapsed portion of the estimated life of the reseller relationship. In 2012 and 2013, the first and second milestones were obtained, and therefore the reseller paid Yodle an additional $1.0 million for each milestone. As of March 31, 2014, one additional milestone remained unearned. Yodle also earns per customer fee revenue from its Canadian reseller on sales of Yodle offerings as well as revenues from assisting its reseller in executing its operations.

Recently Issued Accounting Guidance—In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers. This guidance supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. This guidance is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The amendments in this ASU are effective retrospectively for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Yodle is evaluating the potential impact of this adoption on its consolidated financial statements.

 

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Yodle, Inc. and Subsidiaries

Notes to Unaudited Interim Condensed Consolidated Financial Statements

As of December 31, 2013 and March 31, 2014 and

for the three months ended March 31, 2013 and 2014

(in thousands, except share and per share data)

 

Subsequent Events—Yodle follows ASC 855-10, Subsequent Events, which contains general standards of accounting for, and disclosure of, events that occur after the balance sheet date but before the condensed consolidated financial statements are available to be issued. Management has considered subsequent events through June 25, 2014, the date the condensed consolidated financial statements were available to be issued (see note on Subsequent Events).

3.    BUSINESS COMBINATION AND ASSET ACQUISITION

On February 28, 2013, Yodle acquired 100% of Lighthouse Practice Management Group, Inc. (“Lighthouse”), a provider of dental appointment reminder and practice automation software services, based in Georgia. This business combination resulted in Yodle adding a strong practice automation capability to its existing offerings.

Under the terms of the merger agreement, Yodle (i) paid Lighthouse shareholders $5.0 million in cash at closing; (ii) issued 3,804,348 shares of its Series E Preferred Stock at a fair value of $2.30 per share to the shareholders of Lighthouse that qualified as accredited investors (of which 2,065,217 shares remain in escrow as of March 31, 2014); (iii) promised to pay the Lighthouse shareholders deferred payment consideration of $6.2 million in cash at a later time (the “Deferred Payment”); and (iv) agreed to pay the shareholders an earnout consideration (the “Earn-out”), the amount of which is based on revenue performance over the measurement period (commencing March 1, 2013 and ending February 28, 2014), not to exceed $3.0 million in cash and 869,565 shares. A portion (40%) of the Earn-out will be paid by the issuance of additional Series E Preferred Stock, calculated by dividing the amount of share based Earn-out earned by the initial fair value of $2.30 per share, and the balance (60%) will be paid in cash to the shareholders.

The Deferred Payment is due on the earlier of (a) the second anniversary of the effective date (February 28, 2015), (b) the closing of an initial public offering that nets proceeds to Yodle of at least $20.0 million (“Qualifying Public Offering”), and (c) the closing of a sale of Yodle. The Deferred Payment was subject to a post-close working capital adjustment and was reduced by $0.1 million. The Deferred Payment, subject to the terms of the agreement, accrues a simple interest rate of 8% per annum from the effective date and is payable to shareholders quarterly in arrears. The Company has an option to extend the due date to February 28, 2017 which would result in the interest rate increasing from 8% to 12%. Under the terms of the Deferred Payment, $1.7 million is accounted for as consideration in the business combination, and $4.5 million is compensation expense under ASC 710. The Deferred Payment had a fair value at acquisition of $1.6 million, and is adjusted to fair value at each reporting date. As of December 31, 2013 and March 31, 2014, the fair value of the consideration was $1.6 million and $1.7 respectively and is recorded in deferred consideration in the condensed consolidated balance sheets.

The $4.5 million of compensation expense is being expensed on a straight-line basis over a period of one year from acquisition date, which is the required service period per the agreement and is reflected in the condensed consolidated statements of operations in general and administrative expenses. In September 2013, the merger agreement was amended and the terms of the Deferred Payment were modified, which accelerated expenses for services related to one key employee. For the three months ended March 31, 2013 and 2014, $0.4 million and $0.5 million, respectively were charged to and classified as general and administrative expense in the condensed consolidated statements of operations. Compensation expense of $4.0 million and $4.5 million was outstanding on December 31, 2013 and March 31, 2014, respectively, and recorded in other liabilities, long-term portion and accrued expenses and other current liabilities, respectively, in the condensed consolidated balance sheets.

 

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Yodle, Inc. and Subsidiaries

Notes to Unaudited Interim Condensed Consolidated Financial Statements

As of December 31, 2013 and March 31, 2014 and

for the three months ended March 31, 2013 and 2014

(in thousands, except share and per share data)

 

Interest on the Deferred Payment has a stated interest rate of 8% and is payable quarterly in arrears. Interest expense is bifurcated between the consideration amount and the compensation expense. The interest related to the consideration is recorded to interest expense and other in the condensed consolidated statements of operations, and interest related to the compensation cost is recorded in general and administrative expense in the condensed consolidated statements of operations. The table below summarizes the interest costs related to the Deferred Payment;

 

     Three months ended
March 31,
 
         2013              2014      

Accrued interest on deferred consideration

   $ 11       $ 33   

Accrued interest on compensation expense

     31         89   
  

 

 

    

 

 

 

Total accrued interest on deferred payment

   $ 42       $ 122   
  

 

 

    

 

 

 

The fair value of the Earn-out at the acquisition date was $4.6 million and was recorded as a liability as of the purchase date. In September 2013, the merger agreement was amended to recognize that the Earn-out targets had been met in full; and that in March 2014, the shareholders would be paid 869,565 shares of Series E Preferred Stock, and $3.0 million in cash. Subsequent to the amendment, the Company continued to record the fair value of the Earn-out as a liability under ASC 480. As of December 31, 2013, the Earn-out liability is recorded at a fair value of $5.3 million and is recorded in contingent consideration in business combination in the condensed consolidated balance sheets.

In March 2014, Yodle settled its Earn-out liability in accordance with the terms of September 2013 amendment to the Lighthouse purchase agreement. The changes in fair value of the Earn-out totaled less than $0.1 million and $0.5 million for the three months ended March 31, 2013 and 2014, respectively and were recorded in general and administrative expenses in the condensed consolidated statements of operations.

Software acquisition

On February 28, 2014, Yodle acquired early stage software code from New Service, LLC. Consideration for the acquired asset was $1.4 million, reflected in capitalized technology development costs, net, and consisting of (a) $0.5 million in cash, (b) 87,000 common shares, valued at $2.82 per share, and a deferred payment of $0.6 million, each of (b) and (c) are paid 50% on the first anniversary and 50% on the second anniversary of the closing. The Company estimates the useful life of the acquired software to be three years and is being amortized accordingly.

4.    SUPPLEMENTAL CASH FLOW INFORMATION

 

Supplemental disclosures of cash flow information

     

Cash paid for interest

   $ 348       $ 274   

Cash paid for taxes

     93         39   

Non-cash investing and financing activities

     

Stock issued as consideration in business combination

     8,750         —     

Deferred payment obligation issued as consideration in business combination

     1,615         —     

Fair value of Lighthouse earnout liability

     4,600         —     

Stock issued for Lighthouse earnout liability

     —           2,748   

Property and equipment acquired that are unpaid in accounts payable

     249         103   

Deferred payment obligation issued in software acquisition

     —           615   

Stock used to acquire software asset

     —           246   

 

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Yodle, Inc. and Subsidiaries

Notes to Unaudited Interim Condensed Consolidated Financial Statements

As of December 31, 2013 and March 31, 2014 and

for the three months ended March 31, 2013 and 2014

(in thousands, except share and per share data)

 

5.    GOODWILL AND ACQUIRED INTANGIBLE ASSETS, NET

The changes in the carrying amount of goodwill for the three months ended March 31, 2014 are as follows:

 

     2014  

Goodwill, gross, as of January 1

   $ 55,227   

Accumulated impairment losses through January 1,

     —     
  

 

 

 

Balance as of January 1

     55,227   

Goodwill from business combination

     —     
  

 

 

 

Balance as of March 31, 2014

   $ 55,227   
  

 

 

 

Information regarding acquired intangible assets, net that are being amortized is as follows:

 

     Customer
Relationships
    Non -
competition

agreements
    Tradenames
&
Trademarks
    Developed
Technology
    Total
Intangible
Assets
 

Balance December 31, 2013

   $ 2,229      $ 1,065      $ 1,222      $ 7,092      $ 11,608   

Additions

     —          —          —          4        4   

Amortization

     (134     (368     (74     (426     (1,002
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Carrying Value March 31, 2014

   $ 2,095      $ 697      $ 1,148      $ 6,670      $ 10,610   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Estimated remaining amortization of the acquired intangible assets is as follows:

 

2014 (remainder of year)

   $ 2,294   

2015

     2,790   

2016

     2,574   

2017

     2,530   

2018

     422   
  

 

 

 

Total

   $ 10,610   
  

 

 

 

6.    BANK LOANS

The principal amounts, unamortized discounts, and net carrying amounts are as follows:

 

            December 31, 2013      March 31, 2014  

Bank Loan

   Initial
Principal
     Principal
Outstanding
     Unamortized
Discount
    Net Carrying
Amount
     Principal
Outstanding
     Unamortized
Discount
    Net Carrying
Amount
 

2013 Loan

   $ 3,000       $ 3,000       $ (30   $ 2,970       $ 6,000       $ (27   $ 5,973   
     

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Current portion

      $ —         $ —        $ —         $ 600       $ —        $ 600   

Long-term portion

      $ 3,000       $ (30   $ 2,970       $ 5,400       $ (27   $ 5,373   

In December 2013, Yodle modified its Loan and Security Agreement (“LSA”) with Silicon Valley Bank (“SVB”). Under the LSA, SVB agreed to loan Yodle up to $10.0 million under a term loan facility (the “Term Loan Facility”), as well as the lesser of $2.0 million and 80% of eligible accounts receivable under a revolving

 

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Table of Contents

Yodle, Inc. and Subsidiaries

Notes to Unaudited Interim Condensed Consolidated Financial Statements

As of December 31, 2013 and March 31, 2014 and

for the three months ended March 31, 2013 and 2014

(in thousands, except share and per share data)

 

credit facility (the “Revolving Credit Facility” and together with the “Term Loan Facility”, the “2013 Loan”). The 2013 Loan is secured by substantially all of Yodle’s assets.

The repayment period of the Term Loan Facility will commence on January 2, 2015, with 30 equal monthly payments, and bears interest at 0.75% above prime. From January 1, 2014 to December 31, 2014, Yodle will be required only to pay interest monthly. The Term Loan Facility matures on June 1, 2017, but the draw period for the Term Loan Facility ends on December 31, 2014. On December 12, 2013, Yodle made its first drawdown under the Term Loan Facility of $3.0 million. On February 27, 2014, Yodle drew down an additional $3.0 million and used the funds to satisfy the cash portion of the Earn-out consideration related to the Lighthouse business combination (see note on Business Combination and Asset Acquisition).

Any outstanding principal amount under the Revolving Credit Facility and any accrued and unpaid interest must be paid in full by December 12, 2015. Borrowings under our Revolving Credit Facility accrue interest on a monthly basis and bears interest at 0.25% above prime. As of March 31, 2014, Yodle has not borrowed any amounts under the Revolving Credit Facility.

As of March 31, 2014, $5.4 million was classified as bank loan, long term and $0.6 million was classified as current portion of bank loan in the condensed consolidated balance sheets. The fair value of Term Loan Facility as of March 31, 2014 approximates the recorded value since the loans were made on December 18, 2013 and February, 27 2014 respectively.

Stated interest rates were 4.0% as of December 31, 2013 and March 31, 2014. For the three months ended March 31, 2013 and 2014, the effective interest rates including discount amortization for all bank debt were 11.62% and 4.35%, respectively and interest expense was $0.5 million and less than $0.1 million, inclusive of discount amortization, respectively. In connection with the LSA, Yodle is subject to certain covenants relating to Adjusted EBIDTA/Maximum EBIDTA Loss with which it must comply. As of March 31, 2014, Yodle is in compliance with all such covenants.

7.    SUBORDINATED DEBT

Yodle has entered into debt agreements which are subordinated to the SVB loan. The schedule of principal amounts and net carrying amounts are as follows:

 

Subordinated Debt

   Initial
principal
     December 31, 2013      March 31, 2014  
      Principal
outstanding
     Net
carrying
amount
     Principal
outstanding
     Net
carrying
amount
 

Subordinated Loan

   $ 15,000       $ 15,000       $ 15,000       $ 15,000       $ 15,000   

Promissory Note

     2,460         2,460         2,460         2,460         2,460   
     

 

 

    

 

 

    

 

 

    

 

 

 

Total Subordinated Debt

      $ 17,460       $ 17,460       $ 17,460       $ 17,460   

Current portion

      $ 2,460       $ 2,460       $ 2,460       $ 2,460   

Long-term portion

      $ 15,000       $ 15,000       $ 15,000       $ 15,000   

Subordinated Loan

In September 2013, Yodle borrowed $15.0 million from a reseller. The loan has a fixed interest rate of 5%, payable monthly. The Subordinated Loan is due in September 2017. Interest expense of $0.2 million was

 

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Table of Contents

Yodle, Inc. and Subsidiaries

Notes to Unaudited Interim Condensed Consolidated Financial Statements

As of December 31, 2013 and March 31, 2014 and

for the three months ended March 31, 2013 and 2014

(in thousands, except share and per share data)

 

recorded in the condensed consolidated statements of operations for the three months ended March 31, 2014. The carrying value of the subordinated loan as of March 31, 2014 approximates fair value as the interest rate is relative when compared to the Company’s interest rate from the 2013 Loan. The effective interest rate was 5.13% and interest expense was $0.2 million for the three months ended March 31, 2014.

Promissory Note

On November 2011, Yodle issued a promissory note in the amount of $2.5 million, of which the principal accrues interest at 3.3% per annum. The note is due on the earlier of (i) the closing of an acquisition of Yodle or (ii) June 21, 2014. For the three months ended March 31, 2013 and 2014, $0.02 million and $0.02 million, respectively, was recorded in interest expense and other on the condensed consolidated statements of operations. As of March 31, 2014, the note is recorded as current debt, and the fair value approximates the carrying value as the Note’s interest rate is consistent with the rates available in market. The effective interest rate was 3.38% and interest expense was less than $0.1 million for the three months ended March 31, 2013 and 2014, respectively.

8.    WARRANTS

Preferred Stock Warrants

The following table summarizes the outstanding preferred stock warrant liabilities as of December 31, 2013 and March 31, 2014:

 

Preferred Stock Warrants

  Issue Date   Expiration
Date
    Exercise
Price
    Shares
Outstanding
    Fair
value at
issue
date
    Fair
value as of
December 31,
2013
    Fair
value as of
March 31,
2014
 

Series A

  5/1/2007     5/31/2017        0.1445        311,419      $ —        $ 657      $ 912   

Series B

  7/18/2008     7/17/2018        0.5670        141,093        74        247        365   

Series D—Bridge Financing

  5/23/2011     5/23/2018        1.4045        640,797        326        658        1,135   
  7/23/11-8/23/12     5/23/2018        1.4045        897,120        444        895        1,588   

Series D—2011 Loan

  5/23/11-11/23/11     5/22/2021        1.4045        711,997        666        997        1,666   

Series D—2010 Loan

  10/1/2010     10/1/2020        1.4045        78,320        76        107        180   
       

 

 

   

 

 

   

 

 

   

 

 

 
          2,780,746      $ 1,586      $ 3,561      $ 5,846   
       

 

 

   

 

 

   

 

 

   

 

 

 

The changes in fair value of the warrants recorded to interest expense and other represents income for the three months ended March 31, 2013 was $0.1 million and expense of $2.3 million for the three months ended March 31, 2014.

Common Stock Warrants

As part of a LSA in 2012, SVB received a warrant to purchase 195,000 shares of common stock at a purchase price of $1.19 per share. As of December 31, 2013 and March 31, 2014, respectively, all 195,000 of these warrants remained outstanding.

In March 2009, a recruiting firm received warrants to purchase 37,500 shares of common stock at a purchase price of $0.38 per share. As of December 31, 2013 and March 31, 2014, respectively, 5,553 of these warrants remained outstanding.

 

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Table of Contents

Yodle, Inc. and Subsidiaries

Notes to Unaudited Interim Condensed Consolidated Financial Statements

As of December 31, 2013 and March 31, 2014 and

for the three months ended March 31, 2013 and 2014

(in thousands, except share and per share data)

 

The common warrants issued and outstanding were assessed under ASC 815 and were determined to initially not meet the definition of a derivative, but will require evaluation on an on-going basis. As of March 31, 2014, the warrants still did not meet the definition of a derivative and were therefore classified in stockholders’ equity.

9.    INCOME TAXES

The Company recorded an income tax provision of $0.1 million on a pre-tax loss of $5.8 million during the three months ended March 31, 2014. The Company recorded a $5.3 million tax benefit on a pre-tax loss of $3.1 million during the three months ended March 31, 2013. The effective tax rates are not meaningful. The difference in rates between the two periods is primarily a result of the recording of a one-time benefit for a decrease in the valuation allowance resulting from the acquisition of Lighthouse.

Based on Yodle’s history of generating net operating losses, management has concluded that it is more likely than not that Yodle will not be able to generate sufficient taxable income in future periods to utilize the net operating losses and other deferred tax assets. Therefore, Yodle has established a full valuation against net deferred tax assets.

As of December 31, 2013 and March 31, 2014, the Company had $0.3 million of unrecognized tax benefits, all of which, if recognized, would affect the Company’s effective tax rate. The Company’s continuing practice is to recognize interest and penalties related to income tax matters in income tax expense. The Company had less than $0.1 million accrued for interest and penalties, which is included in the $0.3 million of unrecognized tax benefits noted above. There were no events in the first quarter of 2014 that created new uncertain tax positions.

The Company’s income tax returns are subject to tax examinations in several jurisdictions in which it operates. The tax years that remain subject to examination are primarily 2010 and forward.

10.    CONVERTIBLE PREFERRED STOCK

Yodle has issued six series of convertible preferred stock: Series A, Series B, Series C, Series D, Series E, and Series F collectively “Convertible Preferred Stock”, as follows:

 

Convertible
Preferred

  Issue
Date
    Issued     Outstanding     Authorized     Original
issue
price
    Original
proceeds
at
issuance
    Issuance
Costs
    Proceeds
net of
issuance
costs
    Liquidation
preference
    Carrying
value as of
December 31,
2013
    Carrying
value as of
March 31,
2014
 

Series A

    Nov-06        21,453,287        21,453,287        21,453,287      $ 0.1444      $ 3,098      $ 110      $ 2,988      $ 0.1444      $ 2,988      $ 2,988   

Series A

    Jun-07        3,460,208        3,460,208        25,224,914      $ 0.1445        500        —          500      $ 0.1445        500        500   

Series B

    Nov-07        21,164,021        21,164,021        21,305,114      $ 0.5670        12,000        68        11,932      $ 0.5670        11,932        11,932   

Series C

    Jan-09        15,539,919        15,539,919        15,539,919      $ 0.8366        13,000        90        12,910      $ 0.8366        12,910        12,910   

Series C

    Aug-09        298,000        298,000        15,837,919      $ 0.8366        250        —          250      $ 0.8366        250        250   

Series D

    May-11        7,119,973        7,119,973        7,119,973      $ 1.4045        10,000        65        9,935      $ 1.4045        9,935        9,935   

Series D

    Sep-12        7,274,827        7,274,827        16,723,034      $ 1.4045        10,218        —          10,218      $ 1.4045        10,218        10,218   

Series E

    Feb-13        3,804,348        3,804,348        4,673,913      $ 2.3000        8,750        72        8,678      $ 2.3000        8,678        8,678   

Series E

    Mar-14        869,565        869,565        4,673,913      $ 3.1600        2,748        —          2,748      $ 2.3000        —          2,748   

Series F

    Feb-13        1,666,667        1,666,667        1,666,667      $ 3.0000        5,000        —          5,000      $ 4.5000        5,000        5,000   
   

 

 

         

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 
      82,650,815            $ 65,442      $ 405      $ 65,037        $ 62,411      $ 65,159   
   

 

 

         

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 

 

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Table of Contents

Yodle, Inc. and Subsidiaries

Notes to Unaudited Interim Condensed Consolidated Financial Statements

As of December 31, 2013 and March 31, 2014 and

for the three months ended March 31, 2013 and 2014

(in thousands, except share and per share data)

 

In March 2014, Yodle settled its Earn-out liability in accordance with the terms of the September 2013 amendment to the Lighthouse merger agreement which included the issuance of 869,565 shares of Series E Preferred Stock at a fair value of $3.16 per share (see note on Business Combination and Asset Acquisition). As of March 31, 2014, Yodle concluded that a deemed liquidation event was not probable and, therefore, preferred stock is presented net of issuance costs.

11.    STOCK-BASED COMPENSATION

Under the Equity Incentive Plan (the “Plan”) for directors, employees, and consultants of Yodle, in 2007, the Board authorized the grant of nonqualified and incentive stock options. In February 2013, the Board increased the number of options available to be issued under the plan to 30,953,663 from 26,853,663. In October 2013, the Board increased the number of options available to be issued to 34,953,663 from 30,953,663. Such options become exercisable subject to vesting schedules up to five years from the date of the grant.

There were no option grants during the three months ended March 31, 2013. The fair market value of each option granted for the three months ended March 31, 2014 has been estimated on the grant date using the Black-Scholes-Merton option-pricing model with the following assumptions:

 

     Three months
ended March 31,
2014

Risk-free interest rate (percentage)

   1.78 – 1.84

Expected term (in years)

   6.03 – 6.08

Expected dividend yield (percentage)

  

Expected volatility (percentage)

   56.86 –56.89

As of March 31, 2014, there remains approximately $5.1 million of unrecognized compensation cost from stock options granted under the plan, which is expected to be recognized over a period of 3.61 years.

During the three months ended March 31, 2013 and 2014, no stock–based compensation expense for non-employee consultants was recognized as no non-employee grants were issued or outstanding. A summary of stock option activity as of and for the three months ended March 31, 2014 is as follows:

 

     Number of
Shares
    Weighted
Average
Exercise
Price
     Average
Remaining
Contract
Life
     Aggregate
Intrinsic
Value
 

Options outstanding as of January 1, 2014

     20,960,745      $ 0.89         7.04 Years       $ 23,372   

Granted

     1,412,000        2.01         

Exercised

     (4,496,714     0.19         

Forfeited—unvested

     (297,361     1.18         

Forfeited—vested and cancelled

     (4,186     0.97         
  

 

 

         

Options outstanding as of March 31, 2014

     17,574,484        1.16         7.80 Years         31,615   
  

 

 

         

Options expected to vest as of March 31, 2014

     13,919,884        1.07         7.50 Years      

Options exercisable as of March 31, 2014

     7,742,112        0.67         6.28 Years         17,738   

 

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Table of Contents

Yodle, Inc. and Subsidiaries

Notes to Unaudited Interim Condensed Consolidated Financial Statements

As of December 31, 2013 and March 31, 2014 and

for the three months ended March 31, 2013 and 2014

(in thousands, except share and per share data)

 

The weighted-average grant date fair value of options granted during the three months ended March 31, 2014 was $1.29. There were no grants during the three months ended March 31, 2013. The total intrinsic value of options exercised in the three months ended March 31, 2013 and 2014 was $0.4 million and $9.3 million respectively.

A summary of the status of Yodle’s unvested options as of March 31, 2014, and changes during the three months ended March 31, 2014 is as follows:

 

     Number Of
Options
    Weighted
Average

Grant-
Date Fair
Value
 

Nonvested as of January 1, 2014

     9,321,969        0.77   

Granted

     1,412,000        1.29   

Vested

     (604,236  

Forfeited

     (297,361     0.61   
  

 

 

   

Nonvested as of March 31, 2014

     9,832,372        0.85   
  

 

 

   

On May 23, 2011, the Board authorized the Company to make restricted stock grants of 2,000,000 shares of the Company’s common stock with a fair value of $1.51 per share. The restricted stock grant vests over a two year period; 50% of the shares vest at the one-year anniversary and the remainder vest monthly thereafter. Total fair value of the awards was $3.0 million. Stock-based compensation expense related to restricted stock for the three months ended March 31, 2013 was $0.6 million. As of December 31, 2013 all shares had vested. There were no other grants of restricted stock units during the three months ended March 31, 2014.

Stock-based compensation expense was included in the following costs and expenses:

 

     Three months ended
March 31
 
         2013              2014      

Cost of revenue

   $ 4       $ 10   

Selling and Marketing

     241         237   

Technology and product development

     159         218   

General and administrative

     521         214   
  

 

 

    

 

 

 

Total stock-based compensation expense

   $ 925       $ 679   
  

 

 

    

 

 

 

12.     COMMITMENTS AND CONTINGENCIES

Legal Matters—From time to time Yodle or its subsidiaries may be involved in legal proceedings and/or litigation arising in the ordinary course of business. While the outcome of these matters cannot be predicted with certainty, Yodle does not believe that the outcome of any current claims, individually and in aggregate, will have a material effect on its condensed consolidated financial position, results of operations, or cash flows.

 

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Table of Contents

Yodle, Inc. and Subsidiaries

Notes to Unaudited Interim Condensed Consolidated Financial Statements

As of December 31, 2013 and March 31, 2014 and

for the three months ended March 31, 2013 and 2014

(in thousands, except share and per share data)

 

13.    FAIR VALUE MEASUREMENTS

In accordance with ASC 820, Fair Value Measurements, Yodle has categorized its assets and liabilities recorded at fair value based upon the fair value hierarchy. The levels of fair value hierarchy are as follows:

 

    Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that Yodle has the ability to access.

 

    Level 2 inputs utilize other-than-quoted prices that are observable, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs such as interest rates and yield curves that are observable at commonly quoted intervals.

 

    Level 3 inputs are unobservable and are typically based on Yodle’s own assumptions, including situations where there is little, if any, market activity.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, Yodle categorizes such assets or liabilities based on the lowest level input that is significant to the fair value measurement in its entirety. Yodle’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset. Both observable and unobservable inputs may be used to determine the fair value of positions that are classified within the Level 3 category. As a result, the unrealized gains and losses for assets within the Level 3 category presented below may include changes in fair value that were attributable to both observable (e.g. changes in market interest rates) and unobservable (e.g. changes in historical company data) inputs.

The major categories of assets and liabilities measured on a recurring basis, at fair value, as of December 31, 2013 and March 31, 2014 are as follows:

 

          At December 31, 2013  
          Level 1      Level 2      Level 3      Total  

Asset

   Money market funds    $ 5,294       $ —         $ —         $ 5,294   

Asset

   Certificates of deposit      —           2,228         —           2,228   

Liability

   Preferred stock warrant liabilities      —           —           3,561         3,561   

Liability

   Contingent consideration in business combination      —           2,977         2,313         5,290   

Liability

   Deferred consideration, long-term portion      —           1,637         —           1,637   

 

          At March 31, 2014  
          Level 1      Level 2      Level 3      Total  

Asset

   Money market funds    $ 8,294       $ —         $ —         $ 8,294   

Asset

   Certificates of deposit      —           2,228         —           2,228   

Liability

   Preferred stock warrant liabilities      —           —           5,846         5,846   

Liability

   Current portion of deferred consideration      —           1,679         —           1,679   

Money market funds—Yodle values its money market funds using quoted active market prices for such funds at each reporting date.

Certificates of deposit (“CD”)—Yodle compares its CD rates with active market prices of comparable CDs at each reporting date. The certificates of deposit are classified as restricted cash and have a maturity date of March 2015 or sooner.

 

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Table of Contents

Yodle, Inc. and Subsidiaries

Notes to Unaudited Interim Condensed Consolidated Financial Statements

As of December 31, 2013 and March 31, 2014 and

for the three months ended March 31, 2013 and 2014

(in thousands, except share and per share data)

 

Contingent consideration in business combination—In March 2014, Yodle paid the shareholders of Lighthouse an Earn-out, the amount of which was based on gross revenue performance over the measurement period (commencing March 1, 2013 and ending February 28, 2014). The Earn-out was settled by the issuance of 869,565 Series E Preferred Shares at a fair value of $3.16 per share and the payment of $3.0 million in cash to the shareholders.

Deferred consideration—The valuation technique used to measure fair value for Yodle’s Level 2 deferred consideration was the present value of expected future cash flows.

The fair value of the deferred consideration was determined using the present value of expected cash payments, including interest, over the term of the liability. The discount rate used, 7.03%, was consistent with the discount rate used to calculate the fair value at the acquisition date.

Preferred stock warrant liabilities—The valuation technique used to measure fair value for Yodle’s Level 3 warrant liabilities was a Black Scholes-Merton option pricing model at each reporting date. A rollforward of the fair value measurements of the warrant liability categorized with Level 3 inputs from January 1, 2014 to March 31, 2014 is as follows:

 

Balance as of January 1, 2014

   $  3,561   

Issuance of warrants

     —     

Change in fair value of warrant liability

     2,285   
  

 

 

 

Balance as of March 31, 2014

   $ 5,846   
  

 

 

 

 

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Yodle, Inc. and Subsidiaries

Notes to Unaudited Interim Condensed Consolidated Financial Statements

As of December 31, 2013 and March 31, 2014 and

for the three months ended March 31, 2013 and 2014

(in thousands, except share and per share data)

 

The fair market value of each warrant granted has been estimated as of December 31, 2013 and March 31, 2014 using a Black Scholes-Merton pricing model with the following assumptions:

 

     Year ended
December 31,

2013
   Three months
ended March 31,
2014

Series A Preferred

     

Risk-free interest rate (percentage)

   0.37 –0.99    0.96

Expected term (in years)

   3.39 –4.14    3.14

Expected dividend yield (percentage)

   —      —  

Expected volatility (percentage)

   49.50–67.50    60.70
     2013    2014

Series B Preferred

     

Risk-free interest rate (percentage)

   0.55 –1.42    1.43

Expected term (in years)

   4.55 –5.30    4.30

Expected dividend yield (percentage)

   —      —  

Expected volatility (percentage)

   48.80–64.70    60.70
     2013    2014

Series D Preferred—Bridge Financing

     

Risk-free interest rate (percentage)

   0.17 –0.23    0.21

Expected term (in years)

   1.26 –1.55    1.26

Expected dividend yield (percentage)

   —      —  

Expected volatility (percentage)

   42.10–52.10    59.40
     2013    2014

Series D Preferred—2010 Loan

     

Risk-free interest rate (percentage)

   1.00 –2.02    2.16

Expected term (in years)

   6.81 –7.56    6.56

Expected dividend yield (percentage)

   —      —  

Expected volatility (percentage)

   42.10–52.10    59.40
     2013    2014

Series D Preferred—2011 Loan

     

Risk-free interest rate (percentage)

   1.12 –2.14    2.31

Expected term (in years)

   7.39 –8.14    7.14

Expected dividend yield (percentage)

   —      —  

Expected volatility (percentage)

   42.10–52.10    59.40

 

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Yodle, Inc. and Subsidiaries

Notes to Unaudited Interim Condensed Consolidated Financial Statements

As of December 31, 2013 and March 31, 2014 and

for the three months ended March 31, 2013 and 2014

(in thousands, except share and per share data)

 

14.     SEGMENT, GEOGRAPHIC AND SIGNIFICANT CUSTOMER INFORMATION

The chief operating decision maker (“CODM”) reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. Yodle has concluded that its operations constitute one operating and reportable segment. Substantially all assets were held in the United States as of December 31, 2013 and March 31, 2014.

Yodle’s geographic revenues by country of customer residence, and percentage of total revenue by location, are as follows:

 

     Three months
ended March 31,

2013
    Three months
ended March 31,
2014
 

United States

   $ 33,063         94   $ 43,686         95

International

     2,139         6     2,060         5
  

 

 

      

 

 

    
   $ 35,202         100   $ 45,746         100
  

 

 

      

 

 

    

No single customer exceeds ten percent of Yodle’s revenue for the three months ended March 31, 2013 and 2014. As of December 31, 2013, one customer accounted for 38% of accounts receivable, net. As of March 31, 2014, this customer accounted for 29% of accounts receivable, net.

15.    NET INCOME (LOSS) PER SHARE

Basic and diluted net loss per share attributable to common stockholders is presented in conformity with the two-class method required for participating securities.

In the event a dividend is paid on common stock, convertible preferred stock participates as if they were holders of common shares (on an if-converted basis). To date no dividends have been declared.

Under the two-class method for periods with net income, basic net income per share attributable to common stockholders is computed by dividing the net income attributable to common stockholders by the weighted average number of common shares outstanding during the period. Net income attributable to common stockholders is determined by allocating undistributed earnings among common stock and convertible preferred stock. The holders of convertible preferred stock shall first receive or simultaneously receive a dividend on each outstanding share of convertible preferred stock in an amount at least equal to $0.0116 per share for Series A Preferred, $0.0454 per share for Series B Preferred, $0.0669 per share for Series C Preferred, $0.1124 for Series D Preferred, $0.184 per share for Series E Preferred, and $0.2400 per share for Series F Preferred. Since preferred stockholders are entitled to receive minimum dividend payouts prior to any common stockholders receiving dividends, undistributed earnings is allocated first to preferred shares up to the minimum dividend. In the three months ended March 31, 2013, the undistributed earnings did not exceed the minimum preferred dividend, and as such, all earnings were allocated to preferred stockholders in determining net income per share attributable to common stockholders.

For periods with a net loss, an allocation of the undistributed losses to the holders of convertible preferred stock and unvested restricted stock is not made, as the holders have no obligation to fund losses.

 

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Yodle, Inc. and Subsidiaries

Notes to Unaudited Interim Condensed Consolidated Financial Statements

As of December 31, 2013 and March 31, 2014 and

for the three months ended March 31, 2013 and 2014

(in thousands, except share and per share data)

 

Diluted net income (loss) per share attributable to common stockholders is computed by using the weighted average number of common shares outstanding, plus, for periods with net income attributable to common stockholders, the potential dilutive effect of outstanding stock options and warrants using the treasury stock method. In addition, the Company analyzes the potential effect of the outstanding participating securities under the “if-converted” method when calculating diluted earnings per share, in which it is assumed that the outstanding participating securities convert into common stock at the beginning of the period. The Company reports the more dilutive of the approaches (two-class or “if-converted”) as its diluted net income per share during the period.

     Three months
ended March 31
    Three months
ended March 31
 
     2013     2014  

Net income (loss)

   $ 2,187      $ (5,945

Less: Income attributable to participating preferred stock

     (2,187     —     
  

 

 

   

 

 

 

Net income (loss) attributable to common stockholders

   $ —        $ (5,945
  

 

 

   

 

 

 

Denominator:

    

Denominator for basic EPS-weighted average shares

     34,279,294        41,242,673   

Effect of dilutive securities:

    

Preferred stock warrants

     645,524     

Common stock warrants

     61,532     

Employee stock options

     11,889,534     
  

 

 

   

 

 

 

Denominator for diluted EPS-adjusted weighted average shares

     46,875,884        41,242,673   
  

 

 

   

 

 

 

Net income (loss) per share attributable to common stockholders:

    

Basic EPS

   $ —        $ (0.14
  

 

 

   

 

 

 

Diluted EPS

   $ —        $ (0.14
  

 

 

   

 

 

 

Yodle excluded the following weighted-average common shares underlying stock-based securities from the calculations of diluted net income per common share because their inclusion would have been anti-dilutive:

 

     Three months
ended March 31
     Three months
ended March 31
 
     2013      2014  

Dilutive effect of preferred stock

     78,194,696         82,071,105   

Dilutive effect of employee stock options

     302,000         18,870,335   

Dilutive effect of Preferred Stock Warrants

     —           2,780,746   

Dilutive effect of Common Stock Warrants

     —           200,553   
  

 

 

    

 

 

 
     78,496,696         103,922,739   
  

 

 

    

 

 

 

 

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Yodle, Inc. and Subsidiaries

Notes to Unaudited Interim Condensed Consolidated Financial Statements

As of December 31, 2013 and March 31, 2014 and

for the three months ended March 31, 2013 and 2014

(in thousands, except share and per share data)

 

16.    SUBSEQUENT EVENTS

On May 29, 2014, the Board increased the number of options available to be issued under the Company’s Equity Incentive Plan to 37,353,663 from 34,953,663. During May 2014, Yodle granted 4,875,600 shares to various employees under the plan. Of these options, 2,380,000 are not exercisable unless certain objectives are met, and are subject to cancellation if such objectives are not met within one year of the grant date.

On June 18, 2014, Yodle made a third drawdown, in the amount of $3.0 million, against its 2013 Loan with SVB. Yodle used $2.7 million of the proceeds to pay off the balance and accrued interest due on the promissory note on June 20, 2014. The promissory note was due for payment on June 21, 2014. Following the drawdown, the principal outstanding for the 2013 Loan increased to $9.0 million, with $1.0 million of the agreed loan amount of $10.0 million available for future drawdowns. The drawdown period ends on December 31, 2014. The current portion of the principal outstanding increased to $0.9 million, with the long-term portion increasing to $8.1 million. The payment of the promissory note reduced total subordinated debt by $2.5 million to $15.0 million, all of which is long term. Yodle did not incur additional fees in connection with the June 18, 2014 drawdown.

 

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LOGO

 

 

 


Table of Contents

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

 

Item 13. Other Expenses of Issuance and Distribution.

The following table sets forth all costs and expenses, other than underwriting discounts and commissions, payable by us in connection with the sale of the common stock being registered. All amounts shown are estimates except for the SEC registration fee and the Financial Industry Regulatory Authority, or FINRA, filing fee.

 

     Amount to be
Paid
 

SEC registration fee

   $ 9,660   

FINRA filing fee

     11,100   

Stock exchange initial listing fee

                 *   

Blue sky fees and expenses

                 *   

Printing and engraving expenses

                 *   

Legal fees and expenses

                 *   

Accounting fees and expenses

                 *   

Transfer agent and registrar fees

                 *   

Miscellaneous fees and expenses

                 *   
  

 

 

 

Total

   $             *   
  

 

 

 

 

* To be filed by amendment.

 

Item 14. Indemnification of Directors and Officers.

We are incorporated under the laws of the State of Delaware. Section 102 of the Delaware General Corporation Law permits a corporation to eliminate the personal liability of directors of a corporation to the corporation or its stockholders for monetary damages for a breach of fiduciary duty as a director, except where the director breached his or her duty of loyalty, failed to act in good faith, engaged in intentional misconduct or knowingly violated a law, authorized the payment of a dividend or approved a stock repurchase in violation of Delaware corporate law or obtained an improper personal benefit.

Section 145 of the Delaware General Corporation Law provides that a corporation has the power to indemnify a director, officer, employee or agent of the corporation and certain other persons serving at the request of the corporation in related capacities against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlements actually and reasonably incurred by the person in connection with an action, suit or proceeding to which he is or is threatened to be made a party by reason of such position, if such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, in any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful, except that, in the case of actions brought by or in the right of the corporation, no indemnification shall be made with respect to any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or other adjudicating court determines that, despite the adjudication of liability but in view of all of the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper.

As permitted by the Delaware General Corporation Law, our amended and restated certificate of incorporation and bylaws will provide that: (1) we are required to indemnify our directors to the fullest extent permitted by the Delaware General Corporation Law; (2) we may, in our discretion, indemnify our officers, employees and agents as set forth in the Delaware General Corporation Law; (3) we are required, upon

 

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satisfaction of certain conditions, to advance all expenses incurred by our directors in connection with certain legal proceedings; (4) the rights conferred in the bylaws are not exclusive; and (5) we are authorized to enter into indemnification agreements with our directors, officers, employees and agents.

We have entered into agreements with our directors that require us to indemnify them against expenses, judgments, fines, settlements and other amounts that any such person becomes legally obligated to pay (including with respect to a derivative action) in connection with any proceeding, whether actual or threatened, to which such person may be made a party by reason of the fact that such person is or was a director or officer of us or any of our affiliates, provided such person acted in good faith and in a manner such person reasonably believed to be in, or not opposed to, our best interests. The indemnification agreements also set forth certain procedures that will apply in the event of a claim for indemnification thereunder. At present, no litigation or proceeding is pending that involves any of our directors or officers regarding which indemnification is sought, nor are we aware of any threatened litigation that may result in claims for indemnification.

We maintain a directors’ and officers’ liability insurance policy. The policy insures directors and officers against unindemnified losses arising from certain wrongful acts in their capacities as directors and officers and reimburses us for those losses for which we have lawfully indemnified the directors and officers. The policy contains various exclusions.

In addition, the underwriting agreement to be filed as Exhibit 1.1 to this Registration Statement provides for indemnification by the underwriters of us and our officers and directors for certain liabilities arising under the Securities Act, or otherwise. Our fourth amended and restated investors’ rights agreement with certain investors also provides for cross-indemnification in connection with the registration of our common stock on behalf of such investors.

 

Item 15. Recent Sales of Unregistered Securities.

The following list sets forth information regarding all unregistered securities issued by us since January 1, 2011 through the date of the prospectus that is a part of this registration statement:

Issuances of Common Stock, Restricted Stock and Options to Purchase Common Stock

As partial consideration for our acquisition of ProfitFuel, Inc., on May 23, 2011 we issued 13,000,000 shares of our common stock to entities and individuals that qualified as “accredited investors” within the meaning of Regulation D under the Securities Act in reliance on Rule 506 thereunder. As partial consideration for the agreement of three ProfitFuel employees to become Yodle employees upon the closing of the acquisition on May 23, 2011, we issued 2,000,000 shares of our restricted stock in reliance on Section 4(2) of the Securities Act.

From January 1, 2011 through the date of this prospectus, we have granted under our 2007 Plan options to purchase an aggregate of 21,969,642 shares of our common stock to employees, consultants and directors, having exercise prices ranging from $0.38 to $2.96 per share. Of these options to purchase, an aggregate of 4,758,226 shares have been cancelled without being exercised. During the period from January 1, 2011 through the date of this prospectus, an aggregate of 11,301,948 shares of our common stock were issued upon the exercise of stock options under the 2007 Plan, at exercise prices between $0.06 and $1.64 per share, for aggregate proceeds of approximately $3.0 million.

The offers, sales and issuances of the securities described in the preceding paragraph were exempt from registration under Rule 701 promulgated under the Securities Act, or Rule 701, in that the transactions were by an issuer not involving any public offering or under Section 4(a)(2) of the Securities Act or under compensatory benefit plans and contracts relating to compensation as provided under Rule 701. The recipients of such securities were our employees, directors or consultants and received the securities under our equity incentive plans. Appropriate legends were affixed to the securities issued in these transactions.

 

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Issuances of Preferred Stock

In September 2012, we issued an aggregate of 7,274,827 shares of our Series D preferred stock to nine accredited investors upon the full conversion of the notes described below under “—Issuances of Convertible Notes and Warrants.”

In February 2013, we issued (1) an aggregate of 3,804,348 shares of our Series E preferred stock to five accredited investors at a per share price of $2.30, for aggregate consideration of approximately $8.8 million and (2) an aggregate of 1,666,667 shares of our Series F preferred stock to nine accredited investors at a per share price of $3.00, for aggregate consideration of approximately $5.0 million, in each case in reliance on Rule 506 of Regulation D.

In March 2014, we issued an additional 869,565 shares of our Series E preferred stock, or an aggregate amount of $2.0 million, to the same five accredited investors that received shares of our Series E preferred stock in February 2013 pursuant to the terms of the merger agreement entered into in connection with our acquisition of Lighthouse Practice Management. This issuance was made in reliance on Rule 506 of Regulation D.

Issuances of Convertible Notes and Warrants

On May 23, 2011, we issued of $9.0 million aggregate principal amount of convertible promissory notes to nine accredited investors, in reliance on Rule 506 of Regulation D, to partially fund our acquisition of ProfitFuel, Inc. In September 2012, the holders of these notes converted all outstanding principal and accrued and unpaid interest of approximately $1.2 million under such promissory notes into 7,274,827 shares of our Series D preferred stock.

In connection with the issuance of $9.0 million aggregate principal amount of convertible promissory notes to nine accredited investors as described above, on May 23, 2011, we issued warrants to purchase an aggregate of $900,000 of our capital stock (initially equal to 10% of the aggregate principal amount of the convertible promissory notes) to those same accredited investors. The issuance of these warrants was made in reliance on Rule 506 of Regulation D. These were amended and restated as of September 21, 2012 to account for certain adjustments, as provided by the terms of the original warrants. As of December 31, 2013, the warrants were convertible into an aggregate of approximately $2.2 million of our Series D preferred stock at an exercise price of $1.4045 per share.

The recipients of the securities in 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.

 

Item 16. Exhibits and Financial Statement Schedules.

(a) Exhibits

 

Exhibit

Number

  

Description of Document

    1.1†   

Form of Underwriting Agreement.

    2.1    Agreement and Plan of Merger, dated as of February 28, 2013, by and among Registrant, LH Merger Corp., Lighthouse Practice Management Group, Inc., Brian Smith and the other parties thereto.
    3.1    Fifth Amended and Restated Certificate of Incorporation, as amended and as currently in effect.
    3.2†    Form of Amended and Restated Certificate of Incorporation to be effective upon completion of this offering.

 

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    3.3    By-Laws, as currently in effect.
    3.4†    Form of Amended and Restated Bylaws to be effective upon completion of this offering.
    4.1†    Specimen stock certificate evidencing shares of common stock.
    4.2    Fourth Amended and Restated Investors’ Rights Agreement, dated as of February 28, 2013, by and among the Registrant and certain of its stockholders.
    5.1†    Opinion of Cooley LLP as to legality.
  10.1†    Loan and Security Agreement, dated as of September 9, 2013, between Rogers Communications Inc. and the Registrant, ProfitFuel, Inc. and Lighthouse Practice Management Group, Inc.
  10.1.1†    Intellectual Property Security Agreements relating to the Loan and Security Agreement with Rogers Communications Inc. dated as of September 9, 2013.
  10.1.2†    Subordination Agreement, dated as of September 9, 2013, between Rogers Communications Inc. and Silicon Valley Bank.
  10.2†    Amended and Restated Loan and Security Agreement, dated as of December 12, 2013, between Silicon Valley Bank and the Registrant, ProfitFuel, Inc. and Lighthouse Practice Management Group, Inc.
  10.2.1†    Intellectual Property Security Agreements relating to the Amended and Restated Loan and Security Agreement with Silicon Valley Bank, dated as of December 12, 2013.
  10.3    Agreement of Lease by and between the Registrant and Matana LLC, dated as of October 23, 2008.
  10.3.1    Letter Agreement, dated as of February 1, 2010, between Matana LLC and Registrant.
  10.3.2    Lease Amendment, dated as of April 1, 2011, between 50 West 23rd Street A LLC and Registrant.
  10.3.3    Second Amendment to Lease, dated as of October 14, 2013, between 50 West 23rd Street A LLC and Registrant.
  10.4+†    Yodle, Inc. 2007 Equity Incentive Plan, as amended.
  10.5+†    Forms of Incentive Stock Option Agreements under Yodle, Inc. 2007 Equity Incentive Plan.
  10.6+†    Form of Nonqualified Stock Option Agreement under the Yodle, Inc. 2007 Equity Incentive Plan.
  10.7+†    Form of 2014 Equity Incentive Plan.
  10.8+†    Form of Incentive Stock Option Agreement under 2014 Equity Incentive Plan.
  10.9+†    Form of Nonqualified Stock Option Agreement under 2014 Equity Incentive Plan.
  10.10+†    Form of Restricted Stock Award Agreement under 2014 Equity Incentive Plan.
  10.11+†    Non-Employee Director Compensation Plan to be in effect upon the completion of this offering.
  10.12+†    Form of Indemnification Agreement by and between Registrant and each of its directors and executive officers.
  10.13+†    2014 Executive Bonus Plan.
  10.14+†    Employment Offer Letter by and between the Registrant and Court Cunningham, dated March 19, 2007.
  10.15+†    Employment Offer Letter by and between the Registrant and Eric Raab, dated March 12, 2013.
  10.16+†    Employment Offer Letter by and between the Registrant and Fred Voccola, dated March 8, 2013.
  10.17+†    2013 Yodle Bonus Plan.
  10.18+†    General Manager, Yodle for Brand Networks Bonus Plan.
  21.1†    Subsidiaries of the Registrant.
  23.1    Consent of Deloitte & Touche LLP, independent registered public accounting firm.

 

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  23.2†   

Consent of Cooley LLP (included in Exhibit 5.1).

  24.1   

Power of Attorney. Reference is made to the signature page hereto.

  99.1   

Consent of Research Now.

 

To be filed by amendment.
+ Indicates management contract or compensatory plan.

 

Item 17. Undertakings.

The undersigned Registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the 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 upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall 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, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

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SIGNATURES

Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 7th day of July, 2014.

 

YODLE, INC.

By:

  /s/ Court Cunningham
 

Court Cunningham

Chief Executive Officer and Director

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Court Cunningham and Michael Gordon, and each of them, his true and lawful agent, proxy and attorney-in-fact, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to (1) act on, sign and file with the Securities and Exchange Commission any and all amendments (including post-effective amendments) to this registration statement together with all schedules and exhibits thereto and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended, together with all schedules and exhibits thereto, (2) act on, sign and file such certificates, instruments, agreements and other documents as may be necessary or appropriate in connection therewith, (3) act on and file any supplement to any prospectus included in this registration statement or any such amendment or any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and (4) take any and all actions which may be necessary or appropriate to be done, as fully for all intents and purposes as he might or could do in person, hereby approving, ratifying and confirming all that such agent, proxy and attorney-in-fact or any of his substitutes may lawfully do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

 

Signature    Title    Date

/s/ Court Cunningham

Court Cunningham

  

Chief Executive Officer and Director

(Principal Executive Officer)

   July 7, 2014

/s/ Michael Gordon

Michael Gordon

  

Chief Operating Officer, Chief Financial Officer, Treasurer and Secretary

(Principal Financial Officer)

   July 7, 2014

/s/ Ernest D’Ambrose

Ernest D’Ambrose

  

Chief Accounting Officer

(Principal Accounting Officer)

   July 7, 2014

/s/ Michael Adler

Michael Adler

  

Director

   July 7, 2014

/s/ Rick Faulk

Rick Faulk

  

Director

   July 7, 2014

/s/ Tom Mawhinney

Tom Mawhinney

  

Director

   July 7, 2014

/s/ David Rubin

David Rubin

  

Director

   July 7, 2014

/s/ Rob Stavis

Rob Stavis

  

Director

   July 7, 2014

/s/ Andreas Stavropoulos

Andreas Stavropoulos

  

Director

   July 7, 2014

 

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EXHIBIT INDEX

 

Exhibit

Number

  

Description of Document

   1.1†    Form of Underwriting Agreement.
   2.1    Agreement and Plan of Merger, dated as of February 28, 2013, by and among Registrant, LH Merger Corp., Lighthouse Practice Management Group, Inc., Brian Smith and the other parties thereto.
   3.1    Fifth Amended and Restated Certificate of Incorporation, as amended and as currently in effect.
   3.2†    Form of Amended and Restated Certificate of Incorporation to be effective upon completion of this offering.
   3.3    By-Laws, as currently in effect.
   3.4†    Form of Amended and Restated Bylaws to be effective upon completion of this offering.
   4.1†    Specimen stock certificate evidencing shares of common stock.
   4.2    Fourth Amended and Restated Investors’ Rights Agreement, dated as of February 28, 2013, by and among the Registrant and certain of its stockholders.
   5.1†    Opinion of Cooley LLP as to legality.
 10.1†    Loan and Security Agreement, dated as of September 9, 2013, between Rogers Communications Inc. and the Registrant, ProfitFuel, Inc. and Lighthouse Practice Management Group, Inc.
 10.1.1†    Intellectual Property Security Agreements relating to the Loan and Security Agreement with Rogers Communications Inc. dated as of September 9, 2013.
 10.1.2†    Subordination Agreement, dated as of September 9, 2013, between Rogers Communications Inc. and Silicon Valley Bank.
 10.2†    Amended and Restated Loan and Security Agreement, dated as of December 12, 2013, between Silicon Valley Bank and the Registrant, ProfitFuel, Inc. and Lighthouse Practice Management Group, Inc.
  10.2.1†    Intellectual Property Security Agreements relating to the Amended and Restated Loan and Security Agreement with Silicon Valley Bank, dated as of December 12, 2013.
 10.3    Agreement of Lease by and between the Registrant and Matana LLC, dated as of October 23, 2008.
 10.3.1    Letter Agreement, dated as of February 1, 2010, between Matana LLC and Registrant.
 10.3.2    Lease Amendment, dated as of April 1, 2011, between 50 West 23rd Street A LLC and Registrant.
 10.3.3    Second Amendment to Lease, dated as of October 14, 2013, between 50 West 23rd Street A LLC and Registrant.
 10.4+†    Yodle, Inc. 2007 Equity Incentive Plan, as amended.
 10.5+†    Forms of Incentive Stock Option Agreements under Yodle, Inc. 2007 Equity Incentive Plan.
 10.6+†   

Form of Nonqualified Stock Option Agreement under the Yodle, Inc. 2007 Equity Incentive Plan.

 10.7+†    Form of 2014 Equity Incentive Plan.
 10.8+†    Form of Incentive Stock Option Agreement under 2014 Equity Incentive Plan.
 10.9+†    Form of Nonqualified Stock Option Agreement under 2014 Equity Incentive Plan.
 10.10+†    Form of Restricted Stock Award Agreement under 2014 Equity Incentive Plan.
 10.11+†    Non-Employee Director Compensation Plan to be in effect upon the completion of this offering.
 10.12+†    Form of Indemnification Agreement by and between Registrant and each of its directors and executive officers.
 10.13+†    2014 Executive Bonus Plan.
 10.14+†    Employment Offer Letter by and between the Registrant and Court Cunningham, dated March 19, 2007.

 

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Table of Contents
 10.15+†    Employment Offer Letter by and between the Registrant and Eric Raab, dated March 12, 2013.
 10.16+†    Employment Offer Letter by and between the Registrant and Fred Voccola, dated March 8, 2013.
 10.17+†    2013 Yodle Bonus Plan.
 10.18+†    General Manager, Yodle for Brand Networks Bonus Plan.
 21.1†    Subsidiaries of the Registrant.
 23.1    Consent of Deloitte & Touche LLP, independent registered public accounting firm.
 23.2†    Consent of Cooley LLP (included in Exhibit 5.1).
 24.1    Power of Attorney. Reference is made to the signature page hereto.
  99.1   

Consent of Research Now.

 

  To be filed by amendment.
+   Indicates management contract or compensatory plan.

 

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EX-2.1

Exhibit 2.1

AGREEMENT AND PLAN OF MERGER

THIS AGREEMENT AND PLAN OF MERGER (this “Agreement”), dated as of February 28, 2013, is made and entered into by and among Yodle, Inc., a Delaware corporation (the “Parent”), LH Merger Corp., a Delaware corporation and wholly-owned subsidiary of Parent (“Merger Sub”), Lighthouse Practice Management Group, Inc., a Georgia corporation (the “Company”), and Brian Smith, solely in his capacity as the Representative (the “Representative”) hereunder, the entities that are Shareholders of the Company as of the date hereof and the Shareholder Beneficiaries as of the date hereof.

Introduction

WHEREAS, the Company is in the business of providing dentists hosted software and related services to manage appointment reminder and other ongoing patient communications (the “Business”);

WHEREAS, the Board of Directors of the Company has unanimously (i) determined that it is advisable and in the best interests of the Company and its shareholders to consummate the merger provided for herein in which the Company shall merge with and into Merger Sub with Merger Sub surviving the merger as a wholly-owned subsidiary of Parent (the “Merger”), (ii) approved this Agreement, the Merger and the other transactions contemplated hereby, and (iii) unanimously recommended that the Company’s shareholders approve this Agreement and the Merger;

WHEREAS, the Boards of Directors of each of the Parent and Merger Sub, and the shareholder of Merger Sub, have approved this Agreement, the Merger and the other transactions contemplated hereby;

WHEREAS, the Shareholder Beneficiaries are the holders of all of the outstanding equity securities of the Shareholders and will derive substantial benefit from the Merger and the consummation of the other transactions contemplated by this Agreement as owners of the Shareholders;

WHEREAS, at or before the Closing, the Company shall deliver to the Parent written consents of the Shareholders approving this Agreement, the Merger and the other transactions contemplated hereby by the requisite vote under the Georgia Business Corporation Code (the “GBCC”) and in accordance with the Company’s articles of incorporation and by-laws (the “Company Organizational Documents”), which consents shall constitute not less than the Requisite Shareholder Approval (the “Shareholder Consent”);

WHEREAS, the parties intend that the Merger shall constitute a “reorganization” under the provisions of Section 368 of the Code; and

NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:


ARTICLE 1

DEFINITIONS AND CONSTRUCTION

Section 1.1 Definitions. In addition to the other terms defined within the body of this Agreement, as used in this Agreement, the following terms shall have the meanings set forth or as referenced below:

Affiliate” shall mean, with respect to any Person, any other Person directly or indirectly controlling, controlled by, or under common control with, such Person; provided that, for the purposes of this definition, “control” (including, with correlative meanings, the terms “controlled by” and “under common control with”), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise; and provided, further, that an Affiliate of any Person shall also include (i) any officer, director, trustee or beneficiary of such Person or (ii) any spouse, parent, sibling, issue or lineal descendant of such Person. Without limitation to the above, for the purposes of Section 4.14, “Affiliate” shall mean an entity that is or would have been considered a single employer with the Company under Section 4001(b) of ERISA or part of the same “controlled group” as the Company for purposes of Section 302(d)(3) of ERISA.

Agreement” shall have the meaning set forth in the Preamble.

Aggregate Adjusted Closing Cash Consideration” shall mean an amount equal to (a) the Closing Cash Consideration, minus (b) the sum of (i) the amount of Outstanding Debt, if any, (ii) the Change of Control Payments, if any, and (iii) the unpaid Transaction Expenses at the Effective Time.

Aggregate Adjusted Deferred Payment Consideration” shall mean an amount equal to (a) the Deferred Payment Consideration minus (b) the Deferred Payment Offsets, if any, from time to time outstanding minus (c) any reduction to the Aggregate Adjusted Deferred Payment Consideration under the terms of this Agreement.

Agreed Stock Consideration Value” shall mean $2.30 per share of Parent Series E Preferred Stock.

Amended Payment Terms” shall have the meaning set forth in Section 3.3(b)(ii) below.

Business” has the meaning set forth in the Introduction.

Business Day” shall mean any day other than a Saturday, a Sunday or a day on which banks in the State of New York are authorized or obligated by Law or executive order to close.

Cause” shall mean that the Company Key Employee has (i) breached any fiduciary duty to the Parent, any of its Subsidiaries (including the Company) or the Parent’s successor that could reasonably be expected to result in Losses to the Parent, any of its Subsidiaries or the Parent’s successor in excess of $10,000; (ii) breached any legal or contractual obligation to the

 

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Parent, any of its Subsidiaries (including the Company) or the Parent’s successor in any material respect, which breach, if curable, is not cured within ten (10) days after written notice to the Company Key Employee describing the breach in reasonable detail; (iii) failed to attempt in good faith to follow any reasonable and lawful directive of either the Board of Directors of the Parent (or the Parent’s successor) or any superior officer, that is directed towards and communicated to the Company Key Employee or any group of employees of the Parent or the Parent’s successor that includes the Company Key Employee, which failure, if curable, is not cured within ten (10) days after written notice to the Company Key Employee describing the failure in reasonable detail; (iv) violated any material Parent rule, policy or procedure, which violation, if curable, is not cured within ten (10) days after written notice to the Company Key Employee describing such violation in reasonable detail and including an express reference to this provision; (v) failed to attempt in good faith to perform his responsibilities in a manner consistent with how a reasonably motivated employee would act, which failure, if curable, is not cured within ten (10) days after written notice to the Company Key Employee describing the failure in reasonable detail, (vi) engaged in gross negligence, intentional misconduct, intentional violation of any law, fraud, embezzlement or acts of dishonesty relating specifically to the affairs of the Parent, any of its Subsidiaries (including the Company) or the Parent’s successor; (vii) been convicted of or pleaded nolo contendere to any misdemeanor (other than a traffic violation) relating specifically to the affairs of the Parent, any of its Subsidiaries (including the Company), or the Parent’s successor involving a monetary penalty of at least $2,000, or (viii) been indicted for, convicted of or pleaded nolo contendere to a felony. Notwithstanding the foregoing, if any act or failure to act that constitutes “Cause” is identified by the Parent or the Parent’s successor in a written notice to the Company Key Employee is cured by the Company Key Employee, then the Parent or the Parent’s successor shall not be obligated to allow the Company Key Employee to cure multiple acts or failures to act that the Company believes constitutes “Cause” to deem a termination for Cause under this Agreement; provided, however, that (A) the Company Key Employee shall have an aggregate of two opportunities to cure upon notice of failures described in clauses (iii), (iv) and (v), and (B) the Company Key Employee shall also have one opportunity to cure upon notice of breaches described in clause (ii).

Certificates” shall have the meaning set forth in Section 3.5.

Certificates of Merger” shall have the meaning set forth in Section 2.2.

Change of Control Payments” shall mean any amounts payable by the Company to any current or former employee, officer, director or other Person as a result of or in connection with the consummation of the Merger or any of the other transactions contemplated hereby, whether pursuant to any Stock Option Plan or policy of the Company or any individual employment, severance, change-of-control or other Contract. Without limiting the generality of the foregoing, “Change of Control Payments” shall include any payments (other than the Merger Consideration) which may become payable after the consummation of the Merger as a result of, or in connection with, the occurrence or existence of one or more events or circumstances (such as the lapse of time or termination of employment) as long as the consummation of the Merger is a condition precedent to such payment becoming payable.

Closing” shall have the meaning set forth in Section 2.3 below.

 

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Closing Cash Consideration” shall mean $5,000,000.

Closing Date” shall have the meaning set forth in Section 2.3 below.

Closing Share Consideration” shall mean the Share Consideration minus the Escrow Property as of the Closing Date.

Code” shall mean the United States Internal Revenue Code of 1986, as amended, including the rules and regulations thereunder.

Company” shall have the meaning set forth in the Preamble.

Company Balance Sheet” shall have the meaning set forth in Section 4.6(a) below.

Company Balance Sheet Date” shall have the meaning set forth in Section 4.6(a) below.

Company Common Stock” shall mean the common stock, par value $1.00 per share, of the Company.

Company Contract” shall have the meaning set forth in Section 4.17 below.

Company Convertible Securities” shall mean any evidences of indebtedness, shares or other securities directly or indirectly convertible into or exchangeable for Company Common Stock, including any rights, options or warrants to subscribe for, purchase or otherwise acquire Company Common Stock, whether or not issued under any Stock Option Plan.

Company Disclosure Schedule” shall have the meaning set forth in the introduction to Article 4 below.

Company Intellectual Property” shall have the meaning set forth in Section 4.11(a) below.

Company Key Employee” shall mean each of Brian Smith, Joel Kozikowski, and Allen Jorgensen.

Company Material Adverse Effect” shall mean any change, event, circumstance or effect (whether or not such change, event, circumstance or effect constitutes a breach of a representation, warranty or covenant regarding the Company in this Agreement) that has had a materially adverse effect on the business, assets (including intangible assets), financial condition, prospects, operations or results of operations of the Company, exclusive of any change, event, circumstance or effect arising from or related to: (i) any condition affecting the industry in which the Company is engaged which does not affect the Company disproportionately as compared to other companies in such industry; (ii) acts of war or terrorism; (iii) general economic, political and financial market changes that do not affect the Company disproportionately; (iv) changes in any Law or GAAP; or (v) the failure of the Company to achieve any financial projections or budget in and of itself, provided that the underlying causes of such failure may constitute a Company Material Adverse Effect if otherwise of a character described in this paragraph.

 

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Company Organizational Documents” shall have the meaning set forth in the Introduction.

Company Permits” shall have the meaning set forth in Section 4.12 below.

Company Products” shall mean any of the products and services currently offered by the Company (including without limitation the Lighthouse 360 Product) and any improvement, enhancement, extension or derivative services developed by the Company, the Parent, or their Affiliates (including after the Closing, the Surviving Corporation).

Confidentiality Agreement” shall mean the “Mutual Non-Disclosure Agreement” having a stated effective date of November 13, 2012, between the Company and the Parent, the terms of which are incorporated herein by reference.

Contested Claim” shall have the meaning set forth in Section 10.7(a) below.

Continuing Employee” shall have the meaning set forth in Section 7.5 below.

Contract” shall mean any contract, agreement, license, indenture, note, bond, loan, instrument, lease, franchise, conditional sales contract, mortgage or other arrangement, whether written or oral.

Core Representations” shall have the meaning set forth in Section 10.2(b)(ii)(B) below.

Deferred Payment Consideration” shall mean $6,250,000.

Deferred Payment Event of Default” shall have the meaning set forth in Section 3.3(a)(vi) below.

Deferred Payment Offsets” shall have the meaning set forth in Section 3.3(a)(v) below.

Delaware Secretary of State” shall have the meaning set forth in Section 2.2 below.

Designated Representations” shall have the meaning set forth in Section 10.3(i) below.

DGCL” shall have the meaning set forth in Section 2.1 below.

Disability” shall mean illness (mental or physical) or accident, which results in the Company Key Employee being unable to perform the Company Key Employee’s duties as an employee of the Parent (or any Subsidiary of the Parent) for a period of three months, whether or not consecutive, in any twelve-month period.

Dispute Notice” shall have the meaning set forth in Section 10.7(a) below.

Disputed Earn-out Consideration Notice” shall have the meaning set forth in Section 3.9(d) below.

 

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Distribution Schedule” shall mean the schedule attached hereto as Exhibit A stating the identity and equity ownership of each Shareholder as well as each Shareholder’s pro rata share of the Merger Consideration and any other information reasonably requested by the Parent related to the delivery of the Merger Consideration to the Shareholders.

Earn-out Consideration” shall have the meaning set forth in Section 3.9 below.

Earn-out Consideration Notice” shall have the meaning set forth in Section 3.9(c) below.

Effective Time” shall have the meaning set forth in Section 2.2 below.

Employee Agreement” shall mean each management, employment, retention, severance, change-of-control, consulting, indemnification, relocation, repatriation, expatriation or similar Contract between the Company or any ERISA Affiliate and any employee or consultant (other than Contracts with consultants that are terminable by the Company at any time without notice and without penalty), including any offer letter (other than an offer letter for at-will employment without any severance or change-of-control provisions), which is in effect on the Closing Date or under which there are continuing obligations after the Closing Date.

Employee Benefit Plans” shall mean any program, policy, practice, trust, Contract or other plan providing for compensation, severance, termination pay, performance awards, stock or stock-related awards, fringe benefits or other benefits or remuneration of any kind, whether written or unwritten, funded or unfunded, which is or has been maintained, contributed to, or required to be contributed to, by the Company for the benefit of any employee or any relative or dependent of any employee, including (i) each “employee benefit plan” within the meaning of Section 3(3) of ERISA, (ii) any stock, stock option, stock appreciation right, stock purchase, bonus, deferred compensation, pension, profit-sharing, commission, retirement, severance, retention, change of control, or similar plan or Contract, and (iii) any provision in any staff handbook or written employment policies for the Company relating to employee benefits.

Encumbrance” shall mean any lien, pledge, hypothecation, charge, mortgage, security interest, encumbrance, restrictive covenant, claim, infringement, interference, option, right of first refusal, preemptive right, or restriction of any nature (including any restriction on the voting of any security, any restriction on the transfer of any security or other asset, any restriction on the receipt of any income derived from any asset, any restriction on the use of any asset and any restriction on the possession, exercise or transfer of any other attribute of ownership of any asset) and, in the case of leasehold real property, rent and service charges.

Environment” shall mean soil, surface waters, groundwater, land, surface or subsurface strata and ambient air.

Environmental Claim(s)” shall mean any claim, action, proceeding, investigation, litigation, order, summons, complaint or citation by or with any Governmental Authority or third party relating to Environmental Laws or Environmental Materials.

Environmental Law(s)” shall mean all Laws relating to pollution, Environmental Materials, or the release of materials into the Environment.

 

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Environmental Material(s)” shall mean any substance or material which is a “hazardous substance”, “hazardous waste”, “hazardous material”, “toxic substance”, “toxic waste”, “toxic substance”, “pollutant”, “contaminant”, “radioactive material”, or words of similar import under any Environmental Law.

ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended.

ERISA Affiliate” shall mean any other Person under common control with the Company within the meaning of Code Sections 414(b), (c), (m) or (o) and the regulations issued thereunder.

Escrow Holder” shall have the meaning set forth in Section 10.7(b).

Escrow Property” shall mean the Escrow Shares held from time to time by the Escrow Holder.

Escrow Shares” shall mean 2,065,217 shares of Parent Series E Preferred Stock held by the Parent in accordance with Section 10.7(b).

Exchange Act” shall mean the United States Securities Exchange Act of 1934, as amended, including the rules and regulations thereunder.

Final Working Capital” shall have the meaning set forth in Section 3.10(b) below.

Final Decree” shall have the meaning set forth in Section 10.7(a) below.

Financial Statements” shall have the meaning set forth in Section 4.6(b) below.

Fully-Diluted Share Number” shall mean the sum of (i) the total number of Shares issued and outstanding immediately prior to the Effective Time, and (ii) the total number of Shares issuable upon conversion of any other securities (including notes and other debt securities) convertible into, exchangeable for, or evidencing the right to subscribe for or acquire shares of Company Common Stock outstanding immediately prior to the Effective Time, whether or not then convertible or exercisable.

GAAP” shall mean generally accepted accounting principles in the United States.

GBCC” shall have the meaning set forth in the Introduction.

Georgia Secretary of State” shall have the meaning set forth in Section 2.2 below.

Good Reason” shall mean Company Key Employee’s voluntary termination of employment following (i) the assignment of duties or responsibilities to the Company Key Employee which are inconsistent in a material and adverse respect with the Company Key Employee’s position with the Parent and its Subsidiaries (taken as a whole) and reflect a material diminution in the status of Company Key Employee within the Parent and all of its Subsidiaries (taken as a whole); (ii) a reduction by the Parent, its Subsidiaries or the Parent’s successor in

 

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Company Key Employee’s base salary then in effect other than in connection with a broader reduction in executive officer compensation that applies to substantially all officers other than the Company Key Employee; or (iii) the relocation of the Company Key Employee, without the Company Key Employee’s prior consent, by the Parent to a work location more than 50 miles from the Company Key Employee’s work location as of the Effective Time; provided that the Parent shall have been given written notice from the Company Key Employee describing in reasonable detail the circumstance for which Company Key Employee believes he may resign for Good Reason within twenty (20) days of the first occurrence thereof and the Parent shall not have cured such circumstance within thirty (30) days after the Parent’s receipt of such notice. For clarity, requiring the Company Key Employee to travel to the Parent’s headquarters or other offices, and in accordance with the Parent’s standard T&E policy in effect from time to time, at any time within three (3) months after the Closing Date, or on average an aggregate of five (5) Business Days each calendar month following the three-month period after the Closing Date, shall not be “Good Reason” under this Agreement.

Governmental Authority” shall mean any instrumentality, subdivision, court, administrative agency, commission, official or other authority of any international body, country, state, province, prefect, municipality, locality or other government or political subdivision or department thereof, or any quasi-governmental or private body exercising any regulatory or Taxing Authority or any tribunal, administrative hearing body, arbitration panel, commission or similar dispute resolving panel or body.

Governmental Order” shall mean shall mean any order or injunction issued by or under the authority of any Governmental Authority.

Gross Revenue” shall have the meaning set forth in Section 3.9(b) below.

Indemnifiable Claim” shall have the meaning set forth in Section 10.5 below.

Indemnified Person” shall have the meaning set forth in Section 10.5

Indemnifying Person” shall have the meaning set forth in Section 10.5 below.

Insolvency Event” shall have the meaning set forth in Section 3.3(a)(vi)(A) below.

Intellectual Property” shall have the meaning set forth in Section 4.11(a) below.

IP Licenses” shall have the meaning set forth in Section 4.11(c) below.

IRS” shall mean the United States Internal Revenue Service.

Joint Written Direction” shall have the meaning set forth in Section 10.7(a) below.

Law(s)” shall mean any federal, state, territorial, foreign, international or local law, statute, ordinance, rule, regulation or code of any Governmental Authority.

Leased Real Property” shall have the meaning set forth in Section 4.10(a) below.

 

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Lighthouse 360 Product” shall mean the Company Product currently known as “Lighthouse 360” including related services.

Liquidation” shall mean any distribution of the assets of the Parent upon any dissolution, winding up, liquidation or reorganization of the Parent (whether in bankruptcy, insolvency or receivership proceedings), or upon any assignment for the benefit of creditors, or upon any other marshaling of the assets and liabilities of the Parent for the benefit of any creditor or creditors.

Losses” shall mean all claims, damages, losses, expenses, obligations, costs and liabilities (including reasonable attorneys’ fees and costs of collection).

LPMG LLC” shall have the meaning set forth in the introduction to Article 4 below.

Measurement Period” shall have the meaning set forth in Section 3.9 below.

Merger” shall have the meaning set forth in the Introduction.

Merger Consideration” shall mean (a) the Aggregate Adjusted Closing Cash Consideration, plus (b) the Closing Share Consideration, plus (c) the Escrow Property, plus (d) the Earn-out Consideration, plus (e) the Aggregate Adjusted Deferred Payment Consideration.

Merger Sub” shall have the meaning set forth in the Preamble.

Merger Sub Common Stock” shall have the meaning set forth in Section 3.4 below.

Multiemployer Plan” shall mean any “multiemployer plan” as described in Section 3(37) of ERISA.

Neutral Auditor” shall mean a mutually-agreed partner of KPMG LLP, or such other nationally recognized accounting firm mutually agreed upon by Parent and Representative.

Notice of Claim” shall have the meaning set forth in Section 10.5 below.

Objection Period” shall have the meaning set forth in Section 10.7(a) below.

Option” shall mean, with respect to any Person, any security, right, subscription, warrant, option, “phantom” stock right or other Contract that gives the holder the right to (i) purchase or otherwise receive or be issued any shares of capital stock of such Person or any security of any kind convertible into or exchangeable or exercisable for any shares of capital stock of such Person or (ii) receive or exercise any benefits or rights similar to any rights enjoyed by or accruing to the holder of shares of capital stock of such Person, including any rights to participate in the equity or income of such Person or to participate in or direct the election of any directors or officers of such Person or the manner in which any shares of capital stock of such Person are voted.

 

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Outstanding Debt” shall mean all principal, interest, fees, expenses and other amounts in respect of borrowed money, notes, bonds, debentures and other debt securities, guarantees, interest rate, currency or other hedging arrangements, capital leases, letters of credit and/or installment purchases incurred by the Company prior to the Effective Time, or required to be paid in order to discharge fully all such amounts as of the Effective Time.

Parent” shall have the meaning set forth in the Preamble.

Parent Charter” shall mean the Parent’s Fifth Amended and Restated Certificate of Incorporation, as amended or restated from time to time.

Parent Closing Balance Sheet” shall have the meaning set forth in Section 3.10(a) below.

Parent Disclosure Schedule” shall have the meaning set forth in the introduction to Article 5 below.

Parent Indemnified Persons” shall have the meaning set forth in Section 10.1 below.

