UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
|
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2021
OR
|
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________________ to _________________
Commission File Number: 001-40835
EngageSmart, Inc.
(Exact Name of Registrant as Specified in its Charter)
|
Delaware |
83-2785225 |
|
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer
|
|
30 Braintree Hill Office Park, Suite 101 Braintree, Massachusetts |
02184 |
|
(Address of principal executive offices) |
(Zip Code) |
(781) 848-3733
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
|
Title of each class |
|
Trading Symbol(s) |
|
Name of each exchange on which registered |
|
Common stock, $0.001 par value per share |
|
ESMT |
|
The New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
Large accelerated filer |
|
☐ |
|
Accelerated filer |
|
☐ |
|
Non-accelerated filer |
|
☒ |
|
Smaller reporting company |
|
☐ |
|
|
|
|
|
Emerging growth company |
|
☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
As of October 31, 2021, the registrant had 161,691,540 shares of common stock, $0.001 par value per share, outstanding.
Table of Contents
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Page |
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PART I. |
1 |
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Item 1. |
1 |
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1 |
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Condensed Consolidated Statements of Operations and Comprehensive Loss |
2 |
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Condensed Consolidated Statements of Stockholders'/Members’ Equity |
3 |
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5 |
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7 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
23 |
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Item 3. |
36 |
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Item 4. |
36 |
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PART II. |
38 |
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Item 1. |
38 |
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Item 1A. |
38 |
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Item 2. |
81 |
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Item 3. |
81 |
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Item 4. |
82 |
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Item 5. |
82 |
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Item 6. |
83 |
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84 |
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i
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q may be forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “estimates,” “forecasts,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to statements regarding our future results of operations and financial position, industry and business trends, equity compensation, business strategy, plans, market growth and our objectives for future operations.
The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. Forward-looking statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including, but not limited to, the important factors discussed in Part II, Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q for the period ended September 30, 2021. The forward-looking statements in this Quarterly Report on Form 10-Q are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
You should read this Quarterly Report on Form 10-Q and the documents that we reference and have filed as exhibits to this Quarterly Report on Form 10-Q with the understanding that our actual future results, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained in this Quarterly Report on Form 10-Q, whether as a result of any new information, future events or otherwise.
ii
SUMMARY RISK FACTORS
Our business is subject to numerous risks and uncertainties, including those described in Part II, Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q. You should carefully consider these risks and uncertainties when investing in our common stock. The principal risks and uncertainties affecting our business include the following:
|
• |
|
Our rapid growth may not be sustainable or indicative of our future growth. |
|
• |
|
Our business could be harmed if we fail to manage our infrastructure to support future growth. |
|
• |
|
Our risk management efforts may not be effective to prevent fraudulent activities, which could expose us to material financial losses and liability and otherwise harm our business. |