Parent Material Adverse Effect” shall mean any change, event, circumstance or effect (whether or not such change, event, circumstance or effect constitutes a breach of a representation, warranty or covenant regarding the Parent in this Agreement) that has had a materially adverse effect on the business, assets (including intangible assets), financial condition, prospects, operations or results of operations of the Parent exclusive of any change, event, circumstance or effect arising from or related to: (i) any condition affecting the industry in which the Parent is engaged which does not affect the Parent disproportionately as compared to other companies in such industry; (ii) acts of war or terrorism; (iii) general economic, political and financial market changes that do not affect the Parent disproportionately; (iv) changes in any Law or GAAP; or (v) the failure of the Parent to achieve any financial projections or budget in and of itself, provided that the underlying causes of such failure may constitute a Parent Material Adverse Effect if otherwise of a character described in this paragraph.

Parent Organizational Documents” shall have the meaning set forth in Section 5.1(b) below.

Parent ROFR Agreement” shall mean the Fourth Amended and Restated Right of First Refusal and Co-Sale Agreement, dated on or around the Closing Date, by and among the Parent and the other parties thereto, as amended.

Parent ROFR Agreement Joinder” shall mean the Joinder Agreement to the Parent ROFR Agreement substantially in the form attached hereto as Exhibit J-1.

Parent Series E Preferred Stock” shall mean the Parent’s Series E Preferred Stock, $.001 per value per share.

Parent Series F Preferred Stock” shall mean the Parent’s Series F Preferred Stock, $.001 per value per share.

 

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Parent Voting Agreement” shall mean the Fourth Amended and Restated Voting Agreement, dated on or around the Closing Date, by and among the Parent and the other parties thereto, as amended.

Parent Voting Agreement Joinder” shall mean the Joinder Agreement to the Parent Voting Agreement substantially in the form attached hereto as Exhibit J-2.

Parent Working Capital Determination” shall have the meaning set forth in Section 3.10(a) below.

Parent Working Capital Statement” shall have the meaning set forth in Section 3.10(a) below.

Paying Customer” shall have the meaning set forth in Section 4.21 below.

Pension Plan” shall mean any “employee pension benefit plan” as described in Section 3(2) of ERISA, other than a Multiemployer Plan.

Person” shall mean an individual, a limited liability company, a joint venture, a corporation, a company, a partnership, an association, a trust, a Governmental Authority, a division or operating group of any of the foregoing or any other entity or organization.

Pro Rata Percentage” shall mean, with respect to a Shareholder, the fraction obtained by dividing (i) the sum of the total number of Shares held by such Shareholder immediately prior to the Effective Time, plus the total number of Shares issuable upon conversion of any other securities (including notes and other debt securities) convertible into, exchangeable for, or evidencing the right to subscribe for or acquire shares of Company Common Stock held by such Shareholder outstanding immediately prior to the Effective Time, whether or not then convertible or exercisable, by (ii) the Fully-Diluted Share Number.

Qualifying Public Offering” shall have the meaning set forth in the Parent Charter.

Reference Date” shall mean January 1, 2010.

Refinancing” shall have the meaning set forth in Section 3.3(b)(ii) below.

Related Documents” shall mean this Agreement and all other agreements, documents, certificates and instruments delivered in connection herewith or therewith.

Release Date” shall have the meaning set forth in Section 10.5 below.

Representative” shall mean the Person appointed to serve as the representative of the Shareholders and to perform the duties described in Article 12.

Requisite Shareholder Approval” shall mean the adoption of this Agreement and the approval of the Merger by Shareholders holding 100% of the shares of Company Common Stock.

 

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Sale of the Company” shall have the meaning set forth in the Parent Voting Agreement.

SEC” shall mean the United States Securities and Exchange Commission.

Securities Act” shall mean the United States Securities Act of 1933, as amended, including the rules and regulations thereunder.

Senior Indebtedness” shall mean all indebtedness of, or guaranteed by, the Parent for borrowed money that is secured by assets of the Parent or its Subsidiaries, whether now existing or hereafter arising (including without limitation the indebtedness under that certain Loan and Security Agreement dated as of May 22, 2007, among the Parent, ProfitFuel, Inc. and Silicon Valley Bank, as amended by a certain First Loan Modification Agreement dated as of July 18, 2008, a certain Second Loan Modification Agreement dated as of April 23, 2009, a Third Loan Modification Agreement dated as of October 27, 2010, a Fourth Loan Modification Agreement, dated as of May 23, 2011, a Joinder and Fifth Loan Modification Agreement, dated as of September 29, 2011, a Sixth Loan Modification Agreement, dated as of May 9, 2012, and a Seventh Loan Modification Agreement, dated as of September 4, 2012, without limit as to amount, including all principal and interest (including such interest as may accrue after the initiation of bankruptcy proceedings, without regard as to whether such interest is an allowed claim in such bankruptcy proceedings) on such indebtedness, and all premiums, fees, expenses and other obligations owing by the Parent in respect of such indebtedness.

Share Consideration” shall mean 3,804,348 shares of Parent Series E Preferred Stock.

Shareholder Beneficiaries” shall mean Chad Brandon, Allen Jorgensen, Jeffrey Keller, Joel Kozikowski, and Brian Smith.

Shareholder Consent” shall have the meaning set forth in the Introduction.

Shareholders” shall mean Lighthouse Dental Consulting, Inc., Riley Software Systems, Inc., Jorgensen Enterprises, Inc., Chad Brandon, Inc. and Keller Software, LLC.

Shares” shall mean all shares of Company Common Stock.

Stock Option Plan” shall mean any written plan pursuant to which the Company has granted Options or other Company Convertible Securities.

Straddle Period” shall have the meaning set forth in Section 8.1(b) below.

Straddle Period Tax Calculation” shall have the meaning set forth in Section 8.1(b) below.

Subordination Agreement” shall mean a Subordination Agreement by and among Silicon Valley Bank, Parent and each of the Shareholders.

 

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Subsidiary” shall mean, with respect to any Person, any entity of which securities or other ownership interests having voting power sufficient to elect a majority of the board of directors or other governing body are at any time, directly or indirectly, owned by such Person.

Surviving Corporation” shall have the meaning set forth in Section 2.1.

Surviving Corporation Common Stock” shall have the meaning set forth in Section 3.4 below.

Tax” or “Taxes” shall mean all taxes, charges, fees, levies, penalties, additions or other assessments imposed by any Governmental Authority, including, but not limited to, income, profits, gross receipts, net proceeds, alternative or add on minimum, ad valorem, value added, turnover, sales, use, property, personal property (tangible and intangible), environmental, stamp, leasing, lease, user, excise, duty, franchise, capital stock, transfer, registration, license, withholding, social security (or similar), unemployment, disability, payroll, employment, social contributions, fuel, excess profits, occupational, premium, windfall profit, severance, estimated, or other taxes, charges or assessments or any kind whatsoever, including any interest, penalties or additions attributable thereto.

Tax Arbitrator” shall have the meaning set forth in Section 8.9 below.

Tax Claim” shall have the meaning set forth in Section 8.6(a) below.

Tax Returns” shall mean all reports, estimates, declarations of estimated Tax, information statements and returns relating to, or required to be filed in connection with, any Taxes and any schedules attached to or amendments of (including refund claims with respect to) any of the foregoing.

Third-Party Claim” shall have the meaning set forth in Section 10.5 below.

Transaction Expenses” shall mean all fees, costs and expenses incurred by the Company and the Shareholders (whether or not invoiced or payable as of the Closing), arising out of, relating to, in connection with, or incidental to, the discussion, evaluation, negotiation, documentation, preparation, implementation, consummation and performance of this Agreement and the transactions contemplated hereby, including costs associated with securing required consents of third parties, and fees and disbursements of advisors, consultants, investment bankers and other financial advisors, brokers and finders, lawyers and accountants (including fees and disbursements for services rendered after the Effective Time in connection with actions incidental to the transactions contemplated by this Agreement by any firm or attorney that acted as counsel to the Company or the Shareholders before the Effective Time), to the extent such fees, costs and expenses have not been paid by the Company prior to the Closing, including without limitation, all fees and disbursements set forth on Schedule TE attached to this Agreement.

Transfer Restriction Letter” shall mean each of the Transfer Restriction Letters by and between the Parent and each of Shareholder Beneficiaries.

Transfer Taxes” shall have the meaning set forth in Section 3.11 below.

 

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Uncontested Claim” shall have the meaning set forth in Section 10.7(b) below.

Working Capital” shall mean an amount (which may be positive or negative), as of the close of business on February 28, 2013, equal to the sum of: (i) current assets (including all cash and accounts receivable, deposits in transit and prepaid assets); minus (ii) the Company’s current liabilities (including, without limitation, accrued expenses and corporate credit card borrowings or balances, and accounts payable (including payroll and benefits and payroll advances)); in each case calculated in accordance with the methods, practices and principles set forth on Schedule FS. Schedule WC sets forth, by way of example, a worksheet for the calculation of Working Capital.

Working Capital Determination Date” shall have the meaning set forth in Section 3.10(c) below.

Working Capital Lower Target” shall mean -$160,000.

Working Capital Objection Period” shall have the meaning set forth in Section 3.10(b) below.

Working Capital Objection Statement” shall have the meaning set forth in Section 3.10(b) below.

Section 1.2 Construction. In this Agreement, unless the context otherwise requires:

(a) any reference in this Agreement to “writing” or comparable expressions includes a reference to email, facsimile transmission or other means of electronic communication;

(b) words expressed in the singular number shall include the plural and vice versa, and words expressed in the masculine shall include the feminine and neuter genders and vice versa;

(c) references to Articles, Sections, Exhibits, Schedules and Recitals are references to articles, sections, exhibits, schedules and recitals of this Agreement;

(d) references to “day” or “days” are to calendar days;

(e) references to this “Agreement” or any other agreement or document shall be construed as references to this Agreement or, as the case may be, such other agreement or document as the same may have been, or may from time to time be, amended, varied, novated or supplemented;

(f) any reference to a provision of a statute or regulation includes a reference to any substitute or successor provision; and

(g) “include,” “includes,” and “including” are deemed to be followed by “without limitation” whether or not they are followed by such words or words of similar import.

 

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Section 1.3 Knowledge. For purposes of this Agreement, (i) an individual will be deemed to have “Knowledge” of a particular fact or other matter if such individual is actually aware of such fact or other matter or such individual would reasonably be expected to discover or otherwise become aware of such fact or other matter in the course of conducting a reasonable investigation (as expected from someone in such individual’s role within the Company) concerning the existence of such fact or other matter, (ii) the Company will be deemed to have “Knowledge” of a particular fact or other matter if any of the Shareholder Beneficiaries has Knowledge of such fact or matter; (iii) the Parent will be deemed to have “Knowledge” of a particular fact or other matter if any executive officer of the Parent has Knowledge of such fact or matter.

Section 1.4 Schedules and Exhibits. The Schedules and Exhibits to this Agreement are incorporated into and form an integral part of this Agreement. If an Exhibit is a form of agreement, such agreement, when executed and delivered by the parties thereto, shall constitute a document independent of this Agreement.

ARTICLE 2

THE MERGER

Section 2.1 The Merger. Upon the terms and subject to the conditions of this Agreement, at the Effective Time, the Company shall be merged with and into Merger Sub in accordance with the terms of this Agreement, the GBCC and the Delaware General Corporation Law (the “DGCL”), whereupon the separate existence of the Company shall cease and Merger Sub shall continue as the surviving corporation (the “Surviving Corporation”) and a wholly-owned Subsidiary of the Parent. As a result of the Merger, the outstanding shares of capital stock of the Company and Merger Sub shall be converted or canceled in the manner provided in Article 3.

Section 2.2 Effective Time. At the Closing, the parties shall cause the Merger to be consummated by filing certificates of merger (the “Certificates of Merger”) consistent with this Agreement in forms reasonably satisfactory to the parties with the Secretary of State of the State of Delaware (the “Delaware Secretary of State”) in accordance with the relevant provisions of the DGCL and the Secretary of State of the State of Georgia (the “Georgia Secretary of State”) in accordance with the relevant provisions of the GBCC. The Merger shall become effective at the time of filing of the Certificates of Merger or such later time as agreed to by the Parent and the Company and specified in the Certificates of Merger (the date and time of such filing or such later specified time being referred to herein as the “Effective Time”).

Section 2.3 Closing. The closing of the transactions contemplated by this Agreement (the “Closing”) will take place at the offices of Choate, Hall & Stewart LLP, Two International Place, Boston, Massachusetts 02110, at 10:00 a.m., local time, on the date hereof (the “Closing Date”).

Section 2.4 Effects of the Merger. The Merger shall have the effects set forth in this Agreement, the GBCC and the DGCL. Without limiting the generality of the foregoing, at the Effective Time, all the properties, rights, privileges, powers and franchises of the Company and

 

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Merger Sub shall vest in the Surviving Corporation and all debts, liabilities and duties of the Company and Merger Sub shall become the debts, liabilities and duties of the Surviving Corporation.

Section 2.5 Certificate of Incorporation and By-laws of the Surviving Corporation. At the Effective Time, (i) the certificate of incorporation of Merger Sub as in effect immediately prior to the Effective Time shall become the certificate of incorporation of the Surviving Corporation, except that the name of the Surviving Corporation as stated in such certificate of incorporation shall be “Lighthouse Practice Management Group, Inc.”, and (ii) the by-laws of Merger Sub as in effect immediately prior to the Effective Time shall be the by-laws of the Surviving Corporation, except that the name of the Surviving Corporation on the face of such by-laws and as otherwise set forth therein shall be “Lighthouse Practice Management Group, Inc.”

Section 2.6 Directors and Officers of the Surviving Corporation. The directors and officers of Merger Sub immediately prior to the Effective Time shall, from and after the Effective Time, be the directors and officers, respectively, of the Surviving Corporation until their successors shall have been duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the Surviving Corporation’s certificate of incorporation and by-laws.

ARTICLE 3

EFFECT OF THE MERGER

Section 3.1 Conversion of Company Common Stock. At the Effective Time, by virtue of the Merger and without any action on the part of the parties hereto, the Company’s Board of Directors or the Shareholders, all outstanding shares of Company Common Stock (other than Shares to be canceled in accordance with Section 3.6) shall, by virtue of the Merger and without any action on the part of the holder thereof, be canceled and extinguished and converted automatically at the Effective Time into the right to receive (subject to the exchange procedures specified in Section 3.8 and the other terms of this Agreement) the Merger Consideration as specified on the Distribution Schedule.

Section 3.2 Treatment of Company Convertible Securities.

(a) Cancellation of Company Convertible Securities. The Board of Directors of the Company shall take all such action as is necessary, under any Stock Option Plan and the terms of any applicable Company Convertible Securities (whether granted pursuant to a Stock Option Plan or otherwise) such that at the Effective Time, each of the Company Convertible Securities that is outstanding immediately prior to the Effective Time shall automatically be irrevocably canceled and terminated and be of no further force or effect from and after the Effective Time. All Stock Option Plans and all Company Convertible Securities thereunder shall terminate at the Effective Time.

(b) Further Actions. Prior to the Effective Time, the Board of Directors of the Company shall take such action as is necessary to effectuate the treatment of Company Convertible Securities under this Section 3.2. In addition, prior to the Effective Time, the

 

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Company shall provide notice (subject to reasonable review by Parent) to each holder of Company Convertible Securities describing the treatment of such Company Convertible Securities in accordance with this Section 3.2.

Section 3.3 Aggregate Adjusted Deferred Payment Consideration.

(a) Deferred Payment.

(i) Promise to Pay. Parent promises to pay to each Shareholder such Shareholder’s Pro Rata Percentage of the outstanding balance of the Aggregate Adjusted Deferred Payment Consideration and all accrued but unpaid interest thereon in immediately available funds, to the extent payable, in accordance with this Section 3.3.

(ii) Interest. Simple interest on the Aggregate Adjusted Deferred Payment Consideration shall accrue from and after the Effective Time at a rate equal to eight percent (8%) per annum; provided, that if the Parent does not make the payment required by Section 3.3(a)(iii)(B) when due, such interest shall accrue thereafter at a rate equal to twelve percent (12%) per annum. If upon a Refinancing (as defined below) the holder(s) of Senior Indebtedness prohibit the Parent’s payment of interest pursuant to Section 3.3(a)(iii) when due, then such interest shall compound quarterly when accrued.

(iii) Payment. Subject to Sections 3.3(a)(v) and 3.3(a)(vi), (A) interest on the Aggregate Adjusted Deferred Payment Consideration shall be due and payable quarterly in arrears on the seventh day of the month following the end of each of the Parent’s fiscal quarterly periods (with the first interest payable on or before July 7, 2013 for the month ended March 31, 2013 and the fiscal quarter ended June 30, 2013) and (B) the Aggregate Adjusted Deferred Payment Consideration and all accrued but unpaid interest thereon shall be due and payable upon the earliest of (I) the second anniversary of the Effective Time, (II) upon the closing of a Qualifying Public Offering and (III) the closing of a Sale of the Company.

(iv) Pre-Payment. The Aggregate Adjusted Deferred Payment Consideration and any interest accrued but unpaid thereon may be prepaid in whole or in part without the consent of the Representative or any other Person and without prepayment penalty or premium of any kind. Any voluntary prepayment made shall be (a) first applied to the interest accrued on the Aggregate Adjusted Deferred Payment Consideration as of the date of such prepayment but unpaid thereon, and (b) thereafter applied to the outstanding balance of the Aggregate Adjusted Deferred Payment Consideration. If any of the Aggregate Adjusted Deferred Payment Consideration is prepaid, such amount will remain available as recourse for indemnification claims of the Parent Indemnified Persons in accordance with the last sentence of Section 10.7(c).

(v) Offsets. For each Company Key Employee who ceases to be employed by the Parent, one of its Subsidiaries (including the Surviving Corporation) or the Parent’s successor prior to the first anniversary of the Effective Time, the Aggregate Adjusted Deferred Payment Consideration and any interest accrued but unpaid thereon shall be reduced by $1,500,000 as of the last date of employment (collectively, the “Deferred Payment Offsets”); provided, however, no offset or reduction shall be made if the Company Key Employee’s employment is terminated (a) by reason of death or Disability, (b) by the Parent without Cause or (c) by the Company Key Employee with Good Reason.

 

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(vi) Deferred Payment Events of Default. The entire unpaid balance of the Aggregate Adjusted Deferred Payment Consideration, together with all accrued and unpaid interest thereon, shall immediately be due and payable upon the occurrence of any one or more of the following events of default (each, a “Deferred Payment Event of Default”):

(A) the entry of an order, judgment or decree by any court of competent jurisdiction granting Parent relief as a debtor under the Federal Bankruptcy Code, or applicable state law, or otherwise adjudicating Parent as bankrupt or as insolvent, or the making of an assignment for the benefit of creditors by Parent, or Parent admitting in writing its inability to pay its debts as they become due, or the commencement by or against Parent of a voluntary or involuntary case for relief as a debtor under the Federal Bankruptcy Code, or applicable state law, or the commencement of any other bankruptcy, insolvency, reorganization, arrangement, debt adjustment, receivership, liquidation, trusteeship, custodianship or dissolution proceedings by or against Parent (each, an “Insolvency Event”), and, if instituted adversely, either (i) the consent by Parent to the same or the admission in writing of the material allegations contained in the petition filed in said proceedings or (ii) said proceedings remain in effect and unstayed for a period of sixty (60) consecutive days after the institution thereof;

(B) if a receiver is appointed for Parent; and

(C) the failure to have discharged within a period of sixty (60) days after commencement thereof any attachment, sequestration or similar proceeding against a material portion of the Parent’s assets, which the Parent is not contesting.

(b) Subordination. Each of the Shareholders agrees that the Aggregate Adjusted Deferred Payment Consideration and the cash portion of the Earn-out Consideration is hereby expressly subordinated in the right of payment to the prior payment in full of the holders of the Senior Indebtedness, except as expressly provided in the Subordination Agreement or any other subordination agreement entered into among the Shareholders and holders of Senior Indebtedness.

(i) Liquidation. In the event of a Liquidation, all Senior Indebtedness shall first be paid in full before any payment or distribution of any character, whether in cash, securities or other property, shall be made in respect of the Aggregate Adjusted Deferred Payment Consideration and Earn-out Consideration.

(ii) Refinancing. As long as any portion of the Aggregate Adjusted Deferred Payment Consideration remains outstanding, if Parent refinances the Senior Indebtedness currently held by Silicon Valley Bank (a “Refinancing”), Parent shall use good faith efforts to obtain subordination of the Aggregate Adjusted Deferred Payment Consideration

 

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from the holders of such refinanced Senior Indebtedness that permits the Aggregate Adjusted Deferred Payment Consideration to be paid when due under Section 3.3(a)(iii)(B)(I). If, however, despite Parent’s good faith efforts, the holders of such refinanced Senior Indebtedness will not permit such payment to be paid when due under Section 3.3(a)(iii)(B)(I), then, upon such a Refinancing, the Aggregate Adjusted Deferred Payment Consideration and any accrued but unpaid interest thereon shall by payable under Section 3.3(a)(iii)(B)(I) in arrears in 24 equal, monthly installments (with the first payment due on or before the seventh day of the first month after the second anniversary of the Closing Date and subsequent payments due on or before the seventh day of each subsequent month through the fourth anniversary of the Closing Date), subject to any subordination set forth in the Senior Indebtedness and any subordination agreement entered into between the Shareholders and the holders of such Senior Indebtedness. If the Refinancing occurs after the second anniversary of the Closing Date, then the number of monthly installments shall be equal to the number of months between the date of the Refinancing and the fourth anniversary of the Closing Date. Any amount of Aggregate Adjusted Deferred Payment Consideration remaining outstanding after the second anniversary of the Closing Date shall accrue interest at a rate of 12% per annum as long as such amount remains outstanding. Nothing in this Section 3.3(b)(ii) shall prevent the Parent from refinancing any Senior Indebtedness.

(iii) Modifications of Senior Indebtedness and Security. The holders of the Senior Indebtedness may, at any time and from time to time with or without notice, without impairing or releasing the subordination provisions of this Section 3.3(b), do any one or more of the following: (i) change the manner, place, terms or amount of payment of, or change or extend the time of payment of or renew or alter, the Senior Indebtedness, or amend, modify, supplement or terminate in any manner any instrument, document or agreement relating to the Senior Indebtedness; (ii) release any person or entity liable in any manner for the payment or collection of the Senior Indebtedness; (iii) exercise or refrain from exercising any rights in respect of the Senior Indebtedness against the Parent or any other person or entity; (iv) apply any monies or other property paid by any person or entity or otherwise released in any manner to the Senior Indebtedness; or (v) accept or release any security for the Senior Indebtedness.

(iv) Agreements with Holders of Senior Indebtedness. Each of the Shareholders shall promptly execute such additional agreements as any holders of Senior Indebtedness may request to confirm the provisions of this Section 3.3(b) and otherwise providing for the subordination of the Aggregate Adjusted Deferred Payment Consideration and/or Earn-out Consideration. Each of the Shareholders hereby grants the Representative an irrevocable power of attorney coupled with an interest to execute such agreements on behalf of the Shareholder if the Shareholder does not so execute and deliver such agreements in a timely manner; provided, that, if the Representative has not responded within five (5) days following being requested to act by Parent, then the Shareholders hereby grant each of the Chief Executive Officer and Chief Financial Officer of the Parent an irrevocable power of attorney coupled with an interest to execute such agreements on behalf of the Shareholder if the Shareholder does not so execute and deliver such agreements in a timely manner.

(v) Third Party Beneficiaries. The holders of Senior Indebtedness from time to time are intended third party beneficiaries of the provisions of this Section 3.3(b) and, as such, are entitled to enforce such provisions.

 

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Section 3.4 Merger Sub Stock. Each issued and outstanding share of the common stock, par value $0.001 per share, of Merger Sub (“Merger Sub Common Stock”) shall be converted into and become one fully paid and nonassessable share of common stock, par value $0.001 per share, of the Surviving Corporation (“Surviving Corporation Common Stock”). Each certificate representing outstanding shares of Merger Sub Common Stock shall at the Effective Time represent an equal number of shares of Surviving Corporation Common Stock.

Section 3.5 Effect on Shares. All Shares converted in accordance with Section 3.1 shall no longer be outstanding and shall automatically be deemed canceled and retired and shall cease to exist as of the Effective Time, and each holder of a certificate representing any such Shares (“Certificates”) shall cease to have any rights with respect thereto, except the right to receive the amounts payable in respect of such holder’s Shares as set forth on the Distribution Schedule, in each case without interest. From and after the Effective Time, there shall be no further registration of transfers effected on the stock transfer books of the Surviving Corporation of shares of capital stock of the Company which were outstanding immediately prior to the Effective Time.

Section 3.6 Cancellation of Treasury Stock. Notwithstanding any provision of this Agreement to the contrary, all Shares that are owned by the Company as treasury stock shall, by virtue of the Merger and without any action on the part of the holder thereof, be canceled and retired and shall cease to exist, and no payment or other consideration shall be made or delivered with respect thereto.

Section 3.7 Actions at Closing. At or promptly after the Closing:

(a) the Parent shall set aside a certificate issued in the name of the Representative (as record holder for the benefit of the Shareholders) representing the Escrow Shares to be held in escrow in accordance with Section 10.7(b) of this Agreement;

(b) the Parent shall pay and discharge directly the aggregate amount of all unpaid Transaction Expenses and the aggregate amount of all Change of Control Payments in such amounts and to the accounts designated on a funds flow memorandum delivered by the Company to the Parent in accordance with Section 9.1 (the “Funds Flow Memorandum”) or to the appropriate Governmental Authority, as applicable (as such amounts are being deducted from the Aggregate Adjusted Closing Cash Consideration and are not otherwise being distributed pursuant to this Section 3.7); and

(c) the Parent shall, upon a Shareholder’s compliance with Section 3.8, (i) pay to such Shareholder its Pro Rata Percentage of the Aggregate Adjusted Closing Cash Consideration, as indicated on the Distribution Schedule and (ii) issue to such Shareholder its Pro Rata Percentage of the Closing Share Consideration, as indicated on the Distribution Schedule.

 

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Section 3.8 Surrender and Exchange of Certificates. The Parent shall make payment of the Merger Consideration to the Shareholders in accordance with the following procedures:

(a) Exchange Procedures. Each Shareholder shall deliver the Parent Voting Agreement Joinder and Parent ROFR Agreement Joinder and each Shareholder Beneficiary shall deliver to Parent a Transfer Restriction Letter. Upon surrender of a Certificate to the Parent, together with a duly and validly executed signature page to this Agreement and any Related Document to which such holder is a party, the holder of such Certificate shall be entitled to receive in exchange therefor payment of the applicable Merger Consideration which such holder has the right to receive pursuant to Section 3.1 (without interest, except as set forth in Section 3.3, and less any required withholding), and the Certificate so surrendered shall forthwith be canceled. Until surrendered and canceled as contemplated by this Section 3.8(a), each Certificate shall be deemed at any time after the Effective Time to represent only the right to receive upon surrender thereof the applicable Merger Consideration (without interest, except as set forth in Section 3.3, and less any required withholding) which the holder of such Certificate is entitled to receive hereunder.

(b) Payment to Registered Holders. If any portion of the applicable Merger Consideration is to be paid to a Person other than the Person in whose name the Certificate surrendered in exchange therefor is registered, it will be a condition to such payment that (i) the Certificate so surrendered be properly endorsed and otherwise in proper form for transfer and (ii) the Person requesting such exchange have paid any transfer or other Taxes required by reason of such payment in a name other than the registered holder of the Certificate surrendered or established to the reasonable satisfaction of the Parent that such Tax has been paid or is not applicable.

(c) No Liability. Notwithstanding anything to the contrary in this Agreement, none of the Parent, Merger Sub, the Surviving Corporation or other Affiliates of Parent shall be liable to a holder of a Certificate for any amount delivered to a public official pursuant to and as required by any applicable abandoned property, escheat or similar Law.

(d) Lost, Stolen or Destroyed Certificates. In the event any Certificates representing Shares shall have been lost, stolen or destroyed, the Parent shall deliver, in exchange for such lost, stolen or destroyed Certificates and only upon the making of a satisfactory affidavit of that fact by the holder thereof and the delivery of such other documents reasonably requested by the Parent, the applicable Merger Consideration; provided, however, that the Parent may, in its sole discretion and as a condition precedent to the payment in respect thereof, require the owner of such lost, stolen or destroyed Certificates to deliver an indemnity agreement in such form as the Parent may reasonably request as indemnity against any claim that may be made against the Parent or the Surviving Corporation with respect to such Certificate.

(e) Fractional Shares. The Parent Series E Preferred Stock receivable by each Shareholder by virtue of the Merger shall be rounded down to the nearest whole share and no fraction of a share of Parent Series E Preferred Stock will be issued.

Section 3.9 Earn-out Consideration.

(a) If earned in accordance with this Section 3.9, the Parent shall make the following additional aggregate payment (the “Earn-out Consideration”) to the Shareholders, divided among them in accordance with the Distribution Schedule. If the Gross Revenue for the

 

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period commencing March 1, 2013 and ending February 28, 2014 or such earlier date on which the aggregate Earn-out Consideration earned under this Section 3.9 equals $5,000,000 (the “Measurement Period”) is equal to or less than $7,200,000, the Earn-out Consideration shall be $0. If the Gross Revenue for the Measurement Period is greater than $9,005,054, the aggregate Earn-out Consideration shall be $5,000,000. If the Gross Revenue for the Measurement Period is greater than $7,200,000 but less than $9,005,054, the aggregate Earn-out Consideration shall be equal to 2.77 multiplied by an amount equal to (i) the Gross Revenue for the Measurement Period (rounded down to the nearest dollar) minus (ii) $7,200,000. Forty percent (40%) of the aggregate Earn-out Consideration earned in accordance with this Section 3.9 shall be paid by the issuance of that number of shares of Parent Series E Preferred Stock (rounded down to the nearest whole share) equal to the quotient obtained by dividing (x) the dollar amount of Earn-out Consideration payable in Parent Series E Preferred Stock hereunder by (y) the Agreed Stock Consideration Value and the remaining aggregate Earn-out Consideration shall be paid in cash to the Shareholders, divided among them in accordance with the Distribution Schedule.

(b) As used herein, “Gross Revenue” shall mean the Parent’s and its Subsidiaries’ (including the Surviving Corporation’s) revenue (including any Appropriate Revenue Credit credited under Section 3.9(h)) of the Business from the sale of the Lighthouse 360 Product determined in accordance with the principles set forth on Schedule FS hereto. The determination of Gross Revenue shall exclude (i) all of the Parent’s and its Subsidiaries’ (including the Surviving Corporation’s) revenue other than that of the Business from the Lighthouse 360 Product and (ii) revenue of any new businesses acquired by the Parent or any of its Subsidiaries after the date hereof.

(c) The determination of whether amounts are due under this Section 3.9 shall be made in good faith by the Parent, and written notice thereof (the “Earn-out Consideration Notice”) shall be delivered to the Representative not later than 35 days after the end of the Measurement Period.

(d) If the Representative delivers written notice (the “Disputed Earn-out Consideration Notice”) to the Parent within 20 days after the delivery of the Earn-out Consideration Notice, stating that the Representative objects to the amount of the Earn-out Consideration, specifying the basis for such objection in reasonable detail (including the specific items in dispute), and setting forth the Representative’s proposed amount of the Earn-out Consideration (including the proposed amounts of the disputed items), the Representative and the Parent will attempt to resolve and finally determine and agree upon the Earn-out Consideration as promptly as practicable.

(e) If the Representative and the Parent are unable to agree upon the Earn-out Consideration within 30 days after delivery of the Disputed Earn-out Consideration Notice, the dispute will be submitted to the Neutral Auditor. The Neutral Auditor will (i) resolve the disputed items specified in the Disputed Earn-out Consideration Notice and (ii) determine the aggregate amount of the Earn-out Consideration, as modified only by the resolution of such items. The determination by the Neutral Auditor will be made within 60 days after such selection and will be final and binding upon the parties. The fees, costs and expenses of the Neutral Auditor will be borne by the party whose positions generally did not prevail in such determination, or if the Neutral Auditor determines that neither party could be fairly found to be the prevailing party, then such fees, costs and expenses will be borne 50% by the Shareholders and 50% by the Parent.

 

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(f) If the Representative does not deliver the Disputed Earn-out Consideration Notice to the Parent within 20 days after the date of the Earn-out Consideration Notice, the Earn-out Consideration specified in the Earn-out Consideration Notice will be conclusively presumed to be true and correct in all respects and will be final and binding upon the parties.

(g) Promptly, but in any event within five (5) Business Days, after the Earn-out Consideration is finally determined in accordance with this Section 3.9, the Parent shall deliver the aggregate Earn-out Consideration to the Shareholders in accordance with the Distribution Schedule and Section 3.9(a). Upon a Sale of the Company, any Earn-out Consideration payable hereunder in respect of each share of Parent Series E Preferred Stock shall instead be payable in the consideration received in respect of each share of Parent Series E Preferred Stock in such Sale of the Company, proportionally subject to any escrow or other hold-back arrangement as the other shares of Parent Series E Preferred Stock.

(h) During the Measurement Period, (i) the Business will be operated by the Parent and the Surviving Corporation in the ordinary course and consistent with past practice of the Business under the supervision of the Company Key Employees so long as they remain employed by the Parent or one of its Subsidiaries (including the Surviving Corporation), (ii) the Parent shall provide to the Business available headcount for customer support and development consistent with the Company’s levels as of the Closing Date, which would be headcount of 21 for customer service and 5 for development, and (iii) the Parent shall not divert the efforts of the Company Key Employees from the Business in a manner that would reasonably be expected to have a material and adverse effect on the Business. Notwithstanding the foregoing, the Business shall be operated in compliance with, and the Company Key Employees shall manage the Business so that it is in compliance with, applicable Laws and the Parent’s policies and procedures (such as employment policies and procedures, codes of conduct, budgeting and forecasting, payment card industry compliance standards, and customer Contracts) generally applicable to other operations of the Parent. Unless mutually agreed upon by the Parent and the Representative, during the Measurement Period neither the Parent nor the Surviving Corporation shall operate the Business in a manner that would reasonably be expected to have a material and adverse effect on the Business (for example, neither Parent nor the Surviving Corporation shall modify the pricing strategy or branding of the Business (in effect as of the Closing) or bundle the Lighthouse 360 Product with the Parent’s other service offerings, if such modification or bundling would reasonably be expected to have a material and adverse effect on the Business). Without limiting the foregoing, during the Measurement Period, Parent and Surviving Corporation shall not, except to the extent necessary or advisable to comply with applicable Laws: (i) enter into any agreement with any other dental association or similar group that would result in offering a lower price for the Lighthouse 360 Product to any group of dental practices that would be lower than the price offered to Academy of General Dentistry and Ohio Dental Association members (which is $269 per month as of the Closing Date); (ii) provide any “free trial period” or “reduced-price trial period” pricing (other than existing Company sales and marketing programs, such as $1.00 subscriptions for customers switching to Lighthouse from a competitor, one-month free trials, and client satisfaction waivers, each consistent with the Company’s past practices) for the Lighthouse 360 Product, without including Appropriate

 

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Revenue Credit (as defined later in this Section 3.9) for each customer who uses the Lighthouse 360 Product under such a trial period in the calculation of Gross Revenue hereunder; (iii) use a method of calculating Gross Revenue for purposes of calculating the Earn-out Consideration other than as set forth on Schedule FS, even though that accounting method is different from GAAP; (iv) bundle the Lighthouse 360 Product with any other of Parent’s products or services without including Appropriate Revenue Credit for each customer who uses the Lighthouse 360 Product under the terms of such a bundle in the calculation of Gross Revenue hereunder; (v) create any product offering that competes with the Lighthouse 360 Product, without an agreement in writing between Parent and Representative as to how revenue from such product will be counted toward the Earn-out Consideration; (vi) change the name of the Lighthouse 360 Product to anything that is not substantially the same as “Lighthouse 360”; (vii) change the published price for the Lighthouse 360 Product’s monthly fee, implementation fee, or any of the Lighthouse 360 Product’s optional message types, except that postcards and letters can be increased to reflect postage increases; (viii) increase the prices charged to any existing clients, except that postcards and letters can be increased to reflect postage increases; (ix) require a Contract to be signed by any customer for the Lighthouse 360 Product for any period longer than one month; (x) reduce or discontinue payments under the Company’s existing Referral Program (as defined in Exhibit RP) for existing Company customers for whom a referral reward is already being paid; (xi) materially reduce the scope of, or discontinue, the Company’s Referral Program for new sales; (xii) change the vendor of (unless such vendor terminates or elects not to renew its relationship with the Parent or any of its Subsidiaries (including the Surviving Corporation) for convenience), or with regard to tangible materials, downgrade the specifications of, any of the following products or services provided to the Company’s customers with respect to the Lighthouse 360 Product: email delivery, text message delivery, postcard and letter design, printing, and mailing and automated phone call delivery; (xiii) change any Company salesperson who becomes an employee of the Parent or Surviving Corporation as of the Closing Date from doing inbound sales to doing outbound sales; (xiv) eliminate any inbound sales representative for the Lighthouse 360 Product who is fully trained and competent at selling the Lighthouse 360 Product, who has met sales quota for at least two of the three months prior to termination, and who has materially complied with all directives, policies and procedures of the Parent and its Subsidiaries (including the Surviving Corporation) applicable to such sales representative, unless that sales representative is replaced promptly (but in any event within 30 days) by someone who has already been fully trained and has demonstrated adequate competence at selling the Lighthouse 360 Product; (xv) reduce the budget for marketing the Lighthouse 360 Product below $50,000 per month, or spend such $50,000 per month on materially different activities than the Company’s past practice; (xvi) have the Company’s current Marketing Manager, Jason Stephenson, report directly to any employee other than Brian Smith, for so long as Brian Smith is employed by the Parent or Surviving Corporation, or terminate the employment of Mr. Stephenson except in the event of Mr. Stephenson’s material non-compliance with the Parent’s or Surviving Corporations directives, policies or procedures applicable to him; or (xvii) allow any employee of Parent or any Subsidiary (including the Surviving Corporation) to participate on any public electronic dental forum as a representative of the Lighthouse 360 Product without the approval of the Representative. Subject to, and not in limitation of, the preceding sentences of this Section 3.9, the parties agree and acknowledge that (A) nothing contained herein or in any other agreement, document or instrument entered into in connection with the consummation of the Merger or the other transactions contemplated by this Agreement requires the Parent or any

 

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Subsidiary of the Parent to conduct the Business in any particular manner after the Closing, and, (B) the operations of the Parent and its Subsidiaries after the Closing (including the Company) shall be conducted at the sole and absolute discretion of the Parent, and (C) any restriction in the preceding sentences of this Section 3.9 may be waived or modified with the written approval of the Representative; provided, that the Representative will provide the Parent with notice of any violation of the foregoing as soon as reasonably practicable after any Shareholder or Shareholder Beneficiary becomes aware of a violation, and a 20-day period during which the Parent may cure such violation. “Appropriate Revenue Credit,” as used in this Section 3.9, shall mean an amount equal to, for each customer of the Parent or Surviving Corporation using the Lighthouse 360 Product, (i) $239 for each month during the Measurement Period that such customer is a customer of the Lighthouse 360 Product, plus (ii) the then-current price for all optional message types used by such customer during the Measurement Period, plus (iii) a one-time amount of $299 upon the implementation for each such customer who becomes a customer of the Lighthouse 360 Product for the first time during the Measurement Period.

Section 3.10 Post-Closing Working Capital Adjustments.

(a) Parent’s Working Capital Determination. The Parent shall, within 75 days after the Closing, prepare and deliver to the Representative a balance sheet of the Company as of the Closing Date (the “Parent Closing Balance Sheet”). The Parent Closing Balance Sheet will be prepared in accordance with the methods, practices and principles set forth on Schedule FS. The Parent Closing Balance Sheet will be accompanied by a statement (the “Parent Working Capital Statement”), certified on behalf of the Parent by a duly authorized officer, setting forth in reasonable detail the Parent’s calculations showing the basis for the determination of the amounts set forth in the Parent Closing Balance Sheet and the Parent’s good faith calculation of the Working Capital of the Company as of the Closing Date, including each respective component thereof (the “Parent Working Capital Determination”), including, in all cases, a reasonably detailed summary explanation of the calculations made to arrive at such amounts.

(b) Objection by Representative. If the Parent delivers a Parent Closing Balance Sheet and Parent Working Capital Statement in accordance with Section 3.10(a) within 75 days after the Closing, (i) the Parent and the Representative shall reasonably cooperate with and assist each other in resolving any items disputed by the Representative in good faith, including by making available and granting reasonable access (during normal business hours and subject to the Parent’s reasonable security measures and insurance requirements) to records and employees of the Surviving Corporation (provided, that the Representative is bound by a duty of confidentiality reasonably satisfactory to the Parent), and (ii) the Representative shall have a period of 30 days after delivery of the Parent Closing Balance Sheet and Parent Working Capital Statement (the “Working Capital Objection Period”), to deliver to the Parent a statement (the “Working Capital Objection Statement”) setting forth any objections that the Representative may have to the Parent Working Capital Determination, including a reasonably detailed explanation of the basis for each such objection. If the Representative does not deliver to the Parent a Working Capital Objection Statement by the end of the Working Capital Objection Period, or if during the Working Capital Objection Period the Representative delivers to the Parent written notice that the Representative accepts the Parent Working Capital Determination, then the Parent Closing Balance Sheet and Parent Working Capital Statement and the Parent Working Capital Determination shall be considered final, conclusive and binding. If the

 

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Representative does deliver a Working Capital Objection Statement by the end of the Working Capital Objection Period, the Representative and the Parent shall attempt in good faith to resolve any disputed items. If the Representative and the Parent are unable to resolve all or any of the disputed items within 60 days after delivery of the Working Capital Objection Statement, then the remaining disputed items shall be submitted to the Neutral Auditor. The Neutral Auditor shall be instructed: (i) to address only the unresolved objections set forth in the Working Capital Objection Statement; (ii) with respect to each disputed item, not assign a value greater than the greatest value claimed for such item by either party or smaller than the smallest value claimed for such item by either party; and (iii) to prepare and deliver to the Representative and the Parent the Neutral Auditor’s determination of the Working Capital at the Closing, based solely on its determination of the disputed items, as soon as reasonably practicable (and in any event within 60 days after its engagement). The fees and disbursements of the Neutral Auditor will be borne by the party whose positions generally did not prevail in such determination, or if the Neutral Auditor determines that neither party could be fairly found to be the prevailing party, then such fees and disbursements will be borne 50% by the Parent and 50% by the Representative. Each of the Parent and the Representative shall cooperate with and assist the Neutral Auditor to resolve disputed items, including by making available and granting reasonable access to records and employees. The Working Capital at the Closing as finally determined by (A) failure of the Representative to deliver a Working Capital Objection Statement to Parent Closing Balance Sheet and Parent Working Capital Statement, in which case the Working Capital reflected in Parent Working Capital Statement, (B) agreement of the Representative and the Parent (including pursuant to a notice by the Representative that the Parent Working Capital Statement is acceptable), or (C) the Neutral Auditor, shall be the “Final Working Capital.” The date of the determination of the Final Working Capital shall be referred to herein as the “Working Capital Determination Date.”

(c) Final Working Capital Adjustment. If the Working Capital Lower Target is greater than the Final Working Capital, the Aggregate Adjusted Deferred Payment Consideration shall automatically be reduced by an amount equal to the excess of the Working Capital Lower Target over the Final Working Capital and, in such event, the Parent shall deliver a written notice to the Representative reflecting the new balance of the Aggregate Adjusted Deferred Payment Consideration. If the Final Working Capital is greater than the Working Capital Lower Target, no adjustment will be made hereunder.

Section 3.11 Transfer Taxes; Withholding of Tax. All transfer, sale and use, registration, documentary recording, value added, stamp and similar Taxes and fees (including any penalties and interest) incurred, imposed, assessed or payable in connection with the transactions contemplated by this Agreement (collectively, the “Transfer Taxes”) shall be borne by the Shareholders, and each of the Shareholders shall, at its own expense, properly file on a timely basis all necessary Tax Returns, reports, forms and other documentation with respect to any Transfer Taxes. The Parent and the Surviving Corporation shall be entitled to deduct and withhold from any amounts payable in respect of Shares or Company Convertible Securities such amount, if any, as the Parent or the Surviving Corporation (or any of its Affiliates) is required to deduct and withhold with respect to the making of such payment under United States federal, state, local or non-U.S. Tax Law and to collect any necessary Tax forms, including Form W-9 or the appropriate series of Form W-8, as applicable, or any similar information, from any Shareholder and any other recipient of any payment hereunder. To the extent that amounts are

 

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so withheld by the Parent or the Surviving Corporation, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the former holder of Shares or Company Convertible Securities, as the case may be, in respect of which such deduction and withholding was made by the Parent or the Surviving Corporation.

Section 3.12 Further Assurances. At any time or from time to time after the Closing, each of the parties hereto shall, at the expense of the party making such request, execute and deliver such other documents and instruments, provide such materials and information and take such other actions as may reasonably be necessary, proper or advisable, to the extent permitted by Law, to fulfill its obligations under this Agreement.

ARTICLE 4

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

As of the date of this Agreement and as of the Closing Date, the Company represents and warrants to Parent and Merger Sub as set forth in this Article 4, subject to any exceptions expressly stated in the applicable Part of the disclosure schedule delivered by the Company to Parent on and as of the date hereof and attached hereto as Exhibit C (as supplemented from time to time after the date of this Agreement in accordance with the terms hereof, the “Company Disclosure Schedule”). For purposes of Sections 4.7, 4.9, 4.12, 4.13, 4.16, and 4.21, the term “Company” shall include Lighthouse Practice Management Group, LLC, a dissolved Indiana limited liability company and predecessor to the business of the Company (“LPMG LLC”).

Section 4.1 Organization; Subsidiaries.

(a) The Company (i) is a corporation duly organized, validly existing and in good standing under the laws of the State of Georgia; (ii) has the requisite corporate power and authority to own, lease and operate its assets and properties and to carry on its business as now being conducted and as proposed to be conducted; and (iii) is duly qualified or licensed to do business in each jurisdiction where the character of the properties owned, leased or operated by it or the nature of its activities makes such qualification or licensing necessary, except where the failure to be so qualified or licensed would not have a Company Material Adverse Effect. The Company has no Subsidiaries.

(b) The Company does not own any capital stock of, or any equity interest of any nature in, any Person. The Company has not at any time been a general partner of any general partnership, limited partnership or other Person.

(c) The Company has delivered or made available to Parent true, correct and complete copies of the Company Organizational Documents, as amended to date, and each such instrument is in full force and effect. The Company is in compliance in all material respects with the provisions of the Company Organizational Documents.

(d) Part 4.1(d) of the Company Disclosure Schedule lists all of the current directors and officers (or equivalent) of the Company.

 

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(e) LPMG LLC was properly dissolved under the Laws of the State of Indiana, and all of LPMG LLC’s assets were distributed to certain of the Shareholders. The Shareholders who received LPMG LLC’s assets subsequently contributed all of such assets to the Company and none of such assets (or any other assets used by the Company) are currently owned, in whole or in part, by LPMG LLC, any Shareholder, or any other Person.

Section 4.2 Authority; Non-Contravention.

(a) The Company has all requisite corporate power and authority to enter into this Agreement and the Related Documents and to consummate the transactions contemplated hereby and thereby. The Board of Directors of the Company has unanimously approved this Agreement and declared the advisability of this Agreement and the Merger and recommended that the shareholders of the Company approve and adopt this Agreement and approve the Merger. Section 14-2-1132 of the GBCC applicable to a “business combination” (as defined therein) will not apply to the execution, delivery or performance of this Agreement or the consummation of the Merger or the other transactions contemplated by this Agreement. The execution and delivery by the Company of this Agreement and the Related Documents and the consummation by the Company of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action on the part of the Company. The Requisite Shareholder Approval is sufficient for the Company’s shareholders to approve and adopt this Agreement and approve the Merger, and no other approval of any holder of any securities of the Company is required in connection with the consummation of the transactions contemplated hereby. This Agreement has been duly executed and delivered by the Company and, assuming the due authorization, execution and delivery of this Agreement by Parent, Merger Sub and the Representative, constitutes the valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as enforceability may be limited by bankruptcy and other similar laws affecting the rights of creditors generally and general principles of equity. Assuming the due authorization, execution and delivery of the Related Documents by Parent, Merger Sub, the Representative and/or the other parties thereto, each Related Document, when executed and delivered by the Company, will constitute the valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as enforceability may be limited by bankruptcy and other similar laws affecting the rights of creditors generally and general principles of equity.

(b) The execution and delivery by the Company of this Agreement and the Related Documents do not, and the performance by the Company of this Agreement and the Related Documents will not, (i) conflict with or violate the Company Organizational Documents, (ii) conflict with or violate any Law in any material respect, or (iii) except as set forth in Part 4.2(b) of the Company Disclosure Schedule, result in any material breach of or constitute a material default (or an event that with notice or lapse of time or both would constitute a material breach or result in a material default) under, or impair the Company’s rights or alter in any material respect the rights or obligations of any third party under, or give to others any rights of termination, amendment, acceleration or cancellation of, or result in the creation of an Encumbrance on any of the material properties or assets of the Company pursuant to, any material Contract to which the Company is a party or by which the Company or its properties or assets are bound or affected. No consent, waiver or approval of any Person, nor any notice to any Person, is required to be obtained or made under any material Contract to which the

 

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Company is a party or by which the Company or any of its properties or assets is bound or affected in connection with the execution and delivery by the Company of this Agreement or the performance of this Agreement by the Company, except for such consents, waivers, approvals and notices as are set forth in Part 4.2(b) of the Company Disclosure Schedule or those which have been obtained.

(c) No consent, approval, order or authorization of, or registration, declaration or filing with any Governmental Authority or other Person is required to be obtained or made by the Company in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby, except for (i) the filing of the Certificates of Merger with the Delaware Secretary of State and the Georgia Secretary of State and appropriate documents with the relevant authorities of other states in which the Company is qualified or licensed to do business and (ii) such other consents, authorizations, filings, approvals and registrations which, if not obtained or made, would not have a Company Material Adverse Effect and would not prevent, materially alter or delay any of the transactions contemplated by this Agreement.

Section 4.3 Company Capitalization; Distributions.

(a) Part 4.3(a) of the Company Disclosure Schedule sets forth a true, complete and accurate statement of: (i) the number of shares of each class or series of authorized capital stock of the Company, as well as the number of shares of each such class or series that are outstanding as of the date of this Agreement; (ii) the name of each record owner of such shares and the number and class or series of shares owned of record by each such shareholder; and (iii) any other security of the Company convertible into capital stock of the Company. Except as set forth in Part 4.3(a) of the Company Disclosure Schedule, no Shares are held by the Company in treasury and no shares are subject to vesting restrictions.

(b) All of the issued and outstanding shares of Company Common Stock have been duly authorized, are validly issued, fully paid and non-assessable, were not issued in violation of any preemptive rights or any applicable Law, and are owned by the record holder thereof listed in Part 4.3(b) of the Company Disclosure Schedule.

(c) Except as set forth in Part 4.3(c) of the Company Disclosure Schedule, no Company Convertible Securities, subscriptions, conversion, exchange or other rights, securities, agreements or commitments of any kind obligating the Company, contingently or otherwise, to issue or sell any shares of its capital stock of any class or any securities convertible into, or exercisable or exchangeable for any such shares, or any other equity or voting interest in the Company, are outstanding, and no authorization therefor has been given. There are no outstanding or authorized stock appreciation, phantom stock, profit participation or similar rights with respect to the capital stock of, or other equity or voting interest in, the Company. Except as disclosed in Part 4.3(c) of the Company Disclosure Schedule, there are no Contracts, arrangements or agreements to which the Company is a party or by which it is bound, to (i) repurchase, redeem or otherwise acquire any shares of capital stock of, or other equity or voting interest in, the Company or other Person or (ii) vote or dispose of any shares of capital stock of, or other equity or voting interest in, the Company or other Person. Except as disclosed in Part 4.3(c) of the Company Disclosure Schedule, there are no irrevocable proxies and no

 

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voting trusts or voting agreements with respect to any ownership interests of, or other equity or voting interest in, the Company. The Company is not obligated to declare, pay or set aside for payment any dividend or other distribution (whether in cash, stock or property or otherwise) in respect of any shares of Company Common Stock or any other securities of the Company.

(d) The Company and its Board of Directors have taken all necessary corporate action (including the adoption by the Board of Directors of any necessary resolution(s) and the provision of any notice(s) required under any Company Convertible Securities to the holders of Company Convertible Securities), so that each outstanding Company Convertible Securities may be treated in the manner set forth in Section 3.2.

(e) There are no authorized or outstanding bonds, debentures, notes or other obligations of the Company the holders of which have the right to vote on any matter.

(f) The Company has not made any dividends, payment of management fees or other payments or distributions to the Shareholders that should have been characterized as compensation for services rendered by the Shareholder Beneficiaries under applicable Law.

Section 4.4 Company Shareholder Agreements.

(a) The Distribution Schedule includes a complete and accurate list of the shareholders of the Company and the portion of the Merger Consideration to be delivered to each such shareholder. The Distribution Schedule is correct and complete as of the date hereof and, as updated prior to the Effective Time, will be true, correct and complete as of the Effective Time, and the calculations performed to compute such information are, and will be, accurate and in accordance with the terms of this Agreement, the Company’s Organizational Documents and all other agreements and instruments among the Company and the Shareholders, and no Shareholder shall be entitled to any amounts except as provided on the Distribution Schedule.

(b) The Distribution Schedule sets forth the following information with respect to each Shareholder: (i) the name and the mailing address of such Shareholder as reflected on the stock transfer or other corporate records of the Company; (ii) with respect to each certificate for Company Common Stock, the number and class or series of Company Common Stock represented by such Certificate; (iii) the aggregate Merger Consideration payable with respect to the shares represented by such Certificate; (iv) the pro rata portion of the Escrow Property distributable with respect to the shares of Company Common Stock represented by such Certificate, if ever; (v) the pro rata portion (expressed as a percentage) of the Aggregate Adjusted Deferred Payment Consideration distributable with respect to the shares of Company Common Stock represented by such Certificate; and (vi) the pro rata portion (expressed as a percentage) of the Earn-out Consideration with respect to the shares of Company Common Stock represented by such certificate.

(c) Except as set forth on Part 4.4(c) of the Company Disclosure Schedule, there are no Contracts, written or oral, between the Company and any Person, relating to the registration of Shares under the Securities Act. Except as set forth on Part 4.4(c) of the Company Disclosure Schedule, there are no voting trust, proxy, rights agreement, “poison pill” anti-takeover plan or other Contract to which the Company is a party or by which it is bound with respect to any equity security of any class of the Company.

 

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Section 4.5 Minutes and Stock Records. The minute books of the Company contain records that are accurate in all material respects of all meetings and consents in lieu of meetings of its Board of Directors and any committees thereof (whether permanent or temporary), and of its shareholders since inception, and such records accurately reflect in all material respects all transactions referred to in such minutes and consents. The stock books (or equivalent) of the Company accurately reflect the ownership of the capital stock (or equivalent) of the Company. The Company has made available to Parent true, correct and complete copies of the minutes, consents and stock books of the Company.

Section 4.6 Financial Statements.

(a) The Company has delivered to the Parent the unaudited balance sheets of the Company as at June 30, 2011, June 30, 2012 and December 31, 2012 (the December 31, 2012 balance sheet is sometimes referred to herein as the “Company Balance Sheet” and the date thereof is sometimes referred to as the “Company Balance Sheet Date”), and the unaudited statements of cash flows and income for the fiscal years ended June 30, 2011 and June 30, 2012 and the six-month period ended December 31, 2012.

(b) For purposes of this Agreement, “Financial Statements” shall mean the financial statements referenced in clause (a) above. The Financial Statements and the notes thereto, if any, (i) are complete and accurate in all material respects and fairly present the financial condition of the Company at the respective dates thereof and the results of operations for the periods then ended, and (ii) were prepared in accordance with the books and records of the Company in conformity with the accounting principles set forth on Schedule FS consistently applied during the periods covered thereby, except for the omission of footnotes and normal year-end adjustments which are not, individually and in the aggregate, material. None of the Financial Statements contains any material, non-recurring items, except as expressly set forth therein.

(c) For the twelve-month period ending December 31, 2012, the Company’s Net Income was at least $234,000. As used in this Agreement, “Net Income” shall mean the net income of the Company determined in accordance with the accounting principles set forth on Schedule FS consistently applied. For the twelve-month period ending December 31, 2012, the Company’s revenue was $5,829,000.

Section 4.7 No Undisclosed Liabilities. Other than as set forth in Part 4.7 of the Company Disclosure Schedule, the Company has no liabilities (absolute, accrued, contingent or otherwise), except for (a) liabilities and obligations shown on the Company Balance Sheet, (b) liabilities and obligations incurred since the Company Balance Sheet Date in the ordinary course of business and which are less than $25,000 individually and $100,000 in the aggregate, and (c) liabilities and obligations disclosed in this Agreement or the Company Disclosure Schedule.

 

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Section 4.8 Absence of Certain Changes or Events. Since the Company Balance Sheet Date, except as set forth on Part 4.8 of the Company Disclosure Schedule, there has not been: (i) any occurrence that has had or would have a Company Material Adverse Effect; (ii) any declaration, setting aside or payment of any dividend on, or other distribution (whether in cash, stock or property) in respect of, any of the Company’s capital stock, or any purchase, redemption or other acquisition by the Company of the Company’s capital stock or any other securities of the Company or any grant or issuance of any options, warrants, calls or rights to acquire any such shares or other securities; (iii) any split, combination or reclassification of the Company’s capital stock; (iv) other than as required by the terms of any Employee Agreement or Employee Benefit Plan, any granting by the Company of any increase in compensation or fringe benefits to any directors, officers, employees or consultants of the Company (or any promise, commitment or oral agreement to do the same in the future), or any payment by the Company of any bonus to any directors, officers, employees or consultants of the Company; (v) any acquisition, sale or transfer of any material asset by the Company other than software licenses granted by the Company to customers in the ordinary course of business and consistent with past practice; (vi) any change by the Company in its accounting methods, principles or practices; (vii) any revaluation by the Company of any of its assets, including writing off notes or accounts receivable more than $25,000 in the aggregate; (viii) other than as required by the terms of any Employee Agreement or Employee Benefit Plan, any granting by the Company of any increase in severance or termination pay; (ix) any cancellation or termination of any development, licensing, distribution, sales, services or other similar Contract with respect to any Intellectual Property Rights (as defined in Section 4.11), except by the Company in the ordinary course of business consistent with past practice; (x) any cancellation, compromise, waiver or release of any right or claim (or series of rights or claims) involving more than $25,000 in the aggregate; (xi) any material damage, destruction or loss (whether or not covered by insurance) to any property or assets material to the conduct of the business of the Company; (xii) any creation of any Encumbrance on any of the property or assets of the Company; (xiii) any capital expenditures in excess of $25,000 in the aggregate; (xiv) any creation of any indebtedness for borrowed money; (xv) any entry into, amendment, modification, cancellation or termination of any material Contract, other than in the ordinary course of business consistent with past practice; or (xvi) entry into any Contract to do any of the foregoing.

Section 4.9 Taxes.

(a) The Company has filed all Tax Returns that it was required to file and has complied in all material respects with all Laws in respect of all Taxes. All such Tax Returns were correct and complete in all material respects and were prepared in substantial compliance with all applicable Laws. All Taxes due and owing by the Company (whether or not shown on any Tax Return) have been paid. The Company is not currently the beneficiary of any extension of time within which to file any Tax Return. The Company has not received any written notice of a claim made, and to the Company’s Knowledge, no other claim has ever been made, by a Governmental Authority in a jurisdiction where the Company does not file Tax Returns that the Company is or may be subject to taxation by that jurisdiction. There are no Encumbrances for Taxes (other than Taxes not yet due and payable) upon any of the assets of the Company.

 

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(b) The Company has withheld and paid all Taxes required to have been withheld and paid in connection with any amounts paid or owing to any employee, independent contractor, creditor, stockholder, or other third party.

(c) No foreign, federal, state, or local tax audits or administrative or judicial Tax proceedings are pending or, to the Company’s Knowledge, being conducted with respect to the Company. The Company has not received from any foreign, federal, state, or local Governmental Entity (including jurisdictions where the Company has not filed Tax Returns) any (i) written notice indicating an intent to open an audit or other review, (ii) request for information related to Tax matters, or (iii) notice of deficiency or proposed adjustment for any amount of Tax proposed, asserted, or assessed by any Governmental Authority against the Company. Part 4.9(c) of the Company Disclosure Schedule lists all foreign, federal, state and local income Tax Returns filed with respect to the Company for taxable periods ended on or after June 30, 2006, indicates those Tax Returns that have been audited, and indicates those Tax Returns that currently are the subject of an audit. The Company has made available to Parent correct and complete copies of all such Tax Returns and all examination reports, and statements of deficiencies assessed against or agreed to by the Company since June 30, 2006.

(d) The Company has not waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency, in each case with respect to a taxable year for which the statute of limitations has not expired.

(e) The Company has never been a United States real property holding corporation within the meaning of Code Section 897(c)(2) during the applicable period specified in Code Section 897(c)(1)(A)(ii). The Company has disclosed on its federal income Tax Returns all positions taken therein that could give rise to a substantial understatement of federal income Tax within the meaning of Code Section 6662. The Company is not a party to or bound by any Tax allocation or sharing Contract. The Company (A) has not been a member of an affiliated group filing a consolidated federal income Tax Return (other than a group the common parent of which was the Company) and (B) has no liability for the Taxes of any Person under Treasury Regulations § 1.1502-6 (or any similar provision of state, local or foreign law), as a transferee or successor, by contract, or otherwise.

(f) The Company will not be required to include any item of income in, or exclude any item of deduction from, taxable income for any taxable period (or portion thereof) ending after the Closing Date as a result of: (A) any change in method of accounting for a taxable period ending on or prior to the Closing Date; (B) any “closing agreement” as described in Code Section 7121 (or any corresponding or similar provision of state, local or foreign income Tax law) executed on or prior to the Closing Date; (C) any installment sale or open transaction disposition made on or prior to the Closing Date; or (D) except as reflected on the Company Balance Sheet or received after the Company Balance Sheet Date in the ordinary course, consistent with past practices, any prepaid amount received on or prior to the Closing Date.

(g) The Company has not distributed stock of another Person, or has had its stock distributed by another Person, in a transaction that was purported or intended to be governed in whole or in part by Code Sections 355 or 361.

(h) The Company has not engaged in any transaction that constitutes a listed transaction as described under Code Section 6011 and Treasury regulations promulgated thereunder.

 

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Section 4.10 Title to Properties.

(a) The Company does not hold any interest in real property, other than the leaseholds described in Part 4.10 of the Company Disclosure Schedule (such property being the “Leased Real Property”). Part 4.10 of the Company Disclosure Schedule lists all real property leases (including underleases, serviced office Contracts and any licenses, consents and approvals required from the landlords and any superior landlords with respect to any such lease) to which the Company is a party and each amendment thereto. All such current leases are in full force and effect, are valid and effective in accordance with their respective terms, and there is not, under any of such leases, any existing default or event of default (or event which with notice or lapse of time, or both, would constitute a default) that would give rise to a claim against the Company in excess of $25,000. Such leases permit the current occupation and use of such real property by the Company. The Leased Real Property comprises all the real property occupied or otherwise used by the Company.

(b) The Company has good and marketable title to, or, in the case of leased properties and assets, valid leasehold interests in, all of its tangible properties and assets, real, personal and mixed, used or held for use in its business, free and clear of any Encumbrances except for Encumbrances for Taxes not yet due and payable and such Encumbrances, if any, which are not, individually or in the aggregate, material in character, amount or extent. The Leased Real Property is free of any tenancy, sub-tenancy, license or other Contract entitling a person other than the Company to occupy the whole or any part. There are no outstanding actions, disputes, claims or demands between the Company and any third party affecting the Leased Real Property or any neighboring property or any boundary walls and fences, or with respect to any easement, right or means of access to the Leased Real Property. To the Knowledge of the Company, there is no resolution, proposal, scheme or order, whether or not formally adopted, that would materially interfere with the use or occupation of, or access to, the Leased Real Property by the Company.

(c) All of the material tangible properties and assets of the Company are in operating condition sufficient to conduct the operations of the Company in substantially the same manner as currently conducted.

(d) Except as set forth in the leases set forth in Part 4.10 of the Company Disclosure Schedule, the Company does not have any liability, actual or contingent, arising directly or indirectly out of any Contract, underlease, tenancy, conveyance, transfer or any other deed or document relating to real property or to any estate or interest in real property entered into by the Company, including any actual or contingent liability arising directly or indirectly out of (i) any estate or interest held by the Company as original lessee or underlessee; (ii) any guarantee given by the Company in relation to a lease or underlease; or (iii) any other covenant made by the Company in favor of any lessor or head lessor.

 

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Section 4.11 Intellectual Property.

(a) As used herein, “Intellectual Property” shall mean all intellectual property rights of every kind including all (i) patents, patent applications, patent disclosures and inventions; (ii) trademarks, service marks, trade dress, trade names, logos and corporate names (in each case, whether registered or unregistered) and registrations and applications for registration thereof; (iii) copyrights (registered or unregistered) and registrations and applications for registration thereof; (iv) computer software, firmware, data, data bases and documentation thereof; (v) trade secrets and other confidential or proprietary information (including without limitation, ideas, formulas, compositions, inventions (whether patentable or unpatentable and whether or not reduced to practice), know-how, manufacturing and production processes and techniques, research and development information, drawings, specifications, designs, plans, proposals, technical data, copyrightable works, financial and marketing plans and customer and supplier lists and information); (vi) World Wide Web addresses and domain name registrations, (vii) works of authorship including without limitation, computer programs, source code and executable code, whether embodied in software, firmware or otherwise, documentation, designs, files, records, data and mask works and any rights in semiconductor masks, layouts, architectures or topography; and (viii) goodwill associated with any of the foregoing. As used herein “Company Intellectual Property” shall mean Intellectual Property owned or used by the Company.

(b) Part 4.11(b) of the Company Disclosure Schedule contains a complete and accurate list of all Company Intellectual Property owned by the Company included in clauses (i)–(iii) and (vi) of the definition of Intellectual Property that has been registered or for which an application for registration has been filed. The Company is the sole and exclusive owner of the Company Intellectual Property owned by the Company.

(c) Part 4.11(c) of the Company Disclosure Schedule contains a complete and accurate list of (i) all licenses and other rights granted by the Company to any Person with respect to any Company Intellectual Property and (ii) all licenses and other rights granted by any Person to the Company with respect to any Company Intellectual Property (excluding so-called “off-the-shelf” and “shrink wrap” software licensed to the Company in the ordinary course of business and easily obtainable without material expense), in each case identifying whether or not each such license is exclusive or non-exclusive (collectively for clauses (i) and (ii), the “IP Licenses”). Except as set forth on Part 4.11(c) of the Company Disclosure Schedule and payments in the ordinary course of business for so-called “off-the-shelf” or “shrink wrap” software, the Company is not required to pay any royalties or other compensation to any third parties in respect of its ownership or use of any Company Intellectual Property.

(d) The Company owns or possesses sufficient legal rights to use all Intellectual Property necessary for or currently used in its business as currently conducted. The Company has not violated or infringed, is not violating or infringing or, by conducting its business as currently conducted, will not violate or infringe any Intellectual Property of any other Person, and has not received any notice or communication (including any “invitation to license” letter) from any Person claiming any violation or infringement of another Person’s Intellectual Property rights. The Company has no Knowledge of any violation or infringement by any Person of any Company Intellectual Property.

 

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(e) Each item of registered Company Intellectual Property, if any, owned by the Company is valid and subsisting; all necessary registration, maintenance and renewal fees in connection with such registered Company Intellectual Property have been paid; and all necessary documents and certificates in connection with such registered Company Intellectual Property have been filed with the relevant authorities in the United States or foreign jurisdictions, as the case may be, for the purposes of maintaining such registered Company Intellectual Property. To the Knowledge of the Company, there is no threatened or reasonably foreseeable loss of any Company Intellectual Property or, except as disclosed on Part 4.11(e) of the Company Disclosure Schedule, expiration or renewal of any registered Company Intellectual Property within the next 12 months.

(f) Except as disclosed on Part 4.11(f) of the Company Disclosure Schedule, the Company has not provided and is not obligated to provide the source code for any of its software to any other Person. The Company has not, by license, transfer, escrow or otherwise, authorized any other Person to reverse engineer, disassemble or decompile any of its software to create such source code.

(g) None of the software owned by the Company, and none of the software licensed to the Company, incorporates, is combined with or distributed with any open source, community source, shareware, freeware or other code that would result in such software being covered by the GNU General Public License or any other licensing regime, in each case that would require the Company to (i) disclose or distribute its own source code, (ii) license its software for the purpose of making derivative works, (iii) grant to any Person any rights or immunities under any Company Intellectual Property owned by or exclusively licensed to the Company, or (iv) distribute its software at no charge or minimal charge.

(h) The Company has taken reasonable and customary steps to protect its rights in, and the confidentiality of, the Company Intellectual Property (including trade secrets) belonging to the Company or provided by any other Person to the Company.

(i) No third party has claimed or, to the Knowledge of the Company has reason to claim that any person employed by or affiliated with the Company has (i) violated or may be violating any of the terms or conditions of such person’s employment, consulting, non-competition, non-disclosure, non-solicitation, confidentiality or similar agreement with such third party (nor any Law relating to unfair competition, trade secrets or proprietary information); (ii) disclosed or may be disclosing or utilized or may be utilizing any trade secret or proprietary information or documentation of such third party or (iii) interfered or may be interfering in the employment relationship between such third party and any of its employees. No person employed by or affiliated with the Company has employed or proposes to employ any trade secret or any information or documentation proprietary to any other Person in connection with its business as currently conducted.

(j) The Company’s rights in and to its Intellectual Property are free and clear of all Encumbrances.

(k) Except as disclosed in Part 4.11(k) of the Company Disclosure Schedule, the Company has all necessary rights to integrate the Company Products with (or use the Company Products in connection with) its customers’ software and systems.

 

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Section 4.12 Compliance with Laws. Since the Reference Date, the Company has not been in conflict with, or in default or violation of any Law applicable to the Company or by which the Company or any of its properties or assets was or is bound or affected. No investigation or review by any Governmental Authority is pending or, to the Company’s Knowledge, threatened or is reasonably anticipated against the Company, nor, to the Company’s Knowledge, has any Governmental Authority indicated an intention to conduct an investigation of the Company. There is no Contract, judgment, injunction, order or decree binding upon the Company which has or could reasonably be expected to have the effect of prohibiting or impairing any business practice of the Company, any acquisition of material property by the Company or the conduct of business by the Company as currently conducted. The Company holds all permits, licenses, variances, exemptions, orders and approvals from Governmental Authorities that are material to or required for the operation of the business of the Company as currently conducted (collectively, the “Company Permits”). The Company is in compliance in all material respects with the terms of the Company Permits.

Section 4.13 Litigation. Except as disclosed in Part 4.13(a) of the Company Disclosure Schedule, there is no claim, action, suit, proceeding (at law or in equity), arbitration, reference of any dispute or disagreement to an expert, or any alternative dispute resolution or investigation (including any demand letter or similar written request) pending or, to the Knowledge of the Company, threatened against the Company or any assets of the Company, and there are no Governmental Orders currently in force against the Company or affecting any of its assets. No Shareholder, director, officer, agent or employee of the Company has a claim or demand for payment or, to the Knowledge of the Company, any basis for a claim or demand for payment against the Company in respect of the period prior to and including the Closing or any claim for indemnification pursuant to the Company Organizational Documents of the Company, or any other applicable Contract. There is no pending, or to the Knowledge of the Company, threatened, claim, action, suit, proceeding (at law or equity), arbitration, reference of any dispute or disagreement to an expert, or any alternative dispute resolution or investigation (including any demand letter or similar written request) against the Company that questions or challenges (i) the validity of this Agreement or any Related Document or (ii) any action taken or to be taken by the Company, the Shareholders, the Representative, or the directors or officers of the Company pursuant to this Agreement or any Related Document or in connection with the transactions contemplated hereby or thereby. Except as disclosed in Part 4.13(b) of the Company Disclosure Schedule, since the Reference Date, there have been no claims, actions, suits, proceedings (at law or in equity), arbitrations, references of any dispute or disagreement to an expert, or any alternative dispute resolutions or investigations (including any demand letters or similar written requests) threatened against the Company or any assets of the Company (whether or not in writing and whether or not settled by written agreement) with a reasonable potential value of at least $25,000. Part 4.13(c) of the Company Disclosure Schedule sets forth all “cease and desist” letters, notices, and similar communications (whether written, by email, or otherwise) received by the Company since the Reference Date.

 

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Section 4.14 Employee Benefit Plans.

(a) Part 4.14 of the Company Disclosure Schedule contains an accurate and complete list of each Employee Benefit Plan and each Employee Agreement, including a list of each document comprising or embodying any material part thereof. Except as disclosed in Part 4.14 of the Company Disclosure Schedule, the Company is not paying compensation or other payments to any former employee (or relative or dependent) or former consultant.

(b) The Company has made available to Parent accurate and complete copies of the plan documents and summary plan descriptions, the most recent determination letter received from the IRS, the most recent annual report (Form 5500, with all applicable attachments), and all related trust, insurance and other funding Contracts that implement each Employee Benefit Plan (to the extent applicable), all documents embodying each Employee Agreement and each staff handbook or written employment policies for the Company.

(c) Each of the Company and its ERISA Affiliates has performed in all material respects all obligations required to be performed by it under, is not in default or violation of, and the Company has no Knowledge of any default or violation by any other party to, each Employee Benefit Plan or Employee Agreement, and each Employee Benefit Plan has been maintained, funded and administered in all material respects in accordance with its terms and in material compliance in form and in operation with all applicable Laws (including ERISA and the Code), including the maintenance of reasonably accurate records. Each Employee Benefit Plan that is intended to meet the requirements of a “qualified plan” under Code Section 401(a) has received a written determination, advisory or opinion letter from the IRS that such Employee Benefit Plan is so qualified, and nothing has occurred since the date of such determination or letter that could reasonably be expected to adversely affect the qualified status of such plan; (iii) no “prohibited transaction,” within the meaning of Code Section 4975 or Sections 406 and 407 of ERISA, and not otherwise exempt under Section 408 of ERISA, has occurred with respect to any Employee Benefit Plan. There are no actions, suits, claims, proceedings or investigations pending, or to the Company’s Knowledge, threatened or reasonably anticipated (other than routine claims for benefits) against any Employee Benefit Plan and, to the Knowledge of the Company, there are no facts or circumstances which may reasonably be expected to give rise to any such action, suit, claim, proceeding or investigation. Each Employee Benefit Plan can be amended, terminated or otherwise discontinued either before or after the Effective Time in accordance with its terms, without liability to Parent, the Surviving Corporation, the Company or any of their ERISA Affiliates (other than ordinary administration expenses typically incurred in a termination event and payment of benefits pursuant to such Employee Benefit Plan). Except as set forth in Part 4.14 of the Company Disclosure Schedule, all contributions due from the Company or any ERISA Affiliate with respect to any of the Employee Benefit Plans have been made as required under ERISA or have been accrued on the Company Balance Sheet and, except as set forth in Part 4.14 of the Company Disclosure Schedule, no further contributions will be due or will have accrued thereunder as of the Closing Date.

(d) Neither the Company nor any ERISA Affiliate contributes to, has any obligation to contribute to, or has any liability under or with respect to any Pension Plan which is subject to Title IV of ERISA or Code Section 412.

 

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(e) Neither the Company nor any ERISA Affiliate contributes to, has any obligation to contribute to, or has any liability (including withdrawal liability as defined in ERISA Section 4201) under or with respect to any Multiemployer Plan.

(f) No Employee Benefit Plan or Employee Agreement provides, or has any liability to provide, life insurance, health or other employee welfare benefits to any Person following termination of employment or other service (including retirement), except as may be required by COBRA, Part 6 of Title I of ERISA or other applicable statute.

(g) Neither the Company nor any ERISA Affiliate has in any material respect violated any of the health care continuation requirements of COBRA, the requirements of FMLA or any similar provisions of Law applicable to any employees.

(h) The execution of this Agreement and the consummation of the transactions contemplated hereby will not (either alone or upon the occurrence of any termination of employment) constitute an event under any Employee Benefit Plan, Employee Agreement, trust or loan that will or may result in any payment (whether of severance pay or otherwise), acceleration, forgiveness of indebtedness, loss of rights, vesting, distribution, increase in benefits or obligation to fund benefits with respect to any employee.

(i) Each Employee Benefit Plan required to be listed in Part 4.14 of the Company Disclosure Schedule that is a “nonqualified deferred compensation plan” (as defined in Code Section 409A(d)(1)) and was in existence prior to October 3, 2004, has not been “materially modified” (within the meaning of Section 885(d)(2)(B) of the American Jobs Creation Act of 2004 and any applicable guidance issued thereunder) since October 3, 2004, in a manner which would cause amounts deferred in taxable years beginning before January 1, 2005, under such plan to be subject to Code Section 409A. Each Employee Benefit Plan required to be listed in Part 4.14 of the Company Disclosure Schedule that is a “nonqualified deferred compensation plan” (as defined in Code Section 409A(d)(1)) and which has not been terminated has been operated since January 1, 2005 in good faith compliance with the provisions of Code Section 409A, Notice 2005-1 and the regulations issued under Code Section 409A.

Section 4.15 Employment Matters.

(a) The Company: (i) is in compliance in all material respects with all applicable Laws respecting employment, employment practices, immigration, terms and conditions of employment and wages and hours; (ii) has withheld all amounts required by any Law or by Contract to be withheld from the wages, salaries and other payments to employees; (iii) has properly classified independent contractors for purposes of all applicable Laws; (iv) is not liable for any arrears of wages or any Taxes (other than wages (and Taxes thereon) which have accrued in the ordinary course of business but which are not yet payable) or any penalty for failure to comply with any of the foregoing; and (v) is not liable for any payment to any trust or other fund or to any Governmental Authority with respect to unemployment compensation benefits, social security, withholdings or remittances applicable to employee wages, or other benefits or obligations for employees (other than routine payments to be made in the normal course of business and consistent with past practice). There are no pending, or, to the Company’s Knowledge, threatened actions, suits, claims or proceedings against the Company

 

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under any insurance policy or program covering any of its employees, including but not limited to its workers’ compensation policy or long-term disability policy. To the Company’s Knowledge, no employee or consultant of the Company has violated any employment, consulting, non-disclosure, non-competition, non-solicitation or other Contract by which such employee is bound to the Company (nor any Law relating to unfair competition, trade secrets or proprietary information). There are no claims pending or, to the Company’s Knowledge, threatened between the Company and any employee. The Company does not have any Employee Agreement currently in effect that is not terminable at will by the Company without any payment pursuant thereto or in connection therewith. The Company will have no material liability to any employee or to any other Person as a result of the termination of any employee leasing or staffing agency Contract.

(b) No work stoppage, labor strike, slowdown, lockout or other labor dispute against the Company is pending or, to the Company’s Knowledge, threatened. To the Company’s Knowledge, no employee of the Company is represented by any union or other labor organization. The Company has no Knowledge of any activities or proceedings of any labor union to organize any employees. There are no actions, suits, claims, labor disputes or grievances pending, or, to the Company’s Knowledge, threatened relating to any labor, safety or discrimination matters involving any employee, including charges of unfair labor practices or discrimination complaints. The Company is not engaged in any unfair labor practices within the meaning of the National Labor Relations Act. The Company is not, nor has it been a party to, or bound by, any collective bargaining or union Contract with respect to employees, and no collective bargaining or union Contract is being negotiated by the Company.

(c) During the three (3) months prior to the Closing, the Company has not taken any action that could constitute a mass layoff, group termination, mass termination, or plant closing which may trigger notice requirements or liability under any Law, including collective dismissal laws.

(d) Part 4.15(d)(i) of the Company Disclosure Schedule sets forth a complete list of all employees of and consultants to the Company, showing date of hire, hourly rate or salary or other basis of compensation, other benefits accrued (including, without limitation, accrued vacation) as of a recent date and job function. To the Company’s Knowledge, no officer or key employee of the Company intends to terminate his or her employment with the Company within the next 12 months. Except as set forth on Part 4.15(d)(ii) of the Company Disclosure Schedule, each employee of the Company commits his or her full business time to the Company.

Section 4.16 Environmental Matters. The Company is in compliance in all material respects with all applicable Environmental Laws. Since the Reference Date, the Company has not received any written communication that alleges that the Company is not in compliance with applicable Environmental Laws. To the Knowledge of the Company, there are no circumstances that would reasonably be expected to prevent or interfere with compliance by the Company with all applicable Environmental Laws. All Company Permits and other governmental authorizations currently held by the Company pursuant to any Environmental Law are in full force and effect, the Company is in compliance in all material respects with all of the terms of such Company Permits and authorizations and, to the Knowledge of the Company, no other Company Permits or authorizations are required by the Company for the conduct of its

 

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businesses as currently conducted. To the Knowledge of the Company, management, handling, storage, transportation, treatment and disposal by the Company of all Environmental Materials has been in compliance in all material respects with all applicable Environmental Laws. There is no Environmental Claim pending or, to the Company’s Knowledge, threatened or reasonably anticipated against or involving the Company or, to the Company’s Knowledge, against any Person whose liability for any Environmental Claim the Company has or may have retained or assumed either contractually or by operation of law, nor, to the Company’s Knowledge, is there any circumstance that might form the basis for any Environmental Claim.

Section 4.17 Certain Contracts. Except as set forth in Part 4.17 of the Company Disclosure Schedule, the Company is not a party to or is bound by any:

(a) Contract or other arrangement for any of the benefits of which will be increased, or the vesting of benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement;

(b) Contract or other arrangement of indemnification, any guaranty by the Company or any instrument evidencing indebtedness by way of direct loan, sale of debt securities, purchase money obligation, conditional sale, or otherwise;

(c) Contract or other arrangement containing covenants in respect of “most-favored nation” pricing or purporting to limit or which effectively limit the Company’s freedom to (i) compete in any line of business or in any geographic area, (ii) solicit or hire individuals employed by other Persons, or (iii) grant any exclusive distribution rights or other exclusive rights; or which would (in any case described in (i) – (iii)) so limit Parent, the Company or the Surviving Corporation or any of their respective Subsidiaries after the Effective Time;

(d) Contract or other arrangement relating to the disposition or acquisition by the Company of assets not in the ordinary course of business, including by means of any merger, consolidation or the like;

(e) Contract or other arrangement with any customer with continuing obligations (other than the hosting of the Company Products in the ordinary course), including any requirements to provide future professional services or to do any customization of any Company Product;

(f) Contract or other arrangement with third parties relating to the distribution or resale of the Intellectual Property Rights or Company Products from whom the Company received revenues in excess of $25,000 individually for each such contract or arrangement since the Reference Date;

(g) Contract or other arrangement to forgive any indebtedness of any Person to the Company other than write-offs for bad debt in the ordinary course of the Company’s business that are reflected on the Company Balance Sheet;

(h) loan agreement, promissory note or other Contracts or other unwritten arrangement with respect to, or evidence of, indebtedness for borrowed money;

 

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(i) Contract or other arrangement (i) which obligated the Company to make payments to any third party in the aggregate of $25,000 or more for such third party during the twelve-month period ended December 31, 2012, or (ii) that requires the Company to make payments to any third party in the aggregate of $25,000 or more for such third party during the twelve-month period following the date of this Agreement;

(j) Contract or other arrangement with any customer or reseller (i) from whom the Company received aggregate payments of $25,000 or more during the twelve-month period ended December 31, 2012, or (ii) that is obligated to purchase more than $25,000 in Company Products from the Company during the twelve-month period following the date of this Agreement;

(k) Contract or other arrangement that provides a customer or reseller with the right to terminate a Contract relating to the purchase of Company Products for convenience;

(l) Contract or other arrangement currently in force providing for capital expenditures by the Company in excess of $25,000;

(m) power of attorney;

(n) other Contract or other arrangement that cannot be terminated by the Company within 30 days without any liability or obligation in excess of $25,000;

(o) Contract or other arrangement with any Governmental Authority;

(p) Contract or other arrangement entered into outside the ordinary course of business or on other than arms’ length terms; or

(q) other Contract or other arrangement that is material to the Company.

Each IP License and other Contract or other arrangement that is required to be disclosed in the Company Disclosure Schedule pursuant to this Section 4.17 or otherwise shall be referred to herein as a “Company Contract.” Each Company Contract is valid and in full force and effect in accordance with its terms. The Company is not, nor to the Company’s Knowledge, is any other party thereto, in breach, violation or default under, and the Company has not received written notice alleging that it has breached, violated or defaulted under, any of the terms or conditions of any Company Contract in such a manner as would permit any other party thereto to cancel or terminate any such Company Contract, or would permit any other party to seek damages or other remedies for any or all of such alleged breaches, violations, or defaults in excess of $25,000 individually or $75,000 in the aggregate.

Section 4.18 Related-Party Matters. Other than as disclosed in Part 4.18 of the Company Disclosure Schedule, to the Knowledge of the Company, no shareholder, director, officer or employee of the Company (nor, to the Knowledge of the Company, any Person affiliated or associated with any of the foregoing (including without limitation, LPMG LLC) or in which any of the foregoing has any interest) (i) has any interest, direct or indirect, in (A) any customer, supplier or competitor of the Company, (B) any other Person with whom the Company has a business relationship (other than any interest arising solely from the ownership of less than

 

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1% of the publicly traded securities of any Person), or (C) any Intellectual Property Rights or any other assets or property, real or personal, tangible or intangible, used in or pertaining to the business of the Company (other than any interest arising solely through the ownership of any Company Common Stock); (ii) is or was a party to or has or had any interest, direct or indirect, in any Contract, any Company Intellectual Property or other assets used by the Company, or other transaction with the Company (other than (W) compensation paid to any employee who is not a director or officer of the Company, (X) benefits available generally on the same terms to all employees of the Company or payable under an Employee Benefit Plan, and (Y) reimbursement for reasonable expenses incurred on behalf of the Company); or (iii) has had any personal expense paid by the Company.

Section 4.19 Brokers’ and Finders’ Fees. Except as disclosed in Part 4.19 of the Company Disclosure Schedule, the Company has not incurred, nor will it incur, directly or indirectly, any liability for brokerage or finders’ fees or agents’ commissions or any similar charges in connection with this Agreement or any transaction contemplated hereby.

Section 4.20 Insurance. Part 4.20 of the Company Disclosure Schedule sets forth a description of each insurance policy or bond which provides coverage for the Company. The Company has provided notice to its insurers in accordance with the applicable insurance policies or bonds of all potential claims of which the Company has Knowledge, and there is no claim in excess of $25,000 pending under any of such policies or bonds as to which coverage has been questioned, denied or disputed by the underwriters of such policies or bonds. All premiums due and payable under all such policies have been paid, and the Company is otherwise in compliance in all material respects with the terms of such policies and bonds. To the Knowledge of the Company, there is no threatened or reasonably anticipated termination of, or material premium increase with respect to, any of such policies. The Company has not incurred any material uninsured loss or casualty since the Reference Date. The Company has not made any knowing or intentional misrepresentation of, or knowingly or intentionally omitted to disclose, any material fact to any of its insurers that might justify denial by such insurer of any coverage under any such policy or bond.

Section 4.21 Customers; Customer Satisfaction.

(a) As of December 31, 2012, the Company had over 2,000 active Paying Customers. During the period from December 1, 2011 to November 30, 2012 (the “Reference Period”), the Company paid refunds and issued credits (whether partial or full) amounting to no more than 1% of the amounts of all customer invoices for the Lighthouse 360 Product during the Reference Period. During the calendar month of December 2012, the number of customers of the Lighthouse 360 Product who were paying only $1 (or similar discounted price) as part of a bailout arrangement with the Company was no more than 4.5% of all customers of the Lighthouse 360 Product during such calendar month.

(b) The Company’s historical customer data reflected in Part 4.21(b) of the Company Disclosure Schedule are true and correct based on the methodology described therein.

(c) For purposes of this Agreement, a “Paying Customer” is a customer who paid for the Lighthouse 360 Product, excluding, for clarity, (i) any customer whose credit card

 

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was declined or was paid a refund and (ii) a customer who receives use of the Lighthouse 360 Product without charge for a certain period of time will not be counted as a Paying Customer during that period of time for purposes of this Section 4.21.

Section 4.22 Suppliers and Practice Management Software Companies.

(a) Part 4.22(a) of the Company Disclosure Schedule sets forth a list of all suppliers, vendors and service providers of the Company that are material to the Company. To the Company’s Knowledge, all such suppliers, vendors and service providers will continue after the Closing to sell the products and provide the services currently sold or provided by them to the Company. The Company’s relationships with such suppliers, vendors and service providers are good commercial working relationships. Except as set forth on Part 4.22(a) of the Company Disclosure Schedule, no such supplier, vendor or service provider (x) has terminated, threatened to terminate, discussed with the Company any dissatisfaction with, its relationship with the Company, (y) has decreased, limited, or threatened to decrease or limit (whether verbally or in writing), the services, supplies or materials supplied to the Company, or (z) has materially changed or threatened to materially change (whether verbally or in writing) its business relationship with the Company.

(b) Part 4.22(b) of the Company Disclosure Schedule sets forth a list of all practice management software companies that customers of the Company use in their business that are material to the Business. Except as disclosed on Part 4.22(b) of the Company Disclosure Schedule, to the Company’s Knowledge no such practice management software company has taken any actions or threatened to take any actions that would adversely affect the Business as it is currently conducted, including, without limitation, restricting in any material respect the Company’s ability to interface with such company’s practice management software, or charging a fee therefor.

Section 4.23 Disclosure. The representations, warranties and other statements of the Company, the Shareholders, and the Shareholder Beneficiaries contained in this Agreement and the Related Documents, taken as a whole, do not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained herein and therein not misleading. To the Knowledge of the Company, there is no event or circumstance which the Company has not disclosed to the Parent which could have a Company Material Adverse Effect.

ARTICLE 4A

REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS AND

SHAREHOLDER BENEFICIARIES

As of the date of this Agreement and as of the Closing Date, each Shareholder and Shareholder Beneficiary, severally and not jointly, represents and warrants to the Parent and Merger Sub that the following statements are true, correct and complete.

Section 4A.1 Title. The Shareholder is the record and beneficial owner of the shares of Company Common Stock set forth on Part 4.3(a) of the Company Disclosure Schedule, free and clear of all Encumbrances, other than restrictions on transfers under applicable securities laws.

 

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The Shareholder has not granted any option or right, and is not a party to or bound by any agreement that requires or, upon the passage of time, the payment of money or occurrence of any other event, would require the Shareholder to transfer any of such shares to anyone.

Section 4A.2 Organization and Authority. The Shareholder (a) is duly formed, validly existing and in good standing under the laws of its jurisdiction of formation, (b) has the requisite power and authority to execute and deliver this Agreement and the other agreements, documents and instruments of the Shareholder contemplated hereby and to perform its obligations hereunder and thereunder, and (c) such execution, delivery and performance by the Shareholder have been duly and validly authorized by all requisite action on the part of the Shareholder.

Section 4A.3 No Conflict. No consent, order, authorization, approval, declaration or filing is required on the part of the Shareholder for or in connection with the execution, delivery or performance of this Agreement and the other agreements, documents and instruments of the Shareholder contemplated hereby. The execution, delivery and performance of this Agreement and the other agreements, documents and instruments contemplated hereby by the Shareholder will not result in any violation of, be in conflict with, constitute a default under, or cause the acceleration of any obligation or loss of any rights under any Law, agreement, contract, instrument, charter, by-laws, operating agreement, partnership agreement, organizational document, license, permit, authorization, franchise or certification to which the Shareholder is a party or by which the Shareholder is bound.

Section 4A.4 Validity and Enforceability. This Agreement is, and each of the other agreements, documents and instruments contemplated hereby to which the Shareholder is a party shall be when executed and delivered by the Shareholder, the valid and binding obligations of the Shareholder enforceable in accordance with its terms except as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, and by laws related to the availability of specific performance, injunctive relief or other equitable remedies.

Section 4A.5 Securities Law Representations.

(a) The Shareholder understands that the shares of Parent Series E Preferred Shares have not been registered under the Securities Act, or registered or qualified under the securities or “Blue Sky” laws of any jurisdiction, and are being issued pursuant to exemptions contained in the Act and exemptions contained in other applicable securities or “Blue Sky” laws. The Shareholder further understands that the Company’s or Parent’s reliance on these exemptions is based in part on the representations made by the Shareholder in this Agreement. In this connection, the Shareholder and Shareholder Beneficiary each represents and warrants that the offer and sale of the Parent Series E Preferred Shares were made solely in the state listed on the Company’s books.

(b) The Shareholder understands the term “accredited investor” as used in Regulation D promulgated under the Act and represents and warrants that it is an “accredited investor” for purposes of acquiring the Parent Series E Preferred Stock. Notwithstanding the preceding sentence, Parent acknowledges that neither Keller Software, LLC nor Jeffrey Keller is,

 

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or represents that it or he is, an “accredited investor”. The Shareholder understands that the shares of Parent Series E Preferred Stock are an illiquid investment, which will not become freely transferable by reason of any “change of circumstances” whatever. Keller Software, LLC has consulted with Curt Rocca, in his capacity as Keller Software, LLC’s purchaser representative with respect to Keller Software, LLC’s acquisition of shares of the Parent Series E Preferred Stock hereunder, and after such consultation, has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of such acquisition.

(c) The Shareholder is acquiring the Parent Series E Preferred Stock for its own account for investment, and not for, with a view to, or in connection with the resale or distribution thereof. The Shareholder has no present intention to sell, hypothecate, distribute or otherwise transfer the Parent Series E Preferred Stock or any portion thereof or any interest therein.

(d) The Shareholder understands that the Parent Series E Preferred Stock will constitute “restricted securities” within the meaning of Rule 144 promulgated under the Act and that, as such, the Parent Series E Preferred Stock must be held indefinitely unless they are subsequently registered under the Act or unless an exemption from the registration requirements thereof is available. The Shareholder has been advised that Rule 144, which permits the resale, subject to various terms and conditions, of small amounts of such “restricted securities” after they have been held for six months, does not now apply to the Parent, because the Parent is not now required to file, and does not file, current reports under the Securities Exchange Act of 1934, and because information concerning the Parent substantially equivalent to that which would be available if the Parent were required to file such reports is not now publicly available. The Parent may become a reporting entity at some future date, but no assurance can be given that it will do so.

(e) In connection with the Shareholders acquisition of the Parent Series E Preferred Stock, the Shareholder accepts the condition that the Parent may maintain “stop transfer” orders with respect to the Parent Series E Preferred Stock and that each certificate or other document evidencing the Parent Series E Preferred Stock will bear conspicuous legends in substantially the form set forth below:

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS THE REGISTRATION PROVISIONS OF SAID ACT HAVE BEEN COMPLIED WITH OR UNLESS THE CORPORATION HAS RECEIVED AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.

THE SHARES EVIDENCED HEREBY ARE SUBJECT TO A VOTING AGREEMENT (A COPY OF WHICH MAY BE OBTAINED UPON WRITTEN REQUEST TO THE SECRETARY OF THE CORPORATION), AND BY ACCEPTING ANY INTEREST IN SUCH SHARES THE PERSON

 

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ACCEPTING SUCH INTEREST SHALL BE DEEMED TO AGREE TO AND SHALL BECOME BOUND BY ALL THE PROVISIONS OF THAT VOTING AGREEMENT, INCLUDING CERTAIN RESTRICTIONS ON TRANSFER AND OWNERSHIP SET FORTH THEREIN.

THE SALE, PLEDGE, HYPOTHECATION OR TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS ALSO SUBJECT TO, AND IN CERTAIN CASES PROHIBITED BY OR SUBJECT TO AN OPTION UNDER, THE TERMS AND CONDITIONS OF A CERTAIN RIGHT OF FIRST REFUSAL AND CO-SALE AGREEMENT BY AND AMONG THE STOCKHOLDER, THE CORPORATION AND CERTAIN OTHER HOLDERS OF STOCK OF THE CORPORATION AND A CERTAIN RESTRICTED STOCK AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED OWNER OF THESE SHARES (OR HIS PREDECESSOR IN INTEREST). COPIES OF SUCH AGREEMENTS MAY BE OBTAINED UPON WRITTEN REQUEST TO THE SECRETARY OF THE CORPORATION.

(f) The Shareholder has consulted its attorney, accountant and/or purchaser representative with respect to its acquisition of the Parent Series E Preferred Stock. The Shareholder has had the opportunity to fully investigate the Parent and its business and financial condition and have knowledge of the Parent’s current activities. The Shareholder acknowledges that the Parent has granted it and its attorney, accountant and/or purchaser representative access to all information about the Parent that it or its attorney, accountant and/or purchaser representative have requested and has offered each of it and them access to all further information that it and they deemed relevant to an investment decision with respect to the Parent Series E Preferred Stock. The Shareholder and its attorney, accountant and/or purchaser representative have had the opportunity to ask questions of, and receive answers from, representatives of the Parent concerning such information and the Parent’s financial condition and prospects. No investigation made heretofore or hereafter by the Shareholder shall limit or affect the representations, warranties, covenants, closing conditions and indemnities of the Parent and the Merger Sub hereunder, each of which shall survive any such investigation.

ARTICLE 5

REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB

As of the date of this Agreement and as of the Closing Date, the Parent and Merger Sub, jointly and severally, represent and warrant to the Company, each Shareholder and each Shareholder Beneficiary that the following statements are true, correct and complete, subject to any exceptions expressly stated in the applicable part of the disclosure schedule delivered by the Parent to Company on and as of the date hereof and attached hereto as Exhibit D (as supplemented from time to time after the date of this Agreement in accordance with the terms hereof, the “Parent Disclosure Schedule”).

 

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Section 5.1 Organization.

(a) The Parent (i) is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware; (ii) has the requisite corporate power and authority to own, lease and operate its assets and properties and to carry on its business as now being conducted and as proposed to be conducted; and (iii) is duly qualified or licensed to do business in each jurisdiction where the character of the properties owned, leased or operated by it or the nature of its activities makes such qualification or licensing necessary, except where the failure to be so qualified or licensed would not have a Parent Material Adverse Effect.

(b) The Parent has delivered or made available to the Company true, correct and complete copies of the Parent’s certificate of incorporation and by-laws (the “Parent Organizational Documents”), and each such instrument is in full force and effect. The Parent is in compliance in all material respects with the provisions of the Parent Organizational Documents.

Section 5.2 Ownership of Merger Sub; No Prior Activities. Other than the Merger Sub, Yodle Canada, Inc. and ProfitFuel, Inc., the Parent has no Subsidiaries. Merger Sub is a direct, wholly-owned Subsidiary of Parent, was formed solely for the purpose of engaging in the transactions contemplated by this Agreement, and has engaged in no business activity other than as contemplated by this Agreement. Except for obligations or liabilities incurred in connection with its incorporation and the transactions contemplated by this Agreement, Merger Sub has not and will not have incurred, directly or indirectly, through any Subsidiary or Affiliate, any obligations or liabilities or engaged in any business activities of any type or kind whatsoever or entered into any agreements or arrangements with any Person.

Section 5.3 Company Business. Immediately following the Merger, Parent’s qualified group (as the term is defined in § 1.368-1(d)(4)(ii) of the Income Tax Regulations) will continue the historic business of the Company or use a significant portion of the Company’s historic business assets in a business, and Parent (including the members of such qualified group) has no plan or intention to sell or otherwise dispose of any of the assets of the Company acquired in the Merger, except for dispositions made in the ordinary course of business and transfers among corporations within Parent’s qualified group.

Section 5.4 Authority; Non-Contravention.

(a) Each of the Parent and the Merger Sub has all requisite corporate power and authority to enter into this Agreement and the Related Documents and to consummate the transactions contemplated hereby and thereby. The execution and delivery by each of the Parent and the Merger Sub of this Agreement and the Related Documents and the consummation by each of the Parent and the Merger Sub of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action on the part of each of the Parent and the Merger Sub. This Agreement has been duly executed and delivered by each of the Parent and the Merger Sub and, assuming the due authorization, execution and delivery of this Agreement by the Company and the Representative, constitutes the valid and binding obligation of each of the Parent and the Merger Sub, enforceable against each of the Parent and the Merger Sub in accordance with its terms, except as enforceability may be limited by bankruptcy and other similar laws affecting the rights of creditors generally and general principles of equity. Assuming the due authorization, execution and delivery of the Related Documents by the

 

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Company, the Representative and/or the other parties thereto, each Related Document, when executed and delivered by each of the Parent and the Merger Sub will constitute the valid and binding obligation of each of the Parent or the Merger Sub, enforceable against such party in accordance with its terms, except as enforceability may be limited by bankruptcy and other similar laws affecting the rights of creditors generally and general principles of equity.

(b) The execution and delivery by each of the Parent and the Merger Sub of this Agreement and the Related Documents do not, and the performance by each of the Parent and the Merger Sub of this Agreement and the Related Documents will not, (i) conflict with or violate the certificate of incorporation or by-laws of the Parent or the Merger Sub, (ii) conflict with or violate any Law in any material respect, or (iii) except as set forth in Part 5.4(b) of the Parent Disclosure Schedule, result in any material breach of or constitute a material default (or an event that with notice or lapse of time or both would constitute a material breach or result in a material default) under, or impair the Parent’s rights or alter in any material respect the rights or obligations of any third party under, or give to others any rights of termination, amendment, acceleration or cancellation of, or result in the creation of an Encumbrance on any of the material properties or assets of the Parent pursuant to, any material Contract to which the Parent is a party or by which the Parent or its properties or assets are bound or affected. No consent, waiver or approval of any Person, nor any notice to any Person, is required to be obtained or made under any material Contract to which the Parent is a party or by which the Parent or any of its properties or assets is bound or affected in connection with the execution and delivery by the Parent of this Agreement or the performance of this Agreement by the Parent, except for such consents, waivers, approvals and notices which have been obtained.

(c) No consent, approval, order or authorization of, or registration, declaration or filing with any Governmental Authority or other Person is required to be obtained or made by the Parent or the Merger Sub in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby, except for (i) the filing of Certificates of Merger with the Delaware Secretary of State and the Georgia Secretary of State and appropriate documents with the relevant authorities of other states in which the Parent is qualified or licensed to do business and (ii) such other consents, authorizations, filings, approvals and registrations which, if not obtained or made, would not have a Parent Material Adverse Effect and would not prevent, materially alter or delay any of the transactions contemplated by this Agreement.

Section 5.5 Parent Capitalization.

(a) Part 5.5(a) of the Parent Disclosure Schedule sets forth a true, complete and accurate statement of: (i) the number of shares of each class or series of authorized capital stock of the Parent, as well as the number of shares of each such class or series that are outstanding as of the date of this Agreement, (ii) any other security of the Parent convertible into capital stock of the Parent (including aggregate outstanding options, warrants, convertible notes and other securities convertible into equity of the Parent), and (iii) the liquidation preference per share for each series of shares.

(b) All of the issued and outstanding shares of the Parent’s capital stock have been duly authorized, are validly issued, fully paid and non-assessable, and were not issued in violation of any preemptive rights or any applicable Law.

 

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Section 5.6 Financial Statements. The Parent has furnished to the Company (A) its audited financial statements as of December 31, 2011, and (B) its unaudited balance sheet at December 31, 2012 (the “Parent Balance Sheet”), and the related unaudited statements of operations and cash flows for the period then ended, subject to normal year-end audit adjustments (collectively, the “Parent Financial Statements”). The Parent Financial Statements present fairly in all material respects the financial condition and results of operations of the Parent, at the dates and for the periods indicated, and have been prepared in accordance with GAAP consistently applied, except that the unaudited Parent Financial Statements may not be in accordance with GAAP because of the absence of footnotes normally contained therein and are subject to normal audit adjustments which in the aggregate will not be material.

Section 5.7 No Undisclosed Liabilities. Other than as set forth in Part 5.7 of the Parent Disclosure Schedule, the Parent has no liabilities (absolute, accrued, contingent or otherwise) required by GAAP to be disclosed in the Parent Balance Sheet, except for (a) liabilities and obligations shown on the Parent Balance Sheet, and (b) liabilities and obligations incurred since December 31, 2012 in the ordinary course of business.

Section 5.8 Absence of Certain Changes and Events. Since December 31, 2012, there has not been any occurrence that has had or would have a Parent Material Adverse Effect.

Section 5.9 Legal Proceedings. There is no claim, action, suit, proceeding (at law or in equity), arbitration, reference of any dispute or disagreement to an expert, or any alternative dispute resolution or investigation (including any demand letter or similar written request) pending or, to the Knowledge of the Parent, threatened against the Parent, its Subsidiaries, or any assets of the Parent, and there are no Governmental Orders currently in force against the Parent, its Subsidiaries or affecting any of its assets, in each case that would reasonably likely cause a Parent Material Adverse Effect. Except as disclosed in Part 5.9(a) of the Parent Disclosure Schedule, (i) there is no pending, or to the Knowledge of the Parent, threatened, claim, action, suit, proceeding (at law or equity), arbitration, reference of any dispute or disagreement to an expert, or any alternative dispute resolution or investigation (including any demand letter or similar written request) against the Parent that questions or challenges the validity of this Agreement or any Related Document and (ii) there is no action taken or to be taken by the directors or officers of the Parent pursuant to this Agreement or any Related Document or in connection with the transactions contemplated hereby or thereby, in each case that would reasonably likely have a Parent Material Adverse Effect. Except as disclosed in Part 5.9(b) of the Parent Disclosure Schedule, during the three-year period ending on the Effective Date, there have been no claims, actions, suits, proceedings (at law or in equity), arbitrations, references of any dispute or disagreement to an expert, or any alternative dispute resolutions or investigations (including any demand letters or similar written requests) threatened against the Parent or any assets of the Parent (whether or not in writing and whether or not settled by written agreement) with a reasonable potential value of at least $500,000.

 

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Section 5.10 Brokers’ and Finders’ Fees. The Parent has not incurred, nor will it incur, directly or indirectly, any liability for brokerage or finders’ fees or agents’ commissions or any similar charges in connection with this Agreement or any transaction contemplated hereby.

Section 5.11 Valid Issuance of Shares. The Share Consideration, when issued and delivered in accordance with the terms set forth in this Agreement, will be validly issued, fully paid and nonassessable and free of restrictions on transfer other than restrictions on transfer under the Parent ROFR Agreement and the Parent Voting Agreement, applicable state and federal securities laws, or liens or encumbrances created by or imposed by a Shareholder. Assuming the accuracy of the representations of the Shareholders contained in this Agreement, the Share Consideration will be issued in compliance with all applicable federal and state securities laws.

ARTICLE 6

[RESERVED]

ARTICLE 7

ADDITIONAL AGREEMENTS

Section 7.1 [Reserved]

Section 7.2 Disclosures. Except as required by any applicable Law or by any stock exchange on which any security of the Parent or any of its Affiliates is listed or traded, no press release or other public disclosure, either written or oral, of the transactions contemplated hereby shall be made by the Parent, the Company, any Shareholder, the Representative or any officer, director, employee or Affiliate thereof, without the prior written consent of the Parent and the Representative; provided, however, that the parties may include reference to the existence of this Agreement and the transactions contemplated hereby (but without disclosure of the amount of the Merger Consideration or any other financial terms hereof) in any request for any third-party consent necessary for the consummation of the transactions contemplated under this Agreement; provided further, that the Parent may include reference to the existence of this Agreement and the transactions contemplated hereby in discussions with the Parent’s lenders and potential financing sources.

Section 7.3 [Reserved]

Section 7.4 [Reserved]

Section 7.5 Company Employee Matters. Each employee of the Company that becomes an employee of the Parent at the Effective Time (each, a “Continuing Employee”) will be eligible to participate in employee benefit plans maintained by the Parent on substantially the same basis as similarly situated current employees of the Parent in the same jurisdiction. In that case, with respect to the Continuing Employees who are eligible to and elect to participate in any employee benefit plan maintained by the Parent (other than a defined benefit plan or severance plan), the Parent shall, to the extent permitted by applicable Law and the terms of the applicable employee benefit plan maintained by the Parent, take commercially reasonable steps to (i)

 

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provide that each Continuing Employee shall receive service credit under each such employee benefit plan for their period of service with the Company prior to the Closing for purposes of determining eligibility to participate and vesting (but not accrual of benefits under a defined benefit plan) where length of service is relevant under an employee benefit plan maintained by the Parent, and (ii) waive all limitations as to preexisting conditions exclusions, evidence of insurability requirements and waiting periods with respect to participation and coverage requirements applicable to the Continuing Employees under any medical, dental and vision plans that such employees may be eligible to participate in after the Closing Date, except, in each case under clauses (i) and (ii) above, where doing so would cause a duplication of benefits. Neither the Parent nor the Surviving Corporation shall be obligated to employ any Continuing Employee for any period of time after the Effective Time. The Continuing Employees are not third-party beneficiaries of the provisions of this Section 7.5, and nothing herein expressed or implied will give or be construed to give any Continuing Employee any legal or equitable rights hereunder, or to constitute an amendment of any employee benefit plan. Each Continuing Employee will be entitled to vacation and paid-time off in accordance with Parent’s standard policies applicable to its employees, but, except as set forth in the next sentence, will not be credited for vacation and paid time off accrued at the Company (except as required by applicable law). Notwithstanding the previous sentence, the Parent will assume the vacation time accrued at the Company for all non-exempt Continuing Employees, up to a maximum of 40 hours, with the remaining accrued vacation being paid to such Continuing Employees on or around the Closing Date; provided, that all such payments shall be included in the final calculation of Working Capital hereunder.

Section 7.6 Confidential Information.

(a) Prior to the Closing, except as required by Law, Parent, the Company and the Representative shall each keep confidential and not directly or indirectly reveal, report, publish, disclose or transfer any information regarding the Parent, the Company and negotiations preceding this Agreement other than to their respective representatives, each will use such information solely in connection with the transactions contemplated by this Agreement, and if the transactions contemplated hereby are not consummated for any reason, each shall return to the other, without retaining any copies thereof, any schedules, documents or other written information obtained from the other in connection with this Agreement and the transactions contemplated hereby and shall cause all of its representatives and other parties to whom it may have disclosed such information to do the same. Notwithstanding the foregoing, Parent may disclose information regarding the Company and the negotiations preceding this Agreement to its lenders and potential financing sources.

(b) Following the Closing, the Representative shall keep confidential and not directly or indirectly reveal, report, publish, disclose or transfer any Company Confidential Information and will not use such information for his own benefit or for the benefit of any other Person (other than the Surviving Corporation and Parent) and shall cause his representatives to do the same. Notwithstanding the foregoing limitations, no party to this Agreement shall be required to keep confidential or return any information that (i) is known or available through other lawful sources not bound by a confidentiality agreement with the disclosing party; (ii) is or becomes publicly known or generally known in the industry through no fault of the receiving party or its agents; (iii) is requested or required to be disclosed pursuant to Law, provided the other parties are given reasonable prior notice or consent thereto; (iv) is independently developed by the receiving party; or (v) relates solely to the Tax aspects and consequences of the transactions contemplated by this Agreement.

 

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(c) If the Representative is requested or required (by oral question or request for information or documents in any legal proceeding, interrogatory, subpoena, civil investigative demand, or similar process) to disclose any Company Confidential Information, the Representative shall notify the Parent promptly of the request or requirement so that the Parent may seek an appropriate protective order or waive compliance with the provisions of this Section 7.6. If, in the absence of a protective order or the receipt of a waiver hereunder, the Representative is, on the advice of counsel, compelled to disclose any Company Confidential Information to any Governmental Authority or else stand liable for contempt, the Representative may disclose the Company Confidential Information to the Governmental Authority; provided, that the Representative shall use his commercially reasonable efforts to obtain, at the request and sole expense of the Parent, an order or other assurance that confidential treatment will be accorded to such portion of the Company Confidential Information required to be disclosed.

Section 7.7 Non-competition; Non-solicitation

(a) Non-competition. Each of the Shareholders and Shareholder Beneficiaries hereby agrees that, in order to protect the goodwill of the Company and in consideration of the benefits each Shareholder and each Shareholder Beneficiary will or may receive under this Agreement and the Related Documents, including the payments that may be made to such Shareholder with respect to such Shareholder’s Shares pursuant to this Agreement (and such Shareholder Beneficiaries’ benefits in respect of such payments), during the period commencing on the date hereof and continuing through the end of the Restriction Period (as defined below) each Shareholder and Shareholder Beneficiary shall not, without the prior written consent of the Parent, directly or indirectly, run, own, manage, operate, control, be employed by, provide consulting services to, be an officer or director of, participate in, lend his name to, invest in, or otherwise be connected or affiliated in any manner with the management, ownership, operation or control (all of the foregoing being referred to herein as “Relationships”) of (i) during the portion of the Restriction Period during which the applicable Shareholder Beneficiary is engaged as an employee or consultant by the Parent or any of its Subsidiaries (which restriction shall apply to the Shareholder owned by such Shareholder Beneficiary), any business, venture or activity that is in any way or manner competitive with the business of either the Parent or the Surviving Corporation, including but not limited to retention marketing and customer communication software and/or services for the dental practice sector, or any business or enterprise that develops, manufactures, markets, licenses, sells or provides any product or service that in any way or manner competes with any product or service developed, manufactured, marketed, licensed, sold or provided, or planned to be developed, manufactured, marketed, licensed, sold or provided, by the Parent or Surviving Corporation or (ii) during the portion of the Restriction Period in which the applicable Shareholder is not engaged as an employee or consultant by the Parent or any of its Subsidiaries (which restriction shall apply to the Shareholder owned by such Shareholder Beneficiary) any business, venture or activity that is in any way or manner competitive with any business or enterprise that develops, manufactures, markets, licenses, sells or provides any product or service that in any way or manner competes with any product or service developed, manufactured, marketed, licensed, sold or provided, or planned to be developed, manufactured, marketed, licensed, sold or provided, by the Parent or

 

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Surviving Corporation as of the cessation of such employment or consulting relationship, in each case in any area where the Parent or its Subsidiaries (including the Surviving Corporation) then does business or is actively planning to do business. When used in this Section 7.7, the term “Restriction Period” shall mean the period commencing on Closing Date and continuing for four (4) years thereafter. By way of example and without limiting the activities that Shareholders and Shareholder Beneficiaries are free to engage in assuming compliance with the restrictions contained in this Section 7.7, Parent agrees that (i) after the termination of a Shareholder Beneficiary’s employment or other business relationship with the Parent or its Subsidiaries (including the Surviving Corporation), such Shareholder Beneficiary and its related Shareholder shall be free to enter into or otherwise engage in any Relationship to the extent consisting of dental practice management consulting services provided to dental practices, including training on the use of “PracticeWorks”; (ii) Allen Jorgensen from entering into or otherwise engaging in any Relationships at any time that is for the direct and exclusive benefit of the North Gwinnett Dental Care practice; and (iii) provided it is not otherwise prohibited by this Section 7.7, a Shareholder Beneficiary from creating a dental practice management software system, delivering seminars to dentists on practice management matters, or creating an online forum relating to the PracticeWorks dental practice management software system. Parent further agrees that the restrictions in this Section 7.7(a) shall not be construed to prohibit or restrict any of the Shareholders and/or Shareholder Beneficiaries from investing in up to 1% of any class of the securities of any Person (but may not otherwise participate in the activities of such Person) if such securities are listed on any national securities exchange or have been registered under Section 12(g) of the Exchange Act.

(b) Non-solicitation. Each of the Shareholders and each of the Shareholder Beneficiaries hereby agrees that, in order to protect the goodwill of the Parent (and its Subsidiaries, including the Surviving Corporation) and in consideration of the payments to be made to such Shareholder with respect to such Shareholder’s Shares pursuant to this Agreement, during the Restriction Period, such Shareholder and Shareholder Beneficiary shall not directly or indirectly, (i) solicit, persuade, encourage, or hire any Person who is, or was within the 12-month period prior thereto, an employee or consultant of the Parent (or any of its Subsidiaries, including the Surviving Corporation) or take any other action which is intended to induce, to terminate or limit his or her employment with or service to the Parent (or any of its Subsidiaries, including the Surviving Corporation), whether or not that person would commit a breach of any employment contract or consultancy agreement by leaving the employment of or service to the Parent (or any of its Subsidiaries, including the Surviving Corporation), (ii) interfere in any manner with the employment or consulting relationship between the Parent (or any of its Subsidiaries, including the Surviving Corporation) and any employee or consultant of the Parent (or any of its Subsidiaries, including the Surviving Corporation), or (iii) solicit, persuade, encourage or take any other action which is intended to induce (A) any manufacturer, supplier or other business partner of the Parent (or any of its Subsidiaries, including the Surviving Corporation) to adversely alter, to modify or to discontinue or limit its relationship with the Parent (or any of its Subsidiaries, including the Surviving Corporation), or (B) any Person who is, or was within the 12-month period prior thereto, a customer of the Parent (or any of its Subsidiaries, including the Surviving Corporation) to discontinue or limit, or not to commence, purchasing from the Parent (or any of its Subsidiaries, including the Surviving Corporation). Notwithstanding clauses (i) and (ii) of the preceding sentence, (A) Brian Smith shall not be deemed in breach of those clauses if the employee or consultant of the Parent involved is his wife, Fran Martini and (B) Joel Kozikowski

 

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shall not be deemed in breach of those clauses if he is no longer employed by Parent and (Y) he solicits or hires George Sykes within 12 months following the date that George Sykes’ employment with the Parent was terminated by the Parent other than for performance reasons or for material non-compliance with the Parent’s or Surviving Corporations directives, policies or procedures.

(c) Acknowledgment. Each Shareholder and each Shareholder Beneficiary agrees with the Parent that the covenants in this Section 7.7 are reasonable in all respects (including, without limitation, with respect to the subject matter, time period and geographical area) and are necessary to protect the interest of the Parent in the Surviving Corporation, including the goodwill and the Intellectual Property. Further, each Shareholder and each Shareholder Beneficiary acknowledges that without the restrictions contained in this Section 7.7, the benefits of the transactions contemplated by this Agreement, particularly given the nature of the technology being acquired hereunder, its highly confidential nature and the ongoing development of Company Products, could be circumvented, and that the Parent would not have entered into this Agreement without the restrictions contained in this Section 7.7.

(d) Validity. If a final judgment of a court of competent jurisdiction declares that any term or provision of this Section 7.7 is invalid or unenforceable, the parties agree that the court making such determination of invalidity or unenforceability will have the power to, and the parties intend that the court making such determination of invalidity or unenforceability shall, reduce the scope, duration, or geographic area of such term or provision, to delete specific words or phrases, or to replace any invalid or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this Agreement shall be enforceable as so modified to provide for a covenant having the maximum enforceable scope, duration, geographic area and other provisions (not greater than those contained herein) as shall be valid and enforceable under such applicable law.

Section 7.8 Release.

(a) EACH SHAREHOLDER AND SHAREHOLDER BENEFICIARY, ON ITS OWN BEHALF AND, TO THE EXTENT OF ITS LEGAL AUTHORITY, ON BEHALF OF ITS SUCCESSORS, ASSIGNS, HEIRS, NEXT-OF-KIN, REPRESENTATIVES, ADMINISTRATORS, EXECUTORS, DIRECTORS, OFFICERS, EMPLOYEES, PARTNERS, MEMBERS, AGENTS AND AFFILIATES, AND ANY OTHER PERSON CLAIMING BY, THROUGH, OR UNDER ANY OF THE FOREGOING, DOES HEREBY UNCONDITIONALLY AND IRREVOCABLY RELEASE, WAIVE AND FOREVER DISCHARGE, EFFECTIVE AS OF THE EFFECTIVE TIME, THE COMPANY, PARENT, MERGER SUB AND SURVIVING CORPORATION, AND EACH OF THEIR RESPECTIVE PAST AND PRESENT DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, PREDECESSORS, SUCCESSORS, ASSIGNS, STOCKHOLDERS, PARTNERS, INSURERS, SUBSIDIARIES AND AFFILIATES (THE “RELEASED PARTIES”), FROM ANY AND ALL CLAIMS, DEMANDS, DAMAGES, JUDGMENTS, CAUSES OF ACTION, SECURITY INTERESTS AND LIABILITIES OF ANY NATURE WHATSOEVER, WHETHER OR NOT KNOWN, SUSPECTED OR CLAIMED, ARISING DIRECTLY OR INDIRECTLY FROM ANY ACT, OMISSION, EVENT OR TRANSACTION OCCURRING (OR ANY

 

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CIRCUMSTANCES EXISTING) ON OR PRIOR TO THE CLOSING (THE “RELEASED CLAIMS”), INCLUDING WITHOUT LIMITATION ANY AND ALL OF THE FOREGOING ARISING OUT OF OR RELATING TO (I) THE SHAREHOLDER’S OR SHAREHOLDER BENEFICIARY’S CAPACITY AS A CURRENT OR FORMER EMPLOYEE, DIRECTOR, OFFICER, MEMBER, MANAGER, PARTNER, AGENT, STOCKHOLDER, OPTION HOLDER, WARRANT HOLDER OR OTHER SECURITY HOLDER OF THE COMPANY OR ANY OF ITS PREDECESSORS, SUBSIDIARIES OR AFFILIATES (OR THE SHAREHOLDER’S OR SHAREHOLDER BENEFICIARY’S CAPACITY AS A CURRENT OR FORMER TRUSTEE, DIRECTOR, OFFICER, EMPLOYEE, MEMBER, MANAGER, PARTNER OR AGENT WHERE THE SHAREHOLDER OR SHAREHOLDER BENEFICIARY IS OR WAS SERVING AT THE REQUEST OF THE COMPANY), (II) ANY RIGHTS OF INDEMNIFICATION OR CONTRIBUTION EXISTING AS OF THE CLOSING, WHETHER PURSUANT TO THE RELEASED PARTIES’ CERTIFICATES OF INCORPORATION, BYLAWS, OTHER ORGANIZATIONAL DOCUMENT, APPLICABLE LAW, CONTRACT OR OTHERWISE (OTHER THAN SUCH RIGHTS ARISING FROM THE SHAREHOLDER’S OR SHAREHOLDER BENEFICIARY’S SERVICE (OR THE SERVICE OF ANY APPOINTEE, DESIGNEE OR OTHER REPRESENTATIVE OF THE SHAREHOLDER OR SHAREHOLDER BENEFICIARY) AS A DIRECTOR OR OFFICER OF THE COMPANY OR ANY SUBSIDIARY), OR (III) ANY CONTRACT, AGREEMENT (INCLUDING WITHOUT LIMITATION LOAN AND OTHER AGREEMENTS EVIDENCING INDEBTEDNESS OF ANY RELEASED PARTIES) OR OTHER ARRANGEMENT (WHETHER VERBAL OR WRITTEN, BUT EXCLUDING THE MERGER AGREEMENT AND THE RELATED DOCUMENTS) ENTERED INTO OR ESTABLISHED PRIOR TO THE EFFECTIVE TIME, INCLUDING ANY CONTRACTS, AGREEMENTS OR OTHER ARRANGEMENTS REQUIRED TO BE DISCLOSED ON THE COMPANY DISCLOSURE SCHEDULE AND ANY STOCKHOLDER AGREEMENTS, INVESTOR AGREEMENTS, EMPLOYMENT AGREEMENTS OR NON-COMPETITION AGREEMENTS, IN ALL CASES WHETHER OR NOT KNOWN, SUSPECTED OR CLAIMED, ARISING DIRECTLY OR INDIRECTLY FROM ANY ACT, OMISSION, EVENT OR TRANSACTION OCCURRING (OR ANY CIRCUMSTANCES EXISTING) ON OR PRIOR TO THE EFFECTIVE TIME.

(b) NOTWITHSTANDING THE FOREGOING, NO SHAREHOLDER OR SHAREHOLDER BENEFICIARY IS HEREBY RELEASING, WAIVING OR DISCHARGING, AND THE RELEASED CLAIMS EXPRESSLY DO NOT INCLUDE: (I) COMPENSATION NOT YET PAID (INCLUDING ANY AMOUNTS PAYABLE IN CONNECTION WITH THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT AND THE RELATED DOCUMENTS), (II) REIMBURSEMENT FOR EXPENSES INCURRED BY THE SHAREHOLDER OR SHAREHOLDER BENEFICIARY IN THE ORDINARY COURSE OF HIS EMPLOYMENT OR CONSULTANCY WHICH ARE REIMBURSABLE UNDER THE EXPENSE REIMBURSEMENT POLICIES OF THE COMPANY (AFTER THE CLOSING, THE SURVIVING CORPORATION), AND (III) ANY CLAIMS ENFORCING THE SHAREHOLDER’S OR SHAREHOLDER BENEFICIARY’S RIGHTS PURSUANT TO THIS AGREEMENT AND ANY RELATED DOCUMENT. THE SHAREHOLDER OR SHAREHOLDER BENEFICIARY UNDERSTANDS THAT THIS IS A FULL AND FINAL GENERAL RELEASE OF THE RELEASED PARTIES FROM THE RELEASED CLAIMS.

 

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(c) BY EXECUTING AND DELIVERING THIS AGREEMENT, EACH SHAREHOLDER AND SHAREHOLDER BENEFICIARY WAIVES AND AGREES NOT TO ASSERT ITS RIGHTS, IF ANY, TO DISSENT OR SEEK STATUTORY APPRAISAL IN RESPECT OF THE SHAREHOLDER’S OR SHAREHOLDER BENEFICIARY’S EQUITY INTERESTS IN THE COMPANY PURSUANT TO APPLICABLE LAW (INCLUDING SECTION 14-2-13 OF THE GBCC).

(d) Each Shareholder and Shareholder Beneficiary expressly acknowledges and agrees that the Parent would not enter into the merger agreement other than in contemplation of the foregoing release, which is a material term of the Merger.

ARTICLE 8

TAX MATTERS

Section 8.1 Preparation of Tax Returns.

(a) Pre-Closing Taxes.

(i) The Representative shall prepare or cause to be prepared and file or cause to be filed all Tax Returns (other than with respect to sales and use Taxes) for the Company for all periods ending on or prior to the Closing Date that are required to be filed after the Closing Date. All such Tax Returns shall be prepared in a manner consistent with past practice (except to the extent there is no reasonable basis therefor, or a change in Law or fact). The Representative will deliver to the Parent a copy of each such Tax Return at least twenty (20) days prior to its due date (taking into account valid extensions) for filing. The Parent shall alter or amend such Tax Returns only to the extent necessary to comply with applicable Law. If any such Tax Returns are altered or amended, the Parent shall, if practicable, provide a copy of such Tax Returns to the Representative prior to any filing by the Parent. As soon as practicable following the preparation of such Tax Return, the Representative shall pay and deliver to the Parent all Taxes (except to the extent that such Taxes were included in the Final Working Capital calculation as finally determined in accordance with Section 3.10), if any, imposed on the Company with respect to such Tax Return, and the Parent shall remit to the appropriate Governmental Authority the amount so disbursed to the Parent. The Parent shall provide the Representative a copy of such Tax Return.

(ii) The Parent shall prepare or cause to be prepared, and file or cause to be filed, all sales and use Tax Returns of the Company with respect to periods ending on or prior to the Closing Date that are filed or required to be filed after the Closing Date. The Parent will deliver to the Representative a copy of each such Tax Return at least twenty (20) days prior to filing, along with a calculation of the Taxes to be paid under this Section 8.1(a)(ii). As soon as practicable following the preparation and filing of such Tax Return, the Representative shall pay and deliver to the Parent all Taxes (except to the extent that such Taxes were included in the Final Working Capital calculation as finally determined in accordance with Section 3.10), if any, paid or payable by the Company with respect to such Tax Return, and the Parent shall remit to the appropriate Governmental Authority the amount so disbursed to the Parent. The Parent shall provide the Representative a copy of such filed Tax Return.

 

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(b) The Parent shall prepare or cause to be prepared, and file or cause to be filed, all Tax Returns of the Company with respect to periods ending after the Closing Date, and shall pay or cause to be paid all Taxes of the Company shown thereon or otherwise imposed on or payable by the Company after the Closing Date. Such Tax Returns shall report all items potentially affecting the liability of the Shareholders hereunder in a manner consistent with past practice (except to the extent there is no reasonable basis therefor, or a change in Law or fact). The Parent will deliver to the Representative a copy of each such Tax Return at least 30 days prior to filing, along with a calculation of the Taxes to be paid under this Section 8.1(b) (the “Straddle Period Tax Calculation”). If the Representative disagrees with such Tax Return or such calculation, he shall notify the Parent within twenty (20) days, whereupon the Parent and the Representative shall negotiate in good faith to resolve such dispute. If the parties are unable to resolve the dispute within thirty (30) days of the Representative’s notice to the Parent, the dispute shall be referred to the Neutral Auditor, whose fees shall be shared equally by the Shareholders and the Parent. The Neutral Auditor’s conclusion shall be binding on all parties. As soon as practicable following the finalization of the Straddle Period Tax Calculation, the Representative shall pay and deliver to the Parent all Taxes (except to the extent that such Taxes were included in the Final Working Capital calculation as finally determined in accordance with Section 3.10), if any, imposed on the Company with respect to such Tax Returns to reimburse the Parent to the extent any payment the Parent is required to make relates to the portion of any Straddle Period ending on the close of business on the Closing Date, as determined pursuant to this Section 8.1. All Taxes of the Company that relate to any taxable year or period that includes but does not end on the Closing Date (the “Straddle Period”) shall be apportioned between the Shareholders and the Parent as follows: (i) in the case of Taxes other than income, profit, gains, sales and use and withholding Taxes, on a per diem basis, and (ii) in the case of income, profit, gains, sales and use and withholding Taxes, as determined from the books and records of the Company as though the taxable year of the Company terminated at the close of business on the Closing Date. Parent shall provide the Representative a copy of all Tax Returns that relate to a Straddle Period.

Section 8.2 Cooperation and Assistance. The Parent, the Shareholders and the Representative shall reasonably cooperate, and shall cause their respective Affiliates, directors, officers, employees, agents, auditors and other representatives to reasonably cooperate, in preparing and filing all Tax Returns and in resolving all disputes and audits with respect to all taxable periods relating to Taxes, including by maintaining and making available to each other all records necessary in connection with Taxes and making employees available on a mutually convenient basis to provide additional information or explanation of any material provided hereunder or to testify at proceedings relating to such Tax Claim.

Section 8.3 Tax Sharing Agreements. Any and all Tax sharing agreements or practices to which the Company is a party or otherwise subject shall be terminated as of the Closing Date, and after the Closing Date the Company shall not be bound thereby, have any liability thereunder, or make any payment thereunder.

Section 8.4 FIRPTA Certificate. On or prior to the Closing, the Company shall deliver to the Parent a certificate of non-foreign status, duly executed and acknowledged, in form and substance reasonably satisfactory to the Parent, meeting the requirements of Code Section 1445 and the Treasury Regulations thereunder. If the Parent does not receive the certification on or prior to the Closing, the Parent shall be permitted to withhold from the payments to be made pursuant to this Agreement any required withholding Tax under Code Section 1445.

 

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Section 8.5 Tax Elections; Waivers; Settlement or Compromise. Except as otherwise expressly permitted by the terms of this Agreement, between the date hereof and the Closing Date, the Company shall not, without the prior written consent of the Parent, make any election regarding Taxes, execute any waiver of restrictions on assessment or collection of any Tax, or settle or compromise any claim regarding any Tax.

Section 8.6 Tax Claims.

(a) After the Closing, each of the Parent and the Representative shall promptly notify the other party in writing upon receipt (in the case of the Representative, by either the Representative or any Shareholder) of any written notice of any pending or threatened audit or assessment, suit, proposed adjustment, deficiency, dispute, administrative or judicial proceeding or similar claim relating to Taxes (“Tax Claim”) with respect to damages for which the Shareholders could be liable pursuant to this Agreement; provided, that the delay or failure to so notify the Representative shall only relieve the Shareholders of their obligations to the extent, if at all, that they are materially prejudiced by reason of such delay or failure.

(b) The Parent will control, without affecting its or any other Parent Indemnified Person’s rights to indemnification under this Agreement, the defense of all Tax Claims; provided, that the Representative and its counsel (at the Shareholders’ sole expense) may participate in (but not control the conduct of) the defense of any such Tax Claim; and, provided further, that the Parent may not pay, settle or compromise any Tax Claim relating to a taxable period that ends on or before the Closing Date or, with respect to any taxable period beginning on or before and ending after the Closing Date, the portion of such taxable period ending on and including the Closing Date or that otherwise results in any liability to the Shareholders under this Agreement, without the Representative’s consent (not to be unreasonably withheld, conditioned or delayed).

Section 8.7 Refunds. Refunds of Taxes for tax periods ending on or before the Closing Date or the portion of any Straddle Period ending on the Closing Date shall be remitted to the Shareholders within five days of receipt according to the Shareholders’ Pro Rata Percentages of the refunds.

Section 8.8 Amended Tax Returns. Unless required by applicable Law, no amended Tax Return with respect to a tax period ending on or prior to the Closing Date or with respect to a Straddle Period shall be filed by or on behalf of the Company without consent of the Representative, which consent shall not be unreasonably withheld, conditioned or delayed with respect to any Tax Return for a Straddle Period.

Section 8.9 Dispute Resolution for Tax Matters. With respect to any dispute, controversy or claim relating to Taxes between the Parent and the Company (prior to the Closing), or between the Parent and the Representative (for any Tax for which an indemnity claim may exist), the Parent and the Company or the Representative, as applicable, shall cooperate in good faith to resolve such dispute, controversy or claim between them for a period

 

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of twenty (20) Business Days from the date written notice of such dispute, controversy or claim is received by the Parent or the Representative, as the case may be; but if the applicable parties are unable to resolve such dispute, controversy or claim, the parties shall submit the dispute, controversy or claim for resolution, which resolution shall be final, conclusive and binding on the parties, to the Neutral Auditor that is mutually agreeable to the Parent and the Company or the Representative, as applicable, or a mutually agreed upon tax lawyer who is a partner in a reputable, national law firm and who is familiar with transactions of the types contemplated hereby, who is independent with respect to each party (such accountant or lawyer, the “Tax Arbitrator”). Notwithstanding anything in this Agreement to the contrary, the fees and expenses of the Tax Arbitrator relating to any dispute as to the amount of Taxes owed shall be paid by the Parent, on the one hand, and the Representative, on the other hand, in proportion to each party’s respective liability for the portion of the Taxes in dispute, as determined by the Tax Arbitrator.

ARTICLE 9

CLOSING CONDITIONS

Section 9.1 Conditions Precedent to the Obligations of Parent and Merger Sub. The obligations of Parent and Merger Sub to consummate the transactions contemplated by this Agreement are subject to the fulfillment at or before the Closing of each of the following conditions, any one or more of which may be waived by Parent in its sole discretion:

(a) Representations and Warranties. All representations and warranties of the Company contained in this Agreement shall be true, correct and complete in all material respects on and as of the Closing Date with the same effect as though such representations and warranties had been made on and as of the Closing Date, except for the representations and warranties of the Company contained herein that are limited by Company Material Adverse Effect or materiality, each of which shall be true, correct and complete in all respects as of the Closing Date (in each case, unless the particular statement speaks expressly as of another date or time, in which case it shall be true, correct and complete as of such other date or time).

(b) Performance of Agreements. The Company shall have performed and complied in all material respects with all agreements, covenants and commitments required to be performed by or complied with pursuant to the terms hereof on or prior to the Closing Date.

(c) Material Changes. There shall have been no changes, events or circumstances that, individually or in the aggregate, have had or would reasonably be expected to have a Company Material Adverse Effect.

(d) Company Consents. All authorizations, consents, amendments and approvals identified on Schedule 9.1(d) shall have been obtained and be in full force and effect.

(e) Compliance Certificate. The Company shall have delivered to the Parent a certificate, dated the Closing Date and executed by a duly authorized officer, as to the fulfillment of the conditions set forth in Sections 9.1(a), 9.1(b), and 9.1(c).

 

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(f) Corporate Authority. The Parent shall have received copies of resolutions duly adopted by the Board of Directors and Shareholders of the Company authorizing the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby, certified as true, correct and unmodified as of the Closing Date by a duly authorized officer of the Company.

(g) Shareholder Approval. The Requisite Shareholder Approval shall have been obtained, shall not have been rescinded or revoked and shall remain in full force and effect.

(h) Updated Distribution Schedule. The Parent shall have received from the Company an updated copy of the Distribution Schedule, giving effect to any changes required as a result of the passage of time between the date of this Agreement and the Effective Time.

(i) Subordination Agreement. Each Shareholder shall have executed and delivered to the Parent the Subordination Agreement, dated on or around the Effective Time.

(j) Resignation of Directors. Each member of the Board of Directors of the Company shall have tendered his resignation as such, which resignation shall be effective at the Effective Time.

(k) Parent Voting Agreement and Parent ROFR Agreement; Transfer Restriction Letter. Each of the Shareholders shall have executed and delivered to the Parent the Joinder to Parent Voting Agreement and Joinder to Parent ROFR Agreement, and each of the Shareholder Beneficiaries shall have executed and delivered to the Parent a Transfer Restriction Letter.

(l) FIRPTA Certificate. The Parent shall have received a duly executed certificate pursuant to Section 8.4.

(m) Employee Matters. Each (i) Shareholder Beneficiary shall have executed and delivered, contemporaneously with the execution and delivery of this Agreement, an executive offer letter from Parent setting forth terms acceptable to such Shareholder Beneficiary of his employment by the Parent following the Closing, (ii) each employee of the Company (including each Shareholder Beneficiary), shall have executed and delivered effective as of the Closing, the Parent’s standard Employee Confidentiality, Assignment of Inventions and Non-Compete Agreement, and (iii) all Shareholder Beneficiaries shall be employed by the Parent.

(n) No Injunction. There shall not be in effect on the Closing Date any preliminary or permanent Governmental Order (including a temporary restraining order), or any Law, prohibiting or making illegal the consummation of any of the transactions contemplated by this Agreement.

(o) No Restraints. There shall not be instituted or pending any action or proceeding by any Governmental Entity (i) seeking to restrain, prohibit or otherwise interfere with the ownership or operation by Parent or any of its Subsidiaries of all or any portion of the business of the Company or any of its Subsidiaries, or to compel Parent or any of its Subsidiaries to dispose of or hold separate all or any portion of the business or assets of the Company or any of its Subsidiaries, (ii) seeking to impose or confirm material limitations on the ability of Parent

 

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or any of its Subsidiaries effectively to exercise full rights of ownership of the shares of Company Common Stock (or shares of stock of the Surviving Corporation) including the right to vote any such shares on any matters properly presented to shareholders or (iii) seeking to require divestiture by Parent or any of its Subsidiaries of any such shares.

(p) Funds Flow Memorandum; Pay-Off Letters. The Parent shall have received (i) an updated Funds Flow Memorandum certified by an officer of the Company and (ii) pay-off letters executed by the parties (other than the Shareholders) listed in the Funds Flow Memorandum.

(q) 401(k) Plan. The Company shall have terminated the Insperity 401(k) Plan at least one (1) day prior to the Effective Date and the Company shall have delivered evidence, reasonably satisfactory to the Parent, of such termination.

(r) Affiliate Lease. The Office Lease between Settles Point Family Limited Partnership, a Georgia corporation and the Company shall have been amended in the form of Exhibit E hereto.

(s) BRS Amendment. The Dealer Agreement, dated as of June 1, 2011, by and between the Company and BRS Systems, LLC shall have been amended in the form of Exhibit F hereto.

(t) Honey and Halo3. The Company shall have entered into a Software Purchase Agreement with George Sykes and S Group Ventures, LLC and a Software License Agreement with James Russo and Halo3 Consulting, LLC, in the forms attached hereto as Exhibits G-1 and G-2.

(u) Financing. The Parent shall have received sufficient funds from the sale of Parent Series F Preferred Stock.

Section 9.2 Conditions Precedent to the Obligations of the Company, Shareholders and Shareholder Beneficiaries. The obligations of the Company, Shareholders and Shareholder Beneficiaries to consummate the transactions contemplated by this Agreement are subject to the fulfillment at or before the Closing of each of the following conditions, any one or more of which may be waived by the Company and the Representative in its and his sole discretion:

(a) Representations and Warranties. All representations and warranties of the Parent and Merger Sub contained in this Agreement shall be true, correct and complete in all material respects on and as of the Closing Date with the same effect as though such representations and warranties had been made on and as of the Closing Date, except for the representations and warranties of the Parent and Merger Sub contained herein that are limited by Parent Material Adverse Effect or materiality, each of which shall be true, correct and complete in all respects as of the Closing Date (in each case, unless the particular statement speaks expressly as of another date or time, in which case it shall be true, correct and complete as of such other date or time).

 

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(b) Performance of Agreements. The Parent and Merger Sub shall have performed in all material respects all obligations, agreements, conditions and commitments required to be fulfilled by the Parent and Merger Sub pursuant to the terms hereof on or before the Closing Date.

(c) Material Changes. There shall have been no changes, events or circumstances that, individually or in the aggregate, have had or would reasonably be expected to have a Parent Material Adverse Effect.

(d) Offer Letters. None of the offer letters, dated on the date hereof, by and between the Parent and the Company Key Employees have been revoked by the Parent.

(e) Compliance Certificate. The Parent and Merger Sub shall have delivered to the Company a certificate, dated the Closing Date, executed on the Parent’s and Merger Sub’s behalf by a duly authorized officer, as to the fulfillment of the conditions set forth in Sections 9.2(a), 9.2(b) and 9.2(c).

(f) Consents. All authorizations, consents or approvals of any and all Governmental Authorities and third parties necessary for the consummation of the transaction contemplated hereby shall have been obtained and be in full force and effect.

(g) No Injunction. There shall not be in effect on the Closing Date any preliminary or permanent Governmental Order (including a temporary restraining order), or any Law, prohibiting or making illegal the consummation of any of the transactions contemplated by this Agreement.

ARTICLE 10

INDEMNIFICATION

Section 10.1 Indemnification of Parent Indemnified Persons. Subject to the limits set forth in this Article 10, from and after the Effective Time, each Shareholder and Shareholder Beneficiary shall indemnify and hold harmless the Parent and its Affiliates (including, following the Effective Time, the Surviving Corporation (but excluding any Shareholders)) and each of their respective directors, officers, employees, agents, representatives, controlling Persons, successors and assigns (the Parent, its Affiliates and such other Persons are collectively hereinafter referred to as the “Parent Indemnified Persons”), from and against any and all Losses that any such Parent Indemnified Persons may directly or indirectly suffer, sustain, incur or become subject to arising out of or as a result of:

(a) any breach or inaccuracy of any representation or warranty of the Company, any Shareholder, or any Shareholder Beneficiary contained in this Agreement or any certificate delivered pursuant hereto (in each case, for purposes of determining Losses under this Article 10 but not for purposes of determining whether any breach or inaccuracy has occurred, as such representation or warranty would read if all qualifications as to materiality, including each reference to the defined term Company Material Adverse Effect, were deleted therefrom);

 

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(b) any breach or non-fulfillment of any covenant, undertaking, agreement or other obligation of the Company, any Shareholder, any Shareholder Beneficiary, or the Representative contained in this Agreement or any certificate delivered pursuant hereto, in each case, required to be taken at or prior to the Closing (a breach of any representation or warranty referenced in subsection (a) in and of itself shall not violate this subsection (b));

(c) any Transaction Expenses or obligations under Contracts with respect to Transaction Expenses, except to the extent that such Transaction Expenses are included in the post-Closing adjustments made pursuant to Article 3 of this Agreement;

(d) any inaccuracy in the updated Distribution Schedule delivered to the Parent pursuant to Section 9.1(h);

(e) except to the extent satisfied by way of withholding from the Merger Consideration, any (i) Taxes of the Company with respect to any Tax periods ending on or prior to the Closing Date and for the portion of any Straddle Period ending at the closing of business on the Closing Date as determined pursuant to Section 8.1(b) (except to the extent that such Taxes were included in the Final Working Capital calculation in accordance with Section 3.10), and (ii) any Transfer Taxes for which the Shareholders are responsible pursuant to Section 3.11.

(f) any act or failure to act, or any alleged act or failure to act, of the Representative (including fraud, gross negligence, willful misconduct or bad faith);

(g) any claims or actions by Persons who are or were shareholders of the Company, in their capacities as shareholders (including with respect to exercise of dissenters rights or breaches of fiduciary duties), whether against the Company, members of the Company’s board of directors, other shareholders, the Parent or otherwise, arising out of facts or circumstances existing on or prior to the Closing (including claims or actions arising out of the authorization, execution and delivery of this Agreement, the performance by the Company of its obligations hereunder or the consummation of the transactions contemplated hereby);

(h) any failure to comply with the requirements of the payment card industry data security standards as imposed by the PCI Security Standards Council; or

(i) any fraud, willful breach or willful misrepresentation by the Company in connection with this Agreement or the transactions contemplated hereby; provided, however, that breach of the representations and warranties in the first sentence of Section 4.12 (Compliance with Laws) shall not be considered a willful breach if such breached representation and warranty is true and correct in all material respects.

Section 10.2 Survival of Representations and Warranties.

(a) The representations and warranties of the Company, the Shareholders, the Shareholder Beneficiaries and the Representative contained in this Agreement or any certificate delivered pursuant hereto, and the Parent Indemnified Persons’ right to indemnity pursuant to Section 10.1, shall survive the Closing and shall remain in full force and effect thereafter for the applicable period set forth in Section 10.2(b), whereupon such representations and warranties and rights of indemnity shall terminate and be of no further force or effect, except with respect to

 

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any inaccuracy therein or breach thereof (or alleged inaccuracy or breach), notice of which shall have been duly given within such period in accordance with Section 10.5, in which case such representations and warranties shall survive until the resolution of the claims set forth in such notice and the collection of the amount, if any, of such claims following resolution thereof. The representations and warranties of the Parent and Merger Sub contained in this Agreement or any certificate delivered pursuant hereto shall survive Closing and shall remain in full force and effect thereafter.

(b) Notwithstanding anything in this Section 10.2 to the contrary:

(i) all representations, warranties, covenants, undertakings, agreements and other obligations of the Company, the Shareholders, the Shareholder Beneficiaries and the Representative contained in this Agreement or any certificate delivered pursuant hereto shall survive the Closing in accordance with their terms, subject to Section 10.2(b)(ii) below;

(ii) notwithstanding Section 10.2(b)(i), the Parent Indemnified Persons may give notice of, and make a claim relating to, and shall be entitled to indemnification subject to the following limitations:

(A) pursuant to Section 10.1(a), in connection with any claim related to any breach or inaccuracy of the representations or warranties of the Company, other than the Core Representations (as defined below), at any time prior to (but not after) 18 months after the Closing Date; and

(B) pursuant to Section 10.1(a), in connection with any claim related to any breach or inaccuracy of the representations or warranties of the Company contained in Section 4.1 (‘Organization; Subsidiaries’), Section 4.2 (‘Authority; Non-Contravention’), Section 4.3 (‘Company Capitalization; Distributions’), Section 4.4 (‘Company Shareholder Agreements’), Section 4.9 (‘Taxes’), and Article 4A (‘Representations and Warranties of the Shareholders and Shareholder Beneficiaries’) (collectively, the “Core Representations”), at any time prior to (but not after) the sixtieth day following the date of expiration of the applicable statute of limitation period.

(C) pursuant to Sections 10.1(b) through (i), at any time.

(iii) No claim may be brought by any of the Shareholders, Shareholder Beneficiaries or the Representative for breach of any of the representations and warranties set forth in Sections 5.3 and 5.6 through 5.9 more than 18 months after the Closing Date.

Section 10.3 Limitation on Indemnification.

(a) Recovery Threshold. No Parent Indemnified Person shall be entitled to any recovery pursuant to Section 10.1(a) (other than with respect to Losses arising out of or resulting from the breach or inaccuracy of the Core Representations), unless and until the amount of all Losses for which all Parent Indemnified Persons are otherwise entitled to indemnification pursuant to Sections 10.1(a) exceeds $150,000 in the aggregate, in which case the Parent Indemnified Persons shall be entitled to recover all Losses, including the first $150,000.

 

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(b) Indemnification Limits.

(i) Other than (A) Losses arising out of or resulting from the breach or inaccuracy of the representations or warranties contained in Section 4.11 (Intellectual Property) or Section 4.12 (Compliance with Laws) (together, the “Designated Representations”) or of the Core Representations, and (B) claims for fraud, willful breach, or intentional misrepresentation, amounts payable to Parent Indemnified Persons as a result of any claim for indemnification under Section 10.1(a) shall not exceed $4,750,000 in the aggregate.

(ii) Other than claims for fraud, willful breach, or intentional misrepresentation, amounts payable to Parent Indemnified Persons as a result of any claim for indemnification under Section 10.1(a) for Losses arising out of or resulting from the breach or inaccuracy of the Designated Representations (together with any Losses for which the limitations in Section 10.3(b)(i) apply) shall not exceed $11,000,000 in the aggregate.

(iii) Other than claims for fraud, willful breach, or intentional misrepresentation, amounts payable to Parent Indemnified Persons as a result of any claim for indemnification under Section 10.1(a) for Losses arising out of or resulting from the breach or inaccuracy of the Core Representations together with any Losses for which the limitations in Section 10.3(b)(ii) apply and any claims for indemnification pursuant to clauses (b) through (e) and (g) through (h) of Section 10.1 shall not exceed in the aggregate the Merger Consideration.

(iv) Notwithstanding anything in this Agreement to the contrary, in no event shall any Shareholder or Shareholder Beneficiaries be liable to Parent Indemnifiable Persons, as a result of any claim for indemnification under Section 10.1(a) in respect of breaches of the representations and warranties contained in Article 4A, in an amount in excess of the Merger Consideration received by such Shareholder or Shareholder Beneficiary (indirectly through his related Shareholder) (valuing shares of Parent Series E Preferred Stock at the Agreed Stock Consideration Value).

(c) Reduction for Insurance Proceeds. The amount of any Losses claimed by any Parent Indemnified Persons hereunder shall be reduced to the extent of any amounts actually recovered (net of any insurance premium increases and other costs relating to such recovery) by such Parent Indemnified Person under insurance policies.