|
• |
|
If we are unable to attract new customers or convert trial customers into paying customers, our revenue growth and operating results will be adversely affected. |
|
• |
|
If we are not able to introduce new features or services successfully and to make enhancements to our solutions, our business and results of operations could be adversely affected. |
|
• |
|
Our business, financial condition, and results of operations depend substantially on our customers renewing their contracts for our solutions with us and expanding their use of our solutions. Any decline in our customer renewals or failure to convince our customers to broaden their use of solutions and related services would harm our business, results of operations, and financial condition. |
|
• |
|
We have incurred net losses on an annual basis since we were founded, anticipate increasing our operating expenses in the future, and may not achieve or sustain profitability. |
|
• |
|
If we fail to adapt and respond effectively to rapidly changing technology, evolving industry standards and regulations, and changing business needs, requirements, or preferences, our products may become less competitive and our growth rate could decline. |
|
• |
|
Real or perceived errors, failures, or bugs in our solutions could adversely affect our business, results of operations, financial condition, and growth prospects. |
|
• |
|
We may face intense competition, which could limit our ability to maintain or expand market share within our industry, and if we do not maintain or expand our market share, our business, financial condition, and operating results will be harmed. |
|
• |
|
If we are unsuccessful in establishing, growing, or maintaining strategic partnerships, our ability to compete could be impaired, and our operating results may suffer. |
|
• |
|
We expect fluctuations in our quarterly operating results, making it difficult to project future results, and if we fail to meet the expectations of securities analysts or investors with respect to our operating results, the market price of our common stock could decline. |
|
• |
|
We have in the past and may in the future acquire or invest in companies, which may divert our management’s attention and result in additional dilution to our stockholders. We may be unable to integrate acquired businesses and technologies successfully or achieve the expected benefits of such acquisitions. |
|
• |
|
We have identified a material weakness in our internal control over financial reporting. If our remediation of the material weakness is not effective or we fail to develop and maintain effective internal controls over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable laws and regulations could be impaired. |
|
• |
|
General Atlantic has significant influence over EngageSmart, including control over decisions that require the approval of stockholders, which could limit your ability to influence the outcome of matters submitted to stockholders for a vote. |
|
• |
|
We are a “controlled company” within the meaning of the NYSE rules and, as a result, qualify for and intend to rely on exemptions from certain corporate governance requirements. |
iii
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
EngageSmart, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share amounts)
(Unaudited)
|
|
|
September 30, |
|
|
December 31, |
|
||
|
|
|
2021 |
|
|
2020 |
|
||
|
Assets |
|
|
|
|||||
|
Current assets: |
|
|
|
|
|
|
||
|
Cash and cash equivalents |
|
$ |
253,824 |
|
|
$ |
29,350 |
|
|
Accounts receivable, net of allowance for doubtful accounts of $233 and $160 as of September 30, 2021 and December 31, 2020, respectively |
|
|
10,295 |
|
|
|
8,100 |
|
|
Unbilled receivables |
|
|
3,904 |
|
|
|
2,973 |
|
|
Prepaid expenses and other current assets |
|
|
6,684 |
|
|
|
3,490 |
|
|
Total current assets |
|
|
274,707 |
|
|
|
43,913 |
|
|
Property and equipment, net |
|
|
10,320 |
|
|
|
6,211 |
|
|
Goodwill |
|
|
425,677 |
|
|
|
425,677 |
|
|
Acquired intangible assets, net |
|
|
91,820 |
|
|
|
103,520 |
|
|
Other assets |
|
|
3,518 |
|
|
|
1,837 |
|
|
Total assets |
|
$ |
806,042 |
|
|
$ |
581,158 |
|
|
Liabilities and stockholders’/ members' equity |
|
|
|
|
|
|
||
|
Current liabilities: |
|
|
|
|
|
|
||
|
Accounts payable |
|
$ |
6,849 |
|
|
$ |
3,137 |
|
|
Accrued expenses and other current liabilities |
|
|
24,682 |
|
|
|
15,966 |
|
|
Contingent consideration liability |
|
|
2,867 |
|
|
|
1,867 |
|
|
Deferred revenue |
|
|
5,892 |
|
|
|
4,776 |
|
|