Section 10.4 [intentionally omitted]

Section 10. Notification of Indemnifiable Claims. Promptly after the incurrence of any Losses by any Parent Indemnified Person (an “Indemnified Person”), or receipt by a Parent Indemnified Person of notice of any actual or proposed demand, claim, action, suit, proceeding, arbitral action, governmental inquiry, criminal prosecution or other investigation, that has been or may be brought or asserted by a third-party against such Parent Indemnified Person (a “Third Party Claim”), in either case for which such Parent Indemnified Person may reasonably likely to be entitled to indemnification pursuant to this Article 10 (an “Indemnifiable Claim”), such Parent Indemnified Person will give written notice thereof (each, a “Notice of Claim”) to the

 

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Representative (the Person to whom written notice is given is sometimes hereinafter referred to as the “Indemnifying Person”); provided, that the delay or failure to so notify the Indemnifying Person shall only relieve the Indemnifying Person of its obligations to the extent, if at all, that the Indemnifying Person is materially prejudiced by reason of such delay or failure. Each such notice shall be in writing and shall describe such Indemnifiable Claim. Each Notice of Claim, must be delivered on or before the expiration of the applicable time period set forth in Section 10.2(b)(ii) to be valid. Notwithstanding anything to the contrary contained in this Agreement, if, on or before the expiration of the applicable time period set forth in Section 10.2(b)(ii) a Parent Indemnified Person delivers to the Representative a Notice of Claim pursuant to this Agreement, the claim asserted in such Notice of Claim shall survive until such time as such claim is fully and finally resolved.

Section 10.6 Defense of Third Party Claims

(a) In the event any Third Party Claim is instituted against a Parent Indemnified Person which involves or appears reasonably likely to involve an Indemnifiable Claim, the Parent Indemnified Person will, promptly after receipt of notice of any such Third Party Claim, notify the Indemnifying Person of the commencement thereof; provided, that the delay or failure to so notify the Indemnifying Person shall only relieve the Indemnifying Person of its obligations to the extent, if at all, that the Indemnifying Person is materially prejudiced by reason of such delay or failure. With the exception described in the next sentence, the Parent Indemnified Person shall have the right in its sole discretion to control the defense or settlement of such Third Party Claim; provided, that the Representative and its counsel (at the sole expense of the Representative) may participate in (but not control the conduct of) the defense of such Third Party Claim. Notwithstanding the preceding sentence, if the Indemnifying Person and the Parent Indemnified Person(s), exercising good faith, agree that (A) a Third Party Claim for monetary damages, if decided entirely in favor of the claimant, would be one for which the Indemnifying Person is solely responsible pursuant to the terms of Article 10, (B) such Third Party Claim does not seek any remedy other than monetary damages, and (C) the resolution of the Third Party Claim would not potentially have any adverse implications to any Parent Indemnified Person (other than the payment of the Third Party Claim), then the Representative and his counsel shall have the right in his sole discretion to control the defense or settlement of such Third Party Claim; provided, that (i) the Parent Indemnified Person and its counsel (at the sole expense of Parent Indemnified Person) may participate in (but not control the conduct of) the defense of such Third Party Claim and (ii) the Indemnifying Person shall keep the Parent Indemnified Person promptly and fully informed of such Third Party Claim and any proceedings, settlement discussions, and other material information related thereto.

(b) In furtherance of Section 10.6(a), the Representative, each Shareholder, and each Shareholder Beneficiary, on the one hand, and the Parent Indemnified Person, on the other hand shall cooperate fully with the other and make available to the other all reasonably requested information under its control (at such cooperating party’s sole expense).

 

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Section 10.7 Mandatory Procedures for Resolution and Satisfaction of Indemnifiable Claims; Offsets and Escrow.

(a) Subject to this Section 10.7, Parent shall have the right of offset against the Aggregate Adjusted Deferred Payment Consideration for satisfaction of Indemnifiable Claims pursuant to this Article 10.

(b) Subject to this Section 10.7, the Escrow Shares shall be held in escrow by the Parent, as escrow holder (“Escrow Holder”), for satisfaction of Indemnifiable Claims pursuant to this Article 10. For purposes hereof, the Escrow Shares shall be valued at a price per share equal to the Agreed Stock Consideration Value. No fraction of a share of Parent Series E Preferred Stock will be issued as Escrow Shares. The Escrow Shares shall be registered in the name of the Representative.

(c) Notwithstanding any other provision of this Agreement, in the event a Parent Indemnified Person has an Indemnifiable Claim under Section 10.1 that is either an Uncontested Claim or a Contested Claim for which a Joint Written Direction or Final Decree (as those terms are defined in Sections 10.7(d) and (e)) has been issued, the parties agree that any such claims shall be satisfied, at Parent’s option, by (A) offset against the unpaid Aggregate Adjusted Deferred Payment Consideration (or, if no Aggregate Adjusted Deferred Payment Consideration remains unpaid, the payment of cash by the Shareholders, severally and not jointly, to the Parent), (B) if insufficient Aggregate Adjusted Deferred Payment Consideration remains unpaid to satisfy such claim and Parent has paid any Aggregate Adjusted Deferred Payment Consideration to the Shareholders, the payment of cash by the Shareholders severally and not jointly, up the amount of the Aggregate Adjusted Deferred Payment Consideration so paid; (C) by having the Escrow Holder release Escrow Shares to the Parent (valuing each Escrow Share at the Agreed Stock Consideration Value), or (D) by some combination of (A), (B) and (C); provided, however, that if the Parent’s exercise of its option results in less than 40% of the aggregate Merger Consideration that the Shareholders receive being comprised of Parent Series E Preferred Stock (valuing each share at the Agreed Stock Consideration Value), then the Representative may, within 20 days after the Parent notifies the Representative of its election, elect to pay all or part of the Parent Series E Preferred Stock portion of such payment as an offset against the unpaid Aggregate Adjusted Deferred Payment Consideration or in cash. In the event that a Parent Indemnified Person has an Indemnifiable Claim under Section 10.1 that is either an Uncontested Claim or a Contested Claim for which a Joint Written Direction or Final Decree has been issued (x) that exceeds the amounts that can be recovered from the Aggregate Adjusted Deferred Payment Consideration and Escrow Shares in accordance with the preceding sentence, or (y) with respect to any portion of an Indemnifiable Claim made in respect of Section 10.1(e), for which no unpaid Aggregate Adjusted Deferred Payment Consideration is available as recourse therefor, then the Parent Indemnified Persons shall be able to recover their Damages from each Shareholder or Shareholder Beneficiaries directly, severally and not jointly, according to the Shareholder’s or Shareholder Beneficiary’s (indirectly through his related Shareholder) Pro Rata Percentage of such Indemnifiable Claim.

(d) The Representative may contest all or any portion of an Indemnifiable Claim by giving Parent written notice of such contest (the “Dispute Notice”) within 30 days after receipt of a Notice of Claim (the “Objection Period”). The Dispute Notice shall include a statement of the grounds of such contest and the amount of the Indemnifiable Claim in dispute. Such right to contest shall terminate if no Dispute Notice is provided by the Representative within the Objection Period. In the event that the Representative delivers a Dispute Notice

 

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within the Objection Period to the Parent contesting all or a portion of a Notice of Claim (a “Contested Claim”) then (A) the Escrow Holder shall not release to the Parent any contested portion of the Escrow Property and (B) the Parent shall not offset any contested amounts against the unpaid Aggregate Adjusted Deferred Payment Consideration until (i) the Parent and the Representative mutually agree in a writing signed by both Parent and Representative (a “Joint Written Direction”), or (ii) the matter is resolved as provided in Article 13 and the Parent and the Representative shall have received a copy of a final order of a court of competent jurisdiction (with respect to which the period for any appeal shall have expired and the delivering party so certifies (a “Final Decree”).

(e) If the Representative does not deliver a Dispute Notice within the Objection Period, the Indemnifiable Claim described in the relevant Notice of Claim shall be deemed an “Uncontested Claim”.

(f) If no Indemnifiable Claims remain unresolved 18 months after the Closing Date (the “Release Date”), then promptly (and, in any event, within five (5) Business Days thereafter), the Escrow Holder shall deliver to the Representative all documents required to release the Escrow Property to the Shareholders. Promptly after the Representative completes and delivers such documents to the Escrow Holder (and, in any event, within five (5) Business Days thereafter), the Escrow Holder shall deliver to the Shareholders the portion of the Escrow Property indicated on the Distribution Schedule under the heading “Escrow Property.”

(g) If an Indemnifiable Claim remains unresolved on the Release Date, then the amount of the unpaid Aggregate Adjusted Deferred Payment Consideration and Escrow Property necessary to satisfy the Indemnifiable Claim pursuant to Section 10.7(c) shall be retained by Parent and Escrow Holder until finally resolved, and the portion of the Escrow Property that is not necessary to satisfy such Indemnifiable Claim shall be delivered within five (5) Business Days following the Release Date by the Escrow Holder to the Shareholders in accordance with the pro rata allocation indicated on the Distribution Schedule.

(h) With respect to any portion of the Escrow Shares deliverable to the Parent pursuant to the terms and conditions of this Agreement, the Parent is hereby authorized by the Representative to take all steps necessary to accomplish the transfer of such Escrow Shares to the Parent. The Representative hereby grants the Escrow Holder an irrevocable power of attorney coupled with an interest to take any and all actions required to effect such transfer.

Section 10.8 Knowledge and Investigation. The right of any Indemnified Person to indemnification pursuant to this Article 10 will not be affected by any investigation conducted at any time, whether before or after the execution and delivery of this Agreement or the Closing, with respect to the accuracy of any representation or warranty or performance of or compliance with any covenant or agreement.

Section 10.9 Adjustment to Merger Consideration. It is the intention of the parties hereto that any payment under this Article 10 shall be treated as an adjustment to the Merger Consideration for federal, state, local and foreign income Tax purposes, and the parties agree to file their Tax Returns accordingly, unless a final determination (within the meaning of Code Section 1313) causes any such payment not to be treated as such an adjustment.

 

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Section 10.10 Exclusive Remedies. Following the Closing, the indemnification provisions of this Article 10 shall be the sole and exclusive remedies of Parent and Parent Indemnified Persons with respect to the subject matter of this Agreement and the transactions contemplated hereby; provided, however, that this provision shall not limit (a) any remedies available to Parent, including equitable remedies, in respect of breaches of Sections 7.6 and 7.7, (b) the Parent Indemnified Persons’ pursuit of injunctive relief for breach of any covenant or agreement contained in this Agreement, and (c) remedies based upon, related to or arising out of fraud, willful breach or intentional misrepresentation. IN NO EVENT SHALL LOSSES INCLUDE ANY CLAIMS FOR PUNITIVE OR EXEMPLARY DAMAGES (IN EACH CASE, EXCEPT TO THE EXTENT ACTUALLY PAID TO A THIRD-PARTY).

Section 10.11 Right of Set-Off. Subject to Section 10.7, if the Representative, Shareholders or Shareholder Beneficiaries have not satisfied any indemnification obligation owed by them hereunder, the Parent or any of its Affiliates may, at their discretion, satisfy the unpaid portion of such obligation by, to the extent permitted by law, setting-off against any amounts due and owing from the Parent or any of its Affiliates to any of the Shareholders or Shareholder Beneficiaries including, without limitation, any amounts due to the Shareholders pursuant to Section 3.3 and Section 3.9.

ARTICLE 11

[RESERVED]

ARTICLE 12

APPOINTMENT OF REPRESENTATIVE

Section 12.1 Appointment. By virtue of having approved and adopted this Agreement, each Shareholder hereby appoints Brian Smith to act as such Shareholder’s true and lawful attorney-in-fact, agent and proxy under this Agreement and the Related Documents, with full power and authority, including power of substitution, acting in the name of and for and on behalf of such Shareholders (i) to amend or waive any provision of this Agreement or any Related Documents, (ii) to review and accept or dispute the Parent Working Capital Determination and the Parent Working Capital Statement pursuant to Section 3.10, (iii) to contest, negotiate, defend, compromise or settle any claim for which a Parent Indemnified Person may be entitled to indemnification under Section 10.1 of this Agreement, (iv) to authorize payment to any Parent Indemnified Person of any of the Escrow Property, or any portion thereof, in satisfaction of any claim made by a Parent Indemnified Person under Section 10.1 of this Agreement, including without limitation pursuant to Section 10.6 of this Agreement, (v) to receive service of process in connection with any claims under this Agreement or any Related Document, (vi) to assert any claim, send any notice or institute any action on behalf of the Shareholders, including any claim under this Agreement or any Related Document, and (vii) to do all other things and to take all other action under or related to this Agreement, including without limitation Article 10 of this Agreement, or any Related Document that the Representative may consider necessary or proper to effectuate the transactions contemplated hereby and thereby and to resolve any dispute with the Parent over any aspect of this Agreement and, on behalf of such Shareholders, to enter into any agreement to effectuate any of the foregoing, which shall have the effect of binding such

 

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Shareholders as if such Shareholders had personally entered into such an agreement. This appointment is exclusive and the Shareholders or Shareholder Beneficiary shall make claims under this Agreement only through the Representative. This appointment and power of attorney granted to the Representative shall be deemed to be coupled with an interest and all authority conferred hereby shall be irrevocable and shall not be subject to termination by operation of law, whether by the death or incapacity or liquidation, dissolution or winding up of any Shareholder or the occurrence of any other event or events and the Representative may not terminate this power of attorney with respect to any Shareholder or such Shareholder’s successors, assigns, heirs, next-of-kin, representatives, administrators, executors, directors, officers, employees, partners, members, agents or affiliates without the prior written consent of the Parent. Without limiting the foregoing, any determination or resolution (in any proceeding, by agreement or otherwise) of any dispute, controversy or claim relating to this Agreement or the Related Documents or the transactions contemplated hereby and thereby to which the Representative (in its capacity as such) is a party shall be binding on all Shareholders and their successors, assigns, heirs, next-of-kin, representatives, administrators, executors, directors, officers, employees, partners, members, agents and affiliates.

Section 12.2 Personal Liability. Neither the Representative nor any agent employed by it shall incur any liability to Parent, Merger Sub, Surviving Corporation or any Shareholder relating to the performance of the Representative’s duties or exercise of the Representative’s rights hereunder, except for actual fraud or bad faith acts by the Representative or pursuant to the commission by the Representative on a continuing basis of acts or omissions finally determined by a court of competent jurisdiction to have been willful or grossly negligent. The Representative shall likewise incur no liability by reason of any error of Law or for any act or omission related thereto. By virtue of having approved and adopted this Agreement, each of the Shareholders hereby severally and not jointly agrees to indemnify and hold harmless the Representative and any agent employed by it against any loss, liability or expense incurred (i) without fraud or bad faith on the part of the Representative and (ii) other than pursuant to the commission by the Representative of acts or omissions finally determined by a court of competent jurisdiction to have been willful or grossly negligent arising out of or in connection with its performance or exercise of obligations and rights under this Agreement. To the extent the Representative is entitled to indemnification pursuant to this Section 12.2, each Shareholder shall bear its Pro Rata Percentage of amounts payable to satisfy such claim.

Section 12.3 Right to Counsel. Each Shareholder agrees that the Representative may consult with counsel chosen by the Representative and shall have full and complete authorization in good faith to act or refrain from acting in accordance with the opinion of such counsel.

Section 12.4 Indemnification Claims. The Representative shall have the exclusive right, power and authority, by or on behalf of any or all Shareholders and Shareholder Beneficiaries, to pursue, defend, settle or commence any action, suit or proceeding against the Parent or the Surviving Corporation or any other Parent Indemnified Person in connection with this Agreement, the Related Documents and the transactions contemplated hereby and thereby, and in no event shall any Shareholder or Shareholder Beneficiary itself have the right to pursue, defend, settle or commence any action, suit or proceeding against the Parent or the Surviving Corporation, or any other Parent Indemnified Person in connection therewith. Each Shareholder and Shareholder Beneficiary hereby waives, and acknowledges and agrees that such Shareholder

 

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or Shareholder Beneficiary shall not have and shall not exercise or assert (or attempt to exercise or assert), any right of contribution, right of indemnity or other right or remedy against the Surviving Corporation in connection with any indemnification obligation or any other liability to which he may become subject under or in connection with this Agreement.

Section 12.5 Reliance. The Parent may rely and shall be protected in acting, or refraining from acting, upon any written notice, instruction or request furnished to it hereunder and reasonably believed by the Parent to be genuine and to have been signed or presented by the Representative as if such written notice, instruction or request had been furnished to it by all the Shareholders. The Representative may rely and shall be protected in acting, or refraining from acting, upon any written notice, instruction or request furnished to the Representative hereunder and reasonably believed by the Representative to be genuine and to have been signed or presented by the proper party or parties.

Section 12.6 Removal and Resignation. Upon the written agreement or consent of the Shareholders who immediately prior to the Effective Time held Shares representing more than 50% of the Shares (excluding Shares held by the Representative), the Shareholders shall be entitled to change the Representative by delivery of a written notice to such effect to the Parent at any time. The Representative shall be permitted to resign by giving not less than thirty (30) days’ advance written notice to the Shareholders and the Parent and, in such event, or upon the death or incapacity of the Representative, a replacement Representative shall be chosen within thirty (30) days of the resignation, death or incapacity of the Representative by action of the Shareholders who immediately prior to the Effective Time held Shares representing more than 50% of the Shares, which new Representative shall be reasonably acceptable to the Parent. If the Parent shall not have received written notice of the appointment of a replacement Representative within such 30-day period, the Parent may appoint any Shareholder Beneficiary as the replacement Representative.

ARTICLE 13

DISPUTE RESOLUTION

Section 13.1 Dispute Resolution. The parties covenant and agree that, subject to the provisions of Section 13.4 and except as may be otherwise expressly set forth in this Agreement or any Related Document, any dispute, controversy or claim between the Parent, Merger Sub and their Affiliates (and, after the Effective Time only, the Surviving Corporation), on the one hand, and any Shareholder, Shareholder Beneficiary or the Representative, on the other hand, arising out of or relating to this Agreement, any Related Document or any of the transactions contemplated hereby or thereby shall be subject to the provisions of Sections 13.2 and 13.3.

Section 13.2 Good Faith Negotiation. The parties recognize that from time to time a dispute may arise out of or relating to this Agreement, any Related Document or the transactions contemplated hereby or thereby. To begin the dispute resolution process, either the Parent or the Representative (on his behalf and on behalf of any Shareholder or Shareholder Beneficiary), as the case may be, must first send written notice of the dispute to the other for attempted resolution by good faith negotiations between the Parent and the Representative within 30 days after such notice is received. If the matter has not been resolved within 30 days of the notice of dispute, either Parent or the Representative may initiate a legal proceeding.

 

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Section 13.3 Exclusions. Section 13.2 shall not apply to (a) any breach by any Shareholder or Shareholder Beneficiary of or non-compliance by any Shareholder or Shareholder Beneficiary with any covenant, agreement, undertaking or other obligation of such Shareholder or Shareholder Beneficiary, including any breach of or non-compliance with Section 7.6 (‘Confidential Information’), (b) the resolution of disputes subject to Section 3.9 (‘Earn-out Consideration’), Section 3.10(c) (‘Final Working Capital Adjustment’) or Section 8.9 (‘Dispute Resolution for Tax Matters’) or (c) any request for specific performance or other injunctive relief as described in Section 14.6 (‘Specific Performance’).

Section 13.4 Submission to Jurisdiction. Except as set forth in Section 13.3, all actions and proceedings arising out of or relating to this Agreement, any Related Document or any of the transactions contemplated hereby or thereby will be heard and determined exclusively in the United States District Court for the Southern District of New York. The parties hereto hereby (a) submit to the exclusive jurisdiction of the United States District Court for the Southern District of New York for the purpose of any action arising out of or relating to this Agreement and any Related Document brought by any party hereto or thereto, and (b) irrevocably waive, and agree not to assert by way of motion, defense, or otherwise, in any such action, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that the action is brought in an inconvenient forum, that the venue of the action is improper, or that this Agreement, and Related Document or the transactions contemplated hereby or thereby may not be enforced in or by any of the above-named courts. For the avoidance of doubt, this Section 13.4 shall in no way limit the ability of a party to seek enforcement of a judgment from a court of the State of New York in another jurisdiction.

ARTICLE 14

GENERAL PROVISIONS

Section 14.1 Notices. All notices and other communications hereunder shall be in writing and shall be deemed delivered when actually received either personally or by recognized overnight commercial delivery service or sent via facsimile (receipt confirmed) to the parties at the following street addresses or facsimile numbers (or at such other street address or facsimile number for a party as shall be specified by like notice):

 

if to Parent or Merger Sub, to:    Yodle, Inc.
   50 W 23rd St. #401
   New York, NY 10010
   Fax: (212) 542-5442
   Attn: Chief Executive Officer
with a copy (which shall not constitute notice) to:    Choate, Hall & Stewart LLP
   Two International Place
   Boston, Massachusetts 02110
   Fax: (617) 248-4000
   Attn: Brian D. Goldstein

 

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if to the Company, to:    Lighthouse Practice Management Group, Inc.
   4955 Alton Tucker Blvd, Suite 300
   Sugar Hill, GA 30518
   Fax: (888) 427-5375
   Attn: Chief Executive Officer
with a copy (which shall not constitute notice) to:    Fisher Broyles, a Limited Liability Partnership
   1200 Abernathy Road, Building 600
   Northpark Town Center
   Suite 1700
   Atlanta, Georgia 30328
   Attn: Chris Wilson
if to the Representative, to:    Brian Smith
   4940 Katelyn Drive
   Indianapolis, IN 46228
with a copy (which shall not constitute notice) to:    Fisher Broyles, a Limited Liability Partnership
   1200 Abernathy Road, Building 600
   Northpark Town Center
   Suite 1700
   Atlanta, Georgia 30328
   Attn: Chris Wilson

Section 14.2 Interpretation. When a reference is made in this Agreement to Exhibits, such reference shall be to an Exhibit to this Agreement unless otherwise indicated. When a reference is made in this Agreement to Sections, such reference shall be to a Section of this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are only for reference purposes and shall not affect in any way the meaning or interpretation of this Agreement. Reference to an agreement herein is to such agreement as amended in accordance with its terms up to the date hereof. Reference to a statute herein is to such statute, as amended.

Section 14.3 Counterparts; Facsimile. This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other party, it being understood that all parties need not sign the same counterpart. For purposes of this Agreement, a document (or signature page thereto) signed and transmitted by facsimile machine, telecopier or electronic mail is to be treated as an original document. The

 

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signature of any party thereon, for purposes hereof, is to be considered as an original signature, and the document transmitted is to be considered to have the same binding effect as an original signature on an original document. At the request of any party, any facsimile, telecopy or scanned document is to be re-executed in original form by the parties who executed the facsimile, telecopy or scanned document. No party may raise the use of a facsimile machine, telecopier or electronic mail or the fact that any signature was transmitted through the use of a facsimile, telecopier or electronic mail as a defense to the enforcement of this Agreement or any amendment or other document executed in compliance with this Agreement.

Section 14.4 Entire Agreement; Third Party Beneficiaries. This Agreement, its Exhibits and the documents and instruments and other agreements among the parties hereto as contemplated by or referred to herein, including the Company Disclosure Schedule and the Parent Disclosure Schedule constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof, it being understood that the Confidentiality Agreement shall survive any termination of this Agreement; and are not intended to confer upon any other person any rights or remedies hereunder. Without limiting the generality of the foregoing, the parties hereto acknowledge that no party hereto makes, and each hereby disclaims, any representations or warranties, express or implied, by such party other than as expressly set forth herein or in any other Related Documents.

Section 14.5 Severability. In the event that any provision of this Agreement or the application thereof becomes or is declared by a court of competent jurisdiction to be illegal, void or unenforceable, the remainder of this Agreement will continue in full force and effect and the application of such provision to other persons or circumstances will be interpreted so as reasonably to effect the intent of the parties hereto. The parties further agree to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision that will achieve, to the extent possible, the economic, business and other purposes of such void or unenforceable provision.

Section 14.6 Other Remedies; Specific Performance; Fee Awards.

(a) Except as otherwise provided in Article 10, any and all remedies expressly conferred upon a party will be deemed cumulative with and not exclusive of any other remedy conferred hereby, or by law or equity upon such party, and the exercise by a party of any one remedy will not preclude the exercise of any other remedy. Upon any breach or alleged breach of Section 7.6 or Section 7.7 by any Shareholder or Shareholder Beneficiary: (A) the parties hereto agree that irreparable damage would occur in the event that Section 7.6 or Section 7.7 were not performed in accordance with their specific terms or were otherwise breached; (B) the parties agree that Parent shall be entitled to seek an injunction or injunctions to prevent breaches of Section 7.6 or Section 7.7 and to enforce specifically the terms and provisions hereof in any court of the United States or any state having jurisdiction, this being in addition to any other remedy to which they are entitled at law or in equity.

(b) If any action, suit or other proceeding (whether at law, in equity or otherwise) is instituted concerning or arising out of this Agreement or any transaction contemplated hereunder, the prevailing party shall recover, in addition to any other remedy granted to such party therein, all such party’s costs and attorneys’ fees incurred in connection with the prosecution or defense of such action, suit or other proceeding.

 

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Section 14.7 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, regardless of the laws that might otherwise govern under applicable principles of conflicts of law thereof.

Section 14.8 Rules of Construction. The parties hereto agree that they have been represented by counsel during the negotiation and execution of this Agreement and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document.

Section 14.9 Assignment. No party may assign either this Agreement or any of its rights, interests, or obligations hereunder without the prior written consent of the other parties hereto. Subject to the preceding sentence, this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. Any purported assignment in violation of this Section 14.9 shall be void.

Section 14.10 Waiver of Jury Trial. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION AS BETWEEN OR AMONG THE PARTIES DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT, ANY RELATED DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY OR DISPUTES RELATING HERETO OR THERETO. EACH PARTY HERETO (i) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF THE OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (ii) ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 14.10.

Section 14.11 Expenses. Except as otherwise expressly set forth in this Agreement, each of the parties hereto shall pay its own expenses and costs (including any related broker or finder’s fees) incurred or to be incurred by it in negotiating, closing and carrying out this Agreement, the Related Documents and the transactions contemplated hereby and thereby.

Section 14.12 Amendments. The parties hereto may amend or modify this Agreement only with a written instrument executed by the Parent, the Surviving Corporation and the Representative, acting on behalf of the Shareholders (and each such amendment or modification shall be deemed to have been agreed to by, and shall be binding upon, each of the Shareholders; provided, that there shall be made no amendment or modification that by Law requires further approval of the Shareholders without the further approval of such Shareholders). No waiver of any provision of this Agreement shall be deemed or shall constitute a waiver of any other provision hereof (whether or not similar), shall constitute a continuing waiver unless otherwise expressly provided nor shall be effective unless in writing and executed (w) in the case of a

 

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waiver by the Parent or Merger Sub, by the Parent, (x) in the case of a waiver by the Company, by the Company, and (y) in the case of a waiver by the Representative (either on behalf of itself or on behalf of one or more Shareholders), by the Representative. No waiver by any party of any breach or violation of, default under or inaccuracy in any representation, warranty, covenant or agreement hereunder, whether intentional or not, will be deemed to extend to any prior or subsequent breach or violation of, default under or inaccuracy in any such representation, warranty, covenant or agreement hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. No delay or omission on the part of any party in exercising any right, power or remedy under this Agreement will operate as a waiver thereof.

* * * * *

 

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IN WITNESS WHEREOF, the parties have, caused this Agreement and Plan of Merger to be executed by their duly authorized respective officers as of the date first written above.

 

YODLE, INC.
By:  

/s/ Court Cunningham

  Court Cunningham, CEO
LH MERGER CORP.
By:  

/s/ Court Cunningham

  Court Cunningham, CEO


IN WITNESS WHEREOF, the parties have caused this Agreement and Plan of Merger to be executed by their duly authorized respective officers as of the date first written above.

 

LIGHTHOUSE PRACTICE MANAGEMENT GROUP, INC.
By:  

/s/ Brian Smith

  Brian Smith, CEO
REPRESENTATIVE

/s/ Brian Smith

Brian Smith, as Representative

 

The Shareholders:     The Shareholder Beneficiaries:
LIGHTHOUSE, DENTAL CONSULTING, INC.    
By:  

/s/ Brian Smith

   

/s/ Brian Smith

Name:   Brian Smith     Brian Smith
Title:   President    
RILEY SOFTWARE, INC.    
By:  

/s/ Joel Kozikowski

   

/s/ Joel Kozikowski

Name:   Joel Kozikowski     Joel Kozikowski
Title:   President    
JORGENSEN ENTERPRISES, INC.    
     

/s/ Allen Jorgensen

By:  

/s/ Allen Jorgensen

    Allen Jorgensen
Name:   Allen Jorgensen    
Title:   President    
CHAD BRANDON, INC.    
     

/s/ Chad Brandon

By:  

/s/ Chad Brandon

    Chad Brandon
Name:   Chad Brandon    
Title:   President    
KELLER SOFTWARE, LLC    

/s/ Jeffrey Keller

      Jeffrey Keller
By:  

/s/ Jeffrey Keller

   
Name:   Jeffrey Keller    
Title:   Managing Member    


Exhibit A: Distribution Schedule

Exhibit C: Company Disclosure Schedule

Exhibit D: Parent Disclosure Schedule

Exhibit E: Form of Affiliate Lease

Exhibit F: Form of BRS Amendment

Exhibit G-1: Form of Software Purchase Agreement

Exhibit G-2: Form of Software License Agreement

Exhibit J-1: Form of Parent ROFR Agreement Joinder

Exhibit J-2: Form of Parent Voting Agreement Joinder


EX-3.1

Exhibit 3.1

FIFTH AMENDED AND RESTATED

CERTIFICATE OF INCORPORATION

OF

YODLE, INC.

(Pursuant to Sections 242 and 245 of the

General Corporation Law of the State of Delaware)

Yodle, Inc., a corporation organized and existing under and by virtue of the provisions of the General Corporation Law of the State of Delaware (the “General Corporation Law”),

DOES HEREBY CERTIFY:

1. That the name of this corporation is Yodle, Inc., and that this corporation was originally incorporated under the name “Natpal, Inc.” pursuant to the General Corporation Law on March 30, 2005.

2. That the Board of Directors duly adopted resolutions proposing to amend and restate the Fourth Amended and Restated Certificate of Incorporation of this corporation dated as of January 26, 2010, as amended by the Certificate of Amendment No. 1 to Fourth Amended and Restated Certificate of Incorporation dated as of October 22, 2010, Certificate of Amendment No. 2 to Fourth Amended and Restated Certificate of Incorporation dated as of May 20, 2011, Certificate of Amendment No. 3 to Fourth Amended and Restated Certificate of Incorporation dated as of February 6, 2012 and Certificate of Amendment No. 4 to Fourth Amended and Restated Certificate of Incorporation dated as of September 25, 2012, declaring said amendment and restatement to be advisable and in the best interests of this corporation and its stockholders, and authorizing the appropriate officers of this corporation to solicit the consent of the stockholders therefor, which resolution setting forth the proposed amendment and restatement is as follows:

RESOLVED, that the Fourth Amended and Restated Certificate of Incorporation of this corporation, as amended, be amended and restated in its entirety to read as follows (the “Certificate of Incorporation”):

FIRST: The name of this corporation is Yodle, Inc. (the “Corporation”).

SECOND: 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. The name of its registered agent at such address is The Corporation Trust Company.

THIRD: The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law.


FOURTH: The total number of shares of all classes of stock which the Corporation shall have authority to issue is (i) 147,000,000 shares of Common Stock, $0.0002 par value per share (“Common Stock”) and (ii) 85,431,561 shares of Preferred Stock, $0.001 par value per share (“Preferred Stock”).

The following is a statement of the designations and the powers, privileges and rights, and the qualifications, limitations or restrictions thereof in respect of each class of capital stock of the Corporation.

 

A. COMMON STOCK

1. General. The voting, dividend and liquidation rights of the holders of the Common Stock are subject to and qualified by the rights, powers and preferences of the holders of the Preferred Stock set forth herein.

2. Voting. The holders of the Common Stock are entitled to one vote for each share of Common Stock held at all meetings of stockholders (and written actions in lieu of meetings). There shall be no cumulative voting. The number of authorized shares of Common Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of shares of capital stock of the Corporation 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 General Corporation Law.

 

B. PREFERRED STOCK

Preferred Stock may be issued from time to time in one or more series, each of such series to consist of such number of shares and to have such terms, rights, powers and preferences, and the qualifications and limitations with respect thereto, as stated or expressed herein.

Twenty Five Million Two Hundred Twenty Four Thousand Nine Hundred Fourteen (25,224,914) shares of the authorized and unissued Preferred Stock of the Corporation are hereby designated “Series A Preferred Stock”, Twenty One Million Three Hundred Five Thousand One Hundred Fourteen (21,305,114) shares of the authorized and unissued Preferred Stock of the Corporation are hereby designated “Series B Preferred Stock”, Fifteen Million Eight Hundred Thirty-Seven Thousand Nine Hundred Nineteen (15,837,919) shares of the authorized and unissued Preferred Stock of the Corporation are hereby designated “Series C Preferred Stock”, Sixteen Million Seven Hundred Twenty Three Thousand Thirty Four (16,723,034) shares of the authorized and unissued Preferred Stock of the Corporation are hereby designated “Series D Preferred Stock”, Four Million Six Hundred Seventy Three Thousand Nine Hundred Thirteen (4,673,913) shares of the authorized but unissued Preferred Stock of the Corporation are hereby designated “Series E Preferred Stock” and One Million Six Hundred Sixty Six Thousand Six Hundred Sixty Seven (1,666,667) shares of the authorized and unissued Preferred Stock of the Corporation are hereby designated “Series F Preferred Stock”, (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 collectively, the

 

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Preferred Stock”), each with the following respective rights, preferences, powers, privileges and restrictions, qualifications and limitations. Unless otherwise indicated, references to “Sections” or “Subsections” in this Part B of this Article FOURTH refer to sections and subsections of Part B of this Article FOURTH.

1. Dividends. 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 the obtaining of any consents required elsewhere in the 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 the greater of (i) $0.0116 per share, with respect to shares of Series A Preferred Stock, $0.0454 per share, with respect to shares of Series B Preferred Stock, $0.0669 per share, with respect to shares of Series C Preferred Stock, $0.1124 per share, with respect to shares of Series D Preferred Stock, $0.1840 per share, with respect to shares of Series E Preferred Stock, or $0.2400 per share, with respect to shares of Series F Preferred Stock (in each case subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization affecting such shares); and (ii) (A) 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 (1) 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 (2) the number of shares of Common Stock issuable upon conversion of a share of such series of Preferred Stock, in each case calculated on the record date for determination of holders entitled to receive such dividend or (B) in the case of a dividend on any class or series that is not convertible into Common Stock, at a rate per share of such series of Preferred Stock determined by (1) 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 affecting such shares) and (2) multiplying such fraction by an amount equal to the Series A Original Issue Price, the Series B Original Issue Price, the Series C Original Issue Price or the Series D Original Issue Price, as applicable (each 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 1 shall be calculated based upon the dividend on the class or series of capital stock that would result in the highest Preferred Stock dividend. The foregoing dividend shall not be cumulative and shall only be payable when and if declared by the Corporation. The “Series A Original Issue Price” shall mean $0.1445 per share, the “Series B Original Issue Price” shall mean $0.5670 per share, the “Series C Original Issue Price” shall mean $0.8366 per share, the “Series D Original Issue Price” shall mean $1.4045 per share, the “Series E Original Issue Price” shall mean $2.30 per share, and the “Series F Original Issue Price” shall mean $3.00 per share, in each case subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the applicable series of Preferred Stock. Notwithstanding anything to the contrary set forth herein, payment of any dividends or distributions on capital stock of the Corporation shall be subject to Subsection 3(c).

 

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2. Liquidation, Dissolution or Winding Up; Certain Mergers, Consolidations and Asset Sales.

(a) Payments to Holders of Preferred Stock. In the event of a voluntary or involuntary liquidation, dissolution or winding up of the Corporation (including a Deemed Liquidation Event, as defined below), the holders of shares of Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to the Corporation’s stockholders, before any payment shall be made to the holders of Common Stock by reason of their ownership thereof, an amount per share equal to:

(i) the Series A Original Issue Price, with respect to shares of Series A Preferred Stock, the Series B Original Issue Price, with respect to shares of Series B Preferred Stock, the Series C Original Issue Price, with respect to shares of Series C Preferred Stock, the Series D Original Issue Price, with respect to shares of Series D Preferred Stock, or the Series E Original Issue Price, with respect to shares of Series E Preferred Stock plus, in each case, any declared but unpaid dividends in respect of such series of Preferred Stock (and minus any dividends paid in respect of such series of Preferred Stock); and

(ii) with respect to the Series F Preferred Stock, an amount equal to the Series F Original Issue Price multiplied by (A) one and one-quarter (1.25), if such event occurs before the first anniversary of the Original Issue Date (as defined in Subsection 4(d)(B) below); (B) one and one-half (1.5), if a such event occurs on or after the first anniversary of the Original Issue Date but before the second anniversary of the Original Issue Date; and (C) two (2.0), if a such event occurs on or after the second anniversary of the Original Issue Date (and minus any dividends paid in respect of the Series F Preferred Stock).

(iii) The applicable amount payable to a holder pursuant to Subsections 2(a)(i) and 2(a)(ii) is hereinafter referred to as the applicable “Preferred Liquidation Amount.” If upon any such liquidation, dissolution or winding up of the Corporation, the assets of the Corporation available for distribution to the Corporation’s stockholders shall be insufficient to pay the holders of shares of Preferred Stock the full amount to which they shall be entitled under this Subsection 2(a), the holders of shares of Preferred Stock shall share ratably in any distribution of the assets available for distribution in proportion to the respective amounts which would otherwise be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full.

(b) Payments to Holders of Common Stock. In the event of a voluntary or involuntary liquidation, dissolution or winding up of the Corporation (including a Deemed Liquidation Event, as defined below), after the payment of all preferential amounts required to be paid to the holders of shares of Preferred Stock, the remaining assets of the Corporation available for distribution to the Corporation’s stockholders shall be distributed among the holders of shares of Common Stock, pro rata based on the number of shares held by each such holder.

(c) Deemed Liquidation Events.

(i) Each of the following events shall be deemed to be a liquidation of the Corporation for purposes of this Section 2 (a “Deemed Liquidation Event”), unless the

 

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holders of fifty-five percent (55%) of the outstanding shares of Preferred Stock, other than the Series E Preferred Stock (the “Requisite Investors”), elect otherwise by written notice given to the Corporation at least ten (10) days prior to the effective date of any such event:

(A) a merger, consolidation, reorganization or any other transaction in which

 

  (I) the Corporation is a constituent party or

 

  (II) a subsidiary of the Corporation is a constituent party and the Corporation issues shares of its capital stock pursuant to such merger, consolidation, reorganization or other transaction,

except any such merger or consolidation or other transaction involving the Corporation or a subsidiary in which the shares of capital stock of the Corporation outstanding immediately prior to such merger or consolidation or other transaction continue to represent, or are converted into or exchanged for shares of capital stock that represent, immediately following such merger or consolidation or other transaction, a majority, by voting power, of the capital stock of (1) the surviving or resulting corporation or (2) if the surviving or resulting corporation is a wholly owned subsidiary of another corporation immediately following such merger or consolidation or other transaction, the parent corporation of such surviving or resulting corporation (provided that, for the purpose of this Subsection 2(c)(i), all shares of Common Stock issuable upon exercise of Options (as defined below) outstanding immediately prior to such merger or consolidation or other transaction or upon conversion of Convertible Securities (as defined below) outstanding immediately prior to such merger or consolidation or other transaction shall be deemed to be outstanding immediately prior to such merger or consolidation or other transaction and, if applicable, converted or exchanged in such merger or consolidation or other transaction on the same terms as the actual outstanding shares of Common Stock are converted or exchanged); or

(B) the sale, lease, transfer, exclusive and irrevocable license or other disposition, in a single transaction or series of related transactions, by the Corporation or any subsidiary of the Corporation of all or substantially all the assets (including, without limitation, the intellectual property assets) of the Corporation and its subsidiaries taken as a whole, except where such sale, lease, transfer, exclusive license or other disposition is to a wholly owned subsidiary of the Corporation, or the exclusive, irrevocable license of any material portion of all of the Corporation’s assets.

(ii) The Corporation shall not have the power to effect any transaction constituting a Deemed Liquidation Event referred to in Subsection 2(c)(i)(A)(I) above unless the acquisition or merger agreement for such transaction (the “Merger Agreement”) 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 Subsections 2(a) and 2(b) above.

(iii) In the event of a Deemed Liquidation Event referred to in Subsection 2(c)(i)(A)(II) or 2(c)(i)(B) above, if the Corporation does not effect a dissolution of

 

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the Corporation under the General Corporation Law within 75 days after such Deemed Liquidation Event, then (A) the Corporation shall send a written notice to each holder of Preferred Stock no later than the 75th day after the Deemed Liquidation Event advising such holders of their right (and the requirements to be met to secure such right) pursuant to the terms of the following clause (B) to require the redemption of such shares of Preferred Stock, and (B) if the Requisite Investors so request in a written instrument delivered to the Corporation not later than 90 days after such Deemed Liquidation Event, 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 of Directors of the Corporation), together with any other assets of the Corporation available for distribution to its stockholders (the “Net Proceeds”), to the extent legally available therefor, on the 120th day after such Deemed Liquidation Event (the “Liquidation Redemption Date”), to redeem all outstanding shares of Preferred Stock at a price per share equal to the applicable Preferred Liquidation Amount. Notwithstanding the foregoing, in the event of a redemption pursuant to the preceding sentence, if the Net Proceeds are not sufficient to redeem all outstanding shares of Preferred Stock, the Corporation shall redeem a pro rata portion of each holder’s shares of Preferred Stock to the fullest extent of such Net Proceeds, based on the respective amounts which would otherwise be payable in respect of the shares to be redeemed if the Net Proceeds were sufficient to redeem all such shares, and shall redeem the remaining shares to have been redeemed as soon as practicable after the Corporation has funds legally available therefor. Prior to the distribution or redemption provided for in this Subsection 2(c)(iii), the Corporation shall not expend or dissipate the consideration received for such Deemed Liquidation Event, except to discharge expenses incurred directly in connection with a voluntary or involuntary liquidation, dissolution or winding up of the Corporation.

(d) Value of Liquidation Proceeds. The amount deemed paid or distributed to the holders of capital stock of the Corporation upon any such voluntary or involuntary liquidation, dissolution or winding up of the Corporation, Deemed Liquidation Event or redemption pursuant to Subsection 2(c)(iii) 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 or rights (other than cash) shall be determined in good faith by the Board of Directors of the Corporation; provided, however, that if the Requisite Investors object to any such value, then the value of such property or rights shall be determined by an investment bank chosen and paid by the Corporation, and acceptable to at least two Preferred Stock Directors (as defined below) or; provided, further, that any securities to be distributed to the stockholders shall be valued as follows: (i) unless otherwise specified in a Merger Agreement, if traded on a nationally recognized securities exchange or inter-dealer quotation system, the value of such securities shall be deemed to be the average of the closing prices of the securities on such exchange or system over the twenty-one (21) trading days (or all such trading days on which such securities have been traded if fewer than twenty-one (21) days) preceding the consummation of such voluntary or involuntary liquidation, dissolution or winding up of the Corporation, Deemed Liquidation Event or redemption pursuant to Subsection 2(c)(iii); (ii) if clause (i) does not apply but the securities are traded over-the-counter, then, unless otherwise specified in a Merger Agreement, the value shall be deemed to be the average of the closing bid prices over the twenty-one (21) trading days (or all such trading days on which such securities have been traded if fewer than twenty-one (21) days) preceding such transaction; and

 

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(iii) if there is no active public market, the value of such securities shall be the fair market value thereof, as determined in good faith by resolution of the Board of Directors of the Corporation, including at least two Preferred Stock Directors. The method of valuation of securities subject to any restrictions on free marketability shall take into account an appropriate discount, as determined in good faith by resolution of the Board of Directors of the Corporation, from the market value determined pursuant to clauses (i), (ii) or (iii) above so as to reflect the approximate fair market value thereof.

3. Voting.

(a) Number of Votes. On any matter presented to the stockholders of the Corporation for their action or consideration at any meeting of stockholders of the Corporation (or by written consent of stockholders in lieu of meeting), each holder of outstanding shares of Preferred Stock shall be entitled to cast the number of votes equal to the number of whole shares of Common Stock into which the shares of Preferred Stock held by such holder are convertible as of the record date for determining stockholders entitled to vote on such matter. Except as provided by law or as provided in this Certificate of Incorporation, holders of shares of Preferred Stock shall vote together with the holders of Common Stock as a single class. Subject to any other vote or consent required by this Certificate of Incorporation, the number of authorized shares of any series of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of shares of capital stock of the Corporation 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 General Corporation Law.

(b) Board of Directors.

(i) For as long as at least 6,055,363 shares of Series A Preferred Stock (in each case subject to appropriate adjustment in the event of any stock dividend, stock split, combination or each other similar recapitalization with respect to the Series A Preferred Stock) are outstanding, the holders of record of the shares of Series A Preferred Stock, exclusively and as a separate class shall be entitled to elect one (1) director of the Corporation (the “Series A Preferred Stock Director”). Any Series A Preferred Stock Director elected as provided in this Subsection 3(b)(i) may be removed without cause by, and only by, the affirmative vote of the holders of the shares of the Series A Preferred Stock, given either at a special meeting of such stockholders duly called for that purpose or pursuant to a written consent of stockholders.

(ii) For as long as at least 5,291,006 shares of Series B Preferred Stock (in each case subject to appropriate adjustment in the event of any stock dividend, stock split, combination or each other similar recapitalization with respect to the Series B Preferred Stock) are outstanding, the holders of record of the shares of Series B Preferred Stock, exclusively and as a separate class shall be entitled to elect one (1) director of the Corporation (the “Series B Preferred Stock Director”). Any Series B Preferred Stock Director elected as provided in this Subsection 3(b)(ii) may be removed without cause by, and only by, the affirmative vote of the holders of the shares of the Series B Preferred Stock, given either at a special meeting of such stockholders duly called for that purpose or pursuant to a written consent of stockholders.

 

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(iii) For as long as at least 1,780,025 shares of Series D Preferred Stock (in each case subject to appropriate adjustment in the event of any stock dividend, stock split, combination or each other similar recapitalization with respect to the Series D Preferred Stock) are outstanding, the holders of record of the shares of Series D Preferred Stock, exclusively and as a separate class shall be entitled to elect one (1) director of the Corporation (the “Series D Preferred Stock Director” and together with the Series A Preferred Stock Director and the Series B Preferred Stock Director, the “Preferred Stock Directors”). Any Series D Preferred Stock Director elected as provided in this Subsection 3(b)(iii) may be removed without cause by, and only by, the affirmative vote of the holders of the shares of the Series D Preferred Stock, given either at a special meeting of such stockholders duly called for that purpose or pursuant to a written consent of stockholders.

(iv) If the holders of shares of Series A Preferred Stock, Series B Preferred Stock or Series D Preferred Stock, as applicable, fail to elect a director to fill the directorship for which they are entitled to elect a director, voting exclusively and as a separate class, pursuant to Subsection 3(b)(i), (ii) or (iii), then the directorship not so filled shall remain vacant until such time as the holders of Series A Preferred Stock, Series B Preferred Stock or Series D Preferred Stock, as applicable, 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 exclusively and as a separate class. The holders of record of the shares of Common Stock and of any other class or series of voting stock (including the Preferred Stock) voting together as a single class, shall be entitled to elect the balance of the total number of directors of the Corporation.

(v) At any meeting held for the purpose of electing a director, 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. Except as otherwise provided in this Subsection 3(b), 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 or by any remaining director or directors elected by the holders of such class or series pursuant to this Subsection 3(b).

(c) Preferred Stock Protective Provisions.

(i) At any time when at least 20,189,412 shares of Preferred Stock other than Series E Preferred Stock (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Preferred Stock) are outstanding, the Corporation shall not, either directly or indirectly by amendment, merger, consolidation or otherwise, do any of the following without (in addition to any other vote required by law or the Certificate of Incorporation) the written consent or affirmative vote of the Requisite Investors:

(A) create, or authorize the creation of, any class or series of capital stock (other than classes or series of capital stock authorized as of the date hereof), or any other security convertible into or exercisable for any equity security (other than classes or series of capital stock authorized as of the date hereof), unless the same ranks junior to the Preferred

 

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Stock with respect to the distribution of assets on the liquidation, dissolution or winding up of the Corporation, the payment of dividends and redemption rights, or increase the authorized number of shares of any additional class or series of capital stock unless the same ranks junior to the Preferred Stock with respect to the distribution of assets on the liquidation, dissolution or winding up of the Corporation, the payment of dividends and redemption rights;

(B) purchase or redeem, or permit any subsidiary of the Corporation to purchase or redeem, any shares of capital stock of the Corporation, except for securities repurchased from former employees, officers, directors, consultants or other persons who performed services for the Corporation or any subsidiary in connection with the cessation of such employment or service at the lower of the original purchase price or the then-current fair market value thereof;

(C) liquidate, dissolve or wind-up the business and affairs of the Corporation, effect any merger, consolidation, recapitalization, reorganization or Deemed Liquidation Event, or consent to any of the foregoing;

(D) increase or decrease the number of authorized shares of Preferred Stock (or any series thereof) or Common Stock, other than an increase in the number of authorized shares of Common Stock made to accommodate an increase in authorized shares of Common Stock reserved for issuance under an Incentive Plan, which Incentive Plan and which increase in the number of authorized shares reserved for issuance under the Incentive Plan was approved by the Board of Directors, including the affirmative consent or vote of at least two Preferred Stock Directors;

(E) amend, alter, change or repeal, by amendment of any provision of the Certificate of Incorporation or Bylaws of the Corporation, or otherwise, that alters or changes the rights, preferences or privileges of the Preferred Stock;

(F) adopt any option plan, purchase plan or other employee stock incentive program or similar arrangements (collectively, “Incentive Plans”), or amend any such plan, program or arrangement so as to modify the number of shares of Common Stock covered thereby;

(G) increase or decrease the authorized number of directors constituting the Board of Directors of the Corporation above or below seven (7) unless approved by the Board, including at least two Preferred Stock Directors;

(H) create, or authorize the creation of, or issue, or authorize the issuance of any debt security or to incur indebtedness, or permit any subsidiary to take any such action with respect to any debt security or to incur indebtedness, if the aggregate indebtedness of the Corporation and its subsidiaries following such action would exceed $1,000,000 unless approved by at least two Preferred Stock Directors;

(I) pay or declare any dividend or make any distribution on any shares of capital stock of the Corporation; or

(J) enter into an exclusive license, exclusive distribution, exclusive marketing or exclusive partnership agreement relating to material intellectual property of the Corporation or any subsidiary of the Corporation.

 

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4. Optional Conversion of Preferred Stock into Common Stock.

The holders of the Preferred Stock shall have rights to convert their shares of Preferred Stock into shares of Common Stock as follows (the “Common Stock Conversion Rights”):

(a) Right to Convert. Each share of Preferred Stock shall be convertible, at the option of the holder thereof, at any time and from time to time, and without the payment of additional consideration by the holder thereof, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Series A Original Issue Price, with respect to the Series A Preferred Stock, the Series B Original Issue Price, with respect to the Series B Preferred Stock, the Series C Original Issue Price, with respect to the Series C Preferred Stock, the Series D Original Issue Price, with respect to the Series D Preferred Stock, the Series E Original Issue Price, with respect to the Series E Preferred Stock, or the Series F Original Issue Price, with respect to the Series F Preferred Stock as applicable, by the Conversion Price (as defined below) in effect at the time of conversion. The “Conversion Price” shall initially be equal to $0.1445, with respect to the Series A Preferred Stock, $0.5670, with respect to the Series B Preferred Stock, $0.8366 with respect to the Series C Preferred Stock, $1.4045 with respect to the Series D Preferred Stock, $2.30 with respect to the Series E Preferred Stock or $3.00 with respect to the Series F Preferred Stock. Such initial Conversion Price, and the rate at which shares of Preferred Stock may be converted into shares of Common Stock, shall be subject to adjustment as provided below. In the event of a liquidation, dissolution or winding up of the Corporation or a Deemed Liquidation Event, the Common Stock 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 Preferred Stock.

(b) Fractional Shares. No fractional shares of Common Stock shall be issued upon conversion of the Preferred Stock. In lieu of any fractional shares of Common Stock to which the holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the fair market value of a share of Common Stock as determined in good faith by the Board of Directors of the Corporation. Whether or not fractional shares would be issuable upon such conversion shall be determined on the basis of the total number of shares of Preferred Stock the holder is at the time converting into Common Stock and the aggregate number of shares of Common Stock issuable upon such conversion.

(c) Mechanics of Conversion.

(i) In order for a holder of Preferred Stock to voluntarily convert shares of Preferred Stock into shares of Common Stock, such holder shall surrender the certificate or certificates for such shares of Preferred Stock (or, if such registered 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), at the office of the transfer agent for the Preferred Stock (or at the principal office of

 

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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 holder’s name or the names of the nominees in which such holder wishes the certificate or certificates for shares of Common Stock to be issued. If required by the Corporation, certificates surrendered for conversion shall 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 certificates (or lost certificate affidavit and agreement) and notice shall be the time of conversion (the “Common Stock Conversion Time”), and the shares of Common Stock issuable upon conversion of the shares represented by such certificate shall be deemed to be outstanding of record as of such date. The Corporation shall, as soon as practicable after the Common Stock Conversion Time, issue and deliver to such holder of Preferred Stock, or to his, her or its nominees, a certificate or certificates for the number of full shares of Common Stock issuable upon such conversion in accordance with the provisions hereof, a certificate for the number (if any) of the shares of Preferred Stock represented by the surrendered certificate that were not converted into Common Stock, and cash as provided in Subsection 4(b) in lieu of any fraction of a share of Common Stock otherwise issuable upon such conversion and payment of any declared but unpaid dividends on the shares of Preferred Stock converted.

(ii) The Corporation shall at all times when the Preferred Stock shall be outstanding, reserve and keep available out of its authorized but unissued capital stock, for the purpose of effecting the conversion of the Preferred Stock, such number of its duly authorized shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding 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 the Preferred Stock, the Corporation 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 best efforts to obtain the requisite stockholder approval of any necessary amendment to this Certificate of Incorporation. Before taking any action which would cause an adjustment reducing the Conversion Price below the then par value of the shares of Common Stock issuable upon conversion of the Preferred Stock, the Corporation will take any corporate action which 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 Common Stock at such adjusted Conversion Price.

(iii) All shares of Preferred Stock which shall have been surrendered for conversion as herein provided shall no longer be deemed to be outstanding and all rights with respect to such shares, including the rights, if any, to receive notices and to vote, shall immediately cease and terminate at the Common Stock Conversion Time, except only the right of the holders thereof to receive shares of Common Stock in exchange therefor and to receive payment of any dividends declared but unpaid thereon. Any shares of Preferred Stock so converted shall be retired and cancelled and shall not be reissued as shares of such series, and the Corporation (without the need for stockholder action) may thereafter take such appropriate action

 

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as may be necessary to reduce the authorized number of shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock or Series F Preferred Stock accordingly.

(iv) Upon any such conversion, no adjustment to the Conversion Price shall be made for any declared but unpaid dividends on the Preferred Stock surrendered for conversion or on the Common Stock delivered upon conversion.

(v) 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 Common Stock upon conversion of shares of Preferred Stock pursuant to this Section 4. The Corporation shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of shares of Common Stock in a name other than that in which the shares of 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.

(d) Adjustments to Conversion Price for Dilutive Issues.

(i) Special Definitions. For purposes of this Certificate of Incorporation, the following definitions shall apply:

(A) “Option” shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire Common Stock or Convertible Securities.

(B) “Original Issue Date” shall mean the date on which the first share of Series F Preferred Stock was issued.

(C) “Convertible Securities” shall mean any evidences of indebtedness, shares or other securities directly or indirectly convertible into or exchangeable for Common Stock, but excluding Options.

(D) “Additional Shares of Common Stock” shall mean all shares of Common Stock issued (or, pursuant to Subsection 4(d)(iii) below, deemed to be issued) by the Corporation after the Original Issue Date, other than the following shares of Common Stock, and shares of Common Stock deemed issued pursuant to the following Options and Convertible Securities (collectively, “Exempted Securities”):

 

  (I)

such number of shares of Common Stock or Options as is authorized as of the date hereof for issuance to employees or directors of, or consultants or advisors to, the Corporation or any of its subsidiaries pursuant to a plan, agreement or arrangement approved by the Board of Directors, including the affirmative vote or consent of at least two Preferred Stock Directors (such number being

 

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  subject to increase if approved by the Board of Directors, including the vote or consent of at least two Preferred Stock Directors);

 

  (II) shares of Common Stock, Options or Convertible Securities issued by reason of a dividend, stock split, split-up or other distribution on shares of Common Stock that is covered by Subsections 4(e), 4(f), 4(g) or 4(h);

 

  (III) shares of Common Stock, Options or Convertible Securities actually issued upon conversion of the shares of Preferred Stock, or as a dividend or distribution on Preferred Stock;

 

  (IV) shares of Common Stock or Preferred Stock issued upon the conversion of any Convertible Securities or Options, provided that such issuance is pursuant to the terms of such Convertible Security or Option;

 

  (V) shares of Common Stock, Options or Convertible Securities issued in connection with bona fide acquisitions, mergers or similar transactions entered into for primarily non-equity financing purposes, the terms of which are approved by the Board of Directors of the Corporation, including the affirmative vote or consent of at least two Preferred Stock Directors;

 

  (VI) shares of Common Stock, Options or Convertible Securities issued to banks or equipment lessors or other financial institutions, or to landlords, brokers or similar entities in connection with commercial credit arrangements, equipment financings, commercial property lease transactions or similar transactions approved by the Board of Directors of the Corporation, including the affirmative vote or consent of at least two Preferred Stock Directors; or

 

  (VII) shares of Common Stock or Preferred Stock issued by the Corporation pursuant to a Qualifying Public Offering.

(ii) No Adjustment of Conversion Price. No adjustment in the Conversion Price of a series of Preferred Stock shall be made as the result of the issuance or deemed issuance of Additional Shares of Common Stock if the Corporation receives written notice from the Requisite Investors agreeing that no such adjustment shall be made as the result of the issuance or deemed issuance of such Additional Shares of Common Stock.

 

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(iii) Deemed Issue of Additional Shares of. Common Stock.

(A) If the Corporation at any time or from time to time after the Original Issue Date shall issue any Options or Convertible Securities (excluding Options or Convertible Securities which are themselves Exempted Securities) or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares of Common Stock (as set forth in the instrument relating thereto, assuming the satisfaction of any conditions to exercisability, convertibility or exchangeability but without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date.

(B) If the terms of any Option or Convertible Security, the issuance of which resulted in an adjustment to the Conversion Price pursuant to the terms of Subsection 4(d)(iv), are revised as a result of an amendment to such terms or any other adjustment pursuant to the provisions of such Option or Convertible Security (but excluding automatic adjustments to such terms pursuant to anti-dilution or similar provisions of such Option or Convertible Security) to provide for either (1) any increase or decrease in the number of shares of Common Stock issuable upon the exercise, conversion or exchange of any such Option or Convertible Security or (2) any increase or decrease in the consideration payable to the Corporation upon such exercise, conversion or exchange, then, effective upon such increase or decrease becoming effective, the Conversion Price computed upon the original issue of such Option or Convertible Security (or upon the occurrence of a record date with respect thereto) shall be readjusted to such Conversion Price as would have been obtained had such revised terms been in effect upon the original date of issuance of such Option or Convertible Security. Notwithstanding the foregoing, no readjustment pursuant to this clause (13) shall have the effect of increasing the Conversion Price to an amount which exceeds the lower of (i) the Conversion Price in effect immediately prior to the original adjustment made as a result of the issuance of such Option or Convertible Security, or (ii) the Conversion Price that would have resulted from any issuances of Additional Shares of Common Stock (other than deemed issuances of Additional Shares of Common Stock as a result of the issuance of such Option or Convertible Security) between the original adjustment date and such readjustment date.

(C) If the terms of any Option or Convertible Security (excluding Options or Convertible Securities which are themselves Exempted Securities), the issuance of which did not result in an adjustment to the Conversion Price pursuant to the terms of Subsection 4(d)(iv) (either because the consideration per share (determined pursuant to Subsection 4(d)(v)) of the Additional Shares of Common Stock subject thereto was equal to or greater than the Conversion Price then in effect, or because such Option or Convertible Security was issued before the Original Issue Date), are revised after the Original Issue Date as a result of an amendment to such terms or any other adjustment pursuant to the provisions of such Option

 

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or Convertible Security (but excluding automatic adjustments to such terms pursuant to anti-dilution or similar provisions of such Option or Convertible Security) to provide for either (1) any increase or decrease in the number of shares of Common Stock issuable upon the exercise, conversion or exchange of any such Option or Convertible Security or (2) any increase or decrease in the consideration payable to the Corporation upon such exercise, conversion or exchange, then such Option or Convertible Security, as so amended or adjusted, and the Additional Shares of Common Stock subject thereto (determined in the manner provided in Subsection 4(d)(iii)(A)) shall be deemed to have been issued effective upon such increase or decrease becoming effective.

(D) Upon the expiration or termination of any unexercised Option or unconverted or unexchanged Convertible Security (or portion thereof) which resulted (either upon its original issuance or upon a revision of its terms) in an adjustment to the Conversion Price pursuant to the terms of Subsection 4(d)(iv), the Conversion Price shall be readjusted to such Conversion Price as would have obtained had such Option or Convertible Security (or portion thereof) never been issued.

(E) If the number of shares of Common Stock issuable upon the exercise, conversion and/or exchange of any Option or Convertible Security, or the consideration payable to the Corporation upon such exercise, conversion and/or exchange, is calculable at the time such Option or Convertible Security is issued or amended but is subject to adjustment based upon subsequent events, any adjustment to the Conversion Price provided for in this Subsection 4(d)(iii) shall be effected at the time of such issuance or amendment based on such number of shares or amount of consideration without regard to any provisions for subsequent adjustments (and any subsequent adjustments shall be treated as provided in clauses (B) and (C) of this Subsection 4(d)(iii)). If the number of shares of Common Stock issuable upon the exercise, conversion and/or exchange of any Option or Convertible Security, or the consideration payable to the Corporation upon such exercise, conversion and/or exchange, cannot be calculated at the time such Option or Convertible Security is issued or amended, any adjustment to the Conversion Price that would result under the terms of this Subsection 4(d)(iii) at the time of such issuance or amendment shall instead be effected at the time such number of shares and/or amount of consideration is first calculable (even if subject to subsequent adjustments), assuming for purposes of calculating such adjustment to the Conversion Price that such issuance or amendment took place at the time such calculation can first be made.

(iv) Adjustment of Conversion Price Upon Issuance of Additional Shares of Common Stock. In the event the Corporation shall at any time after the Original Issue Date issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Subsection 4(d)(iii)), without consideration or for a consideration per share less than the Conversion Price for a series of Preferred Stock in effect immediately prior to such issue, then such Conversion Price shall be reduced, concurrently with such issue, to a price (calculated to the nearest one-hundredth of a cent) determined in accordance with the following formula:

CP2 = CP1 * (A + B) ÷ (A + C)

 

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For purposes of the foregoing formula, the following definitions shall apply:

CP2” shall mean such Conversion Price in effect immediately after such issue of Additional Shares of Common Stock;

CP1” shall mean such Conversion Price in effect immediately prior to such issue of Additional Shares of Common Stock;

A” shall mean the number of shares of Common Stock outstanding and deemed outstanding immediately prior to such issue of Additional Shares of Common Stock (treating for this purpose as outstanding all shares of Common Stock issuable upon exercise of Options outstanding immediately prior to such issue or upon conversion or exchange of Convertible Securities (including the Preferred Stock) outstanding immediately prior to such issue);

B” shall mean the number of shares of Common Stock that would have been issued if such Additional Shares of Common Stock had been issued at a price per share equal to CP (determined by dividing the aggregate consideration received by the Corporation in respect of such issue by CP1); and

C” shall mean the number of such Additional Shares of Common Stock issued in such transaction.

(v) Determination of Consideration. For purposes of this Subsection 4(d), the consideration received by the Corporation for the issue of any Additional Shares of Common Stock shall be computed as follows:

(A) Cash and Property: Such consideration shall:

 

  (I) insofar as it consists of cash, be computed at the aggregate amount of cash received by the Corporation, excluding amounts paid or payable for accrued interest;

 

  (II) insofar as it consists of property other than cash, be computed at the fair market value thereof at the time of such issue, as determined in good faith by the Board of Directors of the Corporation; and

 

  (III) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Corporation for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (I) and (II) above, as determined in good faith by the Board of Directors of the Corporation.

 

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(B) Options and Convertible Securities. The consideration per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Subsection 4(d)(iii), relating to Options and Convertible Securities, shall be determined by dividing

 

  (I) the total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, by

 

  (II) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities.

(vi) Multiple Closing Dates. In the event the Corporation shall issue on more than one date Additional Shares of 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 pursuant to the terms of Subsection 4(d)(iv), and such issuance dates occur within a period of no more than ninety (90) days from the first such issuance to the final such issuance, then, upon the final such issuance, the Conversion Price shall be readjusted to give effect to all such issuances as if they occurred on the date of the first such issuance (and without giving effect to any additional adjustments as a result of any such subsequent issuances within such period).

(e) Adjustment to Conversion Price for Stock Splits and Combinations. If the Corporation shall at any time or from time to time after the Original Issue Date effect a subdivision of the outstanding Common Stock, the Conversion Price in effect immediately before that subdivision shall be proportionately decreased so that the number of shares of Common Stock issuable on conversion of each share of Preferred Stock shall be increased in proportion to such increase in the aggregate number of shares of Common Stock outstanding. If the Corporation shall at any time or from time to time after the Original Issue Date combine the outstanding shares of Common Stock, the Conversion Price in effect immediately before the combination shall be proportionately increased so that the number of shares of Common Stock

 

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issuable on conversion of each share of Preferred Stock shall be decreased in proportion to such decrease in the aggregate number of shares of Common Stock outstanding. Any adjustment under this subsection shall become effective at the close of business on the date the subdivision or combination becomes effective.

(f) Adjustments to Conversion Price for Certain Dividends and Distributions. In the event the Corporation at any time or from time to time after the Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable on the Common Stock in additional shares of Common Stock, then and in each such event the Conversion Price in effect immediately before such event shall be decreased as of the time of such issuance or, in the event such a record date shall have been fixed, as of the close of business on such record date, by multiplying the Conversion Price then in effect by a fraction:

(i) the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and

(ii) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution.

Notwithstanding the foregoing, (a) if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Conversion Price shall be recomputed accordingly as of the close of business on such record date and thereafter the Conversion Price shall be adjusted pursuant to this subsection as of the time of actual payment of such dividends or distributions and (b) no such adjustment shall be made if the holders of Preferred Stock simultaneously receive a dividend or other distribution of shares of Common Stock in a number equal to the number of shares of Common Stock as they would have received if all outstanding shares of Preferred Stock had been converted into Common Stock on the date of such event.

(g) Adjustments for Other Dividends and Distributions. In the event the Corporation at any time or from time to time after the Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock of the Corporation entitled to receive, a dividend or other distribution payable in securities of the Corporation (other than a distribution of shares of Common Stock in respect of outstanding shares of Common Stock) or in other property and the provisions of Section 1 do not apply to such dividend or distribution, then and in each such event the holders of Preferred Stock shall receive, simultaneously with the distribution to the holders of Common Stock, a dividend or other distribution of such securities or other property in an amount equal to the amount of such securities or other property as they would have received if all outstanding shares of Preferred Stock had been converted into Common Stock on the date of such event.

(h) Adjustment for Merger or Reorganization, etc. Subject to the provisions of Section 2, if there shall occur any reorganization, recapitalization, reclassification, consolidation

 

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or merger involving the Corporation in which the Common Stock (but not the Preferred Stock) is converted into or exchanged for securities, cash or other property (other than a transaction covered by Subsections (e), (f) or (g) of this Section 4), then, following any such reorganization, recapitalization, reclassification, consolidation or merger, each share of Preferred Stock shall thereafter be convertible in lieu of the Common Stock into which it was convertible prior to such event into the kind and amount of securities, cash or other property which a holder of the number of shares of Common Stock of the Corporation issuable upon conversion of one share of Preferred Stock immediately prior to such reorganization, recapitalization, reclassification, consolidation or merger would have been entitled to receive pursuant to such transaction; and, in such case, appropriate adjustment (as determined in good faith by the Board of Directors of the Corporation) shall be made in the application of the provisions in this Section 4 with respect to the rights and interests thereafter of the holders of Preferred Stock, to the end that the provisions set forth in this Section 4 (including provisions with respect to changes in and other adjustments of the Conversion Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any securities or other property thereafter deliverable upon the conversion of shares of the Preferred Stock.

(i) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of the Conversion Price pursuant to this Section 4, the Corporation at its expense shall, as promptly as reasonably practicable but in any event not later than 20 days thereafter, compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of shares of Preferred Stock a certificate setting forth such adjustment or readjustment (including the kind and amount of securities, cash or other property into which such shares of Preferred Stock are convertible) and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, as promptly as reasonably practicable after the written request at any time of any holder of shares of Preferred Stock (but in any event not later than 20 days thereafter), furnish or cause to be furnished to such holder a certificate setting forth (i) the Conversion Price then in effect, and (ii) the number of shares of Common Stock and the amount, if any, of other securities, cash or property which then would be received upon the conversion of shares of Preferred Stock.

(j) Notice of Record Date. In the event:

(i) the Corporation shall take a record of the holders of its Common Stock (or other capital stock or securities at the time issuable upon conversion of the Preferred Stock) for the purpose of entitling or enabling them to receive any dividend or other distribution, or to receive any right to subscribe for or purchase any shares of capital stock of any class or any other securities, or to receive any other security; or

(ii) of any capital reorganization of the Corporation, any reclassification of the Common Stock of the Corporation, or any Deemed Liquidation Event; or

(iii) of the voluntary or involuntary dissolution, liquidation or winding up of the Corporation,

then, and in each such case, the Corporation will send or cause to be sent to the holders of the Preferred Stock a notice specifying, as the case may be, (i) the record date for such dividend,

 

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distribution or right, and the amount and character of such dividend, distribution or right, or (ii) the effective date on which such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up is proposed to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or such other capital stock or securities at the time issuable upon the conversion of the Preferred Stock) shall be entitled to exchange their shares of Common Stock (or such other capital stock or securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up, and the amount per share and character of such exchange applicable to the Preferred Stock and the Common Stock. Such notice shall be sent at least 10 days prior to the record date or effective date for the event specified in such notice.

(k) Special Series F Preferred Stock Conversion Price Adjustment upon an Initial Public Offering. If the per share offering price to the public (the “Offering Price”) in the Corporation’s initial public offering of Common Stock (whether a Qualifying Public Offering or otherwise, the “IPO”) is less than the amount to which each share of Series F Preferred Stock would be entitled to receive pursuant to Subsection 2(a)(ii) if the IPO were treated as a Deemed Liquidation Event in which the proceeds available for distribution to the holders of the Corporation’s capital stock were equal to the pre-IPO valuation of the Corporation, then immediately prior to the conversion of the shares of Series F Preferred Stock in connection with the IPO, the Series F Preferred Stock Conversion Price shall be reduced to a price (calculated to the nearest one-hundredth of a cent) equal to (i) the Series F Preferred Stock Conversion Price in effect immediately prior to such conversion multiplied by (ii) a fraction, the numerator of which is the Offering Price and the denominator of which is the per share amount to which a share of Series F Preferred Stock would be entitled to receive pursuant to Subsection 2(a)(ii) were the IPO treated as a Deemed Liquidation Event in which proceeds available for distribution to the holders of the Corporation’s capital shares were equal to the pre-IPO valuation of the Corporation.

5. Mandatory Conversion.

(a) Upon either (i) the closing of the sale of shares of Common Stock to the public in an underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, at a price per share reflecting, prior to underwriting commissions and expenses, a pre-money valuation of the Corporation of not less than $250,000,000 and resulting in at least $20,000,000 of proceeds to the Corporation (a “Qualifying Public Offering”) or (ii) the date and time, or the occurrence of an event, specified by vote or written consent of the Requisite investors (the time of such closing or the date and time specified or the time of the event specified in such vote or written consent is referred to herein as the “Mandatory Conversion Time”), (X) all outstanding shares of Preferred Stock shall automatically be converted into shares of Common Stock, at the then effective conversion rates and (Y) such shares may not be reissued by the Corporation.

(b) All holders of record of shares of Preferred Stock shall be sent written notice of the Mandatory Conversion Time and the place designated for mandatory conversion of all such shares of Preferred Stock pursuant to this Section 5. Such notice need not be sent in advance of the occurrence of the Mandatory Conversion Time. Upon receipt of such notice, each holder of shares of Preferred Stock shall surrender his, her or its certificate or certificates

 

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for all such shares (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) to the Corporation at the place designated in such notice. 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. Any such surrender of certificates in connection with a Qualifying Public Offering may be made subject to the closing of the Qualifying Public Offering. All rights with respect to the Preferred Stock converted pursuant to Section 5(a), including the rights, if any, to receive notices and vote (other than as a holder of Common Stock), will terminate at the Mandatory Conversion Time (notwithstanding the failure of the holder or holders thereof to surrender the certificates at or prior to such time), except only the rights of the holders thereof, upon surrender of their certificate or certificates (or lost certificate affidavit and agreement) therefor, to receive the items provided for in the next sentence of this Subsection 5(b). As soon as practicable after the Mandatory Conversion Time and the surrender of the certificate or certificates (or lost certificate affidavit and agreement) for Preferred Stock, the Corporation shall issue and deliver to such holder, or to his, her or its nominees, a certificate or certificates for the number of full shares of Common Stock issuable on such conversion in accordance with the provisions hereof, together with cash as provided in Subsection 4(b) in lieu of any fraction of a share of Common Stock otherwise issuable upon such conversion and the payment of any declared but unpaid dividends on the shares of Preferred Stock converted. Such converted Preferred Stock shall be retired and cancelled 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 Preferred Stock accordingly.

6. Waiver. Any of the rights, powers, preferences and other terms of the Preferred Stock set forth herein may be waived on behalf of all holders of Preferred Stock by the affirmative written consent or vote of the Requisite Investors; provided, however, if a waiver of any rights, powers, preferences and other terms of the Preferred Stock set forth herein would adversely affect one or more series of Preferred Stock but would not so affect all series of Preferred Stock, then any such waiver shall only be effective if the holders of all the so affected series agree to such waiver by the affirmative written consent or vote of a majority of the outstanding shares of such affected series (consenting or voting, as the case may be, on an as converted basis).

7. Notices. Any notice required or permitted by the provisions of this Article FOURTH to be given to a holder of shares of Preferred Stock shall be mailed, postage prepaid, to the post office address last shown on the records of the Corporation.

FIFTH: In furtherance of and not in limitation of powers conferred by statute, it is further provided:

1. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors.