Notes payable to related parties |
|
|
— |
|
|
|
5,900 |
|
|
Total current liabilities |
|
|
40,290 |
|
|
|
31,646 |
|
|
Long-term debt, net of issuance costs |
|
|
— |
|
|
|
110,200 |
|
|
Deferred income taxes |
|
|
4,848 |
|
|
|
5,471 |
|
|
Contingent consideration liability, net of current portion |
|
|
— |
|
|
|
1,498 |
|
|
Deferred revenue, net of current portion |
|
|
227 |
|
|
|
201 |
|
|
Other long-term liabilities |
|
|
5,533 |
|
|
|
3,482 |
|
|
Total liabilities |
|
|
50,898 |
|
|
|
152,498 |
|
|
Commitments and contingencies (Note 13) |
|
|
|
|
|
|
||
|
Stockholders'/ members' equity: |
|
|
|
|
|
|
||
|
Class A-1 common shares, no par value, no shares issued and outstanding as of September 30, 2021; 97,209,436 shares issued and outstanding as of December 31, 2020 |
|
|
— |
|
|
|
293,286 |
|
|
Class A-2 common shares, no par value, no shares issued and outstanding as of September 30, 2021; 45,262,340 shares issued and outstanding as of December 31, 2020 |
|
|
— |
|
|
|
136,559 |
|
|
Class A-3 common shares, no par value, no shares issued and outstanding as of September 30, 2021; 5,010,888 shares issued and outstanding as of December 31, 2020 |
|
|
— |
|
|
|
19,956 |
|
|
Preferred stock, par value $0.001 per share, 10,000,000 shares authorized and no shares issued and outstanding as of September 30, 2021, and no shares authorized, issued and outstanding as of December 31, 2020 |
|
|
— |
|
|
|
— |
|
|
Common stock, par value $0.001 per share, 650,000,000 shares authorized and 161,601,915 shares issued and outstanding as of September 30, 2021, and no shares authorized, issued and outstanding as of December 31, 2020 |
|
|
162 |
|
|
|
— |
|
|
Additional paid-in capital |
|
|
784,141 |
|
|
|
— |
|
|
Accumulated stockholders'/members’ deficit |
|
|
(29,159 |
) |
|
|
(21,141 |
) |
|
Total stockholders’/members' equity |
|
|
755,144 |
|
|
|
428,660 |
|
|
Total liabilities and stockholders’/members' equity |
|
$ |
806,042 |
|
|
$ |
581,158 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
EngageSmart, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except share and per share amounts)
(Unaudited)
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
||||||||||
|
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
Revenue |
|
$ |
55,493 |
|
|
$ |
39,026 |
|
|
$ |
154,664 |
|
|
$ |
101,560 |
|
|
Cost of revenue |
|
|
14,237 |
|
|
|
9,507 |
|
|
|
39,735 |
|
|
|
26,387 |
|
|
Gross profit |
|
|
41,256 |
|
|
|
29,519 |
|
|
|
114,929 |
|
|
|
75,173 |
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
General and administrative |
|
|
15,287 |
|
|
|
5,726 |
|
|
|
31,990 |
|
|
|
18,053 |
|
|
Selling and marketing |
|
|
19,096 |
|
|
|
11,947 |
|
|
|
51,224 |
|
|
|
34,868 |
|
|
Research and development |
|
|
9,132 |
|
|
|
5,284 |
|
|
|
23,947 |
|
|
|
15,065 |
|
|
Contingent consideration net expense |
|
|
1,157 |
|
|
|
— |
|
|
|
1,370 |
|
|
|
— |
|
|
Restructuring charges |
|
|
(330 |
) |
|
|
2,434 |
|
|
|
(241 |
) |
|
|
2,434 |
|
|
Amortization of intangible assets |
|
|
2,362 |
|
|
|
2,362 |
|
|
|
7,086 |
|
|
|
7,028 |
|
|
Total operating expenses |
|
|
46,704 |
|
|
|
27,753 |
|
|
|
115,376 |
|
|
|
77,448 |
|
|
(Loss) income from operations |
|
|
(5,448 |
) |
|
|
1,766 |
|
|
|
(447 |
) |
|
|
(2,275 |
) |
|
Other income (expense), net: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Interest expense, including related party interest (Note 15) |
|
|
(3,487 |
) |
|
|
(2,390 |
) |
|
|
(8,087 |
) |
|
|
(7,503 |
) |
|
Other (expense) income, net |
|
|
(28 |
) |
|
|
(30 |
) |
|
|
(107 |
) |
|
|
2 |
|
|
Total other income (expense), net |
|
|
(3,515 |
) |
|
|
(2,420 |
) |
|
|
(8,194 |
) |
|
|
(7,501 |
) |
|
Loss before income taxes |
|
|
(8,963 |
) |
|
|
(654 |
) |
|
|
(8,641 |
) |
|
|
(9,776 |
) |
|
Benefit for income taxes |
|
|
(671 |
) |
|
|
(185 |
) |
|
|
(623 |
) |
|
|
(2,918 |
) |
|
Net loss and comprehensive loss |
|
$ |
(8,292 |
) |
|
$ |
(469 |
) |
|
$ |
(8,018 |
) |
|
$ |
(6,858 |
) |
|
Net loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Basic |
|
$ |
(0.06 |
) |
|
$ |
(0.00 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.05 |
) |
|
Diluted |
|
$ |
(0.06 |
) |
|
$ |
(0.00 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.05 |
) |
|
Weighted-average number of common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Basic |
|
|
149,031,242 |
|
|
|
145,900,628 |
|
|
|
148,200,589 |
|
|
|
145,155,933 |
|
|
Diluted |
|
|
149,031,242 |
|
|
|
145,900,628 |
|
|
|
148,200,589 |
|
|
|
145,155,933 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
EngageSmart, Inc.