 

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2. Election of directors need not be by written ballot.

3. Subject to any additional vote required by the Certificate of Incorporation, the Board of Directors is expressly authorized to adopt, amend, alter or repeal the By-Laws of the Corporation.

SIXTH: To the fullest extent permitted by law, 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. If the General Corporation Law or any other law of the State of Delaware is amended after approval by the stockholders of this Article SIXTH to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the General Corporation Law as so amended.

Any repeal or modification of the foregoing provisions of this Article SIXTH by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of, or increase the liability of any director of the Corporation with respect to any acts or omissions of such director occurring prior to, such repeal or modification.

SEVENTH: The following indemnification provisions shall apply to the persons enumerated below.

1. Right to Indemnification of Directors and Officers. The Corporation shall indemnify and hold harmless, to the fullest extent permitted by applicable law as it presently exists or may hereafter be amended, any person (an “Indemnified Person”) who was or is made or is threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a “Proceeding”), by reason of the fact that such person, or a person for whom such person is the legal representative, is or was a director or officer of the Corporation or, while a director or officer of the Corporation, is or was serving at the request of the Corporation as a director, officer, employee or agent of another Corporation or of a partnership, joint venture, limited liability company, trust, enterprise or nonprofit entity, including service with respect to employee benefit plans, against all liability and loss suffered and expenses (including attorneys’ fees) reasonably incurred by such Indemnified Person in such Proceeding. Notwithstanding the preceding sentence, except as otherwise provided in Section 3 of this Article SEVENTH, the Corporation shall be required to indemnify an Indemnified Person in connection with a Proceeding (or part thereof) commenced by such Indemnified Person only if the commencement of such Proceeding (or part thereof) by the Indemnified Person was authorized in advance by the Board of Directors.

2. Prepayment of Expenses of Directors and Officers. The Corporation shall pay the expenses (including attorneys’ fees) incurred by an Indemnified Person in defending any Proceeding in advance of its final disposition, provided, however, that, to the extent required by law, such payment of expenses in advance of the final disposition of the Proceeding shall be made only upon receipt of an undertaking by the Indemnified Person to repay all amounts advanced if it should be ultimately determined that the Indemnified Person is not entitled to be indemnified under this Article SEVENTH or otherwise.

 

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3. Claims by Directors and Officers. If a claim for indemnification or advancement of expenses under this Article SEVENTH is not paid in full within 30 days after a written claim therefor by the Indemnified Person has been received by the Corporation, the Indemnified Person may file suit to recover the unpaid amount of such claim and, if successful in whole or in part, shall be entitled to be paid the expense of prosecuting such claim. In any such action the Corporation shall have the burden of proving that the Indemnified Person is not entitled to the requested indemnification or advancement of expenses under applicable law.

4. Indemnification of Employees and Agents. The Corporation may indemnify and advance expenses to any person who was or is made or is threatened to be made or is otherwise involved in any Proceeding by reason of the fact that such person, or a person for whom such person is the legal representative, is or was an employee or agent of the Corporation or, while an employee or agent of the Corporation, is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, limited liability company, trust, enterprise or nonprofit entity, including service with respect to employee benefit plans, against all liability and loss suffered and expenses (including attorney’s fees) reasonably incurred by such person in connection with such Proceeding. The ultimate determination of entitlement to indemnification of persons who are non-director or officer employees or agents shall be made in such manner as is determined by the Board of Directors in its sole discretion. Notwithstanding the foregoing sentence, the Corporation shall not be required to indemnify a person in connection with a Proceeding initiated by such person if the Proceeding was not authorized in advance by the Board of Directors.

5. Advancement of Expenses of Employees and Agents. The Corporation may pay the expenses (including attorney’s fees) incurred by an employee or agent in defending any Proceeding in advance of its final disposition on such terms and conditions as may be determined by the Board of Directors.

6. Non-Exclusivity of Rights. The rights conferred on any person by this Article SEVENTH shall not be exclusive of any other rights which such person may have or hereafter acquire under any statute, provision of the certificate of incorporation, these by-laws, agreement, vote of stockholders or disinterested directors or otherwise.

7. Other Indemnification. The Corporation’s obligation, if any, to indemnify any person who was or is serving at its request as a director, officer or employee of another corporation, partnership, limited liability company, joint venture, trust, organization or other enterprise shall be reduced by any amount such person has actually collected as indemnification from such other corporation, partnership, limited liability company, joint venture, trust, organization or other enterprise.

8. Insurance. The Board of Directors may, to the full extent permitted by applicable law as it presently exists, or may hereafter be amended from time to time, authorize an appropriate officer or officers to purchase and maintain at the Corporation’s expense insurance: (i) to indemnify the Corporation for any obligation which it incurs as a result of the indemnification of directors, officers and employees under the provisions of this Article SEVENTH; and (ii) to indemnify or insure directors, officers and employees against liability in instances in which they may not otherwise be indemnified by the Corporation under the provisions of this Article SEVENTH.

 

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9. Amendment or Repeal. Any repeal or modification of the foregoing provisions of this Article SEVENTH shall not adversely affect any right or protection hereunder of any person in respect of any act or omission occurring prior to the time of such repeal or modification. The rights provided hereunder shall inure to the benefit of any Indemnified Person and such person’s heirs, executors and administrators.

EIGHTH: The Corporation renounces any interest or expectancy of the Corporation 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, (i) any director of the Corporation who is not an employee of the Corporation or any of its subsidiaries, or (ii) any holder of Preferred Stock or any partner, member, director, stockholder, employee or agent of any such holder, other than someone who is an employee of the Corporation or any of its subsidiaries, unless such matter, transaction or interest is presented to, or acquired, created or developed by, or otherwise comes into the possession of, such person expressly and solely in such person’s capacity as a director of the Corporation.

*        *        *

3. The foregoing amendment and restatement was approved by the holders of the requisite number of shares of said corporation in accordance with Section 228 of the General Corporation Law.

4. That this Fifth Amended and Restated Certificate of Incorporation, which restates and integrates and further amends the provisions of the Corporation’s Fourth Amended and Restated Certificate of Incorporation, and any amendments thereto, has been duly adopted in accordance with Sections 242 and 245 of the General Corporation Law.

[Remainder of Page Intentionally Left Blank]

 

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IN WITNESS WHEREOF, this Fifth Amended and Restated Certificate of Incorporation has been executed by a duly authorized officer of the Corporation on February 27, 2013.

 

By:  

/s/ Court Cunningham

Name:   Court Cunningham
Title:   Chief Executive Officer

 

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EX-3.3

Exhibit 3.3

BY-LAWS

OF

YODLE, INC.

(a Delaware corporation)

ARTICLE I

Provisions of Law

These By-Laws shall be subject to such provisions of the statutory and common laws of the State of Delaware as may be applicable to corporations organized under the laws of the State of Delaware. Subsequent references herein to provisions of law shall be deemed to be references to the aforesaid provisions of law. All references in these By-Laws to such provisions of law shall be construed to refer to such provisions as from time to time amended.

ARTICLE II

Certificate of Incorporation

These By-Laws shall be subject to the Certificate of Incorporation of the Company. All references in these By-Laws to the Certificate of Incorporation shall be construed to mean the Certificate of Incorporation of the Company as from time to time amended.

ARTICLE III

Stockholders

1. Annual Meeting: An annual meeting of stockholders shall be held for the election of directors at such date and time as may be designated by resolution of the Board from time to time. Any other proper business may be transacted at the annual meeting. The Company shalt not be required to hold an annual meeting of stockholders, provided that (i) the stockholders are permitted to act by written consent under the Company’s Certificate of Incorporation and these By-Laws, (ii) the stockholders take action by written consent to elect directors and (iii) the stockholders unanimously consent to such action or, if such consent is less than unanimous, all of the directorships to which directors could be elected at an annual meeting held at the effective time of such action are vacant and are filled by such action.

2. Special Meetings: Unless otherwise required by law or the Certificate of Incorporation, a special meeting of the stockholders may be called for any purpose or purposes by the Chairman of the Board, Chief Executive Officer or President (in the absence of the Chief Executive Officer), or by any two (2) Directors. Upon written


request of one or more stockholders who own at least twenty-five percent (25%) of the capital stock issued and outstanding and entitled to vote at the meeting, a special meeting shall be called by the Secretary, or in the case of the death, absence, incapacity or refusal to act of the Secretary, by any other officer. Such request shall state the purpose or purposes of the proposed meeting.

3. Place of Meeting: All meetings of the stockholders, annual or special, shall be held at such place within or without the State of Delaware as may be designated from time to time by the Board of Directors or the officer calling the meeting or if not so designated, at the registered office of the Company.

4. Notice of Meetings: Except as otherwise provided by law, notice of every meeting of stockholders, annual or special, shall be given by the person or persons calling the meeting or by any officer of the Company acting at his or their direction not less than ten (10) nor more than sixty (60) days before the meeting to each stockholder, who by law, by the Certificate of Incorporation or by these By-Laws, is entitled to vote at or notice of such meeting. Without limiting the manner by which notice otherwise may be given to stockholders, any notice shall be effective if given by a form of electronic transmission consented to (in a manner consistent with the General Corporation Law of the State of Delaware) by the stockholder to whom the notice is given. The notices of meetings shall state the place, if any, date and time of the meeting and the means of remote communications, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at such meeting. The notice of a special meeting shall state, in addition, the purpose or purposes for which the meeting is called. If notice is given by mail, such notice shall be deemed given when deposited in the United States mail, postage prepaid, directed to the stockholder at such stockholder’s address as it appears on the records of the Company. If notice is given by electronic transmission, such notice shall be deemed given at the time specified in Section 232 of the General Corporation Law of the State of Delaware. No notice of any adjourned meeting shall be required if (a) the time and place thereof are announced at the meeting at which the adjournment is taken, (b) the adjournment is for less than thirty (30) days, and (c) no new record date is fixed for the adjourned meeting.

5. Waivers of Notice: Whenever notice is required to be given to any stockholder by law, the Certificate of Incorporation or these By-Laws, a written waiver thereof, signed by the stockholder entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a stockholder at a meeting shall constitute a waiver of notice of such meeting, 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. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice.

6. Voting List: The officer who has charge of the stock ledger of the Company shall prepare and make, at least ten days before every meeting of stockholders, a

 

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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 ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city or town where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present.

7. Quorum: Except as may be otherwise provided by law, by the Certificate of Incorporation, or by these By-Laws, the holders of a majority of all stock issued and outstanding and entitled to vote at a meeting (or if there shall be more than one (1) class or series of stock issued and outstanding and entitled to vote separately at such meeting, and a separate vote by class or series shall be required by law, by the Certificate of Incorporation or by these By-Laws, then a majority of each such class or series) present in person or represented by proxy, shall constitute a quorum. The holders of a majority in interest of all stock issued and outstanding, entitled to vote and present in person or represented by proxy at any meeting of stockholders, including any adjourned meeting, whether or not a quorum is present, may adjourn such meeting to another time and place. At any adjourned meeting, any business may be transacted which might have been transacted at the meeting as originally called, provided a quorum shall be in attendance at such adjourned meeting.

8. Voting and Proxies: Unless otherwise provided by the Certificate of Incorporation, each stockholder shall have one (1) vote for each share of stock and a proportionate vote for each fractional share of stock entitled to vote, held by him of record according to the records of the Company. Stockholders may vote either in person or by written proxy dated not more than three (3) years before such vote, unless the proxy provides for a longer period. A proxy with respect to stock held in the name of two (2) or more persons shall be valid if executed by one (1) of them unless at or prior to the exercise of the proxy, the Company receives a specific written notice to the contrary from any one (1) of them. A proxy purporting to have been executed by or on behalf of a stockholder shall be deemed valid unless challenged at or prior to its exercise. All elections of Directors shall be by written ballot unless otherwise provided in the Certificate of Incorporation.

9. Required Vote: If a quorum is present, then, except as otherwise required by law, the Certificate of Incorporation or these By-Laws, the holders of a majority of the stock present in person or represented by proxy at the meeting and entitled to vote shall decide any such election or other matter to be voted upon by the stockholders.

10. Conduct of Meetings: Meetings of stockholders shall be presided over by the Chairman of the Board, if any, or in the Chairman’s absence by the Vice Chairman of the Board, if any, or in the Vice Chairman’s absence by the Chief Executive Officer, or in

 

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the Chief Executive Officer’s absence by the President, or in the President’s absence by a Vice President, or in the absence of all of the foregoing persons by a chairman designated by the Board of Directors, or in the absence of such designation by a chairman chosen by vote of the stockholders at the meeting. The Secretary shall act as secretary of the meeting, but in the Secretary’s absence the chairman of the meeting may appoint any person to act as secretary of the meeting.

The Board of Directors may adopt by resolution such rules, regulations and procedures for the conduct of any meeting of stockholders of the Company as it shall deem appropriate including, without limitation, such guidelines and procedures as it may deem appropriate regarding the participation by means of remote communication of stockholders and proxy holders not physically present at a meeting. Except to the extent inconsistent with such rules, regulations and procedures as adopted by the Board of Directors, the chairman of any meeting of stockholders shall have the right and authority to prescribe such, rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are appropriate for the proper conduct of the meeting. Such rules, regulations or procedures, whether adopted by the Board of Directors or prescribed by the chairman of the meeting, may include, without limitation, the following: (i) the establishment of an agenda or order of business for the meeting; (ii) rules and procedures for maintaining order at the meeting and the safety of those present; (iii) limitations on attendance at or participation in the meeting to stockholders of record of the Company, their duly authorized and constituted proxies or such other persons as shall be determined; (iv) restrictions on entry to the meeting after the time fixed for the commencement thereof; and (v) limitations on the time allotted to questions or comments by participants. Unless and to the extent determined by the Board of Directors or the chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with the rules of parliamentary procedure.

11. Action Without Meeting: Unless otherwise required in the Certificate of Incorporation, any action required to be taken at any annual or special meeting of stockholders, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, 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. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing.

Any electronic transmission consenting to an action to be taken and transmitted by a stockholder or proxy holder, or by a person or persons authorized to act for a stockholder or proxy holder, shall be deemed to be written, signed and dated for the purposes of this section, provided that any such electronic transmission sets forth or is delivered with information from which the Company can determine (A) that the electronic transmission was transmitted by the stockholder or proxy holder or by a person

 

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or persons authorized to act for the stockholder or proxy holder and (B) the date on which such stockholder or proxy holder or authorized person or persons transmitted such electronic transmission. The date on which an electronic transmission is transmitted shall be deemed to be the date on which such consent was signed. No consent given by electronic transmission shall be deemed to have been delivered until such consent is reproduced in paper form and until such paper form shall be delivered to the Company by delivery to its registered office in the State of Delaware, its principal place of business or an officer or agent of the Company having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Company’s registered office shall be made by hand or by certified or registered mail, return receipt requested. Notwithstanding the foregoing limitations on delivery, consents given by electronic transmission may be otherwise delivered to the principal place of business of the Company or to an officer or agent of the Company having custody of the book in which proceedings of meetings of stockholders are recorded if, to the extent and in the manner provided by resolution of the Board of Directors. Any copy, facsimile or other reliable reproduction of a consent in writing may be substituted or used in lieu of the original writing for any and all purposes for which the original writing could be used provided that such copy, facsimile or other reproduction shall be a complete reproduction of the entire original writing. For purposes of this section “electronic transmission” includes telegram, cablegram or other form of communication not directly involving the physical transmission of paper that creates a record that may be retained, retrieved, and reviewed by a recipient thereof, and that may be directly reproduced in paper form by such a recipient through an automated process.

11. Record Date: For the purpose of determining the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or for the purpose of determining stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights, or 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 Directors may fix, in advance, a date as the record date for any such determination of stockholders. Such date shall not be more than sixty or less than ten days before the date of such meeting, nor more than sixty days prior to any other action. If no such record date is fixed:

(a) 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 next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held;

(b) The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the Directors is necessary, shall be the day on which the first written consent is expressed;

(c) The record date for determining stockholders for any purpose other than those specified in Sections 11(a) and 11(b) shall be at the close of business on the day on which the Board adopts the resolution relating thereto.

 

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When a determination of stockholders entitled to notice of or to vote at any meeting of stockholders has been made as provided in this Section 11 such determination shall apply to any adjournment thereof, unless the Board fixes a new record date for the adjourned meeting.

ARTICLE IV

Directors

1. Powers: The business and affairs of the Company shall be managed by or under the direction of the Board of Directors, which may exercise all the powers of the Company and do all such lawful acts and things as are not by law or by the Certificate of Incorporation or by these By-Laws directed or required to be exercised or done by the stockholders.

2. Number; Qualification; Term of Office: The Board of Directors shall consist of one or more members. The total number of Directors shall be fixed initially by the incorporators and may thereafter be changed from time to time by action of the stockholders or the Directors. Directors need not be stockholders. Each Director shall hold office until his successor is elected and qualified, or until his earlier death, resignation or removal.

3. Election of Directors: The Board of Directors shall be elected at the annual meeting, or in lieu thereof at any special meeting, of stockholders in the manner prescribed by law, by the Certificate of Incorporation and by these By-Laws.

4. Newly Created Directorships and Vacancies: Unless otherwise provided in the Certificate of Incorporation, vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class may be filled by vote of a majority of the directors then in office, although less than a quorum, or by a sole remaining director, or by the stockholders by a majority of the stock present or represented by proxy at a special meeting of stockholders called for that purpose. A Director elected to fill a vacancy shall be elected to hold office until his successor is elected and qualified, or until his earlier death, resignation or removal. If there are no Directors in office, then an election of Directors may be held in the manner provided by law. In the event of a vacancy in the Board of Directors, the remaining Directors, except as otherwise required by law or these By-Laws, may exercise the power of the full Board of Directors until the vacancy is filled.

 

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5. Resignations and Removal of Directors: Any Director may resign at any time by written notice to the Company. Such resignation shall be effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event. Any Director may be removed from office with or without cause by the stockholders upon the vote of the holders of a majority of stock then issued and outstanding and entitled to vote thereon or in such manner as may be provided in the Certificate of Incorporation.

6. Regular Meetings: Regular meetings of the Board of Directors may be held without notice at such times and places as the Directors may determine from time to time; provided that any Director who is absent when such a determination is made shall be given prompt notice of such determination. The first meeting of the Board of Directors following the annual meeting of the stockholders may be held without notice immediately after and at the same place as the animal meeting of the stockholders or the special meeting held in lieu thereof.

7. Special Meetings and Notice: Special meetings of the Board of Directors may be called at any time by the Chairman, Chief Executive Officer or President (in the absence of the Chief Executive Officer), Secretary or by any two (2) Directors. Notice of a special meeting shall be given by the Secretary, an Assistant Secretary or the person calling the meeting to each Director in person, or by telephone, telecopy or electronic mail, or other equivalent electronic media sent to his last known business or home address or email address, at least forty-eight (48) hours in advance of the meeting, or by written notice delivered to his business or home address at least two (2) business days in advance of the meeting. Notice of a meeting need not be given to any Director, if a written waiver of notice, executed by him before or after the meeting, is filed with the records of the meeting, or to any Director who attends the meeting without protesting prior thereto or at its commencement the lack of notice to him. Any notice given hereunder shall state the place, date and hour of the meeting, but need not specify the purposes of the meeting except that if an amendment to these By-Laws or any matter referred to in Article VII or Paragraphs 5 and 6 of Article VIII of these By-Laws shall be a purpose of the meeting, the same shall be so stated in the notice.

8. Quorum; Voting and Adjournments: Except as otherwise required by law, by the Certificate of Incorporation or by these By-Laws, a majority of the total number of Directors then in office shall constitute a quorum at any meeting of the. Directors, and the act of a majority of the Directors present at a meeting at which a quorum shall be present shall be the act of the Board of Directors. Any meeting of Directors may be adjourned to any other time and place as a majority of those Directors present at such meeting and voting shall determine whether or not a quorum of Directors shall be present.

9. Action Without Meeting: Any action required or permitted to be taken at any meeting of the Directors may be taken without a meeting, if all Directors then in office consent to such action by written consent or electronic transmission(s) and such written

 

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consents and electronic transmissions are filed with the records of the meetings of the Directors. Such consent or electronic transmission(s) shall be treated as a vote for all purposes,

10. Telephonic Meetings: Unless otherwise restricted by the Certificate of Incorporation or these By-Laws, members of the Board of Directors or of any committee thereof may participate in a meeting of the Board of Directors or of any committee, as the ease may be, by means of conference telephone or similar 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.

11. Committees: The Board of Directors may, in its discretion, by resolution passed by a majority of the whole Board, designate one (1) or more committees, each committee to consist of one (1) or more of the Directors of the Company and which shall have and may exercise, except as may be otherwise limited by law, such powers and authority, including those possessed by the Board of Directors itself, as shall be conferred or authorized by the resolutions appointing it. The Board of Directors shall have the power at any time to discharge, change the membership of, fill vacancies in, or designate one or more directors as alternate members of any such committee. Written minutes of all proceedings of any such committee shall be kept and made available to each Director, at his request. Except as the Board of Directors may otherwise determine, a majority of the Directors then constituting the membership of any such committee shall constitute a quorum for the transaction of business, except that when a committee shall have only one (1) Director, then one (1) Director shall constitute a quorum. When a quorum is present at any meeting of any such committee, a majority of those present and voting shall be requisite and sufficient to effect any action, or to decide any question or measure presented to the meeting, unless a larger vote shall be required by law or by other provisions of these By-Laws or by the Board of Directors.

Notice shall be provided to each committee member in accordance with Section 7 of this Article, as if such committee meeting were a special meeting of the Directors.

In the event of the absence or disqualification of any member of any committee designated by the Board of Directors, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they 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.

ARTICLE V

Officers

1. Officers: The officers of the Company shall be elected by the Board of Directors and shall consist of a President, a Treasurer, a Secretary and such other officers, including without limitation a Chairman of the Board of Directors, a Chief Executive

 

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Officer, and one or more Vice Presidents, Assistant Treasurers and Assistant Secretaries, as the Directors may from time to time determine. Such other officers shall have such duties and powers as shall be designated from time to time by the Board of Directors or the chief executive officer, and they shall be responsible to and shall report to the chief executive officer or to such other officer as the chief executive officer or the Board of Directors shall designate. If authorized by resolution of the Board of Directors, the Chief Executive Officer may be empowered to appoint from time to time Assistant Secretaries and Assistant Treasurers. Any number of offices may be held by the same person, unless the Certificate of Incorporation or these By-Laws otherwise provide.

2. Tenure: Each officer of the Company shall hold office until his successor is elected and qualified, unless a different term is specified in the vote electing or appointing him, or until his earlier death, resignation or removal.

3. Removal: The Directors may remove any officer elected or appointed by them with or without cause upon the vote of the Directors then in office.

4. Resignation: Any officer may resign at any time by delivering his written resignation to the Company at its principal office or to the chief executive officer or Secretary. Such resignation shall be effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event.

5. Vacancies: Vacancies in any office may be filled by the Directors.

6. Certain Duties and Powers: The officers designated below, subject at all times to modification by and to the direction and control of the Directors, shall have and may exercise the respective duties and powers set forth below:

A. The Chairman of the Board of Directors: The Chairman of the Board of Directors, if there be one, shall, when present, preside at all meetings of the Directors.

B. President: The President shall be the chief executive officer of the Company and shall have general supervision and control of its business. Unless otherwise provided by the Directors, the President shall preside, when present, at all meetings of stockholders, and, if a director, at all meetings of Directors unless there be a Chairman of the Board of Directors who is present at the meeting. Unless otherwise directed by the Board of Directors, the President or any other person authorized by the Board of Directors or the President is authorized to vote, represent and exercise on behalf of the Company all rights incident to any and all shares of any other corporation or corporations standing in the name of the Company. The authority granted herein may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority.

C. Treasurer: The Treasurer shall be the chief financial officer of the Company and shall have general charge of the financial affairs of the Company and shall keep or cause to be kept accurate books of account. He shall have custody of all funds, securities and valuable documents of the Company.

 

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D. Secretary: The Secretary shall keep a true record of the proceedings of all meetings of the stockholders and Directors of the Company. In the absence of the Secretary from any such meeting, an Assistant Secretary, if there be one, otherwise a temporary Secretary shall be chosen by the person presiding at the meeting, and he shall so record the proceedings thereof. Unless a transfer agent is appointed, the Secretary shall also keep or cause to be kept the stock transfer books of the Company.

In addition, except as otherwise required by law, these By-Laws or the Certificate of Incorporation, and subject to modification by and to the direction and control of the Board of Directors, each officer shall have in addition to the above duties and powers, such duties and powers as are customarily incident to his office.

ARTICLE VI

Capital Stock

1. Certificates of Stock: Unless the Directors provide by resolution or resolutions that some or all of any or all classes or series of the Company’s stock shall be uncertificated shares, the shares of the Company shall be represented by certificates. Any such resolution shall not apply to shares represented by a certificate unless such certificate is surrendered to the Company. Notwithstanding the adoption of such a resolution by the Directors, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to one or more certificates signed by the Chairman or Vice-Chairman of the Board of Directors or by the President or a Vice President and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary representing the number of shares registered in certificate form. Any or all the signatures on the certificate may be a 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 Company with the same effect, as if he were such officer, transfer agent or registrar at the date of issue.

2. Legends: Every certificate issued for shares of stock at a time when such shares are subject to any restriction on transfer pursuant to the Certificate of Incorporation, these By-Laws or any agreement among any stockholders or among any such stockholders and the Company shall have the restriction noted conspicuously on the certificate and shall also set forth on the face or back of the certificate either (a) the full text of the restriction or (b) a statement of the existence of such restriction and a statement that the Company will furnish a copy thereof to the holder of such certificate upon written request and without charge.

 

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Every certificate issued for shares of stock at a time when the Company is authorized to issue more than one class or series of stock shall set forth on the face or back of the certificate either (x) the full text or a summary of the powers, designations, preferences, arid relative, participating, optional or other special rights of the shares of each class and series, if any, authorized to be issued, or (y) a statement of the existence of such powers, designations, preferences and relative, participating, optional or other special rights and a statement that the Company will furnish a copy thereof to the holder of such certificate upon written request and without charge.

In the event the Directors have authorized uncertificated stock, within a reasonable time after the issuance or transfer of uncertificated stock, the Company shall send to the registered owners thereof a written notice containing the information required to be set forth or stated on certificates pursuant to law and these By-Laws, or with respect to uncertificated stock issued at a time when the Company is authorized to issue more than one class or series of stock, a statement that the Company will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights.

3. Transfers: The Directors may appoint a transfer agent and a registrar of transfers or either and require all stock certificates to bear their signatures. Transfers of shares of capital stock of the Company shall be made only on the books of the Company by the registered holder thereof or by his duly authorized attorney appointed by a power of attorney duly executed and filed with the Secretary of the Company or a transfer agent, and on surrender of the certificate or certificates for such shares properly endorsed. The Directors may make such additional rules and regulations not inconsistent with law, with the Certificate of Incorporation or with these By-Laws as it deems expedient relative to the issue, transfer and registration of stock certificates.

4. Pledges: Transferees of stock of the Company transferred as collateral security shall be entitled to a new certificate therefor if the instrument of transfer substantially describes the debt or duty which is intended to be secured thereby. Whenever any transfer of shares shall be made for collateral security, and not absolutely, it shall be so expressed in the entry of transfer and on the face of any new certificate issued therefor if, when the certificates are presented to the Company for transfer or uncertificated shares are requested to be transferred, both the transferor and the transferee request the Company to do so.

5. Replacement of Certificates: In case of the alleged loss, destruction or mutilation of a certificate of stock issued by the Company, a duplicate certificate may be issued in place thereof; upon such terms as the Directors may prescribe.

 

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ARTICLE VII

Indemnification

1. Right to Indemnification of Employees and Agents. The Company may indemnify and hold harmless, to the fullest extent permitted by applicable law as it presently exists or may hereafter be amended, any person (an “Indemnified Person”) who was or is made or is threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a “Proceeding”), by reason of the fact that such person, or a person for whom such person is the legal representative, is or was an employee or agent of the Company or, while an employee or agent of the Company, is or was serving at the request of the Company as a director, officer, employee or agent of another corporation or of a partnership, joint venture, limited liability company, trust, enterprise or nonprofit entity, including service with respect to employee benefit plans, against all liability and loss suffered and expenses (including attorneys’ fees) reasonably incurred by such Indemnified Person in such Proceeding. The ultimate determination of entitlement to indemnification of persons who are non-director or officer employees or agents shall be made in such manner as is determined by the Board of Directors in its sole discretion. Notwithstanding the preceding sentence, except as otherwise provided in Section 3 of this Article VII, the Company shall be required to indemnify an Indemnified Person in connection with a Proceeding (or part thereof) commenced by such Indemnified Person only if the commencement of such Proceeding (or part thereof) by the Indemnified Person was authorized in advance by the Board of Directors.

2. Prepayment of Expenses of Employees and Agents. The Company may pay the expenses (including attorneys’ fees) incurred by an Indemnified Person in defending any Proceeding in advance of its final disposition, provided, however, that, to the extent required by law, such payment of expenses in advance of the final disposition of the Proceeding shall be made only upon receipt of an undertaking by the Indemnified Person to repay all amounts advanced if it should be ultimately determined that the Indemnified Person is not entitled to be indemnified under this Article VII or otherwise.

3. Claims by Employees and Agents. If a claim for indemnification or advancement of expenses under this Article VII is not paid in full within 30 days after a written claim therefor by the Indemnified Person has been received by the Company, the Indemnified Person may file suit to recover the unpaid amount of such claim and, if successful in whole or in part, shall be entitled to be paid the expense of prosecuting such claim. In any such action the Company shall have the burden of proving that the Indemnified Person is not entitled to the requested indemnification or advancement of expenses under applicable law.

4. Non-Exclusivity of Rights. The rights conferred on any person by this Article VII shall not be exclusive of any other rights which such person may have or hereafter acquire under any statute, provision of the certificate of incorporation, these by-laws, agreement, vote of stockholders or disinterested directors or otherwise.

 

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5. Other Indemnification. The Company’s obligation, if any, to indemnify any person who was or is serving at its request as a director, officer or employee of another corporation, partnership, limited liability company, joint venture, trust, organization or other enterprise shall be reduced by any amount such person has actually collected as indemnification from such other corporation, partnership, limited liability company, joint venture, trust, organization or other enterprise.

6. Insurance. The Board of Directors may, to the full extent permitted by applicable law as it presently exists, or may hereafter be amended from time to time, authorize an appropriate officer or officers to purchase and maintain at the Company’s expense insurance: (a) to indemnify the Company for any obligation which it incurs as a result of the indemnification of employees and agents under the provisions of this Article VII; and (b) to indemnify or insure employees and agents against liability in instances in which they may not otherwise be indemnified by the Company under the provisions of this Article VII.

7. Amendment or Repeal. Any repeal or modification of the foregoing provisions of this Article VII shall not adversely affect any right or protection hereunder of any person in respect of any act or omission occurring prior to the time of such repeal or modification. The rights provided hereunder shall inure to the benefit of any Indemnified Person and such person’s heirs, executors and administrators.

ARTICLE VIII

Miscellaneous Provisions

1. Fiscal Year: The fiscal year of the Company shall be determined, and may be changed, by the Board of Directors.

2. Seal: The seal of the Company shall, subject to alteration by the Directors, bear its name, the word “Delaware,” and the year of its incorporation.

3. Execution of Instruments: Except as otherwise authorized by the Board of Directors, all deeds, mortgages, leases, transfers, contracts, bonds, notes, checks, drafts and other obligations authorized to be executed by an officer of the Company in its behalf shall be signed by the Chairman of the Board, the President, any Vice President or the Treasurer except as the Directors may generally or in particular cases otherwise determine.

4. Voting of Securities: Except as the Directors may otherwise designate, the Chairman or the President may waive notice of, and act, or appoint any other person or persons to waive notice of or act, as proxy or attorney in fact for this Company (with or

 

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without power of substitution) at any meeting of stockholders or shareholders of any other Company or organization, the securities of which may be held by this Company; and may as such proxy or attorney for this Company (with or without power of substitution), consent to, and sign in writing, any action in lieu of any such meeting.

5. Amendments: These By-Laws may be altered, amended or repealed by the stockholders or, if so authorized by the Certificate of Incorporation, by the Directors, at any meeting of the stockholders or of the Directors; provided, however, that notice of the substance of any such alteration, amendment or repeal be contained in the notice of such meeting.

6. Ratification: Any transaction may be ratified by the Board of Directors or by the stockholders; and if so ratified, shall have the same force and effect as if the questioned transaction had been originally duly authorized, and said ratification shall be binding upon the Company and its stockholders and shall constitute a bar to any claim or execution of any judgment in respect of such questioned transaction,

7. Reliance on Records: Each officer, Director or member of any committee designated by the Board of Directors in the manner hereinbefore provided shall in the performance of his duties be fully protected in relying in good faith upon the books of account or reports made to the Company by any of its officials, or by an independent certified public accountant, or by an appraiser selected with reasonable care by the Board of Directors or by any committee, or in relying in good faith upon other records of the Company.

 

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EX-4.2

Exhibit 4.2

FOURTH AMENDED AND RESTATED

INVESTORS’ RIGHTS AGREEMENT

THIS FOURTH AMENDED AND RESTATED INVESTORS’ RIGHTS AGREEMENT (the “Agreement”) is made as of February 28, 2013, by and among (i) Yodle, Inc., a Delaware corporation (the “Company”), and (ii) each of the investors listed on Schedule A hereto (the “Investors”).

RECITALS

WHEREAS, the Company and certain of the Investors are party to a Third Amended and Restated Investors’ Rights Agreement dated as of January 27, 2010 (the “Prior Investors’ Rights Agreement”);

WHEREAS, pursuant to the Series F Preferred Stock Purchase Agreement (the “Purchase Agreement”), of even date herewith, by and among the Company and certain of the Investors, such Investors are purchasing shares of the Company’s Series F Preferred Stock (the “Financing”);

WHEREAS, as a condition precedent to the Financing, the Company and the undersigned Investors who are party to the Prior Investors’ Rights Agreement must amend and restate the Prior Investors’ Rights Agreement in its entirety; and

WHEREAS, the undersigned Investors represent the holders of at least 55% of the Registrable Securities (as defined the Prior Investors’ Rights Agreement) outstanding on the date of this Agreement and, as such, have the right pursuant to Section 6.6 of the Prior Investors’ Rights Agreement to execute and deliver this Agreement and amend and restate the Prior Investors’ Rights Agreement in the manner provided herein;

NOW, THEREFORE, the parties hereby enter into this Agreement and agree that the Prior Investors’ Rights Agreement is hereby amended and restated to read in its entirety as follows:

1. Definitions. For purposes of this Agreement:

Affiliate” means, with respect to any specified individual, corporation, partnership, association, trust or any other entity (in each case, a “Person”), any other Person which, directly or indirectly, controls, is controlled by, or is under common control with such specified Person, including, without limitation, any general partner, venture partner, officer or director of such Person and any venture capital fund now or hereafter existing which is controlled by or under common control with one or more general partners of, or shares the same management company with, such Person.

Bessemer” means Bessemer Venture Partners VI L.P.

Board” means the Board of Directors of the Company.


Certificate of Incorporation” means the Company’s Certificate of Incorporation, as amended or restated from time to time.

Common Stock” means shares of the Company’s common stock, par value $.0002 per share.

Conversion Shares” means shares of Common Stock issued or issuable upon the conversion of Preferred Stock.

Deemed Liquidation Event” has the meaning assigned to such term in the Certificate of Incorporation.

DFJ” means Draper Fisher Jurvetson Fund IX, L.P., Draper Fisher Jurvetson Partners IX, LLC and Draper Associates, L.P.

DFJ Growth” means Draper Fisher Jurvetson Growth Fund 2006 Partners, L.P. and Draper Fisher Jurvetson Partners Growth Fund 2006, LLC.

Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

Form S-3” means such form under the Securities Act as in effect on the date hereof or any registration form under the Securities Act subsequently adopted by the SEC that permits incorporation of substantial information by reference to other documents filed by the Company with the SEC.

GAAP” means generally accepted accounting principles in the United States.

Government Official” means any officer or employee of a foreign government or government-controlled entity or of a public international organization, or any person acting in an official capacity for or on behalf of any of the foregoing, or any political party or official thereof, or candidate for political office;

Governmental Body” means any (a) nation, state, county, city, town, village, district or other jurisdiction of any nature; (b) federal, state, local, municipal, foreign or other government; (c) governmental or quasi-governmental authority of any nature (including any taxing authority, agency, branch, board, department, commission, bureau, official, or entity and any court or other tribunal); or (d) body exercising or entitled to exercise any administrative, executive, judicial, legislative, police, regulatory or taxing authority or power of any nature;

Group Company” means the Company and all its subsidiaries;

Holder” means any holder of Registrable Securities who is a party to this Agreement or any assignee thereof in accordance with Section 2.13 hereof.

Immediate Family Member” means a child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships, of a natural person referred to herein.

 

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Initiating Holders” means, collectively, any Holders who properly initiate a registration request under this Agreement.

IPO” means the Company’s first underwritten public offering of its Common Stock under the Securities Act.

JAFCO” means JAFCO Technology Ventures III, L.P.

Key Employee” means the president, chief executive officer, chief financial officer, chief operating officer, chief technology officer, vice presidents of operations, research, development, sales or marketing, or any other individual who performs a significant role in the operations of the Company or a Subsidiary or in the development or conception of any Company Intellectual Property (as defined in the Purchase Agreement) as may be reasonably designated by the Board.

Major Investor” means any Investor that, together with such Investor’s Affiliates, holds at least 4,000,000 Conversion Shares (appropriately adjusted for any stock split, dividend, combination or other recapitalization effected after the date hereof).

New Securities” means equity securities of the Company, whether or not currently authorized, or rights, options, or warrants to purchase such equity securities, or securities of any type whatsoever that are, or may become, convertible into or exchangeable into or exercisable for such equity securities.

Preferred Stock” means, collectively, shares of 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.

Preferred Stock Directors” means, at a particular time, the Preferred Stock Director or Preferred Stock Directors (as defined in the Certificate of Incorporation) serving on the Board at such time.

Qualifying Public Offering” has the meaning assigned to such term in the Certificate of Incorporation.

register,” “registered,” and “registration” 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 (i) the Common Stock issuable or issued upon conversion of the Preferred Stock now owned or hereafter acquired by the Investors, (ii) any other shares of Common Stock acquired by the Investors after the date hereof (including shares of Common Stock issuable upon conversion of other securities acquired by the Investors after the date hereof), and (iii) any Common Stock of the Company issued as (or issuable upon the

 

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conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of the shares referenced in clauses (i) and (ii) above; provided, however, that (x) any shares sold by a Person in a transaction in which such Person’s rights under Section 2 hereof are not assigned shall not be deemed Registrable Securities and (y) any shares for which registration rights have terminated pursuant to Section 2.14 of this Agreement shall not be deemed Registrable Securities.

Registrable Securities then outstanding” means the number of shares determined by adding the number of shares of outstanding Common Stock that are Registrable Securities and the number of shares of Common Stock issuable (directly or indirectly) pursuant to then exercisable and/or convertible securities that are Registrable Securities.

Requisite Investors” means Investors holding fifty-five percent (55%) of the Conversion Shares held by all Investors.

SEC” means the Securities and Exchange Commission.

SEC Rule 144” means Rule 144 promulgated by the SEC under the Securities Act.

SEC Rule 145” means Rule 145 promulgated by the SEC under the Securities Act.

Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.

Selling Expenses” means all underwriting discounts, selling commissions, and stock transfer taxes applicable to the sale of Registrable Securities; fees and disbursements of counsel for any Holder, except for the fees and disbursements of the Selling Holder Counsel borne and paid by the Company as provided in Section 2.5; and fees and disbursements of the Company’s certified public accounting firm for any special audit in excess of $15,000.

Series A Preferred Stock” means shares of the Company’s Series A Preferred Stock, par value $0.001 per share.

Series B Preferred Stock” means shares of the Company’s Series B Preferred Stock par value $0.001 per share.

Series C Preferred Stock” means shares of the Company’s Series C Preferred Stock par value $0.001 per share.

Series D Preferred Stock” means shares of the Company’s Series D Preferred Stock par value $0.001 per share.

Series E Preferred Stock” means shares of the Company’s Series E Preferred Stock par value $0.001 per share.

 

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Series F Preferred Stock” means shares of the Company’s Series F Preferred Stock par value $0.001 per share.

Significant Investor” means any Investor that, together with such Investor’s Affiliates, holds at least 1,200,000 Conversion Shares (appropriately adjusted for any stock split, dividend, combination or other recapitalization effected after the date hereof).

Subsidiary” means any corporation, partnership, limited liability company, joint venture or other legal entity of any kind of which the Company (either alone or through or together with one or more of its other Subsidiaries), owns, directly or indirectly, the stock or other equity interests which entitle such holders generally to elect a majority of the board of directors or other governing body of such legal entity.

Violation” means losses, damages or liabilities (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 losses, damages or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations: (i) 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, (ii) the 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 (iii) any violation or alleged violation by the indemnifying party, 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.

Voting Agreement” means that certain Fourth Amended and Restated Voting Agreement by and among the Company, the Investors and the other parties thereto of even date herewith, as amended from time to time hereafter.

2. Registration Rights. The Company covenants and agrees as follows:

2.1 Request for Registration.

(a) If the Company shall receive at any time after the earlier of (i) two (2) years after the date of this Agreement or (ii) six (6) months after the effective date of the registration statement for the IPO, a written request from the Holders of at least 50% of the Registrable Securities then outstanding that the Company file a registration statement under the Securities Act covering the registration of at least twenty percent (20%) of the then outstanding Registrable Securities (or such lesser percentage of Registrable Securities having an anticipated offering price of at least $5,000,000), then the Company shall:

(i) within ten (10) days of the receipt thereof, give written notice of such request (the “Demand Notice”) to all Holders other than the Initiating Holders; and

(ii) as soon as practicable, and in any event within sixty (60) days of the receipt of such request from the Initiating Holders, file a registration statement under the Securities Act covering all Registrable Securities that the Initiating Holders requested to be

 

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registered and any additional Registrable Securities requested to be included in such registration by any other Holders, as specified by notice given by each such Holder to the Company within fifteen (15) days of the date of the Demand Notice, and in each case, subject to the limitations of subsections 2.1(b) and 2.6.

(b) 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 a part of their request made pursuant to subsection 2.1(a) and the Company shall include such information in the Demand Notice. The underwriter will be selected by the Company and shall be reasonably acceptable to a majority in interest of the Initiating Holders. In such event, the right of any Holder to include such Holder’s Registrable Securities in such registration shall be conditioned upon such Holder’s participation in such underwriting and the inclusion of such Holder’s Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company as provided in subsection 2.3(e)) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting. If the underwriter advises the Initiating Holders in writing that marketing factors require a limitation on the number of shares to be underwritten, then the Initiating Holders shall so advise all Holders of Registrable Securities which would otherwise be underwritten pursuant hereto, and the number of shares of Registrable Securities that may be included in the underwriting shall be allocated among all Holders of Registrable Securities, including the Initiating Holders, in proportion (as nearly as practicable) to the number of Registrable Securities owned by each Holder or in such other proportion as shall mutually be agreed to by all such selling Holders. To facilitate the allocation of shares in accordance with the above provisions, the Company or the underwriters may round the number of shares allocated to any Holder to the nearest 100 shares. Notwithstanding the foregoing, in no event shall the number of Registrable Securities included in the offering be reduced unless all other securities are first entirely excluded from the offering.

(c) The Company shall not be obligated to effect, or to take any action to effect, any registration:

(A) pursuant to this Section 2.1:

(i) during the period that is sixty (60) days before the Company’s good faith estimate of the date of filing of, and ending on a date that is one hundred eighty (180) days after the effective date of, a Company-initiated registration, provided, that the Company is actively employing in good faith reasonable best efforts to cause such registration statement to become effective;

(ii) in any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, unless the Company is already subject to service in such jurisdiction and except as may be required under the Securities Act;

(iii) after the Company has effected two registrations pursuant to this Section 2.1; or

(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 pursuant to Section 2.10; or

 

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(B) pursuant to any other provision of this Agreement, in any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, unless the Company is already subject to service in such jurisdiction and except as may be required under the Securities Act. A registration statement shall not be counted as “effected” for purposes of this Section 2.1(c) until such time as the applicable registration statement has been declared effective by the SEC (unless the Initiating Holders withdraw their request for such registration, elect not to pay the registration expenses therefor, and forfeit their right to one demand registration statement pursuant to Section 2.5, in which case such withdrawn registration statement shall be counted as “effected” for purposes of this Section 2.1(c)).

(d) Notwithstanding the foregoing, if the Company shall furnish to Holders requesting a registration statement pursuant to this Section 2.1 a certificate signed by the 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 statement to become effective or to remain effective for as long as such registration statement would otherwise be required to remain effective, because such action (x) would materially interfere with a significant acquisition, corporate reorganization or other similar transaction involving the Company, (y) would require premature disclosure of material information that the Company has a bona fide business purpose for preserving as confidential or (z) would render the Company unable to comply with requirements under the Securities Act or Exchange Act, the Company shall have the right to defer taking action with respect to such filing for a period of not more than ninety (90) days after receipt of the request of the Initiating Holders; provided, however, that the Company may not utilize this right (or any similar right granted to the Company pursuant to Section 2.10(b)) more than once in any twelve month period and provided further that the Company shall not register any securities for its own account or that of any other stockholder during such ninety (90) day period other than a registration statement relating either to the sale of securities to employees of the Company or a subsidiary pursuant to a stock option, stock purchase or similar plan or an SEC Rule 145 transaction, 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 a registration in which the only Common Stock being registered is Common Stock issuable upon conversion of debt securities that are also being registered.

2.2 Company Registration. If the Company proposes to register (including for this purpose a registration effected by the Company for stockholders other than the Holders) any of its Common Stock under the Securities Act in connection with the public offering of such securities solely for cash (other than: (i) a registration statement relating either to the sale of securities to employees of the Company or a subsidiary pursuant to a stock option, stock purchase or similar plan or an SEC Rule 145 transaction; (ii) a registration on any form which 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 (iii) a registration in which the only Common Stock being registered is Common Stock issuable upon conversion of

 

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debt securities which are also being registered), the Company shall, at such time, promptly give each Holder written notice of such registration. Upon the written request of each Holder given within twenty (20) days after mailing of such notice by the Company, the Company shall, subject to the provisions of Section 2.6, cause to be registered under the Securities Act all of the Registrable Securities that each such Holder has requested to be registered. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 2.2 prior to the effectiveness of such registration whether or not any Holder has elected to include securities in such registration. The expenses (other than Selling Expenses) of such withdrawn registration shall be borne by the Company in accordance with Section 2.5 hereof.

2.3 Obligations of the Company. Whenever required under this 2Section 2 to effect the registration of any Registrable Securities, 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 reasonable best 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 one hundred twenty (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 from selling any securities included in such registration at the request of an underwriter of Common Stock (or other securities) of the Company; and (ii) in the case of any registration of Registrable Securities on Form S-3 which 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 180 days in the aggregate, 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 provisions of the Securities Act in order to enable the disposition of all securities covered by such registration statement;

(c) furnish to the selling Holders such numbers of copies of a prospectus, including a preliminary prospectus, as required by the requirements of the Securities Act, and such other documents as the Holders may reasonably request in order to facilitate the disposition of Registrable Securities owned by them;

(d) use its reasonable best efforts to 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 selling Holders; provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions, unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act;

 

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(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 of such offering (each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement);

(f) use its reasonable best efforts to cause all such Registrable Securities covered by such registration statement to be listed on a national securities exchange or trading system and each securities exchange and trading system (if any) on which similar securities issued by the Company are then listed;

(g) provide a transfer agent and registrar for all Registrable Securities registered pursuant to this Agreement and provide a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration;

(h) promptly make available for inspection by the selling Holders, any underwriter(s) participating in any disposition pursuant to such registration statement, and any attorney or accountant or other agent retained by any such underwriter or selected by the selling Holders, all financial and other records, pertinent corporate documents, and properties of the Company, and cause the Company’s officers, directors, employees, and independent accountants to supply all information reasonably requested by any such seller, underwriter, attorney, accountant, or agent, in each case, as necessary or advisable to verify the accuracy of the information in such registration statement and to conduct appropriate due diligence in connection therewith;

(i) notify each selling Holder, promptly after the Company receives a 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; and

(j) after such registration statement becomes effective, notify each Holder of Registrable Securities covered by such registration statement of any amendment or supplement of such registration statement or prospectus, or any request by the SEC therefor.

2.4 Furnish Information. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 2 with respect to the Registrable Securities of any selling Holder that such Holder shall furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as shall be reasonably required to effect the registration of such Holder’s Registrable Securities.

2.5 Expenses of Registration. All expenses (other than Selling Expenses) incurred in connection with registrations, filings or qualifications pursuant to Section 2, including (without limitation) all registration, filing and qualification fees; printers’ and expenses; accounting fees and expenses (not to exceed $15,000 with respect to any special audit); fees and expenses of counsel for the Company; and the reasonable and customary fees and disbursements, not to exceed $35,000, of one counsel for the selling Holders (“Selling Holder Counsel”), shall be borne by the Company; provided, however, that the Company shall

 

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not be required to pay for any expenses of any registration proceeding begun pursuant to Section 2.1 or Section 2.10 if the registration request is subsequently withdrawn at the request of the Holders of a majority of the Registrable Securities to be registered (in which case all selling Holders shall bear such expenses pro rata based upon the number of Registrable Securities that were to be included in the withdrawn registration), unless the Holders of a majority of the Registrable Securities agree to forfeit their right to one demand registration pursuant to Section 2.1 or Section 2.10; provided further, however, that if at the time of such withdrawal, the Holders have learned of a material adverse change in the condition, business, or prospects of the Company from that known to the Holders at the time of their request and have withdrawn the request with reasonable promptness after learning of such information, then the Holders shall not be required to pay any of such expenses and shall retain their rights pursuant to Section 2.1 or Section 2.10. All Selling Expenses relating to Registrable Securities registered pursuant to this Section 2 shall be borne and paid by the Holders pro rata on the basis of the number of Registrable Securities registered on their behalf.

2.6 Underwriting Requirements. In connection with any offering involving an underwriting of shares of the Company’s capital stock pursuant to Section 2.2, the Company shall not be required to include any of the Holders’ Registrable Securities in such underwriting unless the Holders accept the terms of the underwriting as agreed upon between the Company and its underwriters, and then only in such quantity as the underwriters determine in their sole discretion will not jeopardize the success of the offering by the Company. If the total number of securities, including Registrable Securities, requested by stockholders to be included in such offering exceeds the amount of securities to be sold (other than by the Company) that the underwriters determine in their reasonable discretion is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such securities, including Registrable Securities, which the underwriters and the Company determine in their sole discretion will not jeopardize the success of the offering. In the event that the underwriters determine that, following the cutbacks described in the preceding sentence, less than all of the Registrable Securities requested to be registered by Holders can be included in such offering, then the Registrable Securities held by Holders that are included in such offering shall be apportioned pro rata among the selling Holders based on the number of Registrable Securities held by all selling Holders or in such other proportions as shall mutually be agreed to by all such selling Holders. To facilitate the allocation of shares in accordance with the above provisions, the Company or the underwriters may round the number of shares allocated to any Holder to the nearest 100 shares. Notwithstanding the foregoing, in no event shall (i) the number of Registrable Securities included in the offering be reduced unless all other securities (other than securities to be sold by the Company) are first entirely excluded from the offering (provided, however, that this clause (i) may be waived by Holders of 66.6% of all Registrable Securities) and (ii) the amount of securities of the selling Holders included in the offering be reduced below twenty-five percent (25%) of the total amount of securities included in such offering, unless such offering is the IPO, in which case the selling Holders may be excluded further if the underwriters make the determination described above and no other stockholder’s securities are included in such offering. For purposes of apportionment pursuant to this Section 2.6, for any selling stockholder which is a Holder of Registrable Securities and which is an investment fund, partnership, limited liability company or corporation, the partners, members, retired partners, retired members, stockholders and Affiliates of such Holder, or the estates and family members of any such partners, retired partners, members and retired members and any

 

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trusts for the benefit of any of the foregoing persons shall be deemed to be a single “selling Holder”, and any pro-rata reduction with respect to such “selling Holder” shall be based upon the aggregate amount of shares carrying registration rights owned by all entities and individuals included in such “selling Holder,” as defined in this sentence.

2.7 Delay of Registration. No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any registration pursuant to this Agreement as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 2.

2.8 Indemnification. In the event any Registrable Securities are included in a registration statement under this Section 2:

(a) To the extent permitted by law, the Company shall indemnify and hold harmless each selling Holder, and the partners, members, officers, directors and stockholders of each such selling Holder; legal counsel and accountants for each such Holder; any underwriter (as defined in the Securities Act) for each such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Securities Act or the Exchange Act, against any Violation and the Company shall pay to each such Holder, underwriter, controlling person or other aforementioned person, any legal or other expenses reasonably incurred by them in connection with investigating or defending any such claim or proceeding from which Violations may result as such expenses are incurred; provided, however, that the indemnity agreement contained in this subsection 2.8(a) shall not apply to amounts paid in settlement of any such claim or proceeding if such settlement is effected without the consent of the Company (which consent shall not be unreasonably delayed, conditioned or withheld), nor shall the Company be liable in any such case for any Violation to the extent that it arises out of or is based upon actions or omissions made in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by or on behalf of any such Holder, underwriter, controlling person or other aforementioned person.

(b) To the extent permitted by law, each selling Holder, shall severally and not jointly, indemnify and hold harmless the Company, and each of its directors, each of its officers who has signed the registration statement, each person, if any, who controls the Company within the meaning of the Securities Act, legal counsel and accountants for the Company, any underwriter (as defined in the Securities Act), any other Holder selling securities in such registration statement and any controlling person of any such underwriter or other Holder, against any Violations, in each case to the extent (and only to the extent) that such Violation arises out of or is based solely upon actions or omissions made in reliance upon and in conformity with written information furnished by or on behalf of such Holder expressly for use in connection with such registration; and each such Holder will pay to the Company and each other aforementioned person, any legal or other expenses reasonably incurred thereby in connection with investigating or defending any such claim or proceeding from which Violations may result, as such expenses are incurred; provided, however, that the indemnity agreement contained in this subsection 2.8(b) shall not apply to amounts paid in settlement of any such claim or proceeding if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably delayed, conditioned or withheld; provided, further, that, in no event shall any indemnity under this subsection 2.8(b) exceed the proceeds from the offering received by such Holder, except in the case of fraud or willful misconduct by such Holder.

 

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(c) Promptly after receipt by an indemnified party under this Section 2.8 of notice of the commencement of any action (including any governmental action) for which a party may be entitled to indemnification hereunder, such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 2.8, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in such action, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party (together with all other indemnified parties which may be represented without conflict by one counsel) shall have the right to retain one separate 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 actual or potential differing interests between such indemnified party and any other party represented by such counsel in such action. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall relieve such indemnifying party of any liability to the indemnified party under this Section 2.8 only if, and to the extent that, such failure is materially prejudicial to the indemnifying party’s ability to investigate or defend such action, but the omission to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 2.8.

(d) In order to provide for just and equitable contribution to joint liability under the Securities Act in any case in which either (i) any party otherwise entitled to indemnification hereunder makes a claim for indemnification pursuant to this Section 2.8 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 2.8 provides for indemnification in such case, or (ii) contribution under the Securities Act may be required on the part of any party hereto for which indemnification is provided under this Section 2.8, then, and in each such case, such parties will contribute to the aggregate losses, claims, damages, liabilities, or expenses to which they may be subject (after contribution from others) in such proportion as is appropriate to reflect the relative fault of each of the indemnifying party and the indemnified party in connection with the statements, omissions, or other actions that resulted in such loss, liability, claim, damage, or expense, as well as to reflect any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or allegedly untrue statement of a material fact, or the omission or alleged omission of a material fact, relates to information supplied by the indemnifying party or by the indemnified party and the parties’ relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission; provided, however, that, in any such case, (I) no such Holder will 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 (II) no Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) will be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation; and provided further that in no event shall a Holder’s liability

 

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pursuant to this Section 2.8(d), when combined with the amounts paid or payable by such Holder pursuant to Section 2.8(b), exceed the proceeds from the offering received by such Holder (net of any Selling Expenses paid by such Holder), except in the case of willful misconduct or fraud by such Holder.

(e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control.

(f) Unless otherwise superseded by an underwriting agreement entered into in connection with the underwritten public offering, the obligations of the Company and Holders under this Section 2.8 shall survive the completion of any offering of Registrable Securities in a registration statement under this Section 2, and otherwise and shall survive the termination of this Agreement.

2.9 Reports Under Exchange Act. With a view to making available to the Holders the benefits of SEC Rule 144 and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration or pursuant to a registration on Form S-3, the Company agrees to:

(a) make and keep adequate current public information available, as those terms are understood and defined in SEC Rule 144, at all times after the effective date of the registration statement filed by the Company for the IPO so long as the Company is subject to the periodic reporting requirements under Sections 13 or 15(d) of the Exchange Act;

(b) use reasonable best 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 the Company has become subject to such reporting requirements); and

(c) furnish to any Holder, so long as the Holder owns any Registrable Securities, forthwith upon request (i) to the extent accurate, a written statement by the Company that it has complied with the reporting requirements of SEC Rule 144 (at any time after sixty (60) days after the effective date of the registration statement filed by the Company for the IPO), the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), or that it qualifies as a registrant whose securities may be resold pursuant to Form S-3 (at any time after it so qualifies), (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested in availing any Holder of any rule or regulation of the SEC that permits the selling of any such securities without registration (at any time after the Company has become subject to the reporting requirements under the Exchange Act) or pursuant to Form S-3 (at any time after the Company so qualifies to use such form).

2.10 Form S-3 Registration. At any time when it is eligible to use a Form S-3 registration statement, if the Company receives from any Holder a written request or requests

 

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that the Company effect a registration on Form S-3 and any related qualification or compliance with respect to shares of Registrable Securities owned by such Holder having an anticipated offering price, net of Selling Expenses, of at least $3,000,000, the Company shall:

(a) promptly (and in any event within ten (10) business days of receipt by the Company of such written request for registration on Form S-3) give written notice of the proposed registration, and any related qualification or compliance, to all other Holders; and

(b) as soon as practicable (and in any event within forty five (45) days of receipt by the Company of such written request for registration on Form S-3), file a registration statement 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 Holder’s 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 as are specified in a written request given within 15 days after receipt of such written notice from the Company; provided, however, that the Company shall not be obligated to effect, or to take any action to effect, any such registration, qualification or compliance, pursuant to this Section 2.10: (1) if Form S-3 is not then available for such offering by the Holders; (2) 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 Form S-3 Registration to be effected at such time or remain effective for as long as such registration statement otherwise would be required to remain effective, such action (x) would materially interfere with a significant acquisition, corporate reorganization or other similar transaction involving the Company, (y) would require premature disclosure of material information that the Company has a bona fide business purpose for preserving as confidential or (z) would render the Company unable to comply with requirements under the Securities Act or Exchange Act, the Company shall have the right to defer taking action with respect to such filing for a period of not more than ninety (90) days after receipt of the request of the Initiating Holders, in which event the Company shall have the right to defer the filing of the Form S-3 registration statement for a period of not more than sixty (60) days after receipt of the request of the Holder or Holders under this Section 2.10; provided, however, that (i) the Company shall not utilize this right (or any similar right granted to the Company pursuant to Section 2.1(d)) more than once in any twelve month period and (ii) the Company shall not register any securities for the account of itself or any other stockholder during such sixty (60) day period (other than a registration relating solely to the sale of securities of participants in a Company stock plan, a registration relating to a corporate reorganization or transaction under SEC Rule 145, 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 a registration in which the only Common Stock being registered is Common Stock issuable upon conversion of debt securities that are also being registered); (3) if the Company has, within the twelve (12) month period preceding the date of such request, already effected two registrations on Form S-3 for Holders pursuant to this Section 2.10; (4) in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance; or (5) during the period that is sixty (60) days before the Company’s good faith estimate of the date of filing, and ending one hundred eighty (180) days after the effective date of, a registration statement subject to Section 2.2 hereof.

 

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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 2.10 and the Company shall include such information in the written notice referred to in Section 2.10(a). The provisions of Section 2.1(b) shall be applicable to such request (with the substitution of Section 2.10 for references to Section 2.1).

2.11 Assignment of Registration Rights. The rights to cause the Company to register Registrable Securities pursuant to this Section 2 may be assigned (but only with all related obligations) by a Holder to a transferee or assignee of such securities that (i) is a subsidiary, Affiliate, parent, partner, member, retired partner, retired member or stockholder of a Holder, (ii) is a Holder’s Immediate Family Member or trust for the benefit of an individual Holder, or (iii), after such assignment or transfer, such transferee or assignee holds the lesser of (A) at least 3,000,000 shares of Registrable Securities (subject to appropriate adjustment for stock splits, stock dividends, combinations and other recapitalizations) or (B) all shares of Registrable Securities previously held by such Holder, provided: (a) the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned; (b) such transferee or assignee agrees in writing to be bound by and subject to the terms and conditions of this Agreement, including without limitation the provisions of Section 2.14 below; and (c) such assignment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the Securities Act. For the purposes of determining the number of shares of Registrable Securities held by a transferee or assignee, the holdings of transferee or assignee (i) that is a subsidiary, parent, partner, retired partner, member, retired member or stockholder of a Holder; (ii) that is an Affiliate of the Holder, which means with respect to a limited liability company or a limited liability partnership, a fund or entity managed by the same manager or managing member or general partner or management company or by an entity controlling, controlled by, or under common control with such manager or managing member or general partner or management company, (iii) who is a Holder’s Immediate Family Member, or (iv) that is a trust for the benefit of an individual Holder or such Holder’s Immediate Family Member, shall be aggregated together and with those of the assigning Holder; provided that all assignees and transferees who would not qualify individually for assignment of registration rights shall have a single attorney-in-fact for the purpose of exercising any rights, receiving notices or taking any action under this Section 2.

2.12 “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 IPO and ending on the date specified by the Company and the managing underwriter (such period not to exceed one hundred eighty (l80) days, which period may be extended upon the request of the managing underwriter for an additional period of up to twenty (20) days if the Company issues or proposes to issue an earnings or other public release within twenty (20) days of the expiration of the 180-day lockup period) (i) lend, offer, pledge, sell, contract to sell, sell any option or contract to purchase,

 

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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 such offering, or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of such securities, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or other securities, in cash or otherwise. The foregoing provisions of this Section 2.12 shall apply only to the IPO and shall not apply to the sale of any shares to an underwriter pursuant to an underwriting agreement or to shares acquired in or following the IPO, and shall only be applicable to the Holders if all officers, directors and stockholders individually owning more than one percent (1%) of the Company’s outstanding Common Stock (after giving effect to conversion into Common Stock of all outstanding Preferred Stock) are subject to similar agreements, unless the Requisite Investors waive the requirement with respect to any such officer, director or greater than one percent (1 %) stockholder of the Company. In the event that any directors or officers, or any holders of more than one percent of the Company’s outstanding capital stock, are released from their lock-up agreements, the Company will use its best efforts to cause the underwriters to release the Investors pro rata. The Company shall also use its best efforts to cause any future holders of one percent or more of the Company’s outstanding capital stock to agree to a lock-up provision similar to this Section 2.12. The underwriters in connection with the IPO are intended third-party beneficiaries of this Section 2.12 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 2.12 or that are necessary to give further effect thereto. Any discretionary waiver or termination of the restrictions this Section 2.12 or of any or all of the agreements by the Company or the underwriters specified in the prior sentence shall apply to all Holders subject to this Section 2.12 or such agreements pro rata based on the number of shares subject to this Section 2.12 or such agreements.

In order to enforce the foregoing covenants, the Company may impose stop-transfer instructions with respect to the Registrable Securities of each Holder (and the shares or securities of every other person subject to the foregoing restriction) until the end of such period.

2.13 Restrictions on Transfer.

(a) The Preferred Stock and the Registrable Securities shall not be sold, pledged, or otherwise transferred, and the Company shall not recognize any such sale, pledge, or transfer, except upon the conditions specified in this Agreement, which conditions are intended to ensure compliance with the provisions of the Securities Act. A transferring Holder will cause any proposed purchaser, pledgee, or transferee of the Preferred Stock and the Registrable Securities held by such Holder to agree to take and hold such securities subject to the provisions and upon the conditions specified in this Agreement.

(b) Each certificate or instrument representing (i) the Preferred Stock, (ii) the Registrable Securities, and (iii) any other securities issued in respect of the securities referenced in clauses (i) and (ii), upon any stock split, stock dividend, recapitalization, merger,

 

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consolidation, or similar event, shall (unless otherwise permitted by the provisions of Section 2.13(c)) be stamped or otherwise imprinted with a legend substantially in the following form:

THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. SUCH SHARES MAY NOT BE SOLD, PLEDGED, OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR A VALID EXEMPTION FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT.

THE SECURITIES REPRESENTED HEREBY MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT BETWEEN THE COMPANY AND THE STOCKHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY.

The Holders consent to the Company making a notation in its records and giving instructions to any transfer agent of the Restricted Securities in order to implement the restrictions on transfer set forth in this Section 2.13.

(c) The holder of each certificate representing Restricted Securities, by acceptance thereof, agrees to comply in all respects with the provisions of this Section 2. Before any proposed sale, pledge, or transfer of any Restricted Securities, unless there is in effect a registration statement under the Securities Act covering the proposed transaction, the Holder thereof shall give notice to the Company of such Holder’s intention to effect such sale, pledge, or transfer. Each such notice shall describe the manner and circumstances of the proposed sale, pledge, or transfer in sufficient detail and, if reasonably requested by the Company, shall be accompanied at such Holder’s expense by either (i) a written opinion of legal counsel who shall, and whose legal opinion shall, be reasonably satisfactory to the Company, addressed to the Company, to the effect that the proposed transaction may be effected without registration under the Securities Act; (ii) a “no action” letter from the SEC to the effect that the proposed sale, pledge, or transfer of such Restricted Securities without registration will not result in a recommendation by the staff of the SEC that action be taken with respect thereto; or (iii) any other evidence reasonably satisfactory to counsel to the Company to the effect that the proposed sale, pledge, or transfer of the Restricted Securities may be effected without registration under the Securities Act, whereupon the Holder of such Restricted Securities shall be entitled to sell, pledge, or transfer such Restricted Securities in accordance with the terms of the notice given by the Holder to the Company. The Company will not require such a legal opinion or “no action” letter (x) in any transaction in compliance with SEC Rule 144 or (y) in any transaction in which such Holder distributes Restricted 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 2.13. Each certificate or instrument evidencing the Restricted Securities transferred as above provided shall bear, except if such transfer is made pursuant to SEC Rule 144, the appropriate restrictive legend set forth in Section 2.13(b), except that such certificate shall not bear such restrictive legend if, in the opinion of counsel for such Holder and the Company, such legend is not required in order to establish compliance with any provisions of the Securities Act.

 

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2.14 Termination of Registration Rights.

(a) No Holder shall be entitled to exercise any right provided for in this Section 2 after, and all such rights shall terminate upon, the earlier of (i) five (5) years following the consummation of a Qualifying Public Offering and (ii) the closing of a Deemed Liquidation Event.

(b) The rights set forth in this Section 2 shall terminate as to any shares of Registrable Securities when such shares (i) have been (1) registered under the Securities Act pursuant to an effective registration statement filed thereunder and disposed of in accordance with the registration statement covering them or (2) publicly sold pursuant to SEC Rule 144 or (ii) could be sold without restriction under SEC Rule 144 during any ninety (90) day period.

3. Information.

3.1 Delivery of Financial Statements.

(a) The Company shall deliver to each Significant Investor (or the requesting Significant Investor under Section 3.1(iv)), provided that the Board has not reasonably determined that such Significant Investor is a competitor of the Company:

(i) as soon as practicable, but in any event within thirty (30) days after the end of each fiscal year of the Company, an unaudited balance sheet as of the last day of such year, and unaudited statements of income and of cash flows for such year;

(ii) as soon as practicable after the end of each fiscal year of the Company (but in any event not later than the first to occur of (x) ten (10) days after receipt of such final report from such accountants or (y) one hundred and eighty (180) days after the end of the applicable fiscal year of the Company), a balance sheet as of the last day of such year, and statements of income and of cash flows for such year, prepared in accordance with GAAP, and audited and certified by independent public accountants of national standing selected by the Board (including the affirmative vote or consent of at least two Preferred Stock Directors), and a comparison between the actual amounts for such year and the comparable amounts for the prior year;

(iii) as soon as practicable, but in any event within thirty (30) days after the end of each fiscal quarter of each fiscal year of the Company, unaudited statements of income and of cash flows for such fiscal quarter, and an unaudited balance sheet as of the end of such fiscal quarter, all prepared in accordance with GAAP (except that such financial statements may (A) be subject to normal year-end audit adjustments and (B) not contain all notes thereto which may be required in accordance with GAAP) (such financial statements, the “Quarterly Financial Statements”), and a comparison between the actual amounts for such quarter and the comparable amounts for the prior quarter; and

(iv) Upon request by such Significant Investor, a statement showing the number of shares of each class and series of capital stock and securities convertible into or exercisable for shares of capital stock outstanding at the end of the period, the Common

 

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Stock issuable upon conversion or exercise of any outstanding securities convertible or exercisable for Common Stock and the exchange ratio or exercise price applicable thereto and number of shares of issued stock options and stock options not yet issued but reserved for issuance, if any, all in sufficient detail as to permit the Significant Investors to calculate its percentage equity ownership in the Company (such statement, the “Capitalization Table”).

(v) as soon as practicable before the end of each fiscal year, an operating plan for the next fiscal year (“Budget”); and

(vi) such other information relating to the financial condition, business, prospects or corporate affairs of the Company as the Significant Investor may from time to time reasonably request, provided, however, that the Company shall not be obligated under this subsection (a)(vii) or any other subsection of Section 3.1(a) to provide information (A) which the Company reasonably deems in good faith to be a trade secret or confidential information (unless covered by an enforceable confidentiality agreement, in form acceptable to the Company) or (B) the disclosure of which would adversely affect the attorney-client privilege between the Company and its counsel.

(b) If for any period the Company shall have 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 subsection 3.1(a) shall be the consolidated financial statements of the Company and all such consolidated subsidiaries.

(c) Notwithstanding anything else in this Section 3.1 to the contrary, the Company may cease providing the information set forth in this Section 3.1 during the sixty (60) day period before the Company’s good faith estimate of the date of filing of a registration statement effecting the IPO; provided that the Company’s covenants under this Section 3.1 shall be reinstated at such time as the Company is no longer actively employing its reasonable best efforts to cause such registration statement to become effective.

3.2 Inspection. The Company shall permit each Significant Investor (provided that the Board of Directors has not reasonably determined that such Significant Investor is a competitor of the Company), at such Significant Investor’s expense, to visit and inspect the Company’s properties, to examine its books of account and records and to discuss the Company’s affairs, finances and accounts with its officers, during normal business hours and with reasonable advance notice; provided, however, that the Company shall not be obligated pursuant to this Section 3.2 to provide access to any information which it reasonably considers to be a trade secret or confidential information or the disclosure of which would adversely affect the attorney-client privilege between the Company and its counsel.

3.3 Termination of Information, Inspection Covenants. The covenants set forth in Section 3.1 and Section 3.2 shall terminate and be of no further force or effect (i) immediately prior to the consummation of a Qualifying Public Offering, (ii) upon a Deemed Liquidation Event, or (iii) when the Company first becomes subject to the periodic reporting requirements of Section 12(g) or 15(d) of the Exchange Act, whichever event shall first occur.

 

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3.4 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 pursuant to the terms of this Agreement (including notice of the Company’s intention to file a registration statement), unless such confidential information (i) is known or becomes known to the public in general (other than as a result of a breach of this Section 3.4 by such Investor), (ii) is or has been independently developed or conceived by the Investor without use of the Company’s confidential information or (iii) 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 (a) 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, (b) to any prospective purchaser of any Registrable Securities from such Investor as long as such prospective purchaser agrees to be bound by the provisions of this Section 3.4, (c) to any 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 (d) 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. The Company acknowledges that at least some of the Investors are in the business of venture capital and private equity investing and therefore review the business plans and related proprietary information of many enterprises, including enterprises which may have products or services which are adverse to or compete directly or indirectly with those of the Company. Nothing in this Agreement shall otherwise preclude or in any way restrict any Investor or any Affiliate thereof from investing or participating in any particular enterprise whether or not such enterprise has products or services which are adverse to or compete, directly or indirectly, with those of the Company.

4. Right of First Offer.

4.1 Right of First Offer. Subject to the terms and conditions specified in this Section 4.1, and applicable securities laws, in the event the Company proposes to offer or sell any New Securities, the Company shall first make an offering of such New Securities to each Major Investor in accordance with the following provisions of this Section 4.1. A Major Investor shall be entitled to apportion the right of first offer hereby granted to it among itself and its Affiliates in such proportions as it deems appropriate.

(a) The Company shall deliver a notice (the “Offer Notice”) to each of the Major Investors stating (i) its bona fide intention to offer such New Securities, (ii) the number of such New Securities to be offered, and (iii) the price and terms, if any, upon which it proposes to offer such New Securities.

(b) By written notification received by the Company, within twenty (20) calendar days after the Offer Notice is given, each of the Major Investors may elect to purchase or obtain, at the price and on the terms specified in the Offer Notice, up to that portion of such New Securities which equals the proportion that the aggregate number of Conversion Shares then held by such Major Investor bears to the total number of shares of Common Stock of the Company then issued and outstanding (assuming the conversion of all

 

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Convertible Securities (as defined in the Certificate of Incorporation) into Common Stock and assuming the exercise of any Options (as defined in the Certificate of Incorporation) or Convertible Securities authorized for issuance under the Incentive Plans (as defined in the Certificate of Incorporation)). The Company shall promptly, in writing, inform each Major Investor that elects to purchase all the shares available to it (each, a “Fully-Exercising Investor”) of any other Major Investor’s failure to do likewise. During the fifteen (15) day period commencing after the Company has given such notice, each Fully-Exercising Investor shall have an option to purchase all or any part of the remaining unsubscribed New Securities (the “Oversubscription Right”) by delivering written notice to the Company specifying the number of additional New Securities it desires to purchase. In the event the Fully-Exercising Investors exercise their Oversubscription Right and choose to purchase a number of additional New Securities that exceeds the number of remaining unsubscribed New Securities, the remaining New Securities available for purchase under this Section 4.1(b) shall be allocated to such Major Investors pro rata based on the number of additional New Securities such Major Investors have elected to purchase.

(c) If all New Securities referred to in the Offer Notice are not elected to be purchased or obtained as provided in Section 4.1(b), the Company may, during the 120 day period following the expiration of the period provided in Section 4.1(b), offer and sell the remaining unsubscribed portion of such New Securities to any Person or Persons at a price not less than, and upon terms no more favorable to the offeree than, those specified in the Offer Notice. If the Company does not enter into an agreement for the sale of the New Securities within such period, or if such agreement is not consummated within thirty (30) days of the execution thereof, the right provided hereunder shall be deemed to be revived and such New Securities shall not be offered unless first reoffered to the Major Investors in accordance with this Section 4.1.