Condensed Consolidated Statements of Stockholders'/Members’ Equity
(in thousands, except share amounts)
(Unaudited)
|
|
|
Class A-1 |
|
|
Class A-2 |
|
|
Class A-3 |
|
|
Accumulated |
|
|
Total |
|
|||||||||||||||||
|
|
|
Common Shares |
|
|
Common Shares |
|
|
Common Shares |
|
|
Members’ |
|
|
Members’ |
|
|||||||||||||||||
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Deficit |
|
|
Equity |
|
||||||||
|
Balances as of December 31, 2019 |
|
|
97,209,436 |
|
|
$ |
293,286 |
|
|
|
45,262,340 |
|
|
$ |
136,559 |
|
|
|
502,545 |
|
|
$ |
14,334 |
|
|
|
(14,463 |
) |
|
|
429,716 |
|
|
Exercise of equity-based options |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,520,064 |
|
|
|
2,832 |
|
|
|
— |
|
|
|
2,832 |
|
|
Equity-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
151 |
|
|
|
— |
|
|
|
151 |
|
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3,425 |
) |
|
|
(3,425 |
) |
|
Balances as of March 31, 2020 |
|
|
97,209,436 |
|
|
$ |
293,286 |
|
|
|
45,262,340 |
|
|
$ |
136,559 |
|
|
|
3,022,609 |
|
|
$ |
17,317 |
|
|
$ |
(17,888 |
) |
|
$ |
429,274 |
|
|
Exercise of equity-based options |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
343,154 |
|
|
|
214 |
|
|
|
— |
|
|
|
214 |
|
|
Equity-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
155 |
|
|
|
— |
|
|
|
155 |
|
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,964 |
) |
|
|
(2,964 |
) |
|
Balances as of June 30, 2020 |
|
|
97,209,436 |
|
|
$ |
293,286 |
|
|
|
45,262,340 |
|
|
$ |
136,559 |
|
|
|
3,365,763 |
|
|
$ |
17,686 |
|
|
$ |
(20,852 |
) |
|
$ |
426,679 |
|
|
Exercise of equity-based options |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
311,071 |
|
|
|
405 |
|
|
|
— |
|
|
|
405 |
|
|
Equity-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
166 |
|
|
|
— |
|
|
|
166 |
|
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(469 |
) |
|
|
(469 |
) |
|
Balances as of September 30, 2020 |
|
|
97,209,436 |
|
|
$ |
293,286 |
|
|
|
45,262,340 |
|
|
$ |
136,559 |
|
|
|
3,676,834 |
|
|
$ |
18,257 |
|
|
$ |
(21,321 |
) |
|
$ |
426,781 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
EngageSmart, Inc.
Condensed Consolidated Statements of Stockholders'/Members’ Equity (Continued)
(in thousands, except share amounts)
(Unaudited)
|
|
Class A-1 |
|
|
Class A-2 |
|
|
Class A-3 |
|
|
|
|
|
Additional |
|
|
Accumulated |
|
|
Total |
|
|||||||||||||||||||||||
|
|
Common Shares |
|
|
Common Shares |
|
|
Common Shares |
|
|
Common Stock |
|
|
Paid-in |
|
|
Stockholders'/ |
|
|
Stockholders'/ |
|
|||||||||||||||||||||||
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Members’ Deficit |
|
|
Members’ Equity |
|
|||||||||||
|
Balances as of December 31, 2020 |
|
97,209,436 |
|
|
$ |
293,286 |
|
|
|
45,262,340 |
|
|
$ |
136,559 |
|
|
|
5,010,888 |
|
|
$ |
19,956 |
|
|
|
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(21,141 |
) |
|
$ |
428,660 |
|
|
Exercise of equity-based options |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
306,762 |
|
|
|
552 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
552 |
|
|
Equity-based compensation expense |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
222 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
222 |
|
|
Net income |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
485 |
|
|
|
485 |
|
|
Balances as of March 31, 2021 |
|
97,209,436 |
|
|
|
293,286 |
|
|
|
45,262,340 |
|
|
|
136,559 |
|
|
|
5,317,650 |
|
|
|
20,730 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(20,656 |
) |
|
|
429,919 |
|
|
Exercise of equity-based options |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
167,104 |
|
|
|
296 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
296 |
|
|
Equity-based compensation expense |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
338 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
338 |
|
|
Net loss |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(211 |
) |
|
|
(211 |
) |
|
Balances as of June 30, 2021 |
|
97,209,436 |
|
|
|
293,286 |
|
|
|
45,262,340 |
|
|
|
136,559 |
|
|
|
5,484,754 |
|
|
|
21,364 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(20,867 |
) |
|
|
430,342 |
|
|
Exercise of equity-based options |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
99,860 |
|
|
|
215 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
215 |
|
|
Repurchase and retirement of common shares |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(74,529 |
) |
|
|
(51 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(51 |
) |
|
Conversion of Class A-1, A-2 and A-3 common shares into common stock in connection with initial public offering (Note 10) |
|
(97,209,436 |
) |
|
|
(293,286 |
) |
|
|
(45,262,340 |
) |
|
|
(136,559 |
) |
|
|
(5,510,085 |
) |
|
|
(21,528 |
) |
|
|
147,981,861 |
|
|
|
148 |
|
|
|
451,225 |
|
|
|
— |
|
|
|
— |
|
|
Issuance of common stock upon initial public offering, net of underwriting discounts and commissions |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
13,620,054 |
|
|
|
14 |
|
|
|
331,975 |
|
|
|
— |
|
|
|
331,989 |
|
|
Costs incurred in connection with initial public offering |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5,662 |
) |
|
|
— |
|
|
|
(5,662 |
) |
|
Stock-based compensation expense |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6,603 |
|
|
|
— |
|
|
|
6,603 |
|
|
Net loss |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(8,292 |
) |
|
|
(8,292 |
) |
|
Balances as of September 30, 2021 |
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
|
161,601,915 |
|
|
$ |
162 |
|
|
$ |
784,141 |
|
|
$ |
(29,159 |
) |
|
$ |
755,144 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
EngageSmart, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
|
|
|
Nine Months Ended
|
|
|||||
|
|
|
2021 |
|
|
2020 |
|
||
|
Cash flows from operating activities: |
|
|
|
|
|
|
||
|
Net loss |
|
$ |
(8,018 |
) |
|
$ |
(6,858 |
) |
|
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
|
||
|
Depreciation and amortization expense |
|
|
13,620 |
|
|
|
12,499 |
|
|
Stock/equity-based compensation expense |
|
|
7,163 |
|
|
|
472 |
|
|
Contingent consideration net expense |
|
|
1,370 |
|
|
|
— |
|
|
Deferred income taxes |
|
|
(623 |
) |
|
|
(2,918 |
) |
|
Loss on disposal of property and equipment |
|
|
43 |
|
|
|
— |
|
|
Non-cash interest expense, including loss on extinguishment of debt |
|
|
4,066 |
|
|
|
2,978 |
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
||
|
Prepaid expenses and other current assets |
|
|
(3,194 |
) |
|
|
(580 |
) |
|
Accounts receivable, net |
|
|
(2,195 |
) |
|
|
(2,877 |
) |
|
Unbilled receivables |
|
|
(931 |
) |
|
|
(2,326 |
) |
|