(d) The right of first offer in this Section 4.1 shall not be applicable to Exempted Securities (as defined in the Company’s Certificate of Incorporation).

(e) Notwithstanding any provision hereof to the contrary, in lieu of complying with the provisions of this Section 4. 1, the Company may elect to give notice to the Major Investors within five (5) business days after the issuance of New Securities. Such notice shall describe the type, price, and terms of the New Securities. Each Major Investor shall have thirty (30) days from the date notice is given to elect to purchase up to the number of New Securities that would, if purchased by such Major Investor, maintain such Major Investor’s percentage-ownership position, calculated as set forth in Section 4.1(b) before giving effect to the issuance of such New Securities and shall also have Oversubscription Rights described in Section 4.1(b).

4.2 Termination. The covenants set forth in Section 4.1 shall terminate and be of no further force or effect with respect to all Major Investors upon the earlier of: (a) immediately before the consummation of a Qualifying Public Offering or (b) a Deemed Liquidation Event. The provisions of this Section 4 may not be waived with respect to a particular Major Investor without the consent of such Major Investor.

 

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5. Additional Covenants.

5.1 Employee Agreements. The Company shall cause (i) each person hired by it or any subsidiary (or engaged by the Company or any subsidiary as a consultant/independent contractor) after the date hereof with access to confidential information and/or trade secrets to enter into a non-disclosure and proprietary rights assignment agreement substantially in the form approved by the Board and previously provided to the Investors; (ii) each Key Employee to enter into a one year non-competition and non-solicitation agreement, substantially in the form approved by the Board and previously provided to the Investors; and (iii) each key technical officer, employee and consultant to execute and deliver an assignment of inventions agreement in substantially the form approved by the Board and previously provided to the Investors. 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 the Board, including the affirmative vote or consent of at least two Preferred Stock Directors.

5.2 Employee Vesting; Equity Incentives. Unless approved by the Board, including the affirmative vote or consent of at least two Preferred Stock Directors, (i) all future employees and consultants of the Company who shall purchase, or receive options to purchase, shares of the Company’s capital stock following the date hereof shall be required to enter into stock purchase or option agreements (“Grant Agreements”) providing for (x) vesting of shares over a four-year period with the first 25% of such shares vesting following twelve (12) months of continued employment or services, and the remaining shares vesting in equal monthly installments over the following thirty-six (36) months (“Standard Vesting”), (y) a 180-day lockup period in connection with the IPO and (z) a right on the part of the Company or an assignee to repurchase at cost, upon termination of employment or engagement, with or without “cause” (to the extent permissible under applicable securities law), any unvested shares issued pursuant to a Grant Agreement and held by such employee or consultant, and (ii) the Company shall not amend any Grant Agreement with any existing employee or service provider if such amendment would result in a vesting schedule or lockup period that is less restrictive than those proposed under clauses (i)(x) and (i)(y) respectively. Unless otherwise approved by the Board, including the affirmative vote or consent of at least two Preferred Stock Directors (or the Compensation Committee of the Board, if one shall have been designated), no Grant Agreements shall provide for acceleration of vesting upon a Deemed Liquidation Event, IPO or other event.

5.3 Rights of First Refusal. The Company will grant the Investors any rights of first refusal granted to subsequent purchasers of the Company’s equity securities to the extent that such subsequent rights are superior, in the good faith determination of the Board, to those granted to the Investors pursuant to this Agreement.

5.4 Successor Indemnification. In the event that the Company or any of its successors or assigns consolidates with or merges into any other entity and shall not be the continuing or surviving corporation or entity of such consolidation or merger, then the Company shall cause proper provision to be made so that the successors and assigns of the Company assume the obligations of the Company with respect to indemnification of members of the Board as in effect immediately prior to such transaction, whether in the Company’s bylaws, Certificate of Incorporation, separate agreement, or elsewhere, as the case may be.

 

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5.5 Insurance. The Company has obtained from financially sound and reputable insurers Directors and Officers insurance in an amount of $4,000,000 and will use commercially reasonable efforts to cause such insurance policies to be maintained until such time as the Board, including at least two Preferred Stock Directors, determines that such insurance should be discontinued. The policy shall not be cancelable by the Company without prior approval of the Board, including at least two Preferred Stock Directors.

5.6 Board Committees. The Company shall offer each of the Preferred Stock Directors the opportunity to serve on each committee of the Board, provided that the Company shall not be required to offer a Preferred Stock Director the opportunity to serve on a special committee established to review transactions in which such Preferred Stock Director or the Investor that shall have the right to designate such Preferred Stock Director (or an Affiliate of such Investor) has a material interest or conflict of interest.

5.7 Expenses. The Company shall reimburse the non-employee Directors for all reasonable out-of-pocket travel expenses incurred (consistent with the Company’s travel policy) in connection with attending meetings of the Board and all committees.

5.8 Additional Registration Rights. From and after the date of this Agreement, the Company shall not, without the prior written consent of the Requisite Investors, enter into any agreement with any holder or prospective holder of any securities of the Company which would allow such holder or prospective holder (a) to include such securities in any registration unless under the terms of such agreement, such holder or prospective holder may include such securities in any such registration only to the extent that the inclusion of such securities will not reduce the amount of the Registrable Securities of the Holders that are included, (b) to demand registration of any securities held by such holder or prospective holder or (c) any other rights of registration that are in any way prior or superior to the rights granted under Section 2 of this Agreement.

5.9 Keeping of Records and Books of Account. So long as the Investors own at least 10,000,000 shares of Preferred Stock or Common Stock into which shares of Preferred Stock have been converted (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Preferred Stock), the Company shall keep, and cause each Subsidiary to keep, adequate records and books of account in which complete entries will be made in accordance with generally accepted accounting principles consistently applied, reflecting all financial transactions of the Company and any Subsidiary, and in which, for each fiscal year, all proper reserves for depreciation, depletion, returns of merchandise, obsolescence, amortization, taxes, bad debts and other purposes in connection with its business shall be made.

5.10 New Developments. So long as the Investors own at least 10,000,000 shares of Preferred Stock or Common Stock into which shares of Preferred Stock have been converted (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Preferred Stock), where reasonably practicable, the Company shall cause all technological developments, patentable or unpatentable inventions, discoveries or improvements by the Company’s or any Subsidiary’s

 

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officers, employees or consultants to be documented in accordance with the appropriate professional standards, and, where possible and deemed by management to be commercially appropriate based on the advice of legal counsel and other considerations, to file and prosecute United States and foreign patent or copyright applications relating to and protecting such developments on behalf of the Company or any Subsidiary.

5.11 Negative Covenants. So long as the Investors own at least 10,000,000 shares of Preferred Stock or Common Stock into which shares of Preferred Stock have been converted (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Preferred Stock), the Company hereby covenants and agrees with each of the Investors that it shall not, without the approval of the Board of Directors (or committee thereof) including the affirmative vote or consent of at least two Preferred Stock Directors, or if there shall not be two Preferred Stock Directors, then any two of the directors designated by any of Bessemer, JAFCO or DFJ pursuant to the Voting Agreement, if any such director has been designated:

(a) make any loan or advance to, or acquire, or permit any Subsidiary to acquire, or otherwise own, except as permitted under paragraph (d) below, whether by stock purchase, merger, asset purchase or otherwise, any stock or other securities of, any Subsidiary or other Person, unless it is wholly-owned by the Company;

(b) make, or permit any Subsidiary to make, any loan or advance to any Person (including, without limitation, any employee or director), except loans or advances to a wholly-owned Subsidiary and advances and similar expenditures to employees or in the ordinary course of business, not to exceed $100,000 in the aggregate, or under the terms of a employee stock or option plan;

(c) guarantee any indebtedness, except for trade accounts of the Company or any Subsidiary arising in the ordinary course of business;

(d) make any investment other than investments in prime commercial paper, money market funds, certificates of deposit in any United States bank having a net worth in excess of $100,000,000 or obligations issued or guaranteed by the United States of America, in each case having a maturity not in excess of two years;

(e) enter into or be a party to any transaction with any director or officer of the Company or any Subsidiary of the Company except for transactions contemplated by this Agreement or the other Transaction Agreements (as defined in the Purchase Agreement);

(f) employ, terminate the employment of, or change the compensation of any executive officer, or award compensation packages (or amend any existing packages) that provide for the potential of cash compensation in excess of $175,000 per year, the issuance of equity securities representing in excess of 0.5% of the fully diluted capitalization of the Company, provide for the issuance of options or shares to employees without Standard Vesting or for the acceleration of vesting under any circumstance;

(g) change the principal business of the Company and its Subsidiaries, taken as a whole, as of the date of this Agreement or enter new lines of business unrelated to the principal business or exit a line of business conducted by the Company as of the date of this Agreement; or

(h) sell, transfer, license, pledge or grant rights in or to intellectual property of the Company, other than licenses granted in the ordinary course of business.

 

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5.12 Anti-Bribery. The Company hereby warrants that, to its Knowledge, no Group Company, nor any officer, director or employee of a Group Company (the “Representatives”) has taken any actions in furtherance of an offer, payment, promise to pay, or authorization of the payment or giving of money, or anything else of value, to any Government Official or to any other person while knowing that all or some portion of such money or value will be offered, given or promised to a Government Official for the purpose of obtaining or retaining business or securing any improper advantage. The Company further undertakes that: (i) it will use best endeavors to establish within a commercially reasonable period of time, but in any event within one month from the date of this Agreement, sufficient internal controls and procedures to ensure that all Group Companies and the Representatives are acting in accordance with the United States Foreign Corrupt Practices Act, as amended, and United Kingdom Bribery Act 2010, if applicable; (ii) that no Group Company nor any Representative shall take any actions in furtherance of an offer, payment, promise to pay, or authorization of the payment or giving of money, or anything else of value, to any Government Official or to any other person while knowing that all or some portion of such money or value will be offered, given or promised to a Government Official for the purpose of obtaining or retaining business or securing any improper advantage; and (iii) that it will indemnify and hold the Investors harmless from and against any and all claims, losses or damages directly arising from any breach by any Group Company or Group Company Representatives of this Section 5.12.

5.13 Termination of Covenants. The covenants set forth in this Section 5, except for Section 5.3 or Section 5.8, shall terminate and be of no further force or effect upon the earliest of: (a) immediately before the consummation of a Qualifying Public Offering, (b) when the Company first becomes subject to the periodic reporting requirements of Section 12(g) or 15(d) of the Exchange Act, or (c) upon a Deemed Liquidation Event.

6. Miscellaneous.

6.1 Transfers, Successors and Assigns. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and permitted assigns 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 assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement.

6.2 Governing Law. This Agreement and any controversy or matter arising out of or relating to this Agreement shall be governed by, and construed in accordance with, the General Corporation Law of the State of Delaware as to matters within the scope thereof, and as to all other matters shall be governed by and construed in accordance with the internal laws of the Commonwealth of Massachusetts, without regard to conflict of law principles that would result in the application of any law other than the law of the Commonwealth of Massachusetts.

 

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6.3 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement may also be executed and delivered by facsimile signature and in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

6.4 Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement.

6.5 Notices. All notices, requests, and other communications given or made pursuant to this Agreement shall be in writing and shall be deemed effectively given, delivered and received (i) upon personal delivery to the party to be notified; (ii) when sent by confirmed facsimile if sent during normal business hours of the recipient; (iii) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (iv) one (1) business day after the business day of deposit with a nationally recognized overnight courier, specifying next-day delivery, with written verification of receipt. All communications shall be sent to the Company at 50 West 23rd Street, 4th Floor, New York, New York 10010 and with respect to the other parties at their addresses as set forth on Schedule A hereto, or to the principal office of the Company and to the attention of the Chief Executive Officer, in the case of the Company, or to such facsimile number or address, as subsequently modified by written notice given in accordance with this Section 6.5. If notice is given to the Company, a copy shall also be sent to Choate, Hall & Stewart, LLP, 2 International Place, Boston, Massachusetts, 02110, Attention: Brian D. Goldstein, Esq. If notice is given to DFJ, DFJ Growth or to JAFCO, a copy shall also be sent to Sorin Royer Cooper LLC, 1230 Avenue of the Americas, 7th Floor, New York, NY 10020, Attention: Jay S. Rand, Esq. If notice is given to Bessemer, a copy shall also be sent to Lowenstein Sandler LLP, 1251 Avenue of the Americas, New York, New York 10020, Attention: Edward Zimmerman, Esq./Anthony O. Pergola, Esq.

6.6 Amendments and Waivers. 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 at least 55% of the Registrable Securities then outstanding, provided that the Company may in its sole discretion waive compliance with Section 2.13(c); and provided further that any provision hereof may be waived by any waiving party on such party’s own behalf, without the consent of any other party. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each holder of any Registrable Securities then outstanding, each future holder of all such Registrable Securities, the Company, and all of their respective successors and permitted assigns. Notwithstanding the foregoing, (i) this Agreement may not be amended or terminated and the observance of any term hereunder 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, (ii) no Significant Investor’s rights under Section 3 may be waived without the consent of Significant Investors holding at least 55% of the Registrable Securities then held by all Significant Investors,

 

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provided that such waiver applies to all Significant Investors in the same fashion, (iii) no Major Investor’s rights under Section 4 may be waived without the consent of such Major Investor, and (iv) no waiver of the rights of the Investors hereunder shall require the consent of the Company. The Company shall give prompt written 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 6.6 shall be binding on all parties hereto, even if they do not execute such consent. 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.

6.7 Severability. The invalidity of unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision.

6.8 Aggregation of Stock. All shares of capital stock held or acquired by Affiliates shall be aggregated together for the purpose of determining the availability of any rights under this Agreement.

6.9 Entire Agreement. This Agreement (including the Schedules hereto) constitutes the full and entire understanding and agreement between the parties with respect to the subject matter hereof, and any other written or oral agreement relating to the subject matter hereof existing between the parties (including, without limitation, the Prior Investors’ Rights Agreement) are expressly canceled.

6.10 Transfers of Rights. Each Investor hereto hereby agrees that it will not, and may, not assign any of its rights and obligations hereunder, unless such rights and obligations are assigned by such Investor to (a) any Person to which Registrable Securities are transferred by such Investor pursuant to Sections 2.11 and 2.13 hereof, or (b) to any Affiliate of such Investor, and, in each case, such transferee shall be deemed an “Investor” for purposes of this Agreement; provided that such assignment of rights shall be contingent upon the transferee providing a written instrument to the Company notifying the Company of such transfer and assignment and agreeing in writing to be bound by the terms of this Agreement.

6.11 Delays or Omissions. No delay or omission to exercise any right, power or remedy accruing to any party under this Agreement, upon any breach or default of any other party under this Agreement, shall impair any such right, power or remedy of such non-breaching or non-defaulting party nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any party of any breach or default under this Agreement, or any waiver on the part of any party of any provisions or conditions of this Agreement, must be 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 party, shall be cumulative and not alternative.

[Remainder of Page Intentionally Left Blank]

 

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Execution Copy

IN WITNESS WHEREOF, the parties have executed this Fourth Amended and Restated Investors’ Rights Agreement as of the date first above written.

 

COMPANY:
YODLE, INC.
By:  

/s/ Court Cunningham

  Name:   Court Cunningham
  Title:   Chief Executive Officer

 

(Fourth Amended and Restated Investors’ Rights Agreement — Signature Page)


INVESTORS:
DRAPER FISHER JURVETSON FUND IX, L.P.
By:  

/s/ John Fisher

  Name:   John Fisher
  Title:   Managing Director
DRAPER FISHER JURVETSON PARTNERS IX, LLC
By:  

/s/ John Fisher

  Name:   John Fisher
  Title:   Managing Director
DRAPER ASSOCIATES, L.P.
By:  

/s/ Timothy C. Draper

  Name:   Timothy C. Draper
  Title:   General Partner
DRAPER FISHER JURVETSON GROWTH FUND 2006, L.P.
By:   Draper Fisher Jurvetson Growth Fund 2006 Partners, L.P.
Its:   General Partner
By:   DFJ Growth Fund 2006, Ltd.
Its:   General Partner
By:  

/s/ Barry Schuler

  Name:   Barry Schuler
  Title:   Director
DRAPER FISHER JURVETSON PARTNERS GROWTH FUND 2006, LLC
By:  

/s/ Barry Schuler

  Name:   Barry Schuler
  Title:  

Authorized Member

 

(Fourth Amended and Restated Investors’ Rights Agreement — Signature Page)


INVESTORS (Continued):

 

BESSEMER VENTURE PARTNERS VI L.P.
BESSEMER VENTURE PARTNERS CO-INVESTMENT L.P.
BESSEMER VENTURE PARTNERS VI INSTITUTIONAL L.P.
By:   Deer VI & Co. LLC, General Partner
By:  

/s/ J. Edmund Colloton

  Name:   J. Edmund Colloton
  Title:   Executive Manager
JAFCO TECHNOLOGY PARTNERS III, L.P.
By:  

 

  Name:   H. Joseph Horowitz
  Title:   Managing Director
  JTP Management Associates III, L.L.C.
  Its General Partner
THE HERBERT S. MADAN REVOCABLE TRUST DATED 4/23/97
By:  

 

  Name:   Herbert S. Madan, Trustee
  2269 Chestnut Street, #659
  San Francisco, CA 94123
MENTORTECH VENTURES 2005 LP

 

By:  
Title:  

 

ERIC STEIN

 

(Fourth Amended and Restated Investors’ Rights Agreement — Signature Page)


INVESTORS (Continued):

 

BESSEMER VENTURE PARTNERS VI L.P.
BESSEMER VENTURE PARTNERS CO-INVESTMENT L.P.
BESSEMER VENTURE PARTNERS VI INSTITUTIONAL L.P.
By:   Deer VI & Co. LLC, General Partner
By:  

 

  Name:   J. Edmund Colloton
  Title:   Executive Manager
JAFCO TECHNOLOGY PARTNERS III, L.P.
By:  

/s/ Thomas Mawhinney

  Name:   Thomas Mawhinney
  Title:   Managing Director
  JTP Management Associates III, L.L.C.
  Its General Partner
THE HERBERT S. MADAN REVOCABLE TRUST DATED 4/23/97
By:  

 

  Name:   Herbert S. Madan, Trustee
  2269 Chestnut Street, #659
  San Francisco, CA 94123
MENTORTECH VENTURES 2005 LP

 

By:    
Title:    

 

ERIC STEIN

 

(Fourth Amended and Restated Investors’ Rights Agreement — Signature Page)


INVESTORS (Continued):

 

BESSEMER VENTURE PARTNERS VI L.P.
BESSEMER VENTURE PARTNERS CO-INVESTMENT L.P.
BESSEMER VENTURE PARTNERS VI INSTITUTIONAL L.P.
By:   Deer VI & Co. LLC, General Partner
By:  

 

  Name:   J. Edmund Colloton
  Title:   Executive Manager
JAFCO TECHNOLOGY PARTNERS III, L.P.
By:  

 

  Name:   H. Joseph Horowitz
  Title:   Managing Director
  JTP Management Associates III, L.L.C.
  Its General Partner
THE HERBERT S. MADAN REVOCABLE TRUST DATED 4/23/97
By:  

/s/ Herbert S. Madan

  Name:   Herbert S. Madan, Trustee
  2269 Chestnut Street, #659
  San Francisco, CA 94123
MENTORTECH VENTURES 2005 LP

 

By:    
Title:    

 

ERIC STEIN

 

(Fourth Amended and Restated Investors’ Rights Agreement — Signature Page)


INVESTORS (Continued):

 

 

ANTHONY ABATE

/s/ Courtland B. Cunningham

COURTLAND B. CUNNINGHAM
COURTLAND B. CUNNINGHAM IRA
  By:   Charles Schwab & Co., Inc., as Custodian
    By:  

 

    Name:  
    Title:  

 

BOB CRAMER

 

VLTAY MAYADAS

/s/ Michael Gordon

MICHAEL GORDON

 

(Fourth Amended and Restated Investors’ Rights Agreement — Signature Page)


Execution Copy

SCHEDULE A

INVESTORS

Name and Address

Draper Fisher Jurvetson Fund IX, L.P.

2882 Sand Hill Road, Suite 150

Menlo Park, CA 94025

Draper Fisher Jurvetson Partners IX, LLC

2882 Sand Hill Road, Suite 150

Menlo Park, CA 94025

Draper Associates, L.P.

2882 Sand Hill Road, Suite 150

Menlo Park, CA 94025

Draper Fisher Jurvetson Growth Fund 2006 Partners, L.P.

2882 Sand Hill Road, Suite 150

Menlo Park, CA 94025

Draper Fisher Jurvetson Partners Growth Fund 2006, LLC

2882 Sand Hill Road, Suite 150

Menlo Park, CA 94025

Draper Associates Riskmasters Fund III, LLC

2882 Sand Hill Road, Suite 150

Menlo Park, CA 94025

Bessemer Venture Partners VI Institutional L.P.

c/o Bessemer Venture Partners

1865 Palmer Avenue, Suite 104

Larchmont, NY 10538

Bessemer Venture Partners Co-Investment L.P.

c/o Bessemer Venture Partners

1865 Palmer Avenue, Suite 104

Larchmont, NY 10538

Bessemer Venture Partners VI L.P.

c/o Bessemer Venture Partners

1865 Palmer Avenue, Suite 104

Larchmont, NY 10538


JAFCO Technology Partners III, L.P.

505 Hamilton Avenue, Suite 310

Palo Alto, CA 94301

Attn: Takenor Sanami

Eric Stein

2284 Bryant Street

Palo Alto, CA 94301

Mentortech Ventures 2005, LP

229 Glenn Road

Ardmore, PA 19003

Court Cunningham

1435 Lexington Ave., Apt. 60

New York, NY 10128

Charles Schwab & Co., Inc., as custodian for

Courtland B. Cunningham IRA

211 Main Street

San Francisco, CA 94105

Attn: Alternative Investment Custody Svcs.

Anthony Abate

2 Halsey Avenue

Wellesley, MA 02482

Bob Cramer

19 Autumn Lane

Wayland, MA 01778

Vijay Mayadas

233 East 86th Street, #18A

New York, NY 10028

The Herbert S. Madan Revocable Trust Dated 4/23/97

2269 Chestnut Street, #659

San Francisco, CA 94123

Michael Gordon

1170 Fifth Avenue

New York, NY 10029


EX-10.3

Exhibit 10.3

THIS AGREEMENT OF LEASE (this “Lease”), made as of this 23rd day of October, 2008 by and between Matana LLC, having an office do The Moinian Group, 530 Fifth Avenue, Suite 1800, New York, New York 10036 (“Landlord”) and Yodle, Inc. having an office at 50 West 23rd Street, New York, New York (“Tenant”).

1. BASIC LEASE TERMS.

A. Definitions. The following definitions contained in this subsection A of this Article 1 shall have the meanings hereinafter set forth used throughout this Lease and the Exhibits and Schedules (if any) annexed hereto and made a part hereof.

(i) “Base Tax Year” shall mean the Tax Year (as defined in Article 28 hereof) beginning July 1, 2008 and expiring June 30, 2009.

(ii) “Broker(s)” shall mean CB Richard Ellis, Inc. and Newmark Knight Frank, acting as building agent.

(iii) “Building” the building known as 50 West 23rd Street, County, City and State of New York.

(iv) “Commencement Date” shall mean the later of (i) mutual execution and delivery of this Lease and (ii) delivery of Premises to Tenant with substantial completion of Landlord’s Initial Construction.

(v) “Expiration Date” shall mean the date that is the six (6) year and one (1) month anniversary of the Rent Commencement Date.

(vi) “Landlord’s Initial Construction” shall mean the work and installations at the Premises as set forth in Exhibit “C” annexed hereto and made a part hereof.

(vii) Intentionally omitted.

(viii) “Permitted Uses” shall mean executive and administrative offices for general business purposes and uses directly ancillary thereto and for no other purpose.

(ix) “Premises” shall mean a portion of the fourth (4th) floor in the Building, as more particularly shown on Exhibit A annexed hereto and made a part hereof

(x) “Real Property” shall mean the Building together with the plot of land upon which such building stands.

(xi) “Rent” shall mean the rent schedule attached in Exhibit H.

(xii) “Rent Commencement Date” shall mean the later of (i) ninety (90) days after the Commencement Date and (ii) March 1, 2009.

(xiii) “Security Deposit” shall mean the sum of $490,000.00

(xiv) “Tenant’s Proportionate Share” shall mean 6.72%.

Notwithstanding anything to the contrary contained in this subsection A of this Article 1, Articles 1 through 46 of this Lease shall control the rights and obligations of the parties hereto.

B. Demise. Subject to and upon the terms and conditions of this Lease, Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord, the Premises.

C. Term. This Lease shall be for a term (the “Term”) which commences on the Commencement Date and ends on the Expiration Date, unless sooner terminated pursuant to any of the terms, covenants or conditions of this Lease or pursuant to law. In the event that the date set forth above for the Commencement Date is not a date certain, then within ten (10) days of Landlord’s request, Tenant and Landlord shall join in the execution of an agreement stipulating the Commencement Date, the Rent Commencement Date and the Expiration Date of this Lease. The failure of the Tenant to execute such agreement shall constitute an event of default hereunder; provided however, such failure to execute such agreement shall not affect the effectiveness of the terms and provisions hereof.


D. Rent. Commencing as of the Rent Commencement Date, and continuing throughout the Term, Tenant shall pay Landlord the annual Rent set forth in Subsection A of this Article 1, payable without demand, on or in advance of the first day of each month in equal monthly installments, in lawful money (legal tender for public or private debts) of the United States of America, at the office of Landlord or such other place as Landlord may designate from time to time without any set-off, offset, abatement or deduction whatsoever except as otherwise set forth in this Lease, and except that Tenant shall pay the first (1st) monthly installment, in the form of check, upon Tenant’s execution of this Lease. If the Rent Commencement Date occurs on a date other than the first day of a calendar month, Tenant shall pay to Landlord on or before the first day of the next month when annual Rent is due the monthly installment of Rent for such partial month on a pro rata basis (based on the actual number of days in the commencement month), and the first month’s rent paid by Tenant as described above shall be applied to the first full calendar month of the Term for which Rent shall be due and payable. Such payment, together with the sum paid by Tenant as first month’s Rent upon the execution of this Lease, shall constitute payment of the Rent for the period from the Rent Commencement Date to and including the last day of the next succeeding calendar month.

Notwithstanding anything to the contrary herein, if the Landlord has not delivered the Premises to Tenant with Landlord’s Initial Construction “substantially complete” on or before December 1, 2008, Tenant shall receive a day for day rent abatement of the annual base rent for each day after December 15, 2008 to January 14, 2009 that the Premises are not so delivered to Tenant and thereafter a two (2) day rent abatement of the annual base rent for each day after January 15, 2009 that the Premises are not so delivered to Tenant. “Substantially Complete” or “substantial completion” shall mean that Landlord shall have completed materially all of Landlord’s Initial Construction except for details of construction and decoration which are insubstantial or minor in character, the non-competition of which shall not materially interfere with Tenant’s initial construction of the Premises or Tenant’s use of the Premises (“Punchlist Items”).

E. Rent Credit. Notwithstanding anything to the contrary hereinabove set forth, provided this Lease is in full force and effect and Tenant is not in material monetary default under this Lease, Tenant shall be entitled to a credit against the Rent for the period from the Commencement Date through the Rent Commencement Date as well as a rent credit for the month of November 2009. Notwithstanding the foregoing to the contrary, Tenant shall pay for its electrical usage in the Premises from and after the Commencement Date as provided in Section 29.H of this Lease.

2. USE AND OCCUPANCY.

A. Permitted Uses. Tenant shall use and occupy the Premises for the Permitted Uses, and for no other purpose.

B. Use Prohibitions. Anything contained herein to the contrary notwithstanding, Tenant shall not use the Premises or any part thereof, or permit the Premises or any part thereof to be used, (i) for the business of photographic, multilith or multigraph reproductions or offset printing, (ii) as an employment agency, labor union office, physician’s or dentist’s office or for the rendition of any other diagnostic or therapeutic services, dance or music studio, school (except for the training of employees of Tenant), (iii) for a public stenographer or typist, (iv) for a telephone or telegraph agency, telephone or secretarial service for the public at large, (v) for a messenger service for the public at large, (vi) gambling or gaming activities, obscene or pornographic purposes or any sort of commercial sex establishment, (vii) for the possession, storage, manufacture or sale of alcohol, drugs or narcotics, (viii) for the offices or business of any federal, state or municipal agency or any agency of any foreign government or (ix) for a security or guard service, or any other business for which Landlord would not normally rent space for. If any provision of this Lease permits, in whole or in part, use involving fabrication of any product or assembly of components of any product or the sale of any product or service, such use is only permitted to the extent lawful under the present certificate of occupancy for the Building and under laws, ordinances, regulations, rules and orders of any governmental body

 

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having jurisdiction over the Premises, from time to time in effect. The provisions of this Article shall be binding upon Tenant’s successors, assigns, subtenants and licensees and shall not be waived by any consent to an assignment or subletting or otherwise except by written instrument expressly referring to this Article. Nothing in this subsection B shall preclude Tenant from using any part of the Premises for photographic, multilith or multigraph reproductions in connection with, either directly or indirectly, its own business and/or activities. Tenant shall have access to the Premises twenty-four (24) hours per day, seven (7) days per week.

3. ALTERATIONS.

A. Alterations Within Premises. Tenant shall not make or perform or permit the making or performance of, any alterations, installations, improvements, additions or other physical changes in or about the Premises (“Alterations”) without Landlord’s prior consent except that Tenant shall have the right to make decorative changes or non-structural alterations to the Premises costing less than $50,000 without Landlord’s consent but on prior notice to Landlord. Subject to the prior written consent of Landlord which consent shall not be unreasonably withheld, conditioned or delayed, and to the provisions of this Article, Tenant, at Tenant’s expense, may make Alterations in or to the interior of the Premises which are nonstructural, do not affect the Building’s mechanical, electrical, plumbing, Class E or other Building systems or the structural integrity of the Building, do not affect any part of the Building other than the Premises, do not affect any service required to be furnished by Landlord to Tenant or to any other tenant or occupant of the Building, do not reduce the value or utility of the Building and which are performed only by contractors and mechanics first reasonably approved by Landlord and in compliance with all applicable laws. Tenant shall not perform work which would (i) require changes to the structural components of the Building or the exterior design of the Building, (ii) require any material modification to the Building’s mechanical, electrical, plumbing installations or other Building installations outside the Premises, (iii) not be in compliance with all applicable laws, rules, regulations and requirements of any governmental department having jurisdiction over the Building and/or the construction of the Premises, including but not limited to, the Americans with Disabilities Act of 1990, or (iv) be incompatible with the Certificate of Occupancy for the Building. Except as otherwise provided in Section 6.A of this Lease, any changes required by any governmental department affecting the construction of the Premises shall be performed at Tenant’s sole cost and except that Tenant shall not be required to perform or pay for any changes required by any governmental department affecting the construction of the Premises unless same are necessary due to any Tenant Alterations (but not Landlord’s Initial Construction) or due to Tenant’s particular manner of use of the Premises. All Alterations requested by Tenant except Landlord’s Initial Construction shall be done at Tenant’s expense and at such times and in such manner as Landlord may from time to time reasonably designate pursuant to the conditions for Alterations prescribed by Landlord for the Premises. A copy of the current construction conditions and requirements for tenant alteration work and new construction is annexed hereto as Exhibit “E” and made a part hereof. To the extent any Alterations require Landlord’s consent, Landlord shall respond to such a request within ten (10) days after Landlord’s receipt of Tenant’s notice for approval of same to Landlord. If no response is received in such ten (10) day period, Tenant shall send Landlord an additional notice and if no response is received from Landlord within five (5) days after Landlord’s receipt of Tenant’s second request, Landlord’s consent shall be deemed given and Tenant may proceed with its proposed changes or alterations without hindrance from Landlord provided that Tenant has delivered a copy of both the initial request for consent and the second notice to Landlord’s Property Manager as follows: “Newmark Knight Frank, 545 5th Avenue, Suite 409, New York, N.Y. 10017, Attn: Alphie Toro.”

B. Restoration of Premises. All furniture, furnishings and movable fixtures and removable partitions installed by Tenant must be removed from the Premises by Tenant, at Tenant’s expense, prior to the Expiration Date. All Alterations in and to the Premises which may be made by Landlord or Tenant prior to and during the Term, or any renewal thereof, shall become the property of Landlord upon the Expiration Date or earlier end of the Term or any renewal thereof, and shall not be removed from the Premises by Tenant unless Landlord, at Landlord’s option by notice to Tenant prior to the Expiration Date, elects to have them removed from the Premises by Tenant, in which event the same shall be removed from the Premises by Tenant, at Tenant’s expense, prior to the Expiration Date except that in no event shall Tenant be required to remove any part of Landlord’s Initial Construction or improvements that existed in

 

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the Premises prior to the Commencement Date. In the event Landlord elects to have Tenant remove such Alterations, Tenant shall repair and restore in a good and workmanlike manner to Building standard original condition (reasonable wear and tear excepted) any damage to the Premises or the Building caused by such removal. Any of such Alterations or other property not so removed by Tenant at or prior to the Expiration Date or earlier termination of the Term shall become the property of Landlord, but nothing herein shall be deemed to relieve Tenant of responsibility for the cost of removal of any such Alterations or other property which Tenant is obligated to remove hereunder.

C. Chlorofluorocarbons. Prior to the Commencement Date, Landlord shall deliver an ACP-5 to Tenant. Landlord shall remediate any chlorofluorocarbons (CFC’s”) that are prohibited under the Clean Air Act (42 U.S.C. 7401 et seq.) (the “Prohibited CFC’s”) and any asbestos in the Premises at Landlord’s sole cost and expense prior to the Commencement Date and shall indemnify Tenant and hold Tenant harmless from any liability or damages from contamination as a result of any Prohibited CFC’s or asbestos existing at the Premises prior to the Commencement Date. Tenant agrees to use only non-prohibited CFC’s on any repairs to any equipment using CFC’s on the Premises to the extent such repairs are the responsibility of the Tenant under the terms of this Lease and such repairs shall be done in conformance with all laws. Tenant shall indemnify and hold Landlord harmless from any liability or damages resulting from Tenant’s failure to comply with the provisions of this Section 3.C.

D. Submission of Plans. Prior to making any Alterations that require Landlord’s consent, Tenant (i) shall submit to Landlord or to a consultant appointed by Landlord (“Landlord’s Consultant”) detailed plans and specifications (including layout, architectural, mechanical, electrical, plumbing, Class E sprinkler and structural drawings stamped by a professional engineer or architect licensed in the State of New York) for each proposed Alteration and shall not commence any such Alteration without first obtaining Landlord’s approval of such plans and specifications, (ii) shall pay to Landlord all reasonable, out of pocket costs and expenses incurred by Landlord (including the cost of Landlord’s Consultant) in connection with Landlord’s review of Tenant’s plans and specifications, (iii) shall, at its expense, obtain all permits, approvals and certificates required by any governmental or quasi-governmental bodies, and (iv) shall furnish to Landlord evidence that Tenant, and Tenant’s contractors and subcontractors engaged in connection with such Alterations, are carrying such insurance as Landlord may require, as more particularly set forth in Exhibit “E” annexed hereto and made a part hereof. Notwithstanding anything to the contrary herein, nothing herein shall require Tenant to pay any costs or expenses or obtain any approvals or permits with respect to Landlord’s Initial Construction. Upon completion of such Alteration, Tenant, at Tenant’s expense, shall obtain certificates of final approval of such Alteration, including the “as-built” drawings showing such Alterations, required by any governmental or quasi-governmental bodies and shall furnish Landlord with copies thereof. All Alterations shall be made and performed in accordance with the Rules and Regulations (hereinafter defined) and in accordance with the Americans with Disabilities Act of 1990, as amended, including but not limited to the accessibility provisions thereof; all materials and equipment to be incorporated in the Premises as a result of all Alterations shall be new and first quality; no such materials or equipment shall be subject to any lien, encumbrance, chattel mortgage or title retention or security agreement. Tenant agrees to allow Landlord’s designated contractor to bid on any Alterations to be performed by or on behalf of Tenant. Landlord’s approval of Tenant’s plans, specifications and working drawings for Alterations shall create no responsibility or liability on the part of Landlord with respect to their completeness, design, sufficiency or compliance with all applicable laws, rules or regulations of governmental agencies or authorities.

E. Mechanics’ Liens; Labor Conflicts. Any mechanic’s lien filed against the Premises, or the Real Property, for work claimed to have been done for, or materials claimed to have been furnished to, Tenant, shall be discharged by Tenant within thirty (30) days thereafter, at Tenant’s expense, by payment or filing the bond required by law. Tenant shall not, at any time prior to or during the Term, directly or indirectly employ, or permit the employment of, any contractor, service provider, mechanic or laborer in the Premises, whether in connection with any Alterations, cleaning services or otherwise, if, in Landlord’s sole discretion, such employment will interfere or cause any conflict with other contractors, service providers, mechanics, or laborers engaged in the construction, cleaning, maintenance or operation of the Building by Landlord, Tenant or others. In the event of any such interference or conflict, Tenant, upon demand of Landlord, shall cause all contractors, service providers, mechanics or laborers causing such interference or conflict to leave the Building immediately.

 

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4. REPAIRS. Landlord shall maintain and repair the public portions of the Building, both exterior and interior to keep the same in first class condition. Tenant shall, throughout the Term, take good care of the Premises and the fixtures and appurtenances therein and at Tenant’s sole cost and expense, make all nonstructural repairs thereto as and when needed to preserve them in good working order and condition, reasonable wear and tear and damage for which Tenant is not responsible under the terms of this Lease excepted and except that Tenant shall not be required to make any repairs to any building systems or areas outside the Premises unless the same are required due to damage thereto caused by the Tenant. Tenant shall pay Landlord for all replacements to the lamps, tubes, ballasts and starters in the lighting fixtures installed in the Premises. Notwithstanding the foregoing, all damage or injury to the Premises or to any other part of the Building, or to its fixtures, equipment and appurtenances, whether requiring structural or nonstructural repairs, caused by or resulting from the carelessness, omission, neglect or improper conduct of, or Alterations made by, or any work, labor, service or equipment done for or supplied to, Tenant or any subtenant, or the installation, use or operation of any property or equipment by Tenant or any of Tenant’s subtenants, agents, employees, invitees or licensees, shall be repaired promptly by Tenant, at its sole cost and expense, to the satisfaction of Landlord. Tenant also shall repair all damage to the Building and the Premises caused by the moving of Tenant’s fixtures, furniture or equipment. All the aforesaid repairs shall be of quality and class equal to the original work or construction and shall be made in accordance with the provisions of Article 3 hereof. If Tenant fails after ten (10) days written notice to proceed with due diligence to make repairs required to be made by Tenant hereunder or if Landlord elects to make any repairs in or to the Building or the facilities and systems thereof for which Tenant is responsible, the same may be made by Landlord, at the expense of Tenant, and the expenses thereof incurred by Landlord shall be collectible by Landlord as additional rent promptly after rendition of a bill or statement therefor. Tenant shall give Landlord prompt notice of any defective condition in the Premises for which Landlord may be responsible hereunder. Except as expressly provided in this Lease, there shall be no allowance to Tenant for a diminution of rental value and no liability on the part of Landlord by reason of inconvenience, annoyance or injury to business arising from Landlord, Tenant or others making, or failing to make, any repairs, alterations, additions or improvements in or to any portion of the Building, or the Premises, or in or to fixtures, appurtenances, or equipment thereof. If the Premises be or become infested with vermin, Tenant, at Tenant’s expense, shall cause the same to be exterminated from time to time to the reasonable satisfaction of Landlord and shall employ such exterminators and such exterminating company or companies as shall be approved by Landlord. The water and wash closets and other plumbing fixtures shall not be used for any purposes other than those for which they were designed or constructed, and no sweepings, rubbish, rags, acids or other substances shall be deposited therein. If at any time any windows of the Premises are temporarily closed, darkened or bricked-up for any reason whatsoever including, but not limited to, Landlord’s own acts, or any of such windows are permanently closed, darkened or bricked-up if required by law or related to any construction upon property adjacent to the Real Property by Landlord or others, Landlord shall not be liable for any damage Tenant may sustain thereby and Tenant shall not be entitled to any compensation therefore nor abatement of Rent nor shall the same release Tenant from its obligations hereunder nor constitute an eviction provided such obstruction to the windows is not due to Landlord voluntarily allowing such obstruction for reasons other than the safety of the Building or to comply with Law.

5. WINDOW CLEANING. Tenant shall not clean, nor require, permit, suffer or allow any window in the Premises to be cleaned, from the outside in violation of Section 202 of the Labor Law, or any other applicable law, or of the rules of the Board of Standards and Appeals, or of any other board or body having or asserting jurisdiction. Landlord shall clean the exterior of the windows pursuant to its Building standards but in no event less than lx per year.

6. REQUIREMENTS OF LAW; FLOOR LOAD.

A. Requirements of Law. Tenant, at Tenant’s sole expense, shall promptly comply with all present and future laws, statutes, orders, directives and regulations of federal, state, county, city and municipal authorities, departments, bureaus, boards, agencies, commissions and other sub-divisions thereof, and of any official thereof and any other governmental and quasi-public

 

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authority and all rules, orders, regulations or requirements of the New York Board of Fire Underwriters, or any other similar body which shall now or hereafter impose any violation, order or duty upon Landlord or Tenant with respect to the Premises as a result of the particular use, occupation or alteration thereof by Tenant and except that, notwithstanding anything to the contrary in this Lease, Tenant shall not be required to make any structural repairs, alterations or replacements to the Premises or any part of the Building or to the Building systems or sprinklers unless the same is required due solely to Tenant’s acts or omissions. Tenant shall not do or permit to be done any act or thing upon the Premises which is contrary to and will invalidate or be in conflict with any public liability, fire or other policies of insurance at any time carried by or for the benefit of Landlord with respect to the Building and fixtures and property therein, or which shall or might subject Landlord to any liability or responsibility to any person or for property damage. Tenant shall not do, or permit anything to be done in or upon the Premises, or bring or keep anything therein, except as now or hereafter permitted by the New York City Fire Department, New York Board of Fire Underwriters, New York Fire Insurance Rating Organization or other authority having jurisdiction and then only in such quantity and manner as not to increase the insurance rate applicable to the Building, or use the Premises in a manner which shall increase the rate of fire insurance on the Building or on property located therein, over that in similar type buildings or in effect prior to this Lease. If by reason of Tenant’s failure to comply with the provisions of this Article, the fire insurance rate shall at the beginning of this Lease or at any time thereafter be higher than it otherwise would be, then Tenant shall reimburse Landlord, as additional rent hereunder, for that part of all fire insurance premiums thereafter paid by Landlord which shall have been charged because of such failure of use by Tenant, and shall make such reimbursement upon the first day of the month following such outlay by Landlord. In any action or proceeding wherein Landlord and Tenant are parties, a schedule or “make up” of rates for the Building or the Premises issued by the New York Fire Insurance Rating Organization, or other body fixing such fire insurance rates, shall be conclusive evidence of the facts therein stated and of the several items and charges in the fire insurance rates then applicable to the Premises. Any work or installations made or performed by or on behalf of Tenant or any person claiming through or under Tenant pursuant to this Article shall be made in conformity with, and subject to the provisions of, Article 3 hereof.

B. Floor Load. Tenant shall not place a load upon any floor of the Premises exceeding the floor load per square foot area that such floor was designed to carry and which is allowed by law. Landlord reserves the right to prescribe the weight and position of all safes, business machines and heavy equipment and installations such that the same are placed and maintained by Tenant, at Tenant’s expense, in settings sufficient in Landlord’s judgment to absorb and prevent vibration, noise and annoyance. Tenant shall not move any safe, heavy machinery, heavy equipment, freight, bulky matter or fixtures into or out of the Building without Landlord’s prior consent and payment to Landlord of Landlord’s costs in connection therewith. If such safe, machinery, equipment, freight, bulky matter or fixtures requires special handling, Tenant agrees to employ only persons holding a Master Rigger’s License to do said work, and that all work in connection therewith shall comply with the Administrative Code of the City of New York and all other laws and regulations applicable thereto, and shall be done during such hours as Landlord may designate.

7. SUBORDINATION.

A. Subordination. This Lease is subject and subordinate to each and every trust indenture and mortgage (collectively the “Mortgages”) which may now or hereafter affect the Real Property, the Building, and to all renewals, extensions, supplements, amendments, modifications, consolidations, and replacements thereof or thereto, substitutions therefore and advances made thereunder. This clause shall be self-operative and no further instrument of subordination shall be required to make the interest of any lessor under a Superior Lease, or trustee or mortgagee of a Mortgage superior to the interest of Tenant hereunder. In confirmation of such subordination, however, Tenant shall execute promptly any certificate that Landlord may request. Tenant covenants and agrees that, except as expressly provided herein, Tenant shall not do anything that would constitute a default under any Mortgage, or omit to do anything that Tenant is obligated to do under the terms of this Lease so as to cause Landlord to be in default under any of the foregoing. If, in connection with the financing of the Real Property, the Building, any lending institution shall request reasonable modifications of this Lease, provided such modifications do not increase the obligations or and adversely affect the rights of Tenant

 

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under this Lease, Tenant covenants to make such modifications. The Landlord shall request and use commercially reasonable efforts to obtain from its lender a subordination, non-disturbance and attomment agreement (“SNDA”) in the lender’s usual form; provided however that the Landlord’s failure to obtain an SNDA shall not constitute a default under this Lease by the Landlord nor shall the terms and provisions of this Lease be affected thereby; and further provided that any costs incurred by Landlord in obtaining such SNDA shall be paid by Tenant immediately upon demand, the failure to pay such costs shall be deemed an Event of Default (as such term is defined herein).

B. Attornment. If at any time prior to the expiration of the Term, any Mortgage shall be foreclosed or any Superior Lease shall terminate or be terminated for any reason, Tenant agrees, at the election and upon demand of any owner of the Real Property or the Building, or the lessor under any such Superior Lease, or of any mortgagee in possession of the Real Property or the Building, to attorn, from time to time, to any such owner, lessor or mortgagee, upon the then executory terms and conditions of this Lease, for the remainder of the term originally demised in this Lease, provided that such owner, lessor or mortgagee, as the case may be, or receiver caused to be appointed by any of the foregoing, shall not then be entitled to possession of the Premises. The provisions of this subsection B shall inure to the benefit of any such owner, lessor or mortgagee, shall apply notwithstanding that, as a matter of law, this Lease may terminate upon the termination of any such Superior Lease, and shall be self-operative upon any such demand, and no further instrument shall be required to give effect to said provisions. Tenant, however, upon demand of any such owner, lessor or mortgagee, agrees to execute, from time to time, instruments in confirmation of the foregoing provisions of this subsection B, satisfactory to any such owner, lessor or mortgagee, acknowledging such attomment and setting forth the terms and conditions of its tenancy. Nothing contained in this subsection B shall be construed to impair any right otherwise exercisable by any such owner, lessor or mortgagee.

8. RULES AND REGULATIONS. Tenant and Tenant’s employees, agents, visitors and licensees shall observe faithfully, and comply strictly with, the Rules and Regulations annexed hereto and made a part hereof as Exhibit “B” and such other and further reasonable Rules and Regulations as Landlord or Landlord’s agents may from time to time adopt (collectively, the “Rules and Regulations”) on such notice to be given as Landlord may elect. Nothing in this Lease contained shall be construed to impose upon Landlord any duty or obligation to enforce the Rules and Regulations or terms, covenants or conditions in any other lease, against any other tenant and Landlord shall not be liable to Tenant for violation of the same by any other tenant, its employees, agents, visitors or licensees. Notwithstanding anything in this Lease to the contrary, the Rules and Regulations will not be discriminatorily enforced.

9. INSURANCE.

A. Liability Insurance. Tenant shall obtain at its own expense and keep in full force and effect during the Term, a policy of commercial general liability insurance (including, without limitation, insurance covering Tenant’s contractual liability under this Lease), under which Tenant is named as the insured, and Landlord, Landlord’s managing agent, the present and any future mortgagee of the Real Property or the Building and/or such other designees specified by Landlord from time to time, are named as additional insureds. Such policy shall contain a provision that no act or omission of Tenant shall affect or limit the obligation of the insurance company to pay the amount of any loss sustained. Such policy shall also contain a provision which provides the insurance company will not cancel or refuse to renew the policy, or change in any material way the nature or extent of the coverage provided by such policy, without first giving Landlord at least thirty (30) days written notice by certified mail, return receipt requested, which notice shall contain the policy number and the names of the insureds and policy holder. The minimum limits of liability shall be a combined single limit with respect to each occurrence in an amount of not less than $4,000,000 for injury (or death) and damage to property or such greater amount as Landlord may, from time to time, reasonably require. Such coverage may be maintained by a combined single limit policy in the amount of $3,000,000.00 and an “umbrella” or excess coverage policy in the amount of $9,000,000.00. Tenant shall also maintain at its own expense during the Term a policy of workers’ compensation insurance providing statutory benefits for Tenant’s employees and employer’s liability. Tenant shall provide to Landlord upon execution of this Lease and at least thirty (30) days prior to the termination of any existing policy, a certificate evidencing the effectiveness of the insurance policies required to be

 

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maintained hereunder which shall include the named insured, additional insured, carrier, policy number, limits of liability, effective date, the name of the insurance agent and its telephone number. Tenant shall provide Landlord with a complete copy of any such policy upon written request of Landlord. Tenant shall have no right to obtain any of the insurance required hereunder pursuant to a blanket policy covering other properties unless the blanket policy contains an endorsement that names Landlord, Landlord’s managing agent and/or designees specified by Landlord from time to time, as additional insureds, references the Premises, and guarantees a minimum limit available for the Premises equal to the amount of insurance required to be maintained hereunder. Each policy required hereunder shall contain a clause that the policy and the coverage evidenced thereby shall be primary with respect to any policies carried by Landlord, and that any coverage carried by Landlord shall be excess insurance. The limits of the insurance required under this subsection shall not limit the liability of Tenant under this Lease. All insurance required to be carried by Tenant pursuant to the terms of this Lease shall be effected under valid and enforceable policies issued by reputable and independent insurers permitted to do business in the State of New York, and rated in Best’s Insurance Guide, or any successor thereto (or if there be none, an organization having a national reputation) as having a general policyholder rating of “A-” and a financial rating of at least “10”. In the event that Tenant fails to continuously maintain insurance as required by this subsection, Landlord may, at its option and without relieving Tenant of any obligation hereunder, order such insurance and pay for the same at the expense of Tenant provided Landlord first gives Tenant notice and five (5) days to cure said failure. In such event, Tenant shall repay the amount expended by Landlord, with interest thereon, immediately upon Landlord’s written demand therefor.

B. All-Risk Insurance. Tenant shall also maintain at its own expense during the Term a policy against fire and other casualty on an “all risk” form covering all Alterations, construction and other improvements installed within the Premises, whether existing in the Premises on the date hereof or hereinafter installed by or on behalf of Landlord or Tenant, and on all furniture, fixtures, equipment, personal property and inventory of Tenant located in the Premises and any property in the care, custody and control of Tenant (fixed or otherwise) sufficient to provide 100% full replacement value of such items, which policy shall otherwise comply with the provisions of subsections A and C of this Article 9.

C. Waiver of Subrogation. The parties hereto shall procure an appropriate clause in, or endorsement on, any “all-risk” property insurance covering the Premises and the Building, including its respective Alterations, construction and other improvements as well as personal property, fixtures, furniture, inventory and equipment located thereon or therein, pursuant to which the insurance companies waive subrogation or consent to a waiver of right of recovery, and each party hereby agrees that it will not make any claim against or seek to recover from the other or the partners, directors, officers, shareholders or employees of such party for any loss or damage to its property or the property of others resulting from fire or other hazards covered by such “all-risk” property insurance policies to the extent that such loss or damage is actually recoverable under such policies exclusive of any deductibles. Such waiver will not apply should any loss or damage result from one of the parties’ gross negligence or willful misconduct. If the payment of an additional premium is required for the inclusion of such waiver of subrogation provision, each party shall advise the other of the amount of any such additional premiums and the other party shall pay the same. It is expressly understood and agreed that Landlord will not carry insurance on the Alterations, construction and other improvements presently existing or hereafter installed within the Premises or on Tenant’s fixtures, furnishings, equipment, personal property or inventory located in the Premises or insurance against interruption of Tenant’s business.

10. DESTRUCTION OF THE PREMISES; PROPERTY LOSS OR DAMAGE.

A. Repair of Damage. If the Premises or any part thereof shall be damaged by fire or other casualty, Tenant shall give immediate notice thereof to Owner and this Lease shall continue in full force and effect except as hereinafter set forth. If the Premises shall be damaged by fire or other casualty, then the Premises shall be repaired and restored to its condition preceding the damage in accordance with the provisions of this Article 10. Whenever in this Article 10 reference is made to restoration of the Premises, (i) Tenant’s obligation shall be as to all property within the Premises including Tenant’s furniture, fixtures, equipment and other personal property, any and all Alterations, construction or other improvements made to the

 

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Premises by or on behalf of Tenant and any other leasehold improvements existing in the Premises on the date hereof, all of which shall be restored and replaced at Tenant’s sole cost and expense and (ii) Landlord’s obligation, if any, shall be as to the shell, which constitutes the structure of the Building and the mechanical, electrical, plumbing, air-conditioning and other building-wide systems up to the point of connection into the Premises. Landlord shall have no liability to Tenant, and Tenant shall not be entitled to terminate this Lease, if such repairs and restoration are not in fact completed within Landlord’s estimated time period, so long as Landlord shall have proceeded with reasonable due diligence. The Rent until such repairs shall be made shall be reduced in the proportion which the area of the part of the Premises which is not usable by Tenant bears to the total area of the Premises; provided, however, should Tenant reoccupy a portion of the Premises for the conduct of its business prior to the date such repairs are made, the Rent shall be reinstated with respect to such reoccupied portion of the Premises and shall be payable by Tenant from the date of such occupancy. Notwithstanding the foregoing to the contrary, in no event shall the Rent be reduced for a period in excess of two (2) months following the date Landlord substantially completes its repair and restoration obligations hereunder.

B. Landlord’s Termination Option. Anything in subsection A of this Article 10 to the contrary notwithstanding, if the Premises are totally damaged or are rendered wholly untenantable, or if the Building shall be so damaged by fire or other casualty that, in Landlord’s opinion, either substantial alteration, demolition or reconstruction of the Building shall be required (whether or not the Premises shall have been damaged or rendered untenantable), or if the Building, after its proposed repair, alteration or restoration, shall not be economically viable as an office building, then in any of such events, Landlord, at Landlord’s option, may, not later than ninety (90) days following the damage, give Tenant a notice in writing terminating this Lease. In addition, (i) if any damage shall occur to the Premises or the Building during the last one (1) year of the Term, Landlord shall have the option to terminate this Lease upon not less than sixty (60) days prior written notice to Tenant and (ii) Landlord shall not be obligated to repair or restore the Premises or the Building if a holder of a mortgage or underlying leasehold applies proceeds of insurance to the loan or lease payment balance, and the remaining proceeds, if any, available to Landlord are insufficient to pay for such repair or restoration. If Landlord elects to terminate this Lease, the Term shall expire upon the date set forth in such notice, and Tenant shall vacate the Premises and surrender the same to Landlord without prejudice however, to Landlord’s rights and remedies against Tenant under this Lease in effect prior to such termination and any Rent owing shall be paid up to such date and any payments of Rent made by Tenant which were on account of any period subsequent to such date shall be returned to Tenant. Upon the termination of this Lease under the conditions provided for in the next preceding sentence, Tenant’s liability for Rent thereafter accruing shall cease as of the day following such damage.

C. Repair Delays. Landlord shall not be liable for reasonable delays which may arise by reason of the claim adjustment with any insurance company on the part of Landlord and/or Tenant, and for reasonable delays on account of “labor troubles” or any other cause beyond Landlord’s control.

D. Provision Controlling. The parties agree that this Article 10 constitutes an express agreement governing any case of damage or destruction of the Premises or the Building by fire or other casualty, and that Section 227 of the Real Property Law of the State of New York, which provides for such contingency in the absence of an express agreement, and any other law of like import now or hereafter in force shall have no application in any such case.

E. Property Loss or Damage. Any Building employee to whom any property shall be entrusted by or on behalf of Tenant shall be deemed to be acting as Tenant’s agent with respect to such property and neither Landlord nor its agents shall be liable for any damage to property of Tenant or of others entrusted to employees of the Building, nor for the loss of or damage to any property of Tenant by theft or otherwise. Neither Landlord nor its agents shall be liable for any injury or damage to persons or property or interruption of Tenant’s business resulting from fire, explosion, falling plaster, steam, gas, electricity, water, rain or snow or leaks from any part of the Building or from the pipes, appliances or plumbing works or from the roof, street or subsurface or from any other place or by dampness or by any other cause of whatsoever nature; nor shall Landlord or its agents be liable for any such damage caused by other tenants or

 

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persons in the Building or caused by construction of any private, public or quasi-public work; nor shall Landlord be liable for any latent defect in the Premises or in the Building. Anything in this Article 10 to the contrary notwithstanding, nothing in this Lease shall be construed to relieve Landlord from responsibility directly to Tenant for any loss or damage caused directly to Tenant wholly or in part by the gross negligence or willful misconduct of Landlord. Nothing in the foregoing sentence shall affect any right of Landlord to the indemnity from Tenant to which Landlord may be entitled under Article 37 hereof in order to recoup for payments made to compensate for losses of third parties.

F. Tenant’s Termination Option. Notwithstanding anything in this Lease to the contrary, within sixty (60) days after such fire or casualty, Landlord shall notify Tenant of the length of time Landlord estimates, acting reasonably, to complete restoration thereof for which Landlord is responsible. In the event that damage by fire or other casualty occurs during the last one (1) year of the Lease Term and (x) such damage is estimated to take more than six (6) months to repair, or such damage is to the Common Areas and prevents reasonable access to the Premises or (y) such damage is not so repaired within six (6) months after the date of such fire or casualty then Tenant shall have the right to terminate this Lease by notice to Landlord. In addition, if at any time the Premises are so damaged that (i) it is estimated that such repair shall take more than nine (9) months to complete or such damage is to the Common Areas and prevents Tenant reasonable access to the Premises or (ii) such damage is not repaired within nine (9) months after the date of such casualty, then Tenant shall also have the right to terminate this Lease on notice to Landlord.

11. CONDEMNATION.

A. Condemnation. If the whole of the Real Property, the Building or the Premises shall be acquired or condemned for any public or quasi-public use or purpose, this Lease and the Term shall end as of the date of the vesting of title with the same effect as if said date were the Expiration Date. If only a part of the Real Property shall be so acquired or condemned then, (i) except as hereinafter provided in this subsection A, this Lease and the Term shall continue in force and effect but, if a part of the Premises is included in the part of the Real Property so acquired or condemned, from and after the date of the vesting of title, the Rent shall be reduced in the proportion which the area of the part of the Premises so acquired or condemned bears to the total area of the Premises immediately prior to such acquisition or condemnation; (ii) whether or not the Premises shall be affected thereby, Landlord, at Landlord’s option, may give to Tenant, within sixty (60) days next following the date upon which Landlord shall have received notice of vesting of title, a five (5) days notice of termination of this Lease; and (iii) if the part of the Real Property so acquired or condemned shall contain more than thirty percent (30%) of the total area of the Premises immediately prior to such acquisition or condemnation, or if, by reason of such acquisition or condemnation, Tenant no longer has reasonable means of access to the Premises, Tenant, at Tenant’s option, may give to Landlord, within sixty (60) days next following the date upon which Tenant shall have received notice of vesting of title, a five (5) days notice of termination of this Lease. If any such five (5) days notice of termination is given by Landlord or Tenant, this Lease and the Term shall come to an end and expire upon the expiration of said five (5) days with the same effect as if the date of expiration of said five (5) days were the Expiration Date. If a part of the Premises shall be so acquired or condemned and this Lease and the Term shall not be terminated pursuant to the foregoing provisions of this subsection A, Landlord, at Landlord’s expense, shall restore that part of the Premises not so acquired or condemned to a self-contained rental unit. In the event of any termination of this Lease and the Term pursuant to the provisions of this subsection A, the Rent shall be apportioned as of the date of sooner termination and any prepaid portion of Rent for any period after such date shall be refunded by Landlord to Tenant.

B. Award. In the event of any such acquisition or condemnation of all or any part of the Real Property, Landlord shall be entitled to receive the entire award for any such acquisition or condemnation, Tenant shall have no claim against Landlord or the condemning authority for the value of any unexpired portion of the Term and Tenant hereby expressly assigns to Landlord all of its right in and to any such award. Nothing contained in this subsection B shall be deemed to prevent Tenant from making a claim in any condemnation proceedings for the then value of any furniture, furnishings, Alterations and fixtures installed by and at the sole expense of Tenant and included in such taking, provided that such award shall not reduce the amount of the award (or delay the payment thereof) otherwise payable to Landlord.

 

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12. ASSIGNMENT AND SUBLETTING.

A. Prohibition Without Consent. Tenant expressly covenants that it shall not (i) assign or otherwise transfer this Lease or the term and estate hereby granted, (ii) mortgage, pledge or encumber this Lease or the Premises or any part thereof in any manner by reason of any act or omission on the part of Tenant, or (iii) sublet the Premises or any part thereof or permit the Premises or any part thereof to be used or occupied by others (whether for desk space, mailing privileges or otherwise) without obtaining Landlord’s prior written consent which shall not be unreasonably withheld, conditioned or delayed except as otherwise provided in this Article 12. If this Lease be assigned, or if the Premises or any part thereof be sublet or occupied by anybody other than Tenant, Landlord may, after default by Tenant, collect rent from the assignee, subtenant or occupant, and apply the net amount collected to the Rent herein reserved, but no assignment, underletting, occupancy or collection shall be deemed a waiver of the provisions hereof, the acceptance of the assignee, undertenant or occupant as tenant, or a release of Tenant from the further performance by Tenant of covenants on the part of Tenant herein contained. The consent by Landlord to an assignment or underletting shall not in any way be construed to relieve Tenant from obtaining the express consent in writing of Landlord to any further assignment or underletting. In no event shall any permitted subtenant assign or encumber its sublease or further sublet all or any portion of its sublet space, or otherwise suffer or permit the sublet space or any part thereof to be used or occupied by others, without obtaining Landlord’s prior written consent which shall not be unreasonably withheld, conditioned or delayed except as otherwise provided in this Article 12. Any assignment, sublease, mortgage, pledge, encumbrance or transfer in contravention of the provisions of this Article 12 shall be void.

B. Notice of Proposed Transfer. If Tenant shall at any time or times during the Term desire to assign this Lease or sublet all or part of the Premises, Tenant shall give notice thereof to Landlord, which notice shall be accompanied by (i) a conformed or photostatic copy of the proposed assignment or sublease, the effective or commencement date of which shall be not less than thirty (30) nor more than one hundred and eighty (180) days after the giving of such notice, (ii) a statement setting forth in reasonable detail the identity of the proposed assignee or subtenant, the nature of its business and its proposed use of the Premises, (iii) current financial information with respect to the proposed assignee or subtenant, including, without limitation, its most recent financial report (if same exists), (iv) an agreement by Tenant to indemnify Landlord against liability resulting from any claims that may be made against Landlord by the proposed assignee or subtenant or by any brokers or other persons claiming a commission or similar compensation in connection with the proposed assignment or sublease and (v) in the case of a sublease, such additional information related to the proposed subtenant as Landlord shall reasonably request, if any.

C. Landlord’s Options. The notice containing all of the information set forth in Subsection B of this Article 12 above shall be deemed an offer from Tenant to Landlord whereby Landlord (or Landlord’s designee) may, at its option, (a) sublease such space (hereinafter called the “Leaseback Space”) from Tenant upon the terms and conditions hereinafter set forth (if the proposed transaction is a sublease of all or part of the Premises), or (b) terminate this Lease. Said options may be exercised by Landlord by notice to Tenant at any time within thirty (30) days after the aforesaid notice has been given by Tenant to Landlord; and during such thirty (30) day period Tenant shall not assign this Lease nor sublet such space to any person or entity.

D. Termination by Landlord. If Landlord exercises its option to terminate this Lease in the case where Tenant desires either to assign this Lease or sublet all or substantially all of the Premises, then this Lease shall end and expire on the date that such assignment or sublet was to be effective or commence, as the case may be, and the Rent and additional rent due hereunder shall be paid and apportioned to such date. Furthermore, if Landlord exercises its option to terminate this Lease pursuant to subsection C of this Article 12, Landlord shall be free to and shall have no liability to Tenant if Landlord should lease the Premises (or any part thereof) to Tenant’s prospective assignee or subtenant.

 

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E. Takeback by Landlord. If Landlord exercises its option to sublet the leaseback Space, such sublease to Landlord or its designee (as subtenant) shall be at the lower of (i) the rental rate per rentable square foot of Rent and additional rent then payable pursuant to this Lease, or (ii) the rentals set forth in the proposed sublease, and shall be for the same term as that of the proposed subletting, and such sublease:

(i) shall be expressly subject to all of the covenants, agreements, terms, provisions and conditions of this Lease except such as are irrelevant or inapplicable, and except as otherwise expressly set forth to the contrary in this Article 12;

(ii) shall be upon the same terms and conditions as those contained in the proposed sublease, except such as are irrelevant or inapplicable and except as otherwise expressly set forth to the contrary in this Article 12;

(iii) shall give the subtenant the unqualified and unrestricted right, without Tenant’s permission, to assign such sublease or any interest therein and/or to sublet the space covered by such sublease or any part or parts of such space and to make any and all changes, alterations and improvements in the space covered by such sublease, and if the proposed sublease will result in all or substantially all of the Premises being sublet, grant Landlord or its designee the option to extend the term of such sublease for the balance of the term of this Lease less than one (1) day;

(iv) shall provide that any assignee or further subtenant of Landlord or its designee, may, at the election of Landlord with the reasonable consent of Tenant if the sublease is for less than the remainder of the term (less one (1) day), be permitted to make alterations, decorations and installations in such space or any part thereof and shall also provide in substance that any such alterations, decorations and installations in such space therein made by any assignee or subtenant of Landlord or its designee may be removed, in whole or in part, by such assignee or subtenant, at its option, prior to or upon the expiration or other termination of such sublease provided that such assignee or subtenant, at its expense, shall repair any damage and injury to such space so sublet caused by such removal and provided same is at no cost or expense to Tenant and with no removal obligations of Tenant; and

(v) shall also provide that (a) the parties to such sublease expressly negate any intention that any estate created under such sublease be merged with any other estate held by either of said parties, (b) any assignment or subletting by Landlord or its designee (as the subtenant) may be for any purpose or purposes that Landlord, in Landlord’s reasonable discretion, shall deem suitable or appropriate, (c) Tenant, at Tenant’s expense, shall and will at all times provide and permit reasonably appropriate means of ingress to and egress from such space so sublet by Tenant to Landlord or its designee, (d) Landlord, at Landlord’s expense, may make such alterations as may be required or deemed necessary by Landlord to physically separate the subleased space from the balance of the Premises and to comply with any legal or insurance requirements relating to such separation, and (e) that at the expiration of the term of such sublease, Tenant will accept the space covered by such sublease in its then existing condition, subject to the obligations of the subtenant to make such repairs thereto as may be necessary to preserve the premises demised by such sublease in good order and condition except that at Tenant’s request, Landlord shall have any alterations made to the Premises pursuant to Landlord’s Take Back right that Tenant would otherwise be required to remove or that would increase Tenant’s removal costs, removed at Landlord’s expense.

F. Effect of Takeback or Termination. If Landlord exercises its option to sublet the Leaseback Space, (i) Landlord shall indemnify and save Tenant harmless from all obligations under this Lease as to the Leaseback Space during the period of time it is so sublet to Landlord; (ii) performance by Landlord, or its designee, under a sublease of the Leaseback Space shall be deemed performance by Tenant of any similar obligation under this Lease and any default under any such sublease shall not give rise to a default under a similar obligation contained in this Lease nor shall Tenant be liable for any default under this Lease or deemed to be in default hereunder if such default is occasioned by or arises from any act or omission of the tenant under such sublease or is occasioned by or arises from any act or omission of any occupant holding under or pursuant to any such sublease; and (iii) Tenant shall have no obligation, at the expiration or earlier termination of the Term, to remove any alteration, installation or

 

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improvement made in the Leaseback Space by Landlord (or its designee); In addition, if required by applicable law in connection with any termination of this Lease, Tenant shall complete, swear to and file any questionnaires, tax returns, affidavits or other documentation which may be required to be filed with the appropriate governmental agency in connection with any other tax which may now or hereafter be in effect at no expense to Tenant. Tenant further agrees to pay any amounts which may be assessed in connection with any of such taxes and to indemnify Landlord against and to hold Landlord harmless from any claims for payment of such taxes as a result of such transactions.

G. Conditions for Landlord’s Approval. In the event Landlord does not exercise either of the options provided to it pursuant to subsection C of this Article 12 and provided that Tenant is not in default of any of Tenant’s obligations under this Lease (after notice and the expiration of any applicable grace period) as of the time of Landlord’s consent, and as of the effective date of the proposed assignment or commencement date of the proposed sublease, Landlord’s consent (which must be in writing and form reasonably satisfactory to Landlord) to the proposed assignment or sublease shall not be unreasonably withheld or delayed, provided and upon condition that:

(i) Tenant shall have complied with the provisions of subsection B of this Article 12 and Landlord shall not have exercised any of its options under subsection C of this Article 12 within the time permitted therefor;

(ii) In Landlord’s reasonable judgment the proposed assignee or subtenant is engaged in a business or activity, and the Premises, or the relevant part thereof, will be used in a manner, which (a) is in keeping with the then standards of the Building, (b) is limited to the use of the Premises as general and executive offices, and (c) will not violate any negative covenant as to use contained in any other lease of office space in the Building provided Tenant received prior notice of same;

(iii) The proposed assignee or subtenant is a reputable party of good character and with sufficient financial worth considering the responsibility involved, and Landlord has been furnished with reasonable proof thereof;

(iv) Neither (a) the proposed assignee or subtenant nor (b) any person which, directly or indirectly, controls, is controlled by or is under common control with, the proposed assignee or subtenant, is then an occupant of any part of the Building;

(v) The proposed assignee or subtenant is not a person with whom Landlord is or has been, within the preceding six (6) month period, negotiating to lease space in the Building;

(vi) The form of the proposed sublease or instrument of assignment (a) shall be in form reasonably satisfactory to Landlord, and (b) shall comply with the applicable provisions of this Article 12;

(vii) There shall not be more than three (3) subtenants (including Landlord or its designee) of the Premises;

(viii) Intentionally Omitted.

(ix) Within five (5) days after receipt of a bill therefor, Tenant shall reimburse Landlord for the reasonable, out of pocket costs that may be incurred by Landlord in connection with said assignment or sublease, including without limitation, the costs of making investigations as to the acceptability of the proposed assignee or subtenant, and reasonable legal costs incurred by Landlord in connection with the granting of any requested consent which total fees and costs shall not exceed $3,500.00;

(x) Intentionally Omitted.

(xi) The proposed occupancy shall not, in Landlord’s reasonable opinion, increase the office cleaning requirements or the Building’s operating or other expenses or impose an extra burden upon services to be supplied by Landlord to Tenant;

 

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(xii) The proposed assignee or subtenant or its business shall not be subject to compliance with additional requirements of law (including related regulations) beyond those requirements which are applicable to the named Tenant herein; and

(xiii) The proposed subtenant or assignee shall not be entitled, directly or indirectly, to diplomatic or sovereign immunity and shall be subject to the service of process in, and the jurisdiction of the courts of New York State.

Except for any subletting by Tenant to Landlord or its designee pursuant to the provisions of this Article 12, each subletting pursuant to this subsection G of this Article 12 shall be subject to all of the covenants, agreements, terms, provisions and conditions contained in this Lease. Notwithstanding any such subletting to Landlord or any such subletting to any other subtenant and/or acceptance of Rent or additional rent by Landlord from any subtenant, Tenant shall and will remain fully liable for the payment of the Rent and additional rent due and to become due hereunder and for the performance of all the covenants, agreements, terms, provisions and conditions contained in this Lease on the part of Tenant to be performed and all acts and omissions of any licensee or subtenant or anyone claiming under or through any subtenant which shall be in violation of any of the obligations of this Lease shall be deemed to be a violation by Tenant. Tenant further agrees that notwithstanding any such subletting, no other and further subletting of the Premises by Tenant or any person claiming through or under Tenant shall or will be made except upon compliance with and subject to the provisions of this Article 12. If Landlord shall decline to give its consent to any proposed assignment or sublease, or if Landlord shall exercise either of its options under subsection C of this Article 12, Tenant shall indemnify, defend and hold harmless Landlord against and from any and all loss, liability, damages, costs, and expenses (including reasonable counsel fees) resulting from any claims that may be made against Landlord by the proposed assignee or subtenant or by any brokers or other persons claiming a commission or similar compensation in connection with the proposed assignment or sublease.

H. Timing and Future Requests. In the event that (i) Landlord fails to exercise either of its options under subsection C of this Article 12 and consents to a proposed assignment or sublease, and (ii) Tenant fails to execute and deliver the assignment or sublease to which Landlord consented within ninety (90) days after the giving of such consent, then, Tenant shall again comply with all of the provisions and conditions of subsection B of this Article 12 before assigning this Lease or subletting all or part of the Premises.

Notwithstanding anything to the contrary herein, Landlord shall respond to any request for Landlord’s approval to a proposed sublease or assignment (which require Landlord’s approval) within thirty (30) days after delivery of such request by Tenant and Landlord’s time to exercise its rights under Section 12.0 shall run concurrently with Landlord’s time to approve any such sublease or assignment.

I. Sublease Provisions. With respect to each and every sublease or subletting authorized by Landlord under the provisions of this Lease, it is further agreed that:

(i) No subletting shall be for a term ending later than one (1) day prior to the Expiration Date of this Lease;

(ii) No sublease shall be delivered, and no subtenant shall take possession of the Premises or any part thereof, until an executed counterpart of such sublease has been delivered to Landlord;

(iii) Each sublease shall provide that it is subject and subordinate to this Lease and to the matters to which this Lease is or shall be subordinate, and that in the event of termination, re-entry or dispossession by Landlord under this Lease Landlord may, at its option, take over all of the right, title and interest of Tenant, as sublessor, under such sublease, and such subtenant shall, at Landlord’s option, attorn to Landlord pursuant to the then executory provisions of such sublease, except that Landlord shall not (a) be liable for any previous act or omission of Tenant under such sublease, (b) be subject to any counterclaim, offset or defense, not expressly provided in such sublease, which theretofore accrued to such subtenant against Tenant, or (c) be bound by any previous modification of such sublease or by any previous prepayment of more than one (1) month’s Rent. The provisions of this Article 12 shall be self-operative and no further instrument shall be required to give effect to this provision.