Other assets |
|
|
(484 |
) |
|
|
(202 |
) |
|
Accounts payable |
|
|
3,622 |
|
|
|
567 |
|
|
Accrued expenses and other current liabilities |
|
|
5,475 |
|
|
|
5,905 |
|
|
Deferred revenue |
|
|
1,142 |
|
|
|
648 |
|
|
Other long-term liabilities |
|
|
(702 |
) |
|
|
2,679 |
|
|
Net cash provided by operating activities |
|
|
20,354 |
|
|
|
9,987 |
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
||
|
Acquisition of businesses, net of cash acquired |
|
|
— |
|
|
|
(25,518 |
) |
|
Purchases of property and equipment, including costs capitalized for development of internal-use software |
|
|
(3,190 |
) |
|
|
(3,903 |
) |
|
Net cash used in investing activities |
|
|
(3,190 |
) |
|
|
(29,421 |
) |
|
Cash flows from financing activities: |
|
|
|
|
|
|
||
|
Proceeds from issuance of common stock upon initial public offering, net of underwriting discounts and commissions |
|
|
331,989 |
|
|
|
— |
|
|
Proceeds from issuance of common stock to General Atlantic (IC), L.P. in connection with the Corporate Conversion (Note 10) |
|
|
43,236 |
|
|
|
— |
|
|
Payment to settle fractional shares related to Class A-2 shareholders in connection with the Corporate Conversion (Note 10) |
|
|
(43,236 |
) |
|
|
— |
|
|
Proceeds from issuance of long-term debt |
|
|
— |
|
|
|
31,250 |
|
|
Repayment of long-term debt |
|
|
(114,174 |
) |
|
|
— |
|
|
Payment of debt issuance costs |
|
|
(747 |
) |
|
|
— |
|
|
Payment of debt extinguishment costs |
|
|
(90 |
) |
|
|
— |
|
|
Payments of related party notes |
|
|
(5,900 |
) |
|
|
— |
|
|
Payments of contingent consideration |
|
|
(1,868 |
) |
|
|
(1,500 |
) |
|
Proceeds from exercise of stock/equity-based options |
|
|
1,063 |
|
|
|
3,451 |
|
|
Repurchase and retirement of common shares |
|
|
(51 |
) |
|
|
— |
|
|
Payment of initial public offering costs |
|
|
(2,912 |
) |
|
|
— |
|
|
Net cash provided by financing activities |
|
|
207,310 |
|
|
|
33,201 |
|
|
Net increase in cash, cash equivalents and restricted cash |
|
|
224,474 |
|
|
|
13,767 |
|
|
Cash, cash equivalents and restricted cash at beginning of period |
|
|
29,650 |
|
|
|
6,184 |
|
|
Cash, cash equivalents and restricted cash at end of period |
|
$ |
254,124 |
|
|
$ |
19,951 |
|
|
Reconciliation of cash, cash equivalents, and restricted cash: |
|
|
|
|
|
|
||
|
Cash and cash equivalents |
|
$ |
253,824 |
|
|
$ |
19,651 |
|
|
Restricted cash within other assets |
|
|
300 |
|
|
|
300 |
|
|
Total cash, cash equivalents, and restricted cash |
|
$ |
254,124 |
|
|
$ |
19,951 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
EngageSmart, Inc.
Condensed Consolidated Statements of Cash Flows (Continued)
(in thousands, except share amounts)
(Unaudited)
|
|
|
Nine Months Ended
|
|
|||||
|
|
|
2021 |
|
|
2020 |
|
||
|
Supplemental cash flow information: |
|
|
|
|
|
|
||
|
Cash paid for interest |
|
$ |
5,310 |
|
|
$ |
4,302 |
|
|
Cash paid for taxes |
|
$ |
35 |
|
|
$ |
- |
|
|
Supplemental disclosure of non-cash investing and financing activities: |
|
|
|
|
|
|
||
|
Additions to property and equipment included in accounts payable and accrued expenses |
|
$ |
187 |
|
|
$ |
- |
|
|
Deferred initial public offering costs included in accrued expenses |
|
$ |
2,750 |
|
|
$ |
- |
|
|
Debt issuance costs included in accrued expenses |
|
$ |
450 |
|
|
$ |
- |
|
|
Fair value of contingent consideration recorded in purchase accounting |
|
$ |
- |
|
|
$ |
4,608 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
EngageSmart, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Nature of Business and Basis of Presentation
EngageSmart, Inc. and its subsidiaries (together referred to herein as the “Company” or “EngageSmart”) is a leading provider of vertically tailored customer engagement software and integrated payments solutions. EngageSmart offers single instance, multi-tenant, true Software-as-a-Service (“SaaS”) vertical solutions, including SimplePractice, InvoiceCloud, HealthPay24 and DonorDrive, that are designed to simplify our customers' engagement with their clients by driving digital adoption and self-service. The Company serves customers across five core verticals: Health & Wellness, Government, Utilities, Financial Services, and Giving. EngageSmart solutions are purpose-built for each vertical it serves, including end-to-end business management software, customer engagement applications, and billing and payment solutions. EngageSmart is headquartered in Braintree, Massachusetts with additional locations throughout the United States.