 

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(iv) If any laws, orders, rules or regulations of any applicable governmental authority require that any Hazardous Substances, including, without limitation, asbestos, contained in or about the Premises to be sublet (the “Sublet Space”) be dealt with in any particular manner in connection with any alteration of the Sublet Space, then it shall be the subtenant’s obligation, at the subtenant’s expense, to deal with such Hazardous Substances in accordance with all such laws, orders, rules and regulations (unless Landlord elects to deal with such Hazardous Substances itself, in which event, the subtenant shall reimburse Landlord for all of Landlord’s costs and expenses in connection therewith within ten (10) days next following the rendition of a statement therefor).

J. Profits from Assignment or Subletting. If Landlord shall give its consent to any assignment of this Lease or to any sublease or if Tenant shall enter into any other assignment or sublease permitted hereunder, Tenant shall in consideration therefor, pay to Landlord, as additional rent:

(i) in the case of an assignment, an amount equal to one-half (1/2) of all sums and other considerations paid to Tenant by the assignee for or by reason of such assignment (including, but not limited to, sums paid for the sale of Tenant’s fixtures, leasehold improvements, equipment, furniture, furnishings or other personal property, less, in the case of a sale thereof, of the then net unamortized or undepreciated cost thereof determined on the basis of Tenant’s federal income tax returns) less of all expenses reasonably and actually incurred by Tenant with respect to such assignment, including, without limitation, rent allowances, construction costs, legal fees (up to $7,500), brokerage commissions and advertising costs in connection with such assignment, provided that Tenant shall submit to Landlord a receipt evidencing the payment of such expenses (or other proof of payment as Landlord shall reasonably require). The sums payable by under this subsection J(i) of this Article 12 shall be paid to Landlord as and when payable by the assignee to the Tenant; and

(ii) in the case of a sublease, one-half (1/2) of any rents, additional charges or other consideration payable under the sublease to Tenant by the subtenant which is in excess of the Rent and additional rent accruing during the term of the sublease in respect of the subleased space pursuant to the terms hereof (including, but not limited to, sums paid for the sale or rental of Tenant’s fixtures, leasehold improvements, equipment, furniture or other personal property, less, in the case of the sale thereof, the then net unamortized or undepreciated cost thereof determined on the basis of Tenant’s federal income tax returns), less all expenses reasonably and actually incurred by Tenant with respect to said sublease including, without limitation, rent allowance, construction costs, legal fees (up to $7,500), brokerage commissions, advertising costs and the cost of demising the premises so sublet in connection with such sublease, provided that Tenant shall submit to Landlord a receipt evidencing the payment of such expenses (or other proof of payment as Landlord shall reasonably require). The sums payable under this subsection J(ii) of this Article 12 shall be paid to Landlord as and when payable by the subtenant to Tenant.

K. Other Transfers. (i) If Tenant is a corporation other than a corporation whose stock is listed and traded on a nationally recognized stock exchange (hereinafter referred to as a “public corporation”), the provisions of subsections A through J of this Article 12 shall apply to a transfer (by one or more transfers) of a majority of the stock of Tenant as if such transfer of a majority of the stock of Tenant were an assignment of this Lease; but said provisions shall not apply to transactions with a corporation into or with which Tenant is merged or consolidated or to which substantially all of Tenant’s assets are transferred, provided that such merger, consolidation or transfer of assets is for a valid business purpose and not principally for the purpose of transferring the leasehold estate created hereby, and provided further, that in any of such events (a) the successor to Tenant has a net worth computed in accordance with generally accepted accounting principles at least equal to the greater of (1) the net worth of Tenant immediately prior to such merger, consolidation or transfer, or (2) the net worth of Tenant herein named on the date of this Lease and (b) proof reasonably satisfactory to Landlord of such net worth shall have been delivered to Landlord at least ten (10) days prior to the effective date of any such transaction.

 

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(ii) If Tenant is a partnership, the provisions of subsection A of this Article 12 shall apply to a transfer (by one or more transfers) of a majority interest in the partnership, as if such transfer were an assignment of this Lease.

(iii) If Tenant is a subdivision, authority, body, agency, instrumentality or other entity created and/or controlled pursuant to the laws of the State of New York or any city, town or village of such state or of federal government (“Governmental Entity”), the provisions of subsection A of this Article 12 shall apply to a transfer (by one or more transfers) of any of Tenant’s rights to use and occupy the Premises, to any other Governmental Entity, as if such transfer of the right of use and occupancy were an assignment of this Lease; but said provisions shall not apply to a transfer of any of Tenant’s rights in and to the Premises to any Governmental Entity which shall replace or succeed to substantially similar public functions, responsibilities and areas of authority as Tenant, provided that in any of such events the successor Governmental Entity (a) shall utilize the Premises in a manner substantially similar to Tenant, and (b) shall not utilize the Premises in any manner which, in Landlord’s judgment, would impair the reputation of the Building as a first-class office building.

L. Related Corporation. Tenant may, without Landlord’s consent, permit any corporations or other business entities (but not including Governmental Entities) which control, are controlled by, or are under common control with Tenant (herein referred to as “related corporation”) to sublet all or part of the Premises for any of the purposes permitted to Tenant, subject however to compliance with Tenant’s obligations under this Lease (but the provisions of Sections A through J of this Article 12 shall not apply). Such subletting shall not be deemed to vest in any such related corporation any right or interest in this Lease or the Premises nor shall it relieve, release, impair or discharge any of Tenant’s obligations hereunder. For the purposes hereof, “control” shall be deemed to mean ownership of not less than fifty percent (50%) of all of the voting stock of such corporation or not less than fifty percent (50%) of all of the legal and equitable interest in any other business entities.

M. Assumption by Assignee. Any assignment or transfer, whether made with Landlord’s consent pursuant to subsection A of this Article 12 or without Landlord’s consent pursuant to subsection K of this Article 12, shall be made only if, and shall not be effective until, the assignee shall execute, acknowledge and deliver to Landlord an agreement in form and substance satisfactory to Landlord whereby the assignee shall assume the obligations of this Lease and agree to be bound by all of the terms, conditions, covenants and provisions hereof on the part of Tenant to be performed or observed and whereby the assignee shall agree that the provisions in subsection A of this Article 12 shall, notwithstanding such assignment or transfer, continue to be binding upon it in respect of all future assignments and transfers. The original named Tenant covenants that, notwithstanding any assignment or transfer, whether or not in violation of the provisions of this Lease, and notwithstanding the acceptance of Rent and/or additional rent by Landlord from an assignee, transferee or any other party, the original named Tenant shall remain fully liable for the payment of the Rent and additional rent and for the other obligations of this Lease on the part of Tenant to be performed or observed.

N. Liability of Tenant. The joint and several liability of Tenant and any immediate or remote successor in interest of Tenant and the due performance of the obligations of this Lease on Tenant’s part to be performed or observed shall not be discharged, released or impaired in any respect by any agreement or stipulation made by Landlord extending the time, or modifying any of the obligations, of this Lease, or by any waiver or failure of Landlord to enforce any of the obligations of this Lease.

O. Listings. The listing of any name other than that of Tenant, whether on the doors of the Premises or the Building directory, or otherwise, shall not operate to vest any right or interest in this Lease or in the Premises, nor shall it be deemed to be the consent of Landlord to any assignment or transfer of this Lease or to any sublease of the Premises or to the use or occupancy thereof by others. Any such listing shall constitute a privilege extended by Landlord, revocable at Landlord’s will by notice to Tenant.

 

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P. Intentionally Omitted.

(i) Re-entry by Landlord. If Landlord shall recover or come into possession of the Premises before the date herein fixed for the termination of this Lease, Landlord shall have the right, at its option, to take over any and all subleases or sublettings of the Premises or any part thereof made by Tenant and to succeed to all the rights of said subleases and sublettings or such of them as it may elect to take over. Tenant hereby expressly assigns and transfers to Landlord such of the subleases and sublettings as Landlord may elect to take over at the time of such recovery of possession, such assignment and transfer not to be effective until the termination of this Lease or re-entry by Landlord hereunder or if Landlord shall otherwise succeed to Tenant’s estate in the Premises, at which time Tenant shall upon request of Landlord, execute, acknowledge and deliver to Landlord such further instruments of assignment and transfer as may be necessary to vest in Landlord the then existing subleases and sublettings. Every subletting hereunder is subject to the condition and by its acceptance of and entry into a sublease, each subtenant thereunder shall be deemed conclusively to have thereby agreed from and after the termination of this Lease or re-entry by Landlord hereunder of or if Landlord shall otherwise succeed to Tenant’s estate in the Premises, that such subtenant shall waive any right to surrender possession or to terminate the sublease and, at Landlord’s election, such subtenant shall be bound to Landlord for the balance of the term of such sublease and shall attom to and recognize Landlord, as its landlord, under all of the then executory terms of such sublease, except that Landlord shall not (i) be liable for any previous act, omission or negligence of Tenant under such sublease, (ii) be subject to any counterclaim, defense or offset not expressly provided for in such sublease, which theretofore accrued to such subtenant against Tenant, (iii) be bound by any previous modification or amendment of such sublease or by any previous prepayment of more than one (1) month’s rent and additional rent which shall be payable as provided in the sublease, (iv) be obligated to repair the subleased space or the Building or any part thereof, in the event of total or substantial total damage beyond such repair as can reasonably be accomplished from the net proceeds of insurance actually made available to Landlord, (v) be obligated to repair the subleased space or the Building or any part thereof, in the event of partial condemnation beyond such repair as can reasonably be accomplished from the net proceeds of any award actually made available to Landlord as consequential damages allocable to the part of the subleased space or the Building not taken or (vi) be obligated to perform any work in the subleased space of the Building or to prepare them for occupancy beyond Landlord’s obligations under this Lease, and the subtenant shall execute and deliver to Landlord any instruments Landlord may reasonably request to evidence and confirm such attomment. Each subtenant or licensee of Tenant shall be deemed automatically upon and as a condition of occupying or using the Premises or any part thereof, to have given a waiver of the type described in and to the extent and upon the conditions set forth in this Article 12.

13. CONDITION OF THE PREMISES.

A. Acceptance by Tenant. Tenant has examined the Premises and agrees to accept possession of the Premises in the condition and state of repair which shall exist on the date hereof “as is”, and further agrees that Landlord shall have no other or further obligation to perform any work or make any installations, alterations or improvements in order to prepare the Premises for Tenant’s occupancy or otherwise except for the completion of Landlord’s Initial Construction. The taking of possession of the Premises by Tenant after substantial completion of Landlord’s Initial Construction shall be conclusive evidence as against Tenant that, at the time such possession was so taken, the Premises and the Building were in good and satisfactory condition, except that Tenant shall have the right to inspect the Premises after the Commencement Date and provide Landlord with a list of Punchlist Items that require repair or completion. Landlord shall repair said Punchlist items promptly to Tenant’s reasonable satisfaction. Landlord shall provide Tenant with five (5) days notice prior to delivery of the Premises and allow Tenant to perform a walk-through of the Premises prior to the delivery of same by Landlord. Landlord shall also allow Tenant access to the Premises at reasonable times during Landlord’s Initial Construction so that Tenant can commence performance of cabling and wiring in the Premises for its telecommunication and security systems. Landlord shall reasonably coordinate with Tenant with respect to such cabling and wiring provided that such work by Tenant does not delay substantial completion of Landlord’s Initial Construction.

B. All of the terms, covenants and conditions of the Schedules annexed hereto are incorporated in this Lease as if fully set forth at length herein.

 

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14. ACCESS TO PREMISES.

A. Access by Landlord. Tenant shall permit Landlord, Landlord’s agents and public utilities servicing the Building to erect, use, maintain and replace, concealed ducts, pipes and conduits in and through the Premises. Landlord, Landlord’s agents and/or affiliates, and the holder of any Mortgage shall each have the right to enter the Premises at all reasonable times on prior notice to Tenant to (i) examine the same, (ii) to show them to prospective purchasers, mortgagees or lessees of the Building or space therein, (iii) to make such decorations, repairs, replacements, alterations, improvements or additions as Landlord may deem necessary or desirable to the Premises or to any other portion of the Building or which Landlord may elect to perform following Tenant’s failure (after all notice and cure periods) to make repairs or perform any work which Tenant is obligated to perform under this Lease, (iv) for the purpose of complying with laws, regulations or other requirements of government authorities and (v) to perform “Remedial Work” (as defined in Article 40 hereof) after the failure of Tenant to perform the same (after all notice and cure periods) in accordance with the terms of this Lease. Landlord shall be allowed, during the progress of any work in and about the Premises, to take all necessary material and equipment into and upon the Premises and to store them within the Premises without the same constituting an eviction or constructive eviction of Tenant in whole or in part and the Rent shall in nowise abate while any decorations, repairs, replacements, alterations, improvements or additions are being made, by reason of loss or interruption of business of Tenant, or otherwise. During the one (1) year prior to the Expiration Date or the expiration of any renewal or extended term, Landlord may exhibit the Premises to prospective tenants thereof. If, during the last twelve (12) months of the Term, Tenant shall have removed all or substantially all of Tenant’s property therefrom, Landlord may immediately enter and alter, renovate and redecorate the Premises, without elimination or abatement of Rent, or incurring liability to Tenant for any compensation, and such acts shall not be deemed an actual or constructive eviction and shall have no effect upon this Lease. If Tenant shall not be personally present to open and permit an entry into the Premises, at any time, when for any reason an entry therein shall be necessary or permissible, Landlord or Landlord’s agents may enter the same by a master key, or may forcibly enter the same, without rendering Landlord or such agents liable therefor (if during such entry Landlord or Landlord’s agents shall accord reasonable care to Tenant’s property), and without in any manner affecting the obligations and covenants of this Lease. Landlord at all times shall use reasonable efforts to protect the Premises and Tenant’s property therein when Landlord or its agents, representatives or contractors are in the Premises. Nothing herein contained, however, shall be deemed or construed to impose upon Landlord any obligation, responsibility or liability whatsoever, for the care, supervision or repair of the Building or any part thereof, other than as herein provided.

B. Other Landlord Privileges. Notwithstanding anything to the contrary in this Lease, Landlord shall use reasonable efforts to minimize interference with Tenant’s business when Landlord is performing any repairs or alterations in the Premises or Building or for any reason enters upon the Premises. Landlord shall have the right at any time, without the same constituting an actual or constructive eviction and without incurring any liability to Tenant therefor, to change the arrangement and/or location of entrances or passageways, doors and doorways, corridors, elevators, stairs, toilets or other public parts of the Building and to change the name, number or designation by which the Building is commonly known provided Tenant continues to have reasonable access to the Premises. Tenant acknowledges that Landlord may (but shall have no obligation to) perform repairs, improvements, alterations and/or substantial renovation work in and to the public parts of the Building and the mechanical and other systems serving the Building (which work may include improvements to the lobby and facade of the Building, which may require that scaffolding and/or a sidewalk bridge be placed in front of the Building, and the replacement of window glass, requiring access to the same from within the Premises). Except as otherwise provided in this Lease, Landlord shall incur no liability to Tenant, nor shall Tenant be entitled to any abatement of Rent on account of any noise, vibration or other disturbance to Tenant’s business at the Premises (provided that Tenant is not denied access thereto) which shall arise out of the performance by Landlord or other tenants of the aforesaid repairs, alterations, additions, improvements, alterations and renovations of the Building or any part thereof and Tenant hereby agrees to release Landlord of and from any claims (including without limitation, claims arising by reason of loss or interruption of business) of every kind and nature whatsoever arising under or in connection therewith. Tenant understands and agrees that all parts (except surfaces facing the interior of the Premises) of all

 

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walls, windows and doors bounding the Premises (including exterior Building walls, corridor walls, doors and entrances), all balconies, terraces and roofs adjacent to the Premises, all space in or adjacent to the Premises used for shafts, stacks, stairways, chutes, pipes, conduits, ducts, fan rooms, heating, air cooling, plumbing and other mechanical facilities, service closets and other Building facilities are not part of the Premises, and Landlord shall have the use thereof, as well as access thereto through the Premises for the purposes of operation, maintenance, alteration and repair. Landlord, throughout the Term, shall have free access to any and all mechanical installations of Landlord, including but not limited to air-cooling, fan, ventilating, machine rooms and electrical closets.

15. CERTIFICATE OF OCCUPANCY. Tenant shall not at any time use or occupy the Premises in violation of the certificate of occupancy issued for the Premises or for the Building and in the event that any department of the City or State of New York shall hereafter at any time contend and/or declare by notice, violation, order or in any other manner whatsoever that the Premises are used for a purpose which is a violation of such certificate of occupancy whether or not such use shall be a Permitted Use, Tenant shall, upon five (5) days written notice from Landlord, immediately discontinue such use of the Premises. Failure by Tenant to discontinue such use after such notice shall be considered a default in the fulfillment of a covenant of this Lease and Landlord shall have the right to terminate this Lease immediately, and in addition thereto shall have the right to exercise any and all rights and privileges and remedies given to Landlord by and pursuant to the provisions of Articles 17 and 18 hereof.

16. LANDLORD’S LIABILITY. The obligations of Landlord under this Lease shall not be binding upon Landlord named herein after the sale, conveyance, assignment or transfer by such Landlord (or upon any subsequent landlord after the sale, conveyance, assignment or transfer by such subsequent landlord) of its interest in the Building or the Real Property, as the case may be, and in the event of any such sale, conveyance, assignment or transfer, Landlord shall be and hereby is entirely freed and relieved of all covenants and obligations of Landlord hereunder, and it shall be deemed and construed without further agreement between the parties or their successors in interest, or between the parties and the purchaser, grantee, assignee or other transferee that such purchaser, grantee, assignee or other transferee has assumed and agreed to carry out any and all covenants and obligations of Landlord hereunder. Neither the shareholders, members, directors or officers of Landlord, if Landlord is a corporation, nor the partners comprising Landlord (nor any of the shareholders, members, directors or officers of such partners), if Landlord is a partnership (collectively, the “Parties”), shall be liable for the performance of Landlord’s obligations under this Lease. Tenant shall look solely to Landlord to enforce Landlord’s obligations hereunder and shall not seek any damages against any of the Parties. The liability of Landlord for Landlord’s obligations under this Lease shall not exceed and shall be limited to Landlord’s interest in the Building and the Real Property and Tenant shall not look to or attach any other property or assets of Landlord or the property or assets of any of the Parties in seeking either to enforce Landlord’s obligations under this Lease or to satisfy a judgment for Landlord’s failure to perform such obligations. In no event shall Landlord (or any of the officers, trustees, directors, partners, beneficiaries, joint ventures, members, stockholders or other principals or representatives and the like, disclosed or undisclosed, thereof) ever be liable for incidental or consequential damages.

17. DEFAULT.

A. Events of Default; Conditions of Limitation. This Lease and the term and estate hereby granted are subject to the limitations that upon the occurrence, at any time prior to or during the Term, of any one or more of the following events (referred to as “Events of Default”):

(i) if Tenant shall default in the payment when due of any installment of Rent or in the payment when due of any additional rent, and such default shall continue for a period of five (5) days after written notice from Landlord of such default; or

(ii) if Tenant shall default in the observance or performance of any term, covenant or condition of this Lease on Tenant’s part to be observed or performed (other than the covenants for the payment of Rent and additional rent) and Tenant shall fail to remedy such default within twenty (20) days after notice by Landlord to Tenant of such default, or if such default is of such a nature that it cannot be completely remedied within said period of twenty (20) days and Tenant shall not commence within said period of twenty (20) days, or shall not thereafter diligently prosecute to completion all steps necessary to remedy such default; or

 

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(iii) if Tenant shall default in the observance or performance of any term, covenant or condition on Tenant’s part to be observed or performed under any other lease with Landlord or Landlord’s predecessor in interest of space in the Building and such default shall continue beyond any grace period set forth in such other lease for the remedying of such default; or

(iv) if the Premises shall become abandoned and Tenant fails to maintain the Premises as required in this Lease; or

(v) if Tenant’s interest in this Lease shall devolve upon or pass to any person, whether by operation of law or otherwise, except as may be expressly permitted under Article 12 hereof; or

(vi) if this Lease shall be rejected under §235 of Title 11 of the U.S. Bankruptcy Code; or

(vii) if any execution or attachment shall be issued against Tenant or any of Tenant’s property pursuant to which the Premises shall be taken or occupied or attempted to be taken or occupied;

then, in any of said cases, at any time prior to or during the Term, of any one or more of such Events of Default, Landlord, at any time thereafter, at Landlord’s option, may give to Tenant a five (5) days notice of termination of this Lease and, in the event such notice is given, this Lease and the Term shall come to an end and expire (whether or not the Term shall have commenced) upon the expiration of said five (5) days with the same effect as if the date of expiration of said five (5) days were the Expiration Date, but Tenant shall remain liable for damages as provided in Article 18 hereof.

B. Effect of Bankruptcy. Anything elsewhere in this Lease to the contrary notwithstanding, this Lease may be canceled by Landlord by sending of a written notice to Tenant within a reasonable time after the happening of any one or more of the following events: (i) the commencement of a case in bankruptcy or under the laws of any state naming Tenant as the debtor; or (ii) the making by Tenant of any assignment or any other arrangement for the benefit of creditors under any state statute. Neither Tenant nor any person claiming through or under Tenant, or by reason of any statute or order of court, shall thereafter be entitled to possession of the Premises but shall forthwith quit and surrender the Premises. If this Lease shall have been assigned in accordance with its terms, the provisions of this Article 17 shall be applicable to any of the persons or entities primarily or secondarily liable for Tenant’s obligations under this Lease. It is stipulated and agreed that in the event of the termination of this Lease pursuant to this subsection, Landlord shall forthwith, notwithstanding any other provisions of this Lease to the contrary, be entitled to recover from Tenant as and for liquidated damages an amount determined in accordance with Subsection B(i)(c) of Article 18 of this Lease.

C. Conditional Limitation. Nothing contained in this Article 17 shall be deemed to require Landlord to give the notices herein provided for prior to the commencement of a summary proceeding for non-payment of rent or a plenary action for recovery of rent on account of any default in the payment of the same, it being intended that such notices are for the sole purpose of creating a conditional limitation hereunder pursuant to which this Lease shall terminate and if Tenant thereafter remains in possession after such termination, Tenant shall do so as a holdover tenant.

18. REMEDIES AND DAMAGES.

A. Landlord’s Remedies. (i) If Tenant shall default beyond any notice and cure periods in the payment when due of any installment of Rent or in the payment when due of any additional rent, or if any execution or attachment shall be issued against Tenant or any of Tenant’s property whereupon the Premises shall be taken or occupied or attempted to be taken or occupied by someone other than Tenant, or if this Lease and the Term shall expire and come to an end as provided in Article 17:

(i) Landlord and its agents and servants may immediately, or at any time after such default or after the date upon which this Lease and the Term shall expire and come to an end, re-enter the Premises or any part thereof, either by summary proceedings, or by any other applicable action or proceeding, (without being liable to indictment, prosecution or damages therefor), and may repossess the Premises and dispossess Tenant and any other persons from the Premises and remove any and all of their property and effects from the Premises; and

 

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(ii) Landlord, at Landlord’s option, may relet the whole or any part or parts of the Premises from time to time, either in the name of Landlord or otherwise, to such tenant or tenants, for such term or terms ending before, on or after the Expiration Date, at such rental or rentals and upon such other conditions, which may include concessions and free rent periods, as Landlord, in its sole discretion, may determine. Landlord shall have no obligation to relet the Premises or any part thereof and shall in no event be liable for refusal or failure to relet the Premises or any part thereof, or, in the event of any such reletting, for refusal or failure to collect any rent due upon any such reletting, and no such refusal or failure shall operate to relieve Tenant of any liability under this Lease or otherwise to affect any such liability; Landlord, at Landlord’s option, may make such repairs, replacements, alterations, additions, improvements, decorations and other physical changes in and to the Premises as Landlord, in its sole discretion, considers advisable or necessary in connection with any such reletting or proposed reletting, without relieving Tenant of any liability under this Lease or otherwise affecting any such liability.

(iii) Tenant hereby waives the service of any notice of intention to re-enter or to institute legal proceedings to that end which may otherwise be required to be given under any present or future law. Tenant, on its own behalf and on behalf of all persons claiming through or under Tenant, including all creditors, does further hereby waive any and all rights which Tenant and all such persons might otherwise have under any present or future law to redeem the Premises, or to re-enter or repossess the Premises, or to restore the operation of this Lease, after (a) Tenant shall have been dispossessed by a judgment or by warrant of any court or judge, or (b) any re-entry by Landlord, or (c) any expiration or termination of this Lease and the Term, whether such dispossess, re-entry, expiration or termination shall be by operation of law or pursuant to the provisions of this Lease. The words “re-enter”, “re-entry” and “re-entered” as used in this Lease shall not be deemed to be restricted to their technical legal meanings. In the event of a breach or threatened breach by Tenant, or any persons claiming through or under Tenant, of any term, covenant or condition of this Lease on Tenant’s part to be observed or performed, Landlord shall have the right to enjoin such breach and the right to invoke any other remedy allowed by law or in equity as if re-entry, summary proceedings and other special remedies were not provided in this Lease for such breach. The right to invoke the remedies hereinbefore set forth are cumulative and shall not preclude Landlord from invoking any other remedy allowed at law or in equity.

B. Damages. (i) If this Lease and the Term shall expire and come to an end as provided in Article 17, or by or under any summary proceeding or any other action or proceeding, or if Landlord shall re-enter the Premises as provided in subsection A of this Article 18, or by or under any summary proceeding or any other action or proceeding, then, in any of said events:

(a) Tenant shall pay to Landlord all Rent, additional rent and other charges payable under this Lease by Tenant to Landlord to the date upon which this Lease and the Term shall have expired and come to an end or to the date of re-entry upon the Premises by Landlord, as the case may be;

(b) Tenant also shall be liable for and shall pay to Landlord, as damages, any deficiency (referred to as “Deficiency”) between the Rent reserved in this Lease for the period which otherwise would have constituted the unexpired portion of the Term and the net amount, if any, of rents collected under any reletting effected pursuant to the provisions of subsection A(i) of this Article 18 for any part of such period (first deducting from the rents collected under any

 

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such reletting all of Landlord’s out-of-pocket expenses in connection with the termination of this Lease, or Landlord’s reentry upon the Premises and with such reletting including, but not limited to, all repossession costs, brokerage commissions, advertising, legal expenses, attorneys’ fees and disbursements, alteration costs and other expenses of preparing the Premises for such reletting); any such Deficiency shall be paid in monthly installments by Tenant on the days specified in this Lease for payment of installments of Rent, Landlord shall be entitled to recover from Tenant each monthly Deficiency as the same shall arise, and no suit to collect the amount of the Deficiency for any month shall prejudice Landlord’s right to collect the Deficiency for any subsequent month by a similar proceeding; and

(c) whether or not Landlord shall have collected any monthly Deficiencies as aforesaid, Landlord shall be entitled to recover from Tenant, and Tenant shall pay to Landlord, on demand, in lieu of any further Deficiencies as and for liquidated and agreed final damages, a sum equal to the amount by which the Rent reserved in this Lease for the period which otherwise would have constituted the unexpired portion of the Term exceeds the then fair and reasonable rental value of the Premises for the same period, less the aggregate amount of Deficiencies theretofore collected by Landlord pursuant to the provisions of subsection B(1)(b) of this Article 18 for the same period all reduced to present value using a discount rate equal to the interest rate of a governmental security having a maturity closest to the then current expiration of the Lease Term; if, before presentation of proof of such liquidated damages to any court, commission or tribunal, the Premises, or any part thereof, shall have been relet by Landlord for the period which otherwise would have constituted the unexpired portion of the Term, or any part thereof, the amount of rent reserved upon such reletting shall be deemed, prima facie, to be the fair and reasonable rental value for the part or the whole of the Premises so relet during the term of the reletting.

(ii) If the Premises, or any part thereof, shall be relet together with other space in the Building, the rents collected or reserved under any such reletting and the expenses of any such reletting shall be equitably apportioned for the purposes of this subsection B. Tenant shall in no event be entitled to any rents collected or payable under any reletting, whether or not such rents shall exceed the Rent reserved in this Lease. Solely for the purposes of this Article, the term “Rent” as used in subsection B(i) of this Article 18 shall mean the Rent in effect immediately prior to the date upon which this Lease and the Term shall have expired and come to an end, or the date of re-entry upon the Premises by Landlord, as the case may be, adjusted to reflect any increase or decrease pursuant to the provisions of Article 28 hereof for the Comparison Year (as defined in said Article 28) immediately preceding such event. Nothing contained in Article 17 or this Article 18 shall be deemed to limit or preclude the recovery by Landlord from Tenant of the maximum amount allowed to be obtained as damages by any statute or rule of law, or of any sums or damages to which Landlord may be entitled in addition to the damages set forth in subsection B(i) of this Article 18.

C. Legal Fees. (i) Tenant hereby agrees to pay, as additional rent, all reasonable attorneys’ fees and disbursements (and all other court costs or expenses of legal proceedings) which Landlord may incur or pay out by reason of, or in connection with:

(a) any action or proceeding by Landlord to terminate this Lease;

(b) any other action or proceeding by Landlord against Tenant (including, but not limited to, any arbitration proceeding);

(c) any default beyond all notice and cure periods by Tenant in the observance or performance of any obligation under this Lease (including, but not limited to, matters involving payment of rent and additional rent, computation of escalations, alterations or other Tenant’s work and subletting or assignment), whether or not Landlord commences any action or proceeding against Tenant;

 

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(d) any action or proceeding brought by Tenant against Landlord (or any officer, partner or employee of Landlord) in which Tenant fails to secure a final unappealable judgment against Landlord; and

(e) any other appearance by Landlord (or any officer, partner or employee of Landlord) as a witness or otherwise in any action or proceeding whatsoever involving or affecting Landlord, Tenant or this Lease.

(ii) Tenant’s obligations under this subsection C of Article 18 shall survive the expiration of the Term hereof or any earlier termination of this Lease. This provision is intended to supplement (and not to limit) other provisions of this Lease pertaining to indemnities and/or attorneys’ fees.

D. Intentionally Omitted.

19. FEES AND EXPENSES.

A. Curing Tenant’s Defaults. If Tenant shall default in the observance or performance of any term or covenant on Tenant’s part to be observed or performed under or by virtue of any of the terms or provisions in any Article of this Lease, after the giving of notice (if required) and upon the expiration of any applicable grace period (except in an emergency), Landlord may immediately or at any time thereafter and without notice perform the same for the account of Tenant. If Landlord makes any expenditures or incurs any obligations for the payment of money in connection with any such default by Tenant or the cure thereof including, but not limited to, any damages or fines or any reasonable attorneys’ fees and disbursements in instituting, prosecuting or defending any action or proceeding, such sums paid or obligations incurred with interest and costs shall be deemed to be additional rent hereunder and shall be paid by Tenant to Landlord within five (5) days of rendition of any bill or statement to Tenant therefor. If the Term hereof shall have expired at the time Landlord sustains or incurs such expenditures, such sums shall be recoverable by Landlord, as damages.

B. Late Charges. If Tenant shall fail to make payment of any installment of Rent or any additional rent within five (5) days after the date when such payment is due, Tenant shall pay to Landlord, in addition to such installment of Rent or such additional rent, as the case may be, as a late charge and as additional rent, a sum based on a rate equal to the lesser of (i) four percent (4%) per annum above the then current prime rate charged by Citibank, N.A. or its successor and (ii) the maximum rate permitted by applicable law, of the amount unpaid computed from the date such payment was due to and including the date of payment, but in no event shall interest be computed and payable for less than a full calendar month. Tenant acknowledges and agrees that, except as otherwise expressly provided herein, if Tenant fails to dispute any item of additional rent within forty-five (45) days of receipt of a bill or notice therefor, Tenant shall be deemed to have waived its right to dispute the same.

20. NO REPRESENTATIONS BY LANDLORD. Landlord or Landlord’s agents have made no representations or promises with respect to the Building, the Real Property, the Premises, Taxes (as defined in Article 28 hereof) or any other matter or thing affecting or related to the Premises, except as herein expressly set forth and no rights, easements or licenses are acquired by Tenant by implication or otherwise except as expressly set forth herein.

21. END OF TERM.

A. Surrender of Premises. Upon the expiration or other termination of the Term, Tenant shall quit and surrender to Landlord the Premises, vacant, broom clean, in good order and condition, ordinary wear and tear and damage for which Tenant is not responsible under the terms of this Lease excepted, and Tenant shall remove all Alterations and property pursuant to Article 3 hereof. Tenant’s obligation to observe or perform this covenant shall survive the expiration or sooner termination of the Term. If the last day of the Term or any renewal thereof falls on Saturday or Sunday this Lease shall expire on the immediately preceding business day.

B. Holdover by Tenant. The parties recognize and agree that the damage to Landlord resulting from any failure by Tenant to timely surrender possession of the Premises as aforesaid will be substantial, will exceed the amount of the monthly installments of the Rent

 

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theretofore payable hereunder, and will be impossible to accurately measure. Tenant therefore agrees that if possession of the Premises is not surrendered to Landlord within twenty-four (24) hours after the Expiration Date or sooner termination of the Term, in addition to any other rights or remedy Landlord may have hereunder or at law, Tenant shall pay to Landlord for each month and for each portion of any month during which Tenant holds over in the Premises after the Expiration Date or sooner termination of this Lease, for a period of thirty (30) days a sum equal to one and one-half times (1.5) and then thereafter a sum equal to two (2) times the aggregate of that portion of the Rent and the additional rent which was payable under this Lease during the last month of the Term. Nothing herein contained shall be deemed to permit Tenant to retain possession of the Premises after the Expiration Date or sooner termination of this Lease and no acceptance by Landlord of payments from Tenant after the Expiration Date or sooner termination of the Term shall be deemed to be other than on account of the amount to be paid by Tenant in accordance with the provisions of this Article 21, which provisions shall survive the Expiration Date or sooner termination of this Lease. If Tenant shall hold-over or remain in possession of any portion of the Premises beyond the Expiration Date of this Lease, notwithstanding the acceptance of any Rent and additional rent paid by Tenant pursuant to the preceding provisions, Tenant shall be subject not only to summary proceeding and all damages related thereto, but also to any damages arising out of lost opportunities (and/or new leases) by Landlord to re-let the Premises (or any part thereof). All damages to Landlord by reason of such holding over by Tenant may be the subject of a separate action and need not be asserted by Landlord in any summary proceedings against Tenant.

22. QUIET ENJOYMENT. Landlord covenants and agrees with Tenant that upon Tenant paying the Rent and additional rent and observing and performing all the terms, covenants and conditions on Tenant’s part to be observed and performed, Tenant may peaceably and quietly enjoy the Premises, subject, nevertheless, to the terms and conditions of this Lease including, but not limited to, Article 16 hereof and to all Superior Leases and Mortgages.

23. FAILURE TO GIVE POSSESSION. Tenant waives any right to rescind this Lease under Section 223-a of the New York Real Property Law or any successor statute of similar import then in force, or otherwise, and further waives the right to recover any damages which may result from Landlord’s failure to deliver possession of the Premises on the date set forth in Article 1 hereof for the commencement of the Term for any reason whatsoever, including, but not limited to, the failure of the present tenant of the Premises to vacate and surrender the Premises to Landlord. Except as otherwise provided in this Lease, if Landlord shall be unable to give possession of the Premises on such date, and provided Tenant is not responsible for such inability to give possession, the Rent reserved and covenanted to be paid herein shall not commence until the possession of the Premises is given or the Premises are available for occupancy by Tenant, and no such failure to give possession on such date shall in any way affect the validity of this Lease or the obligations of Tenant hereunder or give rise to any claim for damages by Tenant or claim for rescission of this Lease, nor shall same be construed in anyway to extend the Term. If permission is given to Tenant to enter into the possession of the Premises or to occupy premises other than the Premises prior to the Commencement Date, Tenant covenants and agrees that such occupancy shall be deemed to be under all the terms, covenants, conditions and provisions of this Lease, except the covenant to pay Rent.

24. NO WAIVER.

A. If there be any agreement between Landlord and Tenant providing for the cancellation of this Lease upon certain provisions or contingencies and/or an agreement for the renewal hereof at the expiration of the Term, the right to such renewal or the execution of a renewal agreement between Landlord and Tenant prior to the expiration of the Term shall not be considered an extension thereof or a vested right in Tenant to such further term, so as to prevent Landlord from canceling this Lease and any such extension thereof during the remainder of the original Term; such privilege, if and when so exercised by Landlord, shall cancel and terminate this Lease and any such renewal or extension previously entered into between Landlord and Tenant or the right of Tenant to any such renewal or extension; any right herein contained on the part of Landlord to cancel this Lease shall continue during any extension or renewal hereof; any option on the part of Tenant herein contained for an extension or renewal hereof shall not be deemed to give Tenant any option for a further extension beyond the first renewal or extended term.

 

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B. No act or thing done by Landlord or Landlord’s agents during the Term shall be deemed an acceptance of a surrender of the Premises, and no agreement to accept such surrender shall be valid unless in writing signed by Landlord. No employee of Landlord or of Landlord’s agents shall have any power to accept the keys of the Premises prior to the termination of this Lease. The delivery of keys to any employee of Landlord or of Landlord’s agents shall not operate as a termination of this Lease or a surrender of the Premises. In the event Tenant at any time desires to have Landlord sublet the Premises for Tenant’s account, Landlord or Landlord’s agents are authorized to receive said keys for such purpose without releasing Tenant from any of the obligations under this Lease, and Tenant hereby relieves Landlord of any liability for loss of or damage to any of Tenant’s effects in connection with such subletting.

C. The failure of Landlord to seek redress for violation of, or to insist upon the strict performance of, any covenant or condition of this Lease or any of the Rules and Regulations set forth or hereafter adopted by Landlord, shall not prevent a subsequent act which would have originally constituted a violation from having all force and effect of an original violation. The receipt by Landlord of Rent with knowledge of the breach of any covenant of this Lease shall not be deemed a waiver of such breach. The failure of Landlord to enforce any of the Rules and Regulations set forth, or hereafter adopted, against Tenant and/or any other tenant in the Building shall not be deemed a waiver of any such Rules and Regulations but said Rules and Regulations shall not be discriminatorily enforced. No provision of this Lease shall be deemed to have been waived by Landlord unless such waiver be in writing signed by Landlord.

D. No payment by Tenant or receipt by Landlord of a lesser amount than the monthly Rent herein stipulated shall be deemed to be other than on account of the earliest stipulated Rent, or as Landlord may elect to apply same, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as Rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord’s right to recover the balance of such Rent or pursue any other remedy in this Lease provided.

E. This Lease contains the entire agreement between the parties and all prior negotiations and agreements are merged in this Lease. Any executory agreement hereafter made shall be ineffective to change, modify, discharge or effect an abandonment of it in whole or in part unless such executory agreement is in writing and signed by the party against whom enforcement of the change, modification, discharge or abandonment is sought.

25. WAIVER OF TRIAL BY JURY. It is mutually agreed by and between Landlord and Tenant that the respective parties hereto shall and they hereby do waive trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other on any matters whatsoever arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant, Tenant’s use or occupancy of the Premises, any claim of injury or damage, or for the enforcement of any remedy under any statute, emergency or otherwise. It is further mutually agreed that in the event Landlord commences any summary proceeding (whether for nonpayment of rent or because Tenant continues in possession of the Premises after the expiration or termination of the Term), Tenant will not interpose any counterclaim (except for mandatory or compulsory counterclaims) of whatever nature or description in any such proceeding. Tenant shall not join, consolidate, remove, or otherwise attempt to limit or stay any action or proceeding commenced by the Landlord against the Tenant or in which the Landlord and the Tenant are parties.

26. INABILITY TO PERFORM. This Lease and the obligation of Tenant to pay Rent and additional rent hereunder and perform all of the other covenants and agreements hereunder on the part of Tenant to be performed shall in nowise be affected, impaired or excused because Landlord is unable to fulfill any of its obligations under this Lease expressly or impliedly to be performed by Landlord or because Landlord is unable to make, or is delayed in making any repairs, additions, alterations, improvements or decorations or is unable to supply or is delayed in supplying any equipment or fixtures if Landlord is prevented or delayed from so doing by reason of strikes or labor troubles or by accident or by any cause whatsoever reasonably beyond Landlord’s control, including but not limited to, laws, governmental preemption in connection with a National Emergency or by reason of any rule, order or regulation of any federal, state, county or municipal authority or any department or subdivision thereof or any government agency or by reason of the conditions of supply and demand which have been or are affected by

 

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war or other emergency. Notwithstanding anything to the contrary in this Lease, in the event that Tenant is unable to use the Premises for the conduct of its business due solely to (x) Landlord’s breach of an obligation under this Lease to make repairs or provide services or (y) any action or willful misconduct of Landlord, and/or not as a result of casualty, Force Majeure or breach of this Lease by Tenant, and (i) such condition continues for a period in excess of ten (10) consecutive business days after the date of notice from Tenant to Landlord (the “Abatement Notice”) stating that Tenant’s inability to use the Premises is due to such condition, (ii) Tenant does not actually use or occupy any portion of the Premises for any purpose during such period, and (iii) such condition has not resulted from the negligence or misconduct of Tenant, then Base Rent and Additional Rent shall be abated on a per diem basis for the period commencing on the eleventh (11th) consecutive business day after Tenant gives the Abatement Notice and ending on the earlier of the date on which (A) Tenant reoccupies any portion of the Premises, or (B) such condition is substantially remedied.

27. BILLS AND NOTICES. Except as otherwise expressly provided in this Lease, any bills, statements, notices, demands, requests or other communications given or required to be given under this Lease shall be deemed sufficiently given or rendered if in writing, sent by registered or certified mail (return receipt requested) or overnight courier service addressed as follows or to such other address as either Landlord or Tenant may designate as its new address for such purpose by notice given to the others in accordance with the provisions of this Article 27:

 

If to Landlord:   

Matana LLC

c/o The Moinian Group

530 Fifth Avenue

  

18th Floor

New York, New York 10036

with a copy to:   

Property Manager

Newmark & Company Real Estate, Inc.

125 Park Avenue

   New York, New York 10017
If to Tenant: Prior to the Commencement Date:
  

Yodle, Inc.

489 8th Avenue

New York, New York

If to Tenant: After the Commencement Date:
   Yodle, Inc.
  

50 West 23rd Street

New York, New York 10016

with a copy to:   

Joann B. Birle, Esq.

Herrick, Feinstein LLP

One Gateway Center

   Newark, New Jersey 07102

or at any place where Tenant or any agent or employee of Tenant may be found if mailed subsequent to Tenant’s vacating, deserting, abandoning or surrendering the Premises. Landlord and Tenant hereby acknowledge and agree that any such bill, statement, demand, notice, request or other communication may be given by Landlord’s or Tenant’s agent on behalf of Landlord or Tenant, as the case may be. Any such bill, statement, demand, notice, request or other communication shall be deemed to have been rendered or given on the date when it shall have been delivered or delivery was refused as provided in this Article 27. Notwithstanding anything contained in this Article 27 to the contrary, bills and statements issued by Landlord may be sent by the method(s) set forth hereinabove, without copies to any other party but any default notices by Landlord or similar communication shall be delivered to all parties hereunder. This notice provision has been specifically negotiated between the parties hereto.

 

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28. ESCALATION.

A. Defined Terms. In a determination of any increase in the Rent under the provisions of this Article 28, Landlord and Tenant agree as follows:

(i) “Taxes” shall mean the aggregate amount of real estate taxes and any special or other assessments (exclusive of penalties and interest thereon) imposed upon the Real Property and real estate taxes or assessments imposed in connection with the receipt of income or rents from the Building to the extent that same shall be in lieu of all or a portion of the aforesaid taxes or assessments, or additions or increases thereof (including, without limitation, (i) assessments made upon or with respect to any “air rights”, (ii) assessments made in connection with any business improvement district and (iii) any assessments levied after the date of this Lease for public benefits to the Real Property or the Building (excluding an amount equal to the assessments payable in whole or in part during or for the Base Tax Year (as defined in Article 1 of this Lease)) which assessments, if payable in installments, shall be deemed payable in the maximum number of permissible installments and there shall be included in real estate taxes for each Comparison Year in which such installments may be paid, the installments of such assessment so becoming payable during such Comparison Year (in the manner in which such taxes and assessments are imposed as of the date hereof); provided, that if because of any change in the taxation of real estate, any other tax or assessment (including, without limitation, any occupancy, gross receipts, rental, income, franchise, transit or other tax) is imposed upon Landlord or the owner of the Real Property or the Building, or the occupancy, rents or income therefrom, in substitution for or in addition to, any of the foregoing Taxes, such other tax or assessment shall be deemed part of the Taxes. With respect to any Comparison Year (hereinafter defined) all expenses, including attorneys’ fees and disbursements, experts’ and other witnesses’ fees, incurred in contesting the validity or amount of any Taxes or in obtaining a refund of Taxes shall be considered as part of the Taxes for such year. Taxes shall exclude interest, penalties for late payments, transfer taxes, unincorporated business, franchise, excise, corporate, estate, inheritance, succession, capital levy or income, profit or revenue tax on the income or receipts of Landlord.

(ii) “Assessed Valuation” shall mean the amount for which the Real Property is assessed pursuant to applicable provisions of the New York City Charter and of the Administrative Code of the City of New York for the purpose of imposition of Taxes.

(iii) “Tax Year” shall mean the period July 1 through June 30 (or such other period as hereinafter may be duly adopted by the City of New York as its fiscal year for real estate tax purposes).

(iv) “Base Taxes” shall mean the Taxes payable for the Base Tax Year.

(v) “Comparison Year” shall mean with respect to Taxes, any Tax Year subsequent to the Base Tax Year for any part or all of which there is an increase in the Rent pursuant to subsection B of this Article 28.

(vi) “Landlord’s Statement” shall mean an instrument or instruments containing a comparison of any increase or decrease in the Rent for the preceding Comparison Year pursuant to the provisions of this Article 28.

B. Escalation. (i) If the Taxes payable for any Comparison Year (any part or all of which falls within the Term) shall represent an increase above the Base Taxes, then the Rent for such Comparison Year and continuing thereafter until a new Landlord’s Statement is rendered to Tenant, shall be increased by Tenant’s Proportionate Share of such increase. The Taxes shall be initially computed on the basis of the Assessed Valuation in effect at the time Landlord’s Statement is rendered (as the Taxes may have been settled or finally adjudicated prior to such time) regardless of any then pending application, proceeding or appeal respecting the reduction of any such Assessed Valuation, but shall be subject to subsequent adjustment as provided in subsection D(i)(a) of this Article 28.

C. Payment of Escalations. (i) At any time prior to, during or after any Comparison Year Landlord shall render to Tenant, either in accordance with the provisions of Article 27 hereof or by personal delivery at the Premises, a Landlord’s Statement or Statements showing

 

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separately or together (a) a comparison of the Taxes payable for the Comparison Year with the Base Taxes, and (b) the amount of the increase in the Rent resulting from each of such comparisons. Landlord’s failure to render a Landlord’s Statement and/or receive payments with respect thereto during or with respect to any Comparison Year shall not prejudice Landlord’s right to render a Landlord’s Statement and/or receive payments with respect thereto during or with respect to any subsequent Comparison Year, and shall not eliminate or reduce Tenant’s obligation to pay increases in the Rent pursuant to this Article 28 for such Comparison Year. Landlord may also at any time and from time to time, furnish to Tenant a revised Landlord’s Statement or Statements showing separately or together a comparison of the Taxes payable for the Comparison Year with the Base Taxes.

(i) (a) With respect to an increase in the Rent resulting from an increase in the Taxes for any Comparison Year above the Base Taxes, Tenant shall pay to Landlord a sum equal to one-twelfth (1/12) of such increase on the first day of June when such payment is first due and then thereafter on the first of the month during the Term. If Landlord’s Statement shall be furnished to Tenant after the commencement of the Comparison Year to which it relates, then (1) until Landlord’s Statement is rendered for such Comparison Year, Tenant shall pay Tenant’s Proportionate Share of Taxes for such Comparison Year in monthly installments, as described above, based upon the last prior Landlord’s Statement rendered to Tenant with respect to Taxes, and (2) Tenant shall, within twenty (20) days after Landlord’s Statement is furnished to Tenant, pay to Landlord an amount equal to any underpayment of the installments of Taxes theretofore paid by Tenant for such Comparison Year and, in the event of an overpayment by Tenant, Landlord shall permit Tenant to credit against subsequent Rent payments the amount of such overpayment or Landlord shall reimburse Tenant within sixty (60) days after the expiration or termination of this Lease if such credit arises at the end of the Term. If during the Term of this Lease, Taxes are required to be paid (either to the appropriate taxing authorities or as tax escrow payments to a mortgagee or ground lessor) in full or in monthly, quarterly, or other installments, on any other date or dates than as presently required, then, at Landlord’s option, Tenant’s Proportionate Share with respect to Taxes shall be correspondingly accelerated or revised so that Tenant’s Proportionate Share is due at least thirty (30) days prior to the date payments are due to the taxing authorities or the superior mortgagee or ground lessor, as the case may be. The benefit of any discount for any early payment or prepayment of Taxes shall accrue solely to the benefit of Landlord, and such discount shall not be subtracted from Tenant’s Proportionate Share of such Taxes.

(b) Following each Landlord’s Statement, a reconciliation shall be made as follows: Tenant shall be debited with any increase in the Rent shown on such Landlord’s Statement and credited with the aggregate, if any, paid by Tenant on account in accordance with the provisions of subsection C(ii)(a) or C(ii)(b) for the Comparison Year in question; Tenant shall pay any net debit balance to Landlord within twenty (20) days next following rendition by Landlord, either in accordance with the provisions of Article 27 hereof or by personal delivery to the Premises, of an invoice for such net debit balance; any net credit balance shall be applied against the next accruing monthly installment of Rent.

D. Adjustments.

(i) (a) In the event that, after a Landlord’s Statement has been sent to Tenant, an Assessed Valuation which had been utilized in computing the Taxes for a Comparison Year is reduced (as a result of settlement, final determination of legal proceedings or otherwise), and as a result thereof a refund of Taxes is actually received by or on behalf of Landlord, then, promptly after receipt of such refund, Landlord shall send Tenant a statement adjusting the Taxes for such Comparison Year (taking into account the expenses mentioned in the last sentence of subsection A(i) of this Article 28) and setting forth Tenant’s Proportionate Share of such refund and Tenant shall be entitled to receive such Share by way of a credit against the Rent next becoming due after the sending of such Statement or Landlord shall reimburse Tenant within sixty (60) days after the expiration or termination of this Lease if such credit arises at the end of the Term; provided, however, that Tenant’s Share of such refund shall be limited to the amount, if any, which Tenant had theretofore paid to Landlord as increased Rent for such Comparison Year on the basis of the Assessed Valuation before it had been reduced.

 

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(b) In the event that, after a Landlord’s Statement has been sent to Tenant, the Assessed Valuation which had been utilized in computing the Base Taxes is reduced (as a result of settlement, final determination of legal proceedings or otherwise) then, and in such event: (1) the Base Taxes shall be retroactively adjusted to reflect such reduction, (2) the monthly installment of Rent shall be increased accordingly and (3) all retroactive additional rent resulting from such retroactive adjustment shall be forthwith payable when billed by Landlord. Landlord promptly shall send to Tenant a statement setting forth the basis for such retroactive adjustment and additional rent payments.

(ii) Any Landlord’s Statement sent to Tenant shall be conclusively binding upon Tenant unless, within ninety (90) days after such statement is sent, Tenant shall (a) pay to Landlord the amount set forth in such statement, without prejudice to Tenant’s right to dispute the same, and (b) send a written notice to Landlord objecting to such statement and specifying the particular respects in which such statement is claimed to be incorrect. Tenant shall also have the right to inspect and audit Tenant’s books and records as to any item of Rent to which Tenant has a dispute and Landlord shall cooperate with Tenant to make same reasonably available to Tenant.

(iii) Anything in this Article 28 to the contrary notwithstanding, under no circumstances shall the rent payable under this Lease be less than the then annual base Rent set forth in Article 1 hereof.

(iv) The expiration or termination of this Lease during any Comparison Year for any part or all of which there is an increase or decrease in the Rent under this Article shall not affect the rights or obligations of the parties hereto respecting such increase or decrease and any Landlord’s Statement relating to such increase or decrease may, on a pro rata basis, be sent to Tenant subsequent to, and all such rights and obligations shall survive, any such expiration or termination. Any payments due under such Landlord’s Statement shall be payable within twenty (20) days after such statement is sent to Tenant.

(v) Capital Improvements. If any capital improvement is made to the Real Property during any calendar year during the Term, which is required to be made pursuant to applicable law enacted after the Commencement Date, then Tenant shall pay to Landlord, within thirty (30) days after demand therefor, Tenant’s Proportionate Share of the reasonable annual amortization which shall not be less than the useful life of said improvement in accordance with generally accepted accounting principles, with interest, of the cost of such improvement in each calendar year during the Term during which such amortization occurs. This provision shall not be applicable during the last two (2) years of the Term of this Lease and Tenant shall not be required to pay for any of capital improvements made during the last two (2) years of the Lease Term or due to any law enacted prior to the Commencement Date.

29. SERVICES.

A. Elevator. Landlord shall provide passenger elevator facilities on business days from 8:00 A.M. to 6:00 P.M. and shall have one passenger elevator in the bank of elevators servicing the Premises available at all other times. Landlord shall provide freight elevator services on an “as available” basis for incidental use by Tenant from 8.00 A.M. through 12:00 Noon and from 1:00 P.M. through 5:00 P.M. on business days only. Any extended use may be arranged with Landlord’s prior consent and Tenant shall pay as additional rent all building standard charges therefor. Notwithstanding anything to the contrary in this Lease or the Rules and Regulations, Tenant shall have eight (8) hours of free overtime use of the freight elevator (in minimum two (2) hour blocks) in connection with Tenant’s initial move-in to the Premises.

B. Heating. Landlord shall furnish heat to the Premises when and as required by law, on business days from 8:00 A.M. to 6:00 P.M. Landlord shall not be responsible for the adequacy, design or capacity of the heating distribution system if the normal operation of the heat distribution system serving the Building shall fail to provide heat at reasonable temperatures or any reasonable volumes or velocities in any parts of the Premises by reason of any rearrangement of partitioning or other Alterations made or performed by or on behalf of Tenant or any person claiming through or under Tenant.

 

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C. Cooling/Central System or Package Unit. The Premises are currently serviced by a Tenant controlled air conditioning and ventilation system (the “Central System”). Tenant agrees to maintain and repair the Central System at its own cost and expense but Landlord shall be responsible for any major repairs and replacements to said Central System except in the event that any such major repairs or replacement are required by reason of the negligence of or misuse by Tenant of such Central System. Tenant shall not alter, modify or replace the Central System, or any part thereof except as otherwise required herein. The Premises shall also be served by a supplemental air-conditioning system (the “Supplemental System”) that shall be installed in the Premises as part of Landlord’s Initial Construction. Upon delivery of the Premises to Tenant, Landlord shall assign all warranties and service contracts with respect to the Supplemental System to Tenant and Tenant, thereafter, shall be responsible for all repairs, maintenance and replacements with respect to the Supplemental System. Anything in this subsection C to the contrary notwithstanding, Landlord shall not be responsible if the normal operation of the air-cooling system serving the Premises shall fail to provide cooled air at reasonable temperatures, pressures or degrees of humidity or any reasonable volumes or velocities in any parts of the Premises by reason of (i) human occupancy factors and any machinery or equipment installed by or on behalf of Tenant or any person claiming through or under Tenant that have an electrical load in excess of the average electrical load for the Building air-cooling system as designed or (ii) any rearrangement of partitioning or other Alterations made or performed by or on behalf of Tenant or any person claiming through or under Tenant. Tenant agrees to keep and cause to be kept closed all of the windows in the Premises whenever the air-cooling system is in operation and agrees to lower and close the blinds when necessary because of the sun’s position whenever the air-cooling system is in operation. Tenant at all times agrees to cooperate fully with Landlord and to abide by the regulations and requirements which Landlord may prescribe for the proper functioning and protection of the air-cooling system. Landlord represents that the Central System and Supplemental System serve the Premises exclusively and that the Central System and Supplemental System will be in good working order as of the Commencement Date.

D. After Hours and Additional Services. The Rent does not include any charge to Tenant for the furnishing of any additional passenger elevator facilities, any freight elevator facilities (other than as contemplated in Article 29 subsection A) or for the service of heat to the Premises during periods other than the hours and days set forth in sections A, B and C of this Article 29 for the furnishing and distributing of such facilities or services (referred to as “Overtime Periods”). Accordingly, if Landlord shall furnish any (i) passenger elevator facilities to Tenant during Overtime Periods or freight elevator facilities, except as provided in subsection A of this Article 29, or (ii) heat to the Premises during Overtime Periods, then Tenant shall pay Landlord additional rent for such facilities or services at the standard rates then fixed by the Landlord for the Building or, if no such rates are then fixed, at reasonable rates. Neither the facilities nor the services referred to in this Article 29D shall be furnished to Tenant or the Premises if Landlord has not received advance notice from Tenant specifying the particular facilities or services requested by Tenant at least twenty-four (24) hours prior to the date on which the facilities or services are to be furnished; or if Tenant is in default under or in breach of any of the terms, covenants or conditions of this Lease; or if Landlord shall determine, in its sole and exclusive discretion, that such facilities or services are requested in connection with, or the use thereof shall create or aid in a default under or a breach of any term, covenant or condition of this Lease. All of the facilities and services referred to in this Article 29D are conveniences and are not and shall not be deemed to be appurtenances to the Premises, and the failure of Landlord to furnish any or all of such facilities or services shall not constitute or give rise to any claim of an actual or constructive eviction, in whole or in part, or entitle Tenant to any abatement or diminution of Rent, or relieve Tenant from any of its obligations under this Lease, or impose any liability upon Landlord or its agents by reason of inconvenience or annoyance to Tenant, or injury to or interruption of Tenant’s business or otherwise. Landlord may limit the furnishing during Overtime Periods of any of the facilities or services referred to in this Article 29D to a total of twenty (20) hours in any one week.

E. Cleaning/Provided by Tenant. Tenant, at Tenant’s expense, shall cause the Premises to be kept clean in a manner satisfactory to Landlord and no one other than persons reasonably approved by Landlord shall be permitted to enter the Premises or the Building for such purpose. In addition, Tenant shall, at its own cost and expense, clean and remove all garbage, waste, rubbish and refuse from the Premises and the Building in accordance with such rules and regulations Landlord deems reasonably necessary or desirable for the proper operation of the Building.

 

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F. Sprinkler System. If there now is or shall be installed in the Building a “sprinkler system”, and such system or any of its appliances shall be damaged or injured or not in proper working order by reason of any act or omission of Tenant, Tenant’s agents, servants, employees, licensees or visitors, Tenant shall forthwith restore the same to good working condition at its own expense; and if the New York Board of Fire Underwriters or the New York Fire Insurance Rating Organization or any bureau, department or official of the state or city government, shall require or recommend that any changes, modifications, alterations or additional sprinkler heads or other equipment be made or supplied by reason of Tenant’s particular business, or the location of the partitions, trade fixtures, or other contents of the Premises, Tenant shall, at Tenant’s expense, promptly make and supply such changes, modifications, alterations, additional sprinkler heads or other equipment otherwise Landlord shall maintain and repair the sprinkler system at is sole cost and expense (except for the supervisory fee set forth herein). Landlord shall repair, maintain and replace the sprinkler system to the extent required for ordinary office use. Tenant shall pay to Landlord as additional rent the sum of twenty-five ($25.00) Dollars on the first day of each month during the term of this Lease, as Tenant’s portion of the contract price for sprinkler supervisory service.

G. Water. Landlord shall provide water for ordinary drinking, cleaning, pantry, and lavatory purposes, but if Tenant requires, uses or consumes water for any other purposes or in unusual quantities (of which fact Landlord shall be the sole judge), Landlord may install a water meter at Tenant’s expense and thereby measure Tenant’s water consumption for all purposes. In such event (i) Tenant shall keep said meter and installation equipment in good working order and repair at Tenant’s own cost and expense; (ii) Tenant agrees to pay for water consumed, as shown on said meter twenty (20) days after bills are rendered as additional rent; and (iii) Tenant covenants and agrees to pay the sewer rent, charge or any other tax, rent, levy or charge which now or hereafter is assessed, imposed or shall become a lien upon the Premises or the realty of which they are part pursuant to law, order or regulation made or issued in connection with any such metered use, consumption, maintenance or supply of water, water system, or sewage or sewage connection or system. Tenant shall pay to Landlord, as additional rent, on the first day of each month, fifty ($50.00) Dollars for the use of the water supplied to the Building in the absence of a water meter for the Demised Premises.

H. Electricity Charges. (i) Tenant shall obtain electrical service for the demised premises directly from the utility company providing such electrical service to the Building, at Tenant’s own cost and expense with regard to both installation and on-going usage. Tenant’s use of electrical energy shall never exceed the capacity of the then existing feeders to the Building or the then existing risers or wiring installation. Landlord shall have no liability to Tenant for any loss, damage or expense which Tenant may sustain or incur by reason of any change, failure, inadequacy or defect in the supply or character of the electrical energy or if the electrical energy is no longer available or suitable for Tenant’s requirements except for any actual damage suffered by Tenant by reason of any such failure, inadequacy or defect caused by Landlord’s negligence, and then only after actual notice. Tenant hereby acknowledges that it is solely responsible for payment of the electric service for the demised premises.

(ii) At Landlord’s option, Landlord shall furnish and install all replacement lighting, tubes, lamps, bulbs and ballasts required in the Premises, and Tenant shall pay to Landlord or its designated contractor upon demand Landlord’s then established reasonable charges therefor.

I. Interruption of Services. Landlord reserves the right to stop service of the heating, the elevator, electrical, plumbing or other mechanical systems or facilities in the Building and cleaning services when necessary, by reason of accident or emergency, or for repairs, additions, alterations, replacements, decorations or improvements in the reasonable judgment of Landlord desirable or necessary to be made, until said repairs, additions, alterations, replacements, decorations or improvements shall have been completed. Landlord shall have no responsibility or liability for interruption, curtailment or failure to supply heat, outside air, elevator, plumbing, electricity or cleaning when prevented by strikes, labor troubles or accidents or by any cause whatsoever reasonably beyond Landlord’s control, or by laws, orders, rules or

 

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regulations of any federal, state, county or municipal authority or failure of suitable fuel supply, or inability by exercise of reasonable diligence to obtain suitable fuel or by reason of governmental preemption in connection with a National Emergency or by reason of the conditions of supply and demand which have been or are affected by war or other emergency. The exercise of such right or such failure by Landlord shall not constitute an actual or constructive eviction, in whole or in part, or entitle Tenant to any compensation or to any abatement or diminution of Rent, or relieve Tenant from any of its obligations under this Lease, or impose any liability upon Landlord or its agents by reason of inconvenience or annoyance to Tenant, or injury to or interruption of Tenant’s business, or otherwise except as otherwise expressly provided in this Lease.

30. PARTNERSHIP TENANT.

A. Partnership Tenants. If Tenant’s interest in this Lease shall be assigned to a partnership (or to two (2) or more persons, individually and as co-partners of a partnership) pursuant to Article 12 (any such partnership and such persons are referred to in this Article 30 as a “Partnership Tenant”), the following provisions of this Article 30 shall apply to such Partnership Tenant: (i) the liability of each of the parties comprising a Partnership Tenant shall be joint and several, and (ii) each of the parties comprising a Partnership Tenant hereby consents in advance to, and agrees to be bound by, any written instrument which may hereafter be executed, changing, modifying or discharging this Lease, in whole or in part, or surrendering all or any part of the Premises to Landlord, and by any notices, demands, requests or other communications which may hereafter be given by a Partnership Tenant or by any of the parties comprising a Partnership Tenant, and (iii) any bills, statements, notices, demands, requests or other communications given or rendered to a Partnership Tenant and to all such parties shall be binding upon a Partnership Tenant and all such parties, and (iv) if a Partnership Tenant shall admit new partners, all of such new partners shall, by their admission to a Partnership Tenant, be deemed to have assumed performance of all of the terms, covenants and conditions of this Lease on Tenant’s part to be observed and performed, and (v) a Partnership Tenant shall give prompt notice to Landlord of the admission of any such new partners, and upon demand of Landlord, shall cause each such new partner to execute and deliver to Landlord an agreement in form satisfactory to Landlord, wherein each such new partner shall assume performance of all the terms, covenants and conditions of this Lease on Tenant’s part to be observed and performed (but neither Landlord’s failure to request any such agreement nor the failure of any such new partner to execute or deliver any such agreement to Landlord shall vitiate the provisions of subdivision (iv) of subsection A of this Article 30).

B. Limited Liability Entity. Notwithstanding anything to the contrary contained herein, if Tenant is a limited or general partnership (or is comprised of two (2) or more persons, individually or as co-partners), the change or conversion of Tenant to (i) a limited liability company, (ii) a limited liability partnership, or (iii) any other entity which possesses the characteristics of limited liability (any such limited liability company, limited liability partnership or entity is collectively referred to as a “Limited Liability Successor Entity”), shall be prohibited unless the prior written consent of Landlord is obtained, which consent may be withheld in Landlord’s sole discretion. Notwithstanding the foregoing, Landlord agrees not to unreasonably withhold or delay such consent provided that:

(i) The Limited Liability Successor Entity succeeds to all or substantially all of Tenant’s business and assets;

(ii) The Limited Liability Successor Entity shall have a net worth, determined in accordance with generally accepted accounting principles, consistently applied, of not less than the greater of the net worth of Tenant on (1) the date of execution of this Lease, or (2) the day immediately preceding the proposed effective date of such conversion;

(iii) Tenant is not in default of any of the terms, covenants or conditions of this Lease on the proposed effective date of such conversion;

(iv) Tenant shall cause each partner of Tenant to execute and deliver to Landlord an agreement, in form and substance satisfactory to Landlord, wherein each such partner agrees to remain personally liable for all of the terms, covenants and conditions of this Lease that are to be observed and performed by the Limited Liability Successor Entity; and

(v) Tenant shall reimburse Landlord within ten (10) business days following demand by Landlord for any and all reasonable costs and expenses that may be incurred by Landlord in connection with said conversion of Tenant to a Limited Liability Successor Entity, including, without limitation, any attorney’s fees and disbursements.

 

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31. VAULT SPACE. Any vaults, vault space or other space outside the boundaries of the Real Property, notwithstanding anything contained in this Lease or indicated on any sketch, blueprint or plan are not included in the Premises. Landlord makes no representation as to the location of the boundaries of the Real Property. All vaults and vault space and all other space outside the boundaries of the Real Property which Tenant may be permitted to use or occupy is to be used or occupied under a revocable license, and if any such license shall be revoked, or if the amount of such space shall be diminished or required by any Federal, State or Municipal authority or by any public utility company, such revocation, diminution or requisition shall not constitute an actual or constructive eviction, in whole or in part, or entitle Tenant to any abatement or diminution of rent, or relieve Tenant from any of its obligations under this Lease, or impose any liability upon Landlord. Any fee, tax or charge imposed by any governmental authority for any such vaults, vault space or other space shall be paid by Tenant.

32. SECURITY DEPOSIT.

A. Tenant shall deposit with Landlord prior to the Commencement Date the Security Deposit (as defined in Article 1 of this Lease) as security for the faithful performance and observance by Tenant of the terms, conditions and provisions of this Lease, including without limitation the surrender of possession of the Premises to Landlord herein provided. Tenant shall have the right to provide the Security Deposit in the form of a Letter of Credit. It is agreed that in the event Tenant defaults beyond any notice and cure periods in respect of any of the terms, provisions and conditions of this Lease, including, but not limited to, the payment of Rent and additional rent, Landlord may apply or retain the whole or any part of the Security Deposit so deposited to the extent required for the payment of any Rent and additional rent or any other sum as to which Tenant is in default beyond any notice and cure periods or for any sum which Landlord may expend or may be required to expend by reason of Tenant’s default beyond any notice and cure periods in respect of any of the terms, covenants and conditions of this Lease, including but not limited to, any damages or deficiency in the reletting of the Premises, whether such damages or deficiency accrue or accrues before or after summary proceedings or other reentry by Landlord. If Landlord applies or retains any part of the Security Deposit so deposited, Tenant, within ten (10) days’ after notice from Landlord, shall deposit with Landlord the amount so applied or retained so that Landlord shall have the full Security Deposit on hand at all times during the Term. The failure by Tenant to deposit such additional amount within the foregoing time period shall be deemed a material default pursuant to Article 17 of this Lease. If Tenant shall fully and faithfully comply with all of the terms, provisions, covenants and conditions of this Lease, the Security Deposit shall be returned to Tenant within sixty (60) days after the Expiration Date or earlier termination of this Lease and after delivery of the entire possession of the Premises to Landlord. In the event of a sale of the Real Property or the Building or leasing of the Building, Landlord shall have the right to transfer the Security Deposit to the vendee or lessee and Landlord shall thereupon be released by Tenant from all liability for the return of the Security Deposit; and Tenant agrees to look solely to the new Landlord for the return of the Security Deposit; and it is agreed that the provisions hereof shall apply to every transfer or assignment made of the Security Deposit to a new Landlord. Tenant further covenants that it will not assign or encumber or attempt to assign or encumber the Security Deposit and that neither Landlord nor its successors or assigns shall be bound by any such assignment, encumbrance, attempted assignment or attempted encumbrance. Landlord shall retain the Security Deposit in an interest bearing account at a customary rate of interest for the benefit of the tenant less any customary charges charged by managing agent.

B. Upon execution of this Lease, Court Cunningham, a principal of Tenant shall execute a good guy guaranty (the “Guaranty”) in the form attached as Exhibit “G”. If either (x) Court Cunningham is no longer employed by Tenant or (y) Tenant becomes a public corporation, then the Guaranty shall be void and of no further force or effect provided that the then current

 

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tenant of the Premises delivers to Landlord additional security equal to three (3) months of the annual base rent payable at the time that Mr. Cunningham is no longer employed by Tenant or Tenant becomes a public corporation, as the case may be.

C. Provided that Tenant is not then in default beyond notice and cure periods under any of the terms of this Lease, the Security Deposit will be reduced by the sum of $81,666.66 on three separate dates, such that the Security Deposit will be reduced by $81,666.66 on the second anniversary of the Rent Commencement Date and further reduced by $81,666.66 on the third anniversary of the Rent Commencement Date and further reduced by $81,666.66 on the fourth anniversary of the Rent Commencement Date (each a “Security Deposit Reduction”). No Security Deposit Reduction shall occur if, in the twelve months preceding such Security Deposit Reduction, Tenant has twice failed to pay the Fixed Rent and/or Additional Rent after notice from Landlord and an opportunity to cure as provided in this Lease, which shall constitute a “Waived Security Deposit Reduction”. A Waived Security Deposit Reduction shall not waive Tenant’s right to a subsequent Security Deposit Reduction, provided that Tenant otherwise complies with the provisions of this paragraph, but the Security Deposit shall not be reduced by the amount of the Waived Security Deposit Reduction.

33. CAPTIONS. The captions are inserted only as a matter of convenience and for reference and in no way define, limit or describe the scope of this Lease nor the intent of any provision thereof.

34. ADDITIONAL DEFINITIONS.

A. The term “office” or “offices”, wherever used in this Lease, shall not be construed to mean premises used as a store or stores, for the sale or display, at any time, of goods, wares or merchandise, of any kind, or as a restaurant, shop, booth, bootblack or other stand, barber shop, or for other similar purposes or for manufacturing.

B. The words “reenter” and “reentry” as used in this Lease are not restricted to their technical legal meaning.

C. The term “rent” as used in this Lease shall mean and be deemed to include Rent, any increases in Rent, all additional rent and any other sums payable hereunder.

D. The term “business days” as used in this Lease shall exclude Saturdays, Sundays and all days observed by the State or Federal Government as legal holidays and union holidays for those unions that materially affect the delivery of services in the Building.

35. PARTIES BOUND. The covenants, conditions and agreements contained in this Lease shall bind and inure to the benefit of Landlord and Tenant and their respective heirs, distributees, executors, administrators, successors, and, except as otherwise provided in this Lease, their assigns.

36. BROKER. Landlord and Tenant represent and warrant to the other that they have dealt directly with (and only with), the Broker (as defined in Article 1 herein) as broker in connection with this Lease, and that insofar as Landlord and Tenant know no other broker negotiated this Lease or is entitled to any commission in connection therewith; and Landlord and Tenant covenant and agree to pay, hold harmless and indemnify the other from and against any and all cost, expense (including reasonable attorney’s fees) arising from a breach of the provisions of this Article 36. This Paragraph shall survive the expiration or sooner termination of this Lease. Broker shall be entitled to one full commission from Landlord pursuant to a separate agreement.

37. INDEMNITY. Tenant shall not do or permit any act or thing to be done upon the Premises which may subject Landlord to any liability or responsibility for injury, damages to persons or property or to any liability by reason of any violation of law or of any legal requirement of public authority, but shall exercise such control over the Premises as to fully protect Landlord against any such liability. Tenant agrees to indemnify and save harmless Landlord from and against all liabilities, obligations, damages, penalties, claims, costs and expenses, including reasonable attorney fees, incurred or arising from (i) any act, omission or negligence of Tenant, its contractors, licensees, agents, employees, invitees or visitors, including any claims arising from any act, omission or negligence of Landlord or Landlord or Tenant; (ii)

 

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any accident, injury or damage whatsoever caused to any person or to the property of any person and occurring during the Term in or about the Premises unless the same was caused by Landlord’s negligence, (iii) any accident, injury or damage to any person, entity or property, occurring outside of the Premises but anywhere within or about the Real Property, where such accident, injury or damage results or is claimed to have resulted from an act or omission of Tenant or Tenant’s agents, employees, invitees or visitors, including any claims arising from any act, omission or negligence of Landlord or Landlord and Tenant, (iv) any breach, violation or nonperformance of any covenant, condition or agreement in this Lease set forth and contained on the part of Tenant to be fulfilled, kept, observed and performed and (v) Tenant, or any of Tenant’s contractors, licensees, agents, employees, invitees or visitors causing or permitting any Hazardous Substance (as hereinafter defined) to be brought upon, kept or used in or about the Premises or the Real Property or any seepage, escape or release of such Hazardous Substances except for any Hazardous Substances existing at the Premises prior to the Commencement Date which shall be Landlord’s responsibility to remediate from the Premises. The term “Hazardous Substances” shall mean, collectively, (a) asbestos and polychlorinated biphenyls and (b) hazardous or toxic materials, wastes and substances which are defined, determined and identified as such pursuant to any law and (c) any Prohibited CFC’s. Tenant’s liability under this Lease extends to the acts and omissions of any subtenant and any contractor, licensee, agent, employee, invitee or visitor of any subtenant. As used herein and in all other provisions in this Lease containing indemnities made for the benefit of Landlord, the term “Landlord” shall mean the Landlord herein named and its managing agent and their respective parent companies and/or corporations, their respective controlled, associated, affiliated and subsidiary companies and/or corporations and their respective members, officers, partners, agents, consultants, servants, employees, successors and assigns. This indemnity and hold harmless agreement shall include indemnity from and against any and all liability, fines, suits, demands, costs and expenses of any kind or nature incurred in or in connection with any such claim or proceeding brought thereon, and the defense thereof. This Paragraph shall survive the expiration or sooner termination of this Lease.

38. ADJACENT EXCAVATION SHORING. If an excavation shall be made upon land adjacent to the Premises, or shall be authorized to be made, Tenant shall afford to the person causing or authorized to cause such excavation, license to enter upon the Premises for the purpose of doing such work as said person shall deem necessary to preserve the wall or the Building from injury or damage and to support the same by proper foundations without any claim for damages or indemnity against Landlord, or diminution or abatement of Rent.

39. MISCELLANEOUS.

A. No Offer. This Lease is offered for signature by Tenant and it is understood that this Lease shall not be binding upon Landlord unless and until Landlord shall have executed and delivered a fully executed copy of this Lease to Tenant and all of Tenant’s obligations relative to the effectiveness hereof have been satisfied, including, but not limited to, the delivery of a valid insurance certificate complying with the requirements hereof and the receipt by the Landlord of good usable funds for the payment of the first monthly installment of rent and the Security Deposit. The delivery of this Lease by the Tenant to the Landlord shall constitute an irrevocable offer to the Landlord for a period of ten (10) days during which period Landlord may accept or reject this Lease, at its option.

B. Certificates. From time to time, within seven (7) days next following request by Landlord or the mortgagee of a Mortgage, Tenant shall deliver to Landlord or such mortgagee, as the case may be, a written statement executed and acknowledged by Tenant, in form satisfactory to Landlord or such mortgagee, (i) stating that this Lease is then in full force and effect and has not been modified (or if modified, setting forth all modifications), (ii) setting forth the date to which the Rent, additional rent and other charges hereunder have been paid, together with the amount of fixed base monthly Rent then payable, (iii) stating whether or not, to the best knowledge of Tenant, Landlord is in default under this Lease, and, if Landlord is in default, setting forth the specific nature of all such defaults, (iv) stating the amount of the security deposit under this Lease, (v) stating whether there are any subleases affecting the Premises, (vi) stating the address of Tenant to which all notices and communications under the Lease shall be sent, (vii) stating the Commencement Date, the Rent Commencement Date and the Expiration Date, and (viii) as to any other matters requested by Landlord or such mortgagee. Tenant

 

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acknowledges that any statement delivered pursuant to this subsection B may be relied upon by any purchaser or owner of the Real Property or the Building, or Landlord’s interest in the Real Property or the Building or any Superior Lease, or by any mortgagee of a Mortgage, or by any assignee of any mortgagee of a Mortgage, or by any lessor under any Superior Lease.

C. Directory Listings. Landlord agrees to provide Tenant, at Landlord’s sole cost and expense, with a single listing of Tenant’s name on the directory in the lobby of the Building. Upon written request by Tenant, Landlord agrees to provide Tenant with additional listings on such directory, at Tenant’s sole cost and expense, provided Tenant shall be limited to a number of listings determined by multiplying Tenant’s Proportionate Share by the total number of spaces for listings on such directory.

D. Authority. If Tenant is a corporation or partnership, each individual executing this Lease on behalf of Tenant hereby represents and warrants that Tenant is a duly formed and validly existing entity qualified to do business in the State of New York and that Tenant has full right and authority to execute and deliver this Lease and that each person signing on behalf of Tenant is authorized to do so.

E. Signage. Tenant shall not exhibit, inscribe, paint or affix any sign, advertisement, notice or other lettering on any portion of the Building or the outside of the Premises without the prior written consent of Landlord in each instance. A plan of all signage or other lettering proposed to be exhibited, inscribed, painted or affixed on the entry door(s) to the Premises shall be prepared by Tenant in conformity with building standard signage requirements (if any) and submitted to Landlord for Landlord’s reasonable consent. Upon the granting of Landlord’s consent, Tenant may install such signage at Tenant’s sole cost and expense. Upon installation of any such signage or other lettering, such signage or lettering shall not be removed, changed or otherwise modified in any way without Landlord’s prior written reasonable approval. Any signage, advertisement, notice or other lettering which shall be exhibited, inscribed, painted or affixed by or on behalf of Tenant in violation of the provisions of this section may be removed by Landlord and the cost of any such removal shall be paid by Tenant as additional rent. Tenant shall not exhibit, inscribe, paint or affix on any part of the Premises or the Building visible to the general public any signage or lettering including the words “temporary” or “personnel”. Notwithstanding anything to the contrary herein, Landlord approves Tenant’s signage as depicted on Exhibit G hereto.

F. Consents and Approvals. All references in this Lease to the consent or approval of Landlord shall be deemed to mean the written consent of Landlord or the written approval of Landlord and no consent or approval of Landlord shall be effective for any purpose unless such consent or approval is set forth in a written instrument executed by Landlord. Wherever in this Lease Landlord’s consent or approval is required, if Landlord shall delay or refuse such consent or approval, Tenant in no event shall be entitled to make, nor shall Tenant make, any claim, and Tenant hereby waives any claim for money damages (nor shall Tenant claim any money damages by way of set-off, counterclaim or defense) based upon any claim or assertion by Tenant that Landlord unreasonably withheld or unreasonably delayed its consent or approval. Tenant’s sole remedy shall be an action or proceeding to enforce any such provision, for specific performance, injunction or declaratory judgment or to commence an expedited arbitration action in New York City under the rules of the American Arbitration Association for expedited proceedings.

G. Governing Law. This Lease shall be deemed to have been made in New York County, New York, and shall be construed in accordance with the laws of New York. All actions or proceedings relating, directly or indirectly, to this Lease shall be litigated only in courts located within the County of New York. Landlord and Tenant, any guarantor of the performance of Tenant’s obligations hereunder and their respective successors and assigns, hereby subject themselves to the jurisdiction of any state or federal court located with such county, and shall be subject to service provided that the terms, provisions and conditions of Article 27 are adhered to.

H. Financial Statements. Tenant shall furnish Landlord annually throughout the Term, within ninety (90) days following the end of Tenant’s fiscal year (or within five (5) business days after Landlord’s request therefore whichever is later), an updated, current financial statement of Tenant, which statement shall be audited (if available).

 

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40. HAZARDOUS SUBSTANCES. Tenant shall not permit the presence, handling, use, storage or transportation of Hazardous Substances in or about the Premises or the Building and Tenant shall, at its sole cost and expense, perform any and all Remedial Work arising from, growing out of or related to any breach of the foregoing covenant by Tenant. The term “Remedial Work” shall mean all investigation, monitoring, restoration, abatement, detoxification, containment, handling, treatment, removal, storage, decontamination, clean-up, transport, disposal or other ameliorative work or response action undertaken in connection with (a) any “Environmental Laws” (as hereinafter defined), (b) any order of any governmental authority having jurisdiction over the Premises and/or the Building, or (c) any final judgment, consent decree, settlement or compromise with respect to any “Hazardous Substances Claims” (as hereinafter defined). The term “Hazardous Substances Claims” shall mean any and all enforcement, clean-up, removal, remedial or other governmental or regulatory actions, agreements or orders threatened in writing, instituted or completed pursuant to any Environmental Laws and any and all other actions, proceedings, claims, written demands or causes of action, whether meritorious or not (including, without limitation, third party claims for contribution, indemnity, personal injury or real or personal property damage), that, in each case, relate to, arise from or are based, in whole or in part, on the occurrence or alleged occurrence of any violation or alleged violation of or responsibility under any applicable Environmental Law relating to the Premises and/or the Building or to the ownership, use, occupation or operation thereof. The term “Environmental Laws” shall mean any and all present and future federal, state and local laws (whether under common law, statute, ordinance, rule, regulation or otherwise), court or administrative orders or decrees, requirements of permits issued with respect thereto, and other requirements of governmental authorities having jurisdiction over the Premises and/or the Building relating to protection of the environment, to public health and safety or any Hazardous Substances (including, without limitation, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (“CERCLA”), 42 U.S.C. §§ 9601, et seq., as heretofore or hereafter amended from time to time). Notwithstanding anything to the contrary in this Lease, Tenant shall not have any obligation or liability with respect to any Hazardous Substances existing on the Premises or Real Property prior to the Commencement Date and Landlord shall, at its sole cost and expense, perform any Remedial Work and pay any Hazardous Substance Claims for same.

41. LANDLORD’S TERMINATION OPTION. Landlord shall have the right at any time to cancel and terminate this Lease in the event Landlord shall decide to demolish or rehabilitate the Building (the “Termination Option”), provided that Landlord also terminate at least seventy percent (70%) of all other leases in the Building and Landlord shall give notice to Tenant of Landlord’s exercise of the Termination Option not later than six (6) months prior to the proposed termination date set forth in such notice. In the event Landlord shall give such notice of termination pursuant to the provisions of this Article 41, this Lease shall come to an end and expire on the termination date set forth in the notice of termination, with the same force and effect as though said date were the Expiration Date, unless sooner terminated pursuant to any other term, covenant or condition of this Lease, or pursuant to law.

42. LANDLORD’S OPTION TO RELOCATE TENANT. Landlord shall have the right, upon not less than sixty (60) days prior written notice (the “Relocation Notice”) to Tenant, to relocate Tenant, at Landlord’s sole expense, to other space located in the Building (the “Substitution Space”) of substantially comparable size and condition as the Premises, in which event Tenant shall vacate the Premises on the date specified in the Relocation Notice and enter into an amendment of this Lease with Landlord reasonably acceptable to Tenant to provide for (i) the deletion of all reference to the Premises and the insertion of the Substitution Space in place thereof, (ii) a fixed annual rent equal to the then current fixed annual rent per square foot payable by Tenant under this Lease multiplied by the number of rentable square feet in the Substitution Space provided that such Rent shall not be greater than the total Rent being paid Tenant under this Lease as of the date of such relocation (i.e., if the Substitution Space is bigger than the Premises, Tenant’s Rent shall not increase) and (iii) a modification of the definitions of Tenant’s Proportionate Share (as currently defined in Article 1 hereof) to accurately represent the percentage which the Substitution Space bears to the total rentable area of the Building (provided that same shall not be increased). In all other respects, the terms and conditions contained in this

 

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Lease (including escalations and base years) shall remain unmodified and continue in full force and effect. Notwithstanding the foregoing, Landlord shall not have the right to relocate Tenant or send a Relocation Notice during that last year of the Term and/or more than one (1) time during the Term. In the event Landlord shall relocate Tenant, Landlord shall do so at its sole cost and expense and shall upon demand reimburse Tenant for any costs incurred by Tenant with respect to the Relocation including, without limitation, moving, telecommunication and cabling costs and costs for any changes to Tenant’s stationary. In addition, the Substitution Space must be substantially similar in size and configuration to the Premises.

43. CONDOMINIUM. This Lease and all rights of Tenant hereunder are and shall be subject and subordinate in all respects to any past, present and future condominium declaration and any other documents, instruments, or agreements, including, without limitation any by-laws, offering plan(s), or house rules, as same may be amended from time to time (collectively, the “Declaration”) which have been and/or shall be recorded or executed in connection therewith including those which were executed or prepared in order to convert the Land and the improvements (or any part thereof) erected thereon to a condominium form of ownership in accordance with the provisions of Article 9-B of the Real Property Law, or any successor thereto. If any such Declaration is to be recorded, Tenant, upon the request of Landlord, shall enter into an amendment of this Lease confirming such subordination and modifying the Lease in such respects as shall be necessary to conform to such condominium conversion, including, without limitation, appropriate adjustments to Tenant’s Share and appropriate reductions in the Operating Expenses for the Base Operating Year and the Base Tax Amount; provided, that, such amendment shall not reduce Tenant’s rights or increase Tenant’s obligations under this Lease (in either case in any material respect) or increase Tenant’s monetary obligations under the Lease. Tenant shall comply with and shall not breach or permit to be breached any of the terms, covenants, conditions, or provisions of the Declaration.

44. ADDITIONAL SPACE.

A. Effective as of the Additional Space Inclusion Date, the space on the 4th floor of the Building, approximately 5,300 rentable square feet currently occupied by Askjeeves, substantially as shown hatched on the floor plan annexed as Exhibit “F” (the “Additional Space”) shall become part of the Premises, without any further act on the part of Landlord or Tenant and upon all of the terms and conditions of this Lease, except that, from and after the Additional Space Inclusion Date:

(i) Fixed Rent shall be increased by the then escalated rental rate for the Premises as provided on Exhibit “H” per annum, payable in 12 equal monthly installments;

(ii) Tenant’s Proportionate Share shall be increased by 1.56%;

(iii) Intentionally Omitted;

(iv) Intentionally Omitted; and

(v) Except as otherwise provided in this Lease, Landlord shall not be required to perform Landlord’s work or any other work, or render any services to make the Building or the Additional Space ready for Tenant’s use or occupancy, and Tenant shall accept the Additional Space in its “as is” condition on the Additional Space Inclusion Date except that Landlord shall deliver the Additional Space vacant, broom clean and in substantially the condition as of the date hereof, subject to reasonable wear and tear.

B. The “Additional Space Inclusion Date” shall be March 1, 2010 (the “Anticipated Inclusion Date”); provided, that if on the Anticipated Inclusion Date there is a holdover tenancy in all or any part of the Additional Space or if Landlord for any reason has not delivered the Additional Space to Tenant on or prior to said date, then the Additional Space Inclusion Date shall be the date that Landlord delivers vacant possession of the Additional Space to Tenant. Landlord shall use reasonable efforts to deliver possession of the Additional Space to Tenant on or before the Anticipated Inclusion Date, including, to the extent advisable in Landlord’s business judgment, the institution and prosecution of holdover or other appropriate proceedings against any occupant of the Additional Space. If Landlord is unable to deliver possession of the Additional Space to Tenant for any reason on or before the Anticipated Inclusion Date, Landlord

 

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shall have no liability to Tenant therefor and this Lease shall not in any way be impaired except as otherwise provided herein. This Section 44.B. constitutes “an express provision to the contrary” within the meaning of said Section 223(a) of the New York Real. Property Law and any other law of like import now or hereafter in effect. Notwithstanding anything to the contrary in this Article 44, Tenant shall not be required to take and lease from Landlord the Additional Space if Landlord has not delivered the Additional Space to Tenant in the condition required under this Lease and there is less than twelve (12) months remaining in the Term.

C. Landlord and Tenant confirm that the Additional Space is conclusively deemed to contain 5,300 rentable square feet.

D. Promptly after the occurrence of the Additional Space Inclusion Date, Landlord and Tenant shall confirm the occurrence thereof and the inclusion of the Additional Space in the Premises by executing an instrument reasonably satisfactory to Landlord and Tenant; provided, that failure by Landlord or Tenant to execute such instrument shall not affect the inclusion of the Additional Space in the Premises in accordance with this Section 44.01.

45. Landlord’s Contribution.

A. In connection with the Additional Space, Landlord shall reimburse Tenant for the cost of Initial Tenant Work in an amount (the “Work Allowance”) equal to the lesser of (i) $26,500, and (ii) the actual cost of Initial Tenant Work, upon the following terms and conditions:

(i) Reimbursement shall be made to Tenant after all Initial Tenant Work has been substantially completed;

(ii) Tenant shall have supplied to Landlord: (1) a certificate signed by Tenant’s architect and an officer of Tenant certifying that all Initial Tenant Work has been satisfactorily completed in accordance with the plans and specifications therefor approved by Landlord, (2) paid invoices evidencing the cost of all Initial Tenant Work, (3) a general release from all contractors, subcontractors and materialmen performing Initial Tenant Work and (4) all Building Department sign-offs and inspection certificates and any permits required to be issued by the Building Department or any other governmental entities having jurisdiction thereover; and

(iii) Tenant is not then in default beyond any notice and cure periods under this Lease.

B. “Initial Tenant Work” means the installation of fixtures, improvements and appurtenances attached to or built into the Premises, and shall not include movable partitions, business and trade fixtures, machinery, equipment, furniture, furnishings and other articles of personal property.

C. The right to receive reimbursement for the cost of Initial Tenant Work as set forth in this Section 44.02 shall be for the exclusive benefit of Tenant, it being the express intent of the parties hereto that in no event shall such right be conferred upon or for the benefit of any third party, including, without limitation, any contractor, subcontractor, materialman, laborer, architect, engineer, attorney or any other person, firm or entity.

 

- 39 -


It is acknowledged and agreed that in the preparation of this lease, indistinguishable contributions were made by the attorneys and other representatives of both Landlord and Tenant and that Landlord and Tenant each waives any and all rights, either in law or in equity, to have this lease or any part thereof interpreted in favor of one party over the other on the basis of lease draftsmanship and preparation.

IN WITNESS WHEREOF, Landlord and Tenant have respectively executed this Lease as of the day and year first above written.

 

Matana LLC, Landlord
By:   LOGO
 

 

Name:  
Title:  
Yodle, Inc., Tenant
By:   LOGO
 

 

Name:   Court Cunningham
Title:   CEO

 

 

  Tenant’s Tax I.D. Number


EXHIBIT A

Floor Plan of Premises

 

LOGO


EXHIBIT B

RULES AND REGULATIONS

 

I. The rights of each tenant in the Building to the entrances, corridors and elevators of the Building are limited to ingress to and egress from such tenant’s premises and no tenant shall use, or permit the use of the entrances, corridors, or elevators for any other purpose. No tenant shall invite to its premises, or permit the visit of persons in such numbers or under such conditions as to interfere with the use and enjoyment of any of the plazas, entrances, corridors, elevators and other facilities of the Building by other tenants. No tenant shall encumber or obstruct, or permit the encumbrances or obstruction of any of the sidewalks, plazas, entrances, corridors, elevators, fire exits or stairways of the Building. Landlord reserves the right to control and operate the public portions of the Building, the public facilities, as well as facilities furnished for the common use of the tenants, in such manner as Landlord deems best for the benefit of the tenants generally.

 

II. Landlord may refuse admission to the Building outside of ordinary business hours to any person not known to the watchman in charge or not having a pass issued by Landlord or not properly identified, and may require all persons admitted to or leaving the Building outside of ordinary business hours to register. Tenants’ employees, agents and visitors shall be permitted to enter and leave the Building whenever appropriate arrangements have been previously made between Landlord and the tenant with respect thereto. Each tenant shall be responsible for all persons for whom it requests such permission and shall be liable to Landlord for all acts of such persons. Any person whose presence in the Building at any time shall, in the judgment of Landlord, be prejudicial to the safety, character, reputation or interests of the Building or its tenants may be denied access to the Building or may be ejected therefrom. In case of invasion, riot, public excitement or other commotion Landlord may prevent all access to the Building during the continuance of the same, by closing the doors or otherwise, for the safety of the tenants and protection of property in the Building. Landlord may require any person leaving the Building with any package or other object to exhibit a pass from the tenant from whose premises the package or object is being removed, but the establishment and enforcement of such requirement shall not impose any responsibility on Landlord for the protection of any tenant against the removal of property from the premises of tenant. Landlord shall, in no way, be liable to any tenant for damages or loss arising from the admission, exclusion or ejection of any person to or from a tenant’s premises or the Building under the provisions of this rule.

 

III. No tenant shall obtain or accept for use in its premises ice, drinking water, towels, barbering, boot blacking, floor polishing, lighting maintenance, cleaning or other similar services from any persons not authorized by Landlord in writing to furnish such services. Such services shall be furnished only at such hours, in such places within the tenant’s premises and under such regulation as may be fixed by Landlord.

 

IV. No window or other air-conditioning units shall be installed by any tenant, and only such window coverings as are supplied or permitted by Landlord shall be used in a tenant’s premises.

 

V. There shall not be used in any space, nor in the public halls of the Building, either by any tenant, jobber or others in the delivery or receipt of merchandise, any hand trucks, except those equipped with rubber tires and side guards.

 

VI. All entrance doors in each tenant’s premises shall be left locked when the tenant’s premises are not in use. Entrance doors shall not be left open at any time. All windows in each tenant’s premises shall be kept closed at all times and all blinds therein above the ground floor shall be lowered when and as reasonably required because of the position of the sun, during the operation of the air-conditioning system to cool or ventilate the tenant’s premises.

 

VII. No noise, including the playing of any musical instruments, radio or television, which, in the judgment of Landlord, might disturb other tenants in the Building, shall be made or permitted by any tenant. No dangerous, inflammable, combustible or explosive object, material or fluid shall be brought into the Building by any tenant or with the permission of any tenant.


VIII. Each tenant shall be required to use Landlord’s designated locksmith and may only install such locks and other security devices as Landlord approves. Each tenant shall furnish Landlord with keys to its respective premises so that Landlord may have access thereto for the purposes set forth in the Lease. No additional locks or bolts of any kind shall be placed upon any of the doors or windows in any tenant’s premises and no lock on any door therein shall be changed or altered in any respect. Duplicate keys for a tenant’s premises and toilet rooms shall be procured only from Landlord, which may make a reasonable charge therefore. Upon the termination of a tenant’s lease, all keys of the tenant’s premises and toilet rooms shall be delivered to Landlord.

 

IX. Each tenant, shall, at its expense, provide artificial light in the premises for Landlord’s agents, contractors and employees while performing janitorial or other cleaning services and making repairs or alterations in said premises.

 

X. No tenant shall install or permit to be installed any vending machines.

 

XI. No animals or birds may be brought into or kept in or about the Building; Tenant acknowledges that any violation of this Rule and Regulation will impair the first class character and reputation of the Building and shall be a material default under this Lease. In addition, no bicycles, mopeds or vehicles of any kind shall be brought into or kept in or about the Building or permitted therein.

 

XII. No furniture, office equipment, packages or merchandise will be received in the Building or carried up or down in the elevator, except between such hours as shall be designated by Landlord. Landlord shall prescribe the charge for freight elevator use and the method and manner in which any merchandise, heavy furniture, equipment or safes shall be brought in or taken out of the Building, and also the hours at which such moving shall be done. No furniture, office equipment, merchandise, large packages or parcels shall be moved or transported in the passenger elevators at any time.

 

XIII. All electrical fixtures hung in offices or spaces along the perimeter of any tenant’s Premises must be fluorescent, of a quality, type, design and bulb color approved by Landlord unless the prior consent of Landlord has been obtained for other lamping.

 

XIV. The exterior windows and doors that reflect or admit light and air into any premises or the halls, passageways or other public places in the Building, shall not be covered or obstructed by any tenant, nor shall any articles be placed on the windowsills.

 

XV. Canvassing, soliciting and peddling in the Building is prohibited and each tenant shall cooperate to prevent same.

 

XVI. No tenant shall do any cooking conduct any restaurant, luncheonette or cafeteria for the sale or service of food or beverages to its employees or to others, except as expressly approved in writing by Landlord. In addition, no tenant shall cause or permit any odors of cooking or other processes or any unusual or objectionable odors to emanate from the premises. The foregoing shall not preclude tenant from having food or beverages delivered to the premises, provided that no cooking or food preparation shall be carried out at the premises.

 

XVII. No tenant shall generate, store, handle, discharge or otherwise deal with any Hazardous Substances on or about the Real Property.


EXHIBIT C

LANDLORD’S INITIAL CONSTRUCTION

Subject to the other terms and provisions hereof, Landlord agrees, at its sole cost and expense and without charge to Tenant, to do the following work, one time, in the Premises, all of which work shall be of quality, installation, design, capacity, finish and color of the building standard adopted by Landlord for the Building hereinafter called “Building Standard”:

 

    Landlord shall build out the Premises, using Building Standard finishes, as per the plan and workletter attached in Schedule 1.

 

    Landlord shall cosmetically upgrade the existing bathrooms in the Premises.

 

    Landlord shall provide and install a two (2) ton supplemental AC unit in the server room.

 

    Landlord to provide complete ADA and code compliant sprinkler system and life safety system in Premises.

 

    Landlord to provide asbestos free and unobstructed vertical and horizontal shaft space for Tenant’s communication needs.

 

    Deliver all Building systems and HVAC units serving the Premises in good working order.

 

    Remove all Hazardous Substances and Prohibited CFC’s from the Premises.

Notwithstanding anything contained herein to the contrary, Landlord’s Initial Construction shall be deemed to have been substantially completed on the earlier of (i) the date upon which Landlord’s Initial Construction has been completed, other than (A) minor details or adjustments, (B) items which, in accordance with good construction practice, should be performed after completion of Tenant’s initial Alterations and (C) any part of Landlord’s Initial Construction that is not completed due to Tenant Delay (as defined herein); provided, that in each case Landlord shall nevertheless remain obligated to complete Landlord’s Initial Construction and (ii) the date Tenant takes possession of the Premises for the performance of Alterations or for any other reason. The taking of possession of the Premises by Tenant shall be conclusive evidence as against Tenant that, at the time such possession was so taken, the Premises and the Building were in good and satisfactory condition and that Landlord’s Initial Construction was fully and satisfactorily completed except for minor or insubstantial details of construction or mechanical adjustment which Landlord agrees to complete with reasonable diligence after Tenant’s taking of possession.

Tenant Delay” means any delay which Landlord may encounter in the performance of Landlord’s obligations under this Lease by reason of any act or omission of any nature of Tenant, its agents or contractors, including, without limitation, delays due to changes in or additions to Landlord’s Initial Construction requested by Tenant, delays by Tenant in submission of information or giving authorizations or approvals or delays due to the postponement of any Landlord’s Initial Construction at the request of Tenant. Tenant shall pay to Landlord any reasonable costs or expenses incurred by Landlord by reason of any Tenant Delay.


Schedule 1

 

LOGO


Schedule 1

September 15, 2008 (Revised 9/18/08)

 

Project:    Yodle
  

50 West 23rd Street - 4th Floor Partial New

York, NY

Subject:    Proposed Workletter Revised 9/18/08

 

 

Standard Items

 

1. Standard Interior Partitions:

 

    2-1/2” metal studs @ 16” O.C. with (1) layer of 5/8” gypsum board on each side, from floor slab to 6” above hung ceiling.

 

2. Glasslites at Perimeter Offices:

 

    Clear glass safety glass either tempered or laminated 4’ AFF to align with top of doors. Framless. Widths as indicated on plans.

 

3. Ceiling Tile and Grid:

 

    Armstrong Optima open plan Tegular fine texture 24” x 24” x 1” with Silhouette 9/16” bolt-slot grid with 1/8 “ reveal or to match existing, in areas where demolition has occurred or where required if tiles are damaged or broken.

 

4. Light Fixtures:

 

    Fluorescent 2’ x 4’ to match existing

 

5. Power and Outlets:

 

    Private Offices: 2 duplex outlet (1) empty conduit for telephone and low voltage wiring at desk location and (1) duplex convenience outlet.

 

    Open Areas: 2 duplex outlets and (1) empty conduit for reception and low voltage wiring per workstation.

Note:

Two (2) duplex outlets per 150 SF min.

One (1) Stub-up per 150 SF min.

 

6. Interior Private Office Doors:

 

    Replace all office doors with hollow metal doors with full glass (FG).

 

7. Interior Private Office Door Hardware:

 

    1 1/2 pairs hinges mortised by Stanley, FBB 191 4-1/2 x 4-1/2 32D Stainless Steel finishes.

 

    1 mortised latchset with lever handles by Schlage Satin Chromium finish.

 

    1 door stop by Ives FS426 Satin Chromium R Series #02 - Finish: 625. Or to match existing.

 

Page 1 of 2


Schedule 1

 

Proposed Work Letter

Yodle -50 West 23rd Street

September 15, 2008 - Revised 9/18/08

 

8. Window treatment: Nysan solar shades Superweave 5% openness White #0202

 

9. Finishes:

 

    Walls - Benjamin Moore Paint - Latex Flat

 

    Base - 4” rubber base by Allstate

 

    Floor - Carpet Tile TBD Weight: 34 oz

 

10. Pantry:

 

    Millwork base cabinets, counters, and upper cabinets with plastic laminate finish

 

    ADA Sink, faucet, and under cabinet water filter

 

    Linoleum floor

 

    Full Height Refrigerator

 

    Microwave

 

    Dishwasher

 

11. Air Conditioning:

 

    4 ton air supplemental HVAC unit for IT Room as per lease.

 

12. IT Room:

 

    Remove raised flooring.

 

    Remove glass clear story and sheetrock over.

 

    Remove existing telco equipment on wall of data center, replace and paint plywood.

 

    Remove existing cabling.

 

    Construct shelving on wall(s)

 

13. Data Center

 

    Shift existing wall between Data Center and IT Room four feet.

 

    Install fire suppression system.

 

    Install door with strike for electronic access.

 

14. Paint & plaster bathrooms.

 

Page 2 of 2


EXHIBIT D

REQUIREMENTS FOR

“CERTIFICATES OF FINAL APPROVAL”

 

1. All required Building Department Forms must be properly filled out and completed by the approved architect/engineer of record or Building Department expediter, as required.

 

2. All forms are to be submitted to Landlord for Landlord’s review and signature prior to submission of final plans and forms to the New York City Building Department, as required.

 

3. All pertinent forms and filed plans are to be stamped and sealed by a licensed architect and/or professional engineer, as required. All controlled inspections are to be performed by the architect/engineer of record unless approved otherwise by Landlord.

 

4. A copy of all approved forms, permits and approved Building Department plans (stamped and signed by the New York City Building Department) are to be submitted to the building office prior to start of work.

 

5. Copies of all completed inspection reports and NYC Building Department sign-offs are to be submitted to the building office immediately following completion of construction, as required.

 

6. All claims, violations or discrepancies with improperly filed plans, applications, or improperly completed work shall become the sole responsibility of the applicant to resolve, as required.

 

7. All changes to previously approved plans and applications must be filed under an amended application, as required. Landlord reserves the right to withhold approvals to proceed with changes until associated plans are properly filed with the New York City Building Department, as required.

 

8. The architect/engineer of record accepts full responsibility for any and all discrepancies or violations which arise out of non-compliance with all local laws and building codes having jurisdiction over the work.

 

9. Landlord reserves the right to reject any and all work requests and new work applications that are not properly filed or accompanied by approved plans and building permits.

 

10. All ACP’ s and asbestos inspections must be conducted by a licensed and fully qualified asbestos inspection agency approved by Landlord.

These forms must be furnished by the Architect/ Engineer of record or Building Department expediter (filing agency) and approved by the Landlord prior to submitting all plans and forms to the New York City Building Department for final approval.

These forms must be furnished by Tenant.

 

    

Form

  

Description

        *    PW-1    Building Notice Application (Plan work approval application)
        *    PW-1B    Plumbing/Mechanical Equipment Application and Inspection Report
        *    PW-1    Statement Form B
        *    TR-1    Amendment Controlled Inspection Report
        *    PW-2    Building Permit Form (All Disciplines)
   B Form 708    Building Permit “Card”


        *    TR-1    Certification of Completed Inspection and Certified Completion Letter by Architect/Engineer of record or Building Department expediter
   PW-3    Cost Affidavit Form
   PW-4    Equipment Use Application Form
        *    W-6    Revised Certificate of Occupancy for change in use (if applicable)
   Form ACP7
or
   New York City Department of Environmental Protection Asbestos
   Form ACP5    Inspection Report as prepared by a licensed and approved asbestos inspection agency
      Building Department Equipment Use Permits for all new HVAC equipment installed under this application
      Revised Certificate of Occupancy for change in use (if applicable)

 

* These items must be perforated (with the date and New York City Building Department Stamp) to signify New York City Building Department Approval. All forms must bear proper approvals and sign-offs prior to authorization given by Landlord to proceed with the work.


EXHIBIT E

TENANT ALTERATION WORK AND NEW CONSTRUCTION

CONDITIONS AND REQUIREMENTS

 

1. No Alterations are permitted to commence until original Certificates of Insurance required from Tenant’s general contractor (the “General Contractor”) and all subcontractors complying with the attached requirements are on file with the Building office.

 

2. All New York City Building Department applications with assigned BN# and permits must be on file with the Building office prior to starting work. A copy of the building permit must also be posted on the job site by the General Contractor. The General Contractor shall make all arrangements with Landlord’s expediter for final inspections and sign-offs prior to substantial completion.

 

3. The General Contractor shall comply with all Federal, State and local laws, building codes, OSHA requirements, and all laws having jurisdiction over the performance and handling of the Alterations.

 

4. The existing “Class E” fire alarm system (including all wiring and controls), if any, must be maintained at all times. Any additions or alterations to the existing system shall be coordinated with the Building office as required. All final tie-in work is to be performed by Landlord’s fire alarm vendor and coordinated by the General Contractor. All costs for the tie-ins are reimbursable to Landlord by Tenant.

 

5. All wood used, whether temporary or not, such as blocking, form work, doors, frames, etc. shall be fire rated in accordance with the New York City Building and Fire Code requirements governing this work.

 

6. Building standby personnel (i.e. Building operating engineer and/or elevator operator), required for all construction will be at Landlord’s discretion. Freight elevators used for overtime deliveries must be scheduled in writing with Landlord at least 24 hours in advance, as required. All costs associated are reimbursable to Landlord by Tenant.

 

7. The General Contractor shall comply with the Rules and Regulations of the Building elevators and the manner of handling materials, equipment and debris to avoid conflict and interference with Building operations. All bulk deliveries or removals will be made prior to 8:00 a.m. and after 5:00 p.m. or on weekends, as required.

 

8. No exterior hoisting will be permitted. All products or materials specified are to be assembled on-site, and delivered to the site in such a manner so as to allow unobstructed passage through the Building’s freight elevator, lobbies, corridors, etc. The General Contractor will be responsible for protection of all finished spaces, as required.

 

9. All construction personnel must use the freight elevator at all times. Any and all tradesman found riding the passenger elevators without prior approval from Landlord will be escorted out of the Building and not be allowed re-entry without written approval from the Building office.

 

10. During the performance of Alterations, Tenant’s construction supervisor or job superintendent must be present on the job site at all times.

 

11. During the performance of Alterations, all demolition work shall be performed after 6:00 p.m. during the week or on weekends. This would include carting or rubbish removal as well as performing any operations that would disturb other Building tenants or other occupants (drilling, chopping, grinding, recircuiting, etc.).

 

12. No conduits or cutouts are permitted to be installed in the floor slab without prior written approval from Landlord. Landlord reserves the right to restrict locations of such items to areas that will not interfere with the Building’s framing system or components. No conduits or cutouts are permitted outside of Tenant’s Premises.


13. Plumbing connections to Building supply, waste and vent lines are to be performed after normal working hours, and coordinated with the Building manager, and are to include the following minimum requirements:

A. Separate shutoff valves for all new hot and/or cold water supply lines (including associated access doors).

B. Patch and repair of existing construction on floor below, immediately following completion of plumbing work (to be performed after normal working hours, as required).

 

14. The General Contractor must coordinate all work to occur in public spaces, core areas and other tenant occupied spaces with Landlord, and perform all such work after normal working hours (to include associated patch and repair work). The General Contractor shall provide all required protection of existing finishes within the affected area(s).

 

15. The General Contractor must perform all floor coring, drilling or trenching after normal business hours, and obtain Landlord’s permission and approval of same prior to performing such work.

 

16. Convector mounted outlets and associated conduits, wiring, boxes, etc., shall be located and installed in areas where they will not hinder the operation or maintenance of existing fan coil units or prevent removal or replacement of access panels or removable covers.

 

17. The General Contractor shall be responsible for all final tests, inspections and approvals associated with all modifications, deletions or additions to Building Class “E” systems and equipment.

 

18. Recircuiting of existing power/lighting panels and circuits affecting Building and/or tenant operations are to be performed after normal business hours and coordinated with the Building office in advance, as required.

 

19. All burning and welding to be performed in occupied or finished areas shall be performed after normal business hours and coordinated with the Building office in advance, as required. Proper ventilation of the work area will be required in order to perform this work.

 

20. The General Contractor shall provide Landlord’s managing agent and the Building office with all approved submittal and closeout documents as well as all required final inspections and Building Department sign-offs just prior to or immediately following completion of construction.

 

21. Any and all Alterations to the Building sprinkler system (including draining of system) are to be performed after normal business hours and coordinated with the Building office, as required. All costs associated with the shut down, drain and refill of the sprinkler system are reimbursable to Landlord.

 

22. The General Contractor shall be responsible for any and all daily cleanup required to keep the job site clean throughout the entire course of the Alterations. No debris shall be allowed to accumulate in any public spaces.

 

23. The General Contractor shall be responsible for proper protection of all existing finishes and construction for Alterations to be performed in common Building areas. All Alterations to be performed in occupied areas outside of the Premises shall be performed after normal business hours and coordinated with the Building office, as required.

 

24. The General Contractor shall perform any and all hoisting associated with the Alterations after normal business hours. The General Contractor will obtain all required permits and insurance to perform work of this nature. The General Contractor shall specify hoisting methods and provide all required permits and insurance to Landlord’s managing agent and the Building office prior to commencement of Alterations.


25. Union labor shall be used by all contractors and subcontractors performing any and all Alterations within the Building. All contractors and subcontractors shall perform all work in a professional manner, and shall work in close harmony with one another as well as with the Building management and maintenance personnel.

 

26. The General Contractor shall forward complete copies of all approved contractor submittal, and Building and Fire Department sign-offs and Statement of Responsibility forms, to the Building office immediately following completion of construction.


EXHIBIT E (CONTINUED)

CONTRACTOR INSURANCE REQUIREMENTS

LIABILITY LIMITATIONS

 

A. Comprehensive or Commercial General Liability Insurance written on an occurrence basis, to afford protection of $5,000,000 combined single limit for personal injury, bodily injury and/or death and Broad Form property damage arising out of any one occurrence; and which insurance shall include coverage for premises-operations (including explosion, collapse and underground coverage), elevators, contractual liability, owner’s and contractor’s protective liability, and completed operations liability.

 

B. Comprehensive Auto Liability Insurance covering the use of all owned, non-owned and hired vehicles providing bodily injury and property damage coverage, all on a per occurrence basis, at a combined single limit of $1,000,000.

 

C. Worker’s Compensation Insurance providing statutory benefits for contractor’s employees and Employer’s Liability Coverage in an amount not less than $100,000/$500,000/$100,000.

 

D. Property coverage damage to or loss of use of contractor’s equipment.

CERTIFICATE HOLDER

Matana LLC

530 Fifth Avenue, Suite 1800

New York, New York 10036

ADDITIONAL INSUREDS

NEWMARK KNIGHT FRANK

125 Park Avenue

Eleventh (11th) Floor

New York, New York 10017

The Moinian Group

530 Fifth Avenue, Suite 1800

New York, New York 10036

Wachovia Bank, National Association

In addition to listing each of the Additional Insureds, as noted above, the Certificate of Insurance, general liability form, shall state “The General Aggregate limit applies separately to each project.”

The name and address of the Additional Insureds shall appear on the Certificate of Insurance. The insurance agent’s address and telephone number is also required.


EXHIBIT F

ADDITIONAL SPACE


LOGO


EXHIBIT G

GUARANTY

In order to induce the aforesaid Landlord (Matana LLC) to enter into this Lease and for other valuable considerations, the receipts whereof is hereby acknowledged, Court Cunningham (the “Guarantor”) hereby makes the following guaranty and agreement with and in favor of Landlord and its successors and assigns. The following personal Guaranty made for the benefit of Yodle, Inc. (the “Tenant”) is the only provision of the Lease to which the Guarantor is personally liable, unless provided elsewhere in the Lease, as all other provisions, clauses and terms of this Lease are binding solely upon the Tenant.

The undersigned guarantees to Landlord, its successors and assigns, that he/she shall pay to Landlord all Rent, Additional Rent and all other charges that has accrued under the terms of the Lease, (hereinafter collectively referred to as “Accrued Rent”), to the latest date that Tenant and its assigns and sublessees, if any, shall have completely performed all of the following:

 

A. Vacated and surrendered the Premises to Landlord pursuant to the terms of the Lease, and

 

B. Delivered the keys to the Premises to Landlord, and

 

C. Provided Landlord with sixty (60) days prior notice of the date Tenant shall vacate the Premises.

 

D. OMITTED.

This Guaranty is absolute and unconditional and is a guaranty of payment and not of collection. The parties hereto waive all notice of non-payment, non-performance, non-observance or proof, or notice, or demand, whereby to charge the undersigned therefore, all of which the undersigned expressly waive and expressly agree that the validity of this Guaranty, and the obligation of the Guarantor hereto shall in no wise be terminated, affected or impaired by reason of the assertion by Landlord against Tenant of any of the rights or remedies reserved to Landlord pursuant to the performance of the within Lease. The undersigned further covenants and agrees that this Guaranty shall remain and continue in full force and effect, as to any renewal, modification or extension of the Lease and during any period when Tenant is occupying the premises as a “statutory tenant”. As a further inducement to Landlord to make this Lease and in consideration thereof, Landlord and the undersigned covenant agree that in any action or proceeding brought by either Landlord or the undersigned against the other on any matters whatsoever arising out of, under, or by virtue of the terms of this Lease or of this Guaranty that Landlord and the undersigned shall and do hereby waive trial by jury. This Guaranty shall not be affected by any assignment of the Lease unless Landlord has given its approval.

This Guaranty shall be construed in accordance with the Laws of the State of New York.

In the event of assignment of Lease by Tenant with Landlord’s consent, this Guaranty shall cease upon delivery of an original copy of assignment to Landlord and provided the assignee executes a guaranty the same in form and nature to the instant Guaranty.

Notwithstanding anything to the contrary in this Guaranty, if either (x) Guarantor is no longer employed by Tenant or (y) Tenant becomes a public corporation (i.e. a corporation whose stock is listed and traded on a nationally recognized stock exchange), then this Guaranty shall terminate and be null and void and of no further force or effect, provided that the then current tenant of the Premises delivers to Landlord additional security equal to three (3) months of the annual base rent payable at the time that either Mr. Cunningham is no longer employed by Tenant or Tenant becomes a public corporation, as the case may be.

In addition, if this Guaranty has not expired or been terminated pursuant to the terms of the previous paragraph then, upon an assignment of this Lease which requires Landlord’s Consent, this Guaranty shall terminate and be null and void and of no further effect provided that the assignee shall execute a guaranty in substantially the same form as this Exhibit G.


In witness whereof the undersigned has set his hand this      day of October, 2008.

 

 

Court Cunningham
SS#:
Address:


EXHIBIT H

 

Space

  

Year

   Annual Rental Rate      Monthly Rental Rate  

Part 4th Floor

   Commencing on the Rent Commencement Date    $ 867,578.00       $ 72,298.17   
   Commencing on the 1st Anniversary of the Rent Commencement Date    $ 891,436.40       $ 74,286.37   
   Commencing on the 2nd Anniversary of the Rent Commencement Date    $ 915,950.90       $ 76,329.24   
   Commencing on the 3rd Anniversary of the Rent Commencement Date    $ 1,032,463.55       $ 86,038.63   
   Commencing on the 4th Anniversary of the Rent Commencement Date    $ 1,060,856.29       $ 88,404.69   
   Commencing on the 5th Anniversary of the Rent Commencement Date to the Expiration Date    $ 1,090,029.84       $ 90,835.82   


EXHIBIT I

Tenant Signage


Voice: 215.468.7770 Toll Free: 888.311.1946 Web: www.interiortech.com Email: info@interiortech.com

 

  LOGO    PROPOSAL #            23894   
 

Signs For ALL Your Business Needs

INTERIORTECH, LLC

227-A McClellan Street

Philadelphia, PA 19148-1918

  

    Date: 10/8/2008

 

  Job Name I Location

 

      Interior Corporate Identification Signage

To:      Attn: Court Cunningham   
  yodle       Contact Information
  589 8th Avenue       917.349.5037                212.868.1989        917.349.5037   
  9th Floor      

ccunningham&yodle.com

     
  New York       NY        10018      

We hereby submit specifications and estimates for:

(1) Set of 48” wide x 2” deep Satin Stainless Steel Fabricated Letters.

Letters ship with studs, spacers & a mounting pattern

 

LOGO

 

 

We Propose hereby to furnish material and labor, complete in accordance with the above specifications, for the sum of: Six hundred seventy two & 00/100, plus shipping                                          dollars ($672.00 Payment Terms: 50% Deposit, Balance C.O.D.

CLIENT IS RESPONSIBLE FOR ALL SIGN PERMITS & ENGINEER SEALED DRAWINGS

 

 

All material is guaranteed to be as specified. All work to be completed in a professional manner according to standard practices. Any alteration or deviation from above specifications involving extra costs will be executed only upon written orders, and will become an extra charge over and above the estimate. All agreements contingent upon strikes, accidents or delays beyond our control. Owner to carry fire, tornado and other   

Salesperson: Ira Steingold

 

Authorized

Signature:                                                              

Note: This proposal may be withdrawn by us if not accepted within 30 days.

 

 

Acceptance of Proposal

 

The above prices, specifications and conditions are satisfactory and are hereby accepted. You are authorized to do the work as specified. Payment will be made as outlined above.   

Signature:                                                                                  

 

Date of Acceptance:                                                              

Note: Please check layout carefully before signing. You are responsible to check for spelling, message content, dimension, font styles or color errors.


EX-10.3.1

Exhibit 10.3.1

 

 

LOGO             

local online advertising

50 West 23rd Street

New York, New York 10010

February 1, 2010

Matana LLC

c/o The Moinian Group

530 Fifth Avenue, 18th Floor

New York, New York 10036

Re: Agreement of Lease dated October 28, 2008, (the “Lease”), between Matana. LLC (“Landlord”) and Yodle, Inc. (“Tenant”), with respect to certain premises on the fourth floor (the “Premises”) in the building known as 50 West 23rd Street, New York, New York.

Gentlemen:

Reference is made to the Lease. Capitalized terms not defined herein shall have the meaning as ascribed in the Lease.

This letter shall confirm that the Additional Space Inclusion Date shall mean February 1, 2010 and that Tenant accepts the Additional Space In its “As-is” condition as of that date. Landlord hereby agrees that Tenant shall be allowed to perform certain Alterations In the Additional Space (subject to review and consent from Landlord) as of the Additional Space Inclusion Date, but shall not be permitted to operate Its business in the Additional Space, and shall only be permitted to perform work in order to prepare the space for its use, prior to March 1, 2010.

The Lease is hereby amended to the effect that:

1. The Additional Space Inclusion Date shall be February 1, 2010; provided that (a) Tenant’s obligation to pay Landlord any amounts for the Additional Space shall not commence until March 1, 2010 and (b) Tenant’s use of the Additional Space shall be limited to performance of Alterations until March 1, 2010; and

2. The following rent schedule shall apply for the Additional Space and Tenant’s Proportionate Share is increased by 1.56%:

 

Additional Space – 5,300 SF (Pt. 4th floor)

 
     Annual Rent      Monthly Rent  

03/01/2010

     201,400,00         16,783.33   

03/22/2010

     206,938.51         17,244.88   

03/22/2011

     212,629.31         17,719,11   

03/22/2012

     239,676.62         19,973,05   

03/22/2013

     246,267.72         20,522.31   

03/22/2014

     253,040.08         21,086.67   

Article 28 is amended to increase the pro rata by 1.56%

     


Except as expressly modified hereby, the Lease is hereby ratified and confirmed in all respects and shall be binding upon the parties hereto and their respective successors and assigns.

 

Very truly yours,
Yodle, Inc.
By:   LOGO
 

 

Name:   Michael Gordon
Title:   Chief Financial Officer

 

Above Agreed to and Accepted:

Matana LLC

By:   LOGO
 

 

  Name:
  Title:

EX-10.3.2

Exhibit 10.3.2

LEASE AMENDMENT

AGREEMENT, made as of the 1st day of April, 2011, by and between 50 WEST 23rd STREET A LLC, a New York limited liability company and 50 WEST 23RD STREET B LLC, a New York limited liability company, having an office at 45 Main Street, Suite 602, Brooklyn, New York 11201, (collectively, “Landlord”), and YODLE, INC. a Delaware corporation qualified to do business in the State of New York, having a mailing address of 50 West 23rd Street, Suite 401, New York, New York 10010 (“Tenant”).

W I T N E S S E T H:

WHEREAS Matana LLC as landlord (“Original Landlord”) and Tenant as tenant entered into that certain lease dated as of October 23, 2008 (the “Original Lease”) covering certain premises known as Suite 401 (the “Original Premises”) more particularly described in the Lease and located on the fourth (4th) floor in the building known as 50 West 23rd Street, New York, New York (the “Building”); and

WHEREAS by that certain letter agreement (the “Letter Agreement”) dated as of February 1, 2010 by and between Original Landlord and Tenant, Tenant leased certain additional premises located on the fourth (4th) floor in the Building (the “Additional Premises”) from Landlord (the Original Lease and the Letter Agreement as assigned, transferred, amended and modified to date is the “Lease” and the premises covered by the Lease are herein collectively the “Premises”); and

WHEREAS Landlord is the current holder of the landlord’s interest under the Lease; and

WHEREAS Tenant is desirous of leasing from Landlord certain additional premises known as Suite 504 located in the Building and whereas Landlord is desirous of leasing Suite 504 to Tenant, subject to the provisions, conditions, covenants and agreements set forth herein; and

NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto agree as follows:

FIRST: Each term used in this Agreement shall have the meaning ascribed to such term in the Lease, except as expressly amended herein.

SECOND: Landlord and Tenant acknowledge that the term “Commencement Date” shall mean December 19, 2008, that the term “Rent Commencement Date” shall mean March 22, 2009 and that the term “Expiration Date” shall mean April 21, 2015.

THIRD: From and after the date that is the later of (a) August 1, 2011 and (b) the date five (5) business days after the date that Landlord provides written notice to Tenant (the “Substantial Completion Notice”) that Landlord shall deliver the Premises to Tenant with Landlord’s Work Substantially Complete (the “Delivery Date”), Landlord leases to Tenant and


Tenant leases from Landlord certain premises known as Suite 504 located on the fifth (5th) floor of the Building (hereinafter referred to as “Suite 504”) which premises are and located substantially in the location shown hatched on the plan attached hereto as “Exhibit A” and hereby made a part hereof. Landlord has not made and does not make any representation as to the physical condition or any other matter affecting or relating to Suite 504 except as is herein specifically set forth, and Tenant specifically acknowledges that no such representation has been made. Tenant further acknowledges that Landlord has afforded Tenant the opportunity for a full and complete investigation, examination and inspection of Suite 504 and Tenant agrees to accept Suite 504 “as is” except that Landlord shall, at its expense, perform, or cause to be performed, the work set forth on Exhibit J attached hereto and hereby made a part hereof (such work is herein referred to as “Landlord’s Work”). If the substantial completion of the Landlord’s Work is delayed by reason of: (i) any act or omission of Tenant or any of its employees, agents or contractors; or (ii) any failure (not due to any act or omission of Landlord or any of its employees, agents or contractors) to plan or execute Tenant’s Work (as hereafter defined) with reasonable speed and diligence, or (iii) any changes by Tenant in the plans or specifications or any changes or substitutions requested by Tenant; or (iv) Tenant’s failure to furnish plans, information, details and specifications Landlord reasonably requests from Tenant, or subsequent changes thereto; or (v) Tenant’s request for materials, finishes or installations other than Landlord’s standard or as included in Landlord’s Work as set forth in the Exhibits attached hereto; or (vi) the performance or incompletion of work by a party employed or retained by Tenant (each of (i)-(vi), a “Tenant Delay”); then Landlord’s Work shall be deemed substantially completed on the date when the same would have been substantially completed but for such Tenant Delay and, in addition, Tenant shall pay to Landlord all reasonable costs which Landlord incurs by reason of such Tenant Delay. Landlord shall allow Tenant to perform a walk-through of Suite 504 prior to Landlord’s delivery of the Substantial Completion Notice. If Tenant believes that Landlord has not completed some or all of Landlord’s Work as of the date that Landlord delivers the Substantial Completion Notice, then Tenant shall, within ten (10) days following the date Tenant opens for the transaction of business, submit to Landlord a written list of the work Tenant claims remains to be performed by Landlord (the “Punchlist”), and Landlord shall have sixty (60) days thereafter to complete such Punchlist. If Landlord fails to complete such work, the sole remedy of Tenant shall be to complete such work and Tenant shall have the right to set off the reasonable cost thereof from the rent due Landlord in order to reimburse Tenant for the cost and expense of completion of the work. Upon written request of Landlord, Tenant will, within five (5) days following request, furnish to Landlord a written statement that Tenant is in occupancy of Suite 504, that Landlord’s Work has been completed in accordance with Landlord’s obligations or in lieu thereof, a list of the work Tenant claims to be incomplete. Tenant shall perform all other work (“Tenant’s Work”) necessary for it to use Suite 504 as contemplated in this Lease including, but not limited to, cabling and wiring in Suite 504 for Tenant’s telecommunication and security systems, as well as moving in furniture. Landlord shall allow Tenant access to Suite 504 at reasonable times in the two weeks prior to Landlord’s delivery of Suite 504 to Tenant so that Tenant can commence performance of Tenant’s Work. Landlord shall reasonably coordinate with Tenant with respect Tenant’s Work provided that such work by Tenant does not delay substantial completion of Landlord’s Work. Tenant’s Work shall be performed in accordance with all requirements of law as same are described in Article 6 of the Lease and the requirements of Exhibit E of the Lease, at its sole expense, pursuant to plans, drawings and specifications therefor prepared by Tenant and submitted to, and approved by

 

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Landlord and subject to the terms of the Lease, including, without limitation, Article 3 of the Lease. Notwithstanding the provisions of Article 3B of the Lease, with respect to Suite 504 only, upon the expiration or earlier termination of the Lease, Tenant shall have no obligation to remove any of Landlord’s Work or any Alterations made to Suite 504 during the term of the Lease; provided that prior to constructing such Alterations, Tenant obtained Landlord’s approval therefor if same was required pursuant to the terms of the Lease. For purposes of this Agreement, “Substantially Complete” or “substantial completion” shall mean that Landlord shall have completed materially all of Landlord’s Work except for details of construction and decoration which are insubstantial or minor in character, the non-completion of which shall not materially interfere with Tenant’s use of the Premises.

FOURTH: Prior to the Delivery Date, Tenant shall deliver to Landlord insurance satisfying the provisions of the Lease covering Suite 504.

FIFTH: As of the Delivery Date, Exhibit H attached to the Original Lease and the rent schedule in paragraph 2 of the Letter Agreement are both hereby deleted in their entirety and the rent schedule attached hereto as Exhibit H shall be substituted therefor and shall reflect the Rent for the Premises commencing on the Delivery Date through the remainder of the term of the Lease. In the event that Substantial Completion of Landlord’s Work shall not have occurred or been deemed to have occurred on or before October 1, 2011 (the “Outside Date”), which date shall be extended by one day for each day that Landlord is delayed in Substantially Completing Landlord’s Work by a Tenant Delay, and provided that Tenant has provided Landlord with a valid and in effect insurance certificate satisfying all of the conditions of this Lease for the Additional Premises, Tenant shall have the right to terminate this Agreement by written notice given to Landlord within five (5) days after the Outside Date, which termination shall be effective upon the date twenty (20) days following delivery of such termination notice; provided however, if Landlord Substantially Completes Landlord’s Work prior to such effective date of termination, then this Agreement shall continue in full force and effect. If the Delivery Date does not occur on August 1, 2011, the parties hereby agree to modify Exhibit H to reflect the actual Delivery Date; it being understood that the applicable per square foot rental rates reflected therein for each year of the term shall remain unchanged.

SIXTH: Provided Tenant is not in default under its obligations under the Lease on each of the Delivery Date and the date that is one (1) month beyond all notice and cure periods after the Delivery Date, Tenant shall be entitled to a rent credit in the sum of $46,933.33 which shall be applied by Landlord in equal installments of $23,466.66 against the monthly installments of the annual base rent payable under this Lease with respect to each of the first and second months after the Delivery Date. In no event shall the rent credit payable under this paragraph exceed $46,933.33. Notwithstanding the foregoing, if, between the Delivery Date and the Expiration Date the demised premises are surrendered by Tenant, then Tenant shall immediately pay Landlord as additional rent hereunder the unamortized portion of $23,466.66; which is to be amortized on a monthly basis over the period commencing on the Delivery Date and ending on April 21, 2015 and such payment obligation shall expressly survive the expiration or termination of this Lease.

 

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SEVENTH: From and after the Delivery Date, (i) the term “Premises” shall be deemed to include the Original Premises, the Additional Premises and Suite 504 and the plan attached to the Lease as Exhibit A is deleted therefrom and the plan attached hereto as Exhibit A is substituted in lieu thereof; (ii) the term “Base Tax Year” shall be amended so that it shall mean, with respect to the Original Premises and the Additional Premises only, the Tax Year beginning July 1, 2008 and expiring June 30, 2009 and with respect to Suite 504 only, the Tax Year beginning July 1, 2011 and expiring June 30, 2012; (iii) the term “Tenant’s Proportionate Share” shall mean 10.842%; provided however that with respect to escalations as described in Article 28 of the Lease, Tenant’s Proportionate Share with respect to the Original Premises and the Additional Premises only shall be 8.259% and Tenant’s Proportionate Share with respect to Suite 504 only, shall be 2.583%. Tenant’s electrical service for Suite 504 shall be directly metered from the utility company providing such service and Tenant shall pay for such service and the provisions of Article 29H shall apply with respect to the provision and payment of such electrical service. Landlord represents that an independent meter measuring electrical consumption only for Suite 504 is in good working order and shall be usable by Tenant through the term of the Lease.

EIGHTH: Notwithstanding anything to the contrary contained in Article 29 of the Lease or the Rules and Regulations, Tenant shall have sixteen (16) hours of free overtime use of the freight elevator in connection with Tenant’s initial move-in to Suite 504.

NINTH: Notwithstanding anything to the contrary contained in Article 39 of the Lease or the Rules and Regulations, Tenant shall have the right, at Tenant’s sole cost and expense, to install signage on the fifth (5th) floor of the Building, which signage is subject to Landlord’s approval which shall not be unreasonably withheld or delayed. In addition, Landlord shall provide Tenant with twenty-four hours a day, seven days per week accessibility to the premises and security in the Building’s lobby.

TENTH: Landlord and Tenant each warrant and represent to the other that it has not had any conversations, correspondence or dealings with any real estate broker, agent or finder in connection with the additional space described herein or the other transaction described in this Agreement other than CB Richard Ellis, having an office at 200 Park Avenue, New York, New York 10166 (“Broker”) and each party covenants and agrees to indemnify, defend and hold harmless the other on demand from and against any and all costs, expenses or liability (including reasonable attorneys’ fees) for any compensation, commissions, fees and charges claimed by any broker, agent or finder other than Broker in connection with this Agreement due to conversations, correspondence or dealings of Tenant with the claimant. Landlord shall pay Broker any commission which may be payable with respect to this Lease pursuant to a separate agreement and agrees to indemnify, defend and hold Tenant harmless on demand from and against any claims by the Broker regarding Landlord’s failure to make all or any portion of such payment; provided, however, that Landlord’s total liability under this indemnity shall in no event exceed the amount of the commission paid or payable under this Agreement.

ELEVENTH: Landlord represents that, as of the Delivery Date, the Premises (including, without limitation, the sprinkler system and life safety system in the Premises) and all common areas in the Building shall be in compliance with all laws, rules, regulations and requirements of any governmental department having jurisdiction over the Building including, but not limited to,

 

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the Americans with Disabilities Act of 1990. Landlord shall indemnify and hold Tenant harmless from any and all reasonable costs, obligations, or liability incurred by Tenant due to a failure of such representation by Landlord.

TWELTH: Landlord represents that Suite 504 is currently serviced by a Tenant controlled air conditioning and ventilation system (the “Central 504 System”) and that said Central 504 System shall be in good working order as of the Delivery Date. Tenant agrees to maintain and repair the Central 504 System at its own cost and expense but, notwithstanding anything to the contrary in the Lease, Landlord shall be responsible for any major repairs and replacements to said Central 504 System at Landlord’s sole cost and expense. A major repair and replacement shall be deemed to mean any individual repair or replacement to the Central 504 System that is estimated to cost $3,000 or more.

THIRTEENTH: Section 32B of the Lease shall be amended to delete the second sentence sand replace it with the following: “If either (x) Court Cunningham is no longer employed by Tenant; (y) Tenant becomes a public corporation, or (z) Tenant elects in writing at any time in its discretion (a “Guaranty Termination Event”), then the Guaranty shall be void and of no further force or effect provided that the then current tenant of the Premises delivers to Landlord additional security equal to three (3) months of the annual base rent payable at the time that the Guaranty Termination Event occurs.” In addition, the parties agree to enter into an amendment to the Guaranty to reflect this change.

FOURTEENTH: Except as expressly modified and amended herein, and as so modified and amended, the Lease is hereby ratified and confirmed in all respects and shall be binding upon the parties hereto and their respective successors and assigns.

[Remainder of page intentionally left blank]

 

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IN WITNESS WHEREOF, the undersigned have executed this Agreement to be effective as of the date and year written above.

 

LOGO
  YODLE, INC.
  By:  

/s/ Court Cunningham

 

CEO (Tenant)

 

State of New York     
  } SS:   
County of Kings     

On the   1   day of April in the year 2011 before me, the undersigned, a Notary Public in and for said State, personally appeared Courtland Cunningham, personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that (s)he executed the same in his/her capacity, and that by his/her signature on the instrument, the individual or the person upon behalf of which the individual acted, executed the instrument.

 

/s/Natalie Foster

Notary Public

 

LOGO

 

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The undersigned, the guarantor under that certain limited personal guaranty (the “Guaranty”) executed by COURT CUNNINGHAM on October 23, 2008 and given by COURT CUNNINGHAM to Landlord in connection with the Lease, executes this agreement to consent to and agree to the terms set forth herein, to represent that the Guaranty is still in full force and effect for the Lease as modified by this agreement and to ratify and reaffirm his obligations under the Guaranty as modified by this agreement.

 

/s/ Court Cunningham

COURT CUNNINGHAM

 

 

State of New York     
  } SS:   
County of Kings     

On the   1   day of April in the year 2011 before me, the undersigned, a Notary Public in and for said State, personally appeared Courtland Cunningham, personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that (s)he executed the same in his/her capacity, and that by his/her signature on the instrument, the individual or the person upon behalf of which the individual acted, executed the instrument.

 

/s/Natalie Foster

Notary Public

 

LOGO

 

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LOGO

 

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Exhibit H*

 

Lease Period (dates inclusive)

   Annual Rental Rate      Monthly Rental Rate**  

Delivery Date to March 21, 2012

   $ 1,410,180.21       $ 117,515.02   

March 22, 2012 to July 31, 2012

   $ 1,553,740.17       $ 129,478.35   

August 1, 2012 to March 21, 2013

   $ 1,560,076.17       $ 130,006.35   

March 22, 2013 to July 31, 2013

   $ 1,595,060.01       $ 132,921.67   

August 1, 2013 to March 21, 2014

   $ 1,601,538.57       $ 133,461.55   

March 22, 2014 to July 31, 2014

   $ 1,637,484.48       $ 136,457.04   

August 1, 2014 to April 21, 2015

   $ 1,644,108.81       $ 137,009.07   

 

* This Exhibit H assumes an August 1, 2011 Delivery Date and is subject to adjustment per Section 5 of this Agreement.

 

** Monthly installments of annual base rent payable for a partial month shall be prorated on a per diem basis based upon the number of days in the relevant month.

 

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Exhibit J

Landlord’s Work

Landlord will do the following work once at Landlord’s expense promptly after the date hereof and shall substantially complete the same by the Commencement Date subject only to force majeure:

 

  Landlord shall build out the Premises, using Building Standard finishes, as per the plan and workletter attached in Schedule 1.

 

  Landlord to provide complete ADA and code compliant sprinkler system and life safety system in Suite 504.

 

  Landlord to provide asbestos free and unobstructed opening in the ceiling of the Original Premises for Tenant’s communications equipment needs, allowing Tenant to connect Tenant’s communications equipment from the Original Premises to the Additional Premises.

 

  Deliver all Building systems and HVAC units serving Suite 504 in good working order.

 

  Supply and install a Building standard water meter.

The foregoing work will be performed by contractors selected by Landlord, using materials, methods and procedures standard to the Building. Any work not expressly specified herein and any work necessary to have the Additional Premises comply with codes attributable to Tenant’s particular manner of use of the Additional Premises shall be furnished and installed at Tenant’s cost and expense. The cost of any Tenant extras shall be payable simultaneously with the authorization by Tenant of such extra work. Any existing construction shall be accepted by Tenant in “as is” condition.

 

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Schedule 1

 

LOGO

 

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Schedule 1 Cont’d

 

LOGO

 

 

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Schedule 1 Cont’d

 

LOGO

 

 

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EX-10.3.3

Exhibit 10.3.3

SECOND AMENDMENT TO LEASE,

THIS SECOND AMENDMENT TO LEASE (the “Agreement”), made as of the October 14, 2013, by and between 50 WEST 23rd STREET A LLC, a New York limited liability company and 50 WEST 2rd STREET B LLC, as tenants-in-common, each having an office at c/o Two Trees Management Co., Inc., 45 Main Street, Suite 602, Brooklyn, New York 11201, (the “Landlord”), and YODLE, INC., a Delaware corporation, qualified to do business in the State of New York, having a mailing address of 50 West 23rd Street, Suite 401, New York, New York 10010 (the “Tenant”).

W I T N E S S E T H:

WHEREAS, Landlord’s predecessor-in-interest, MATANA LLC (“Matana”), and Tenant entered into that certain lease dated as of October 23, 2008 (the “Lease”) covering certain premises known as Suite 401, as more particularly described in the Lease and located on the fourth (4th) floor in the building (the “Building”) known as 50 West 23rd Street, Brooklyn, New York; and

WHEREAS, Matana and Tenant entered into that certain Letter Agreement dated as of February 1, 2010 (“Letter Agreement”), whereby Tenant leased certain additional premises in the Building known as Suite 404;

WHEREAS, Landlord is the current holder of landlord’s interest under the Lease; and

WHEREAS, Landlord and Tenant entered into that certain Lease Amendment dated as of April 1, 2011 (the “First Amendment”) whereby Tenant leased certain additional premises in the Building known as Suite 504 (Suites 401, 404 and 504 are collectively referred to as the “Existing Premises”) and (the Lease, as amended by the Letter Agreement and the First Amendment are, hereinafter, collectively, referred to as the “Lease”);

WHEREAS, the parties now desire to further amend the Lease to provide for the inclusion therein of additional space to be demised to Tenant, upon such terms, provisions and conditions as are more particularly hereinafter set forth.

NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto agree as follows:

FIRST: Unless the context otherwise clearly indicates a contrary intent or unless specifically provided herein, each term used in this Agreement which is defined in the Lease shall be deemed to have the meaning ascribed to such term in the Lease.

SECOND: For a term commencing as of September 24, 2013 (the “Adjustment Date”) and ending on April 21, 2015, unless sooner terminated in accordance with terms set forth herein or in the Lease, there shall be added to and included in the Existing Premises the following additional space in the Building, to wit:

 

Certain premises known as the Suite 500, 5th floor in the Building, substantially as shown on Exhibit A (the “Added Space”)  

so that the term “Premises” as defined in the Lease shall mean collectively, the Existing Premises and the Added Space. Landlord does hereby lease to Tenant, and Tenant does hereby hire from Landlord, the Added Space for the same use as set forth in the Lease and for no other use or purposes, subject to all of the covenants, agreements, terms and conditions of the Lease, as supplemented by this Agreement.

THIRD: Landlord has not made any representation as to the physical condition or any other matter affecting or relating to the Added Space, and Tenant specifically acknowledges and agrees that no such representation has been made. Tenant further acknowledges that Landlord has afforded Tenant the opportunity for a full and complete investigation, examination and inspection of the Added Space and Tenant agrees to accept same in its “AS IS” condition with no work to be performed by the Landlord whatsoever. Any and all work necessary for Tenant to operate its business in accordance with the terms of the Lease and this Agreement shall be Tenant’s obligation to perform at Tenant’s cost and expense. Tenant shall, as part of Tenant’s work install a climate control thermostat in the demised premises. Tenant will receive a “Rent Credit” up to a maximum amount of One Thousand Dollars ($1,000.00) for the cost of installing said climate control thermostat. Tenant will receive such


Rent Credit within thirty (30) days following receipt of Tenant’s invoice and supporting documentation. Notwithstanding anything herein to the contrary, the parties acknowledge and agree that Tenant has requested the existing tenant to leave the following items in the Added Space for Tenant’s use: 1 conference table, 16 conference room chairs, 1 reception desk and 33 built-in sheetrock workstations (collectively, “Existing Furniture and Furnishings”). Landlord has not made any representation as to the condition or any other matter relating to the Existing Furniture and Furnishings. Tenant shall have the right to retain the Existing Furniture and Furnishings, to dispose of and/or use the same in their existing “AS IS” condition. Tenant acknowledges that Landlord shall not be required to repair or replace any of the Existing Furniture and Furnishings. If Landlord is unable to deliver possession of Suite 500 to Tenant on September 24, 2013 due to the holding-over or failure to surrender possession by any tenant, subtenant or occupant, construction or work in the Building or Suite 500, then Landlord shall not, in any such event, be subject to any liability for failure to give possession of Suite 500 on said date and the validity of this Agreement and the Lease shall not be impaired under such circumstances, but the annual Rent and additional rent payable for Suite 500 shall abate until Landlord delivers to Tenant possession of Suite 500.

FOURTH: Tenant shall deliver to Landlord, concurrently with execution of this Agreement, an insurance certificate satisfying the insurance provisions of the Lease covering the Added Space.

FIFTH: Subject to the abatement set forth in the last sentence of Paragraph THIRD hereof, commencing on the Adjustment Date through and including April 21, 2015, (a) the term “Tenant’s Proportionate Share” as defined in Lease shall be amended to include 2.95% (Base Year shall, be 2013/2014) for the Added Space, (b) Tenant shall pay $150.00 per month for the AC Charge for the Added Space, (c) Tenant shall pay $25,00 per month for the Sprinkler Charge for the Added Space; and (d) Tenant agrees to pay for water consumed as shown on said meter plus 8% as and when bills are rendered, and in the event Tenant defaults in the making of such payment, Landlord may pay such charges and collect the same from Tenant as additional rent.

SIXTH: Subject to the abatement set forth in the last sentence of Paragraph THIRD hereof, the annual Rent payable under the Lease is hereby amended to include the following annual Rent for the Added Space commencing on the Adjustment Date through and including April 21, 2015

 

9/24/13 to 9/23/14:

   $441,144.00 p/yr — $36,762.00 p/mo

9/24/14 to 4/21/15:

   $454,378.00 p/yr — $37,865.00 p/mo

SEVENTH: (A) Tenant shall continue to pay all items of additional rent and any escalation payments provided in the Lease for the Existing Premises and Added Space.

(B) Notwithstanding anything in the Lease or Guaranty to the contrary, Landlord acknowledges and agrees that the Guaranty shall not apply to the Added Space, provided that upon the occurrence of any Guaranty Termination Event as defined in Section 32B of the Lease, the calculation of additional security will include the base rent payable for the Added Space.

EIGHTH: Notwithstanding anything in the Lease to the contrary, Tenant agrees to pay Landlord Tenant’s Percentage of the total amount of any business or building improvement district charges (“BID Charges”) assessed on the Real Property in each year (or portion thereof) during the term of this Lease within ten (10) days after demand is made therefore as additional rent.

NINTH: Tenant warrants and represents to Landlord that, except for DTZ, (“Broker”), it has not dealt with any other real estate broker, agent or finder in connection with the teasing of the Added Space and the other transactions described in this Agreement and Tenant agrees to indemnify, defend and hold Landlord harmless on demand from and against any and all costs, expenses or liability (including reasonable attorneys’ fees) for any compensation, commissions, fees and charges claimed by any other broker, agent or finder with respect to this Agreement or the negotiation of the terms hereof due to the dealings of Tenant with the claimant. Landlord shall pay Broker any commission which may be payable with respect to this Agreement pursuant to a separate agreement.

ELEVENTH: Except as modified by this Agreement, the Lease and all covenants, agreements, terms and conditions shall remain in full force and effect and are hereby in all respects ratified and confirmed and shall be binding upon the parties hereto and their respective successors and assigns.

TWELFTH: This Agreement may be executed in any number of counterparts, provided each of the parties hereto executes at least one counterpart, each such counterpart hereof shall be deemed to be an original instrument, but all such counterparts together shall constitute but one and the same agreement but this Agreement shall not be effective unless and until all parties receive counterparts executed in the aggregate by all parties.

 

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THIRTEENTH: The persons executing this Agreement on behalf of Landlord and Tenant represent and warrant that they do so with full authority to bind the parties hereto to the terms, conditions and provisions hereinabove set forth.

IN WITNESS WHEREOF, the undersigned have executed this Agreement to be effective as of the date and year written above.

 

50 WEST 23RD STREET A LLC
By:  

/s/ David Walentas

  David Walentas
50 WEST 23RD STREET B LLC
By:  

/s/ David Walentas

  David Walentas
YODLE, INC.
By:  

/s/ Michael Gordon

Name:  

Michael Gordon

Title:  

Chief Financial Officer

 

State of New York     
    } SS:      

County of New York

    

On the 14 day of October in the year 2013 before me, the undersigned, a Notary Public in and for said State, personally appeared Michael Gordon, personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her capacity, and that by his/her signature on the instrument, the individual or the person upon behalf of which the individual acted, executed the instrument.

 

LOGO   /s/ Natalie Berning
 

Notary Public

 

 

State of New York     
    } SS:      

County of Kings

    

On the 16th day of October, in the year 2013 before me, the undersigned, a Notary Public in and for said State, personally appeared David Walentas, personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose names is subscribed to the within instrument and acknowledged to me that she executed the same in her capacity, and that by her signatures on the instrument, the individuals or person upon behalf of which the individual acted, executed the instrument.

 

 

  /s/ Susan Yung
 

Notary Public

 

 

LOGO

 

 

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EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the use in this Registration Statement on Form S-1 of our report dated May 14, 2014 relating to the consolidated financial statements of Yodle, Inc. and subsidiaries (the “Company”), appearing in the Prospectus, which is part of such Registration Statement. We also consent to the reference to us under the heading “Experts” in such Prospectus.

/s/ Deloitte & Touche LLP

New York, New York

July 7, 2014


EX-99.1

Exhibit 99.1

June 18, 2014

Research Now

58 W 40th Street, Suite 1600

New York, NY 10080

 

  RE: Consent to Use of Research Now Data

Dear Sir or Madam,

Yodle, Inc. (“Yodle”) is contemplating an initial public offering of its Common Stock. In connection with this offering, Yodle proposes to file a registration statement on Form S-1 (“Registration Statement”) with the Securities and Exchange Commission (“SEC”).

We request your consent to (i) cite, in the Registration Statement and all amendments thereto, certain statistical data (the “Data”) contained in (a) the survey titled “Yodle’s First Annual Small Business Sentiment Survey” dated August 2013 and (b) the survey titled “Yodle’s Small Business and Online Reviews Survey” dated February 2014, in each case that Yodle commissioned with e-Rewards, Inc. (“Research Now”) and (ii) the inclusion of this letter as an exhibit to the Registration Statement. We also request to cite Research Now as the source of the Data.

We acknowledge and agree that any such reference to the Data and any use of the Research Now name shall be subject to the prior written consent of Research Now in each instance. We will submit any changes to the proposed text to Research Now with sufficient time for Research Now to review and comment on such text.

If this is acceptable, please indicate your consent to our use of the Data (subject to the conditions above) by countersigning this letter.

 

Sincerely,
YODLE, INC.

By:

  /s/ Michael Gordon
  Michael Gordon
  Chief Financial Officer

 

CONSENT GRANTED:
E-REWARDS, INC.

By:

  /s/ Vincent DeRobertis
Name:   Vincent DeRobertis
Title:   SVP