Initial Public Offering
On September 27, 2021, the Company completed its initial public offering ("IPO"), in which the Company issued and sold 13,620,054 shares of common stock at a public offering price of $26.00 per share, including 620,054 shares issued upon the exercise of the underwriters' option to purchase additional shares. The Company raised net proceeds of $326.3 million, after deducting the underwriting discount of $22.1 million and offering expenses of $5.7 million. Additionally, certain existing shareholders sold an aggregate of 3,112,446 shares in the IPO at the same price, resulting in net proceeds to the selling stockholders of $75.9 million. On September 27, 2021, the Company used a portion of the net proceeds from its IPO to repay in full the outstanding borrowings of $114.2 million under its Credit Facilities, as defined below.
Prior to the IPO, deferred offering costs, which consist of legal, accounting, consulting and other third-party fees that were directly associated with the IPO, were capitalized within other assets on the Company's unaudited condensed consolidated balance sheet. Upon the completion of the IPO, these costs were offset against the proceeds from the IPO and recorded as a reduction to additional paid-in capital.
Following the Company's IPO, General Atlantic (IC), L.P. ("General Atlantic") controls more than 50% of the combined voting power of its outstanding common stock, and the Company is considered a "controlled company" within the meaning of the corporate governance standards of the New York Stock Exchange ("NYSE").
Corporate Conversion
Immediately prior to effectiveness of the Company’s IPO registration statement on Form S-1, EngageSmart, LLC, a Delaware limited liability company, converted into a Delaware corporation pursuant to a statutory conversion, which changed the Company’s name to EngageSmart, Inc. (“Corporate Conversion”). Refer to Note 10 - Stockholders' Equity for further discussion.
Stock Split
On September 10, 2021, the Company effected a 1-for-3 forward stock split of its common shares. In connection with the forward stock split, each issued and outstanding common share, automatically and without action on the part of the holders, became three common shares. All share, per share and related information presented in the unaudited condensed consolidated financial statements and accompanying notes have been retroactively adjusted, where applicable, to reflect the impact of the forward stock split.
Basis of Presentation
EngageSmart, Inc., formerly EngageSmart, LLC prior to the Corporate Conversion, was formed on December 7, 2018 as Hancock Parent, LLC. On December 11, 2018, EngageSmart, LLC entered a series of arrangements to indirectly acquire, through its wholly-owned subsidiary Hancock Midco, LLC, 100% of the equity interest in Invoice Cloud, Inc (the “InvoiceCloud Acquisition”). On February 11, 2019, Hancock Merger Sub, Inc., a transitory merger company of Hancock Midco, LLC, merged into InvoiceCloud, with InvoiceCloud continuing as the surviving corporation and a wholly-owned subsidiary of Hancock Midco, LLC. For all of the periods reported in these unaudited condensed consolidated financial statements, the Company has not and does not have any material operations on a standalone basis, and all of the material operations of the Company are carried out by its subsidiaries.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and include the accounts of the Company and its
7
wholly owned subsidiaries. All intercompany accounts and transactions between the Company and its subsidiaries have been eliminated in consolidation.
Certain information and note disclosures normally included in the consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. Therefore, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto, included in the Company's final prospectus for the fiscal year ended December 31, 2020, as filed with the Securities and Exchange Commission (the “SEC”) pursuant to Rule 424(b) under the Securities Act of 1933, on September 24, 2021 (“Final Prospectus”). In the opinion of management, the interim unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position for the periods presented. The results for the interim periods presented are not necessarily indicative of future results.
Impact of the COVID-19 Pandemic
The Company is subject to risks and uncertainties relating to the ongoing outbreak of the novel strain of coronavirus (“COVID-19”), which the World Health Organization declared a pandemic in March 2020. The COVID-19 pandemic has continued to spread throughout the United States and the world and has resulted in authorities implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. Work-from-home and other measures have introduced additional operational risks, including cybersecurity risks, and may adversely affect the way the Company and its customers and insurance providers conduct business.
In response to the COVID-19 pandemic, the Company limited corporate travel and reduced certain professional services. In addition, the Company implemented remote working capabilities and measures that focused on the safety of its employees. The Company continues to monitor the rapidly evolving conditions and circumstances as well as guidance from international and domestic authorities, including public health authorities. The Company does not currently foresee the need to take additional actions, however it continues to evaluate the ongoing impact of COVID-19 as facts and circumstances change. The COVID-19 pandemic has not had a material effect on the Company’s revenues and financial results during the periods presented in the financial statements, although the magnitude and duration of the ultimate effects as a result of the COVID-19 pandemic are not possible to predict at this time.
2. Summary of Significant Accounting Policies
The Company’s significant accounting policies are discussed in Note 2—Summary of Significant Accounting Policies within the notes to consolidated financial statements for the year ended December 31, 2020, included in the Company's Final Prospectus. There have been no significant changes to these policies during the nine months ended September 30, 2021, except as noted below.
Risk of Concentrations of Credit and Significant Customers
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents, and accounts receivable. At times, the Company may maintain cash balances in excess of federally insured limits. The Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.
Significant customers are those that accounted for 10% or more of the Company’s total revenue or accounts receivable during any period presented herein. During the nine months ended September 30, 2021 and 2020, no customer accounted for 10% or more of revenue. As of September 30, 2021, the Company had one customer that accounted for more than 10% of its accounts receivable balance. As of December 31, 2020, no customer accounted for 10% or more of accounts receivable.
Recently Issued Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”), which requires lessees to recognize most leases on their balance sheet as a right-of-use asset and a lease liability. In general, lease arrangements exceeding a twelve-month term must be recognized as assets and liabilities on the balance sheet. Under ASU 2016-02, a right of use asset and lease obligation is recorded for all leases, whether operating or financing, while the income statement reflects lease expense for operating leases and amortization/interest expense for financing leases. The FASB also issued ASU 2018-10, Codification Improvements to Topic 842 Leases, and ASU 2018-11, Targeted Improvements to Topic 842 Leases, which allows the new lease standard to be applied as of the adoption date with a cumulative-effect adjustment to the opening balance of retained earnings rather than retroactive restatement of all periods presented. In June 2020, the FASB issued ASU No. 2020-05, which grants a one-year effective-date delay for nonpublic entities to annual reporting periods beginning after December 15, 2021 and to interim periods
8
within fiscal years beginning after December 15, 2022. Early adoption continues to be permitted. The Company will adopt the new standard effective January 1, 2022 on a modified retrospective basis and will not restate comparative periods. The Company is currently evaluating the impact that the adoption of ASU 2016-02 will have on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes may result in earlier recognition of credit losses. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, which narrowed the scope and changed the effective date for non-public entities for ASU 2016-13. The FASB subsequently issued supplemental guidance within ASU No. 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief (“ASU 2019-05”). ASU 2019-05 provides an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. For public entities that are Securities and Exchange Commission filers, excluding entities eligible to be smaller reporting companies, ASU 2016-13 is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. For all other entities, ASU 2016-13 is effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. The Company plans to adopt the new standard effective January 1, 2022. The Company is currently evaluating the impact that the adoption of ASU 2016-13 will have on its consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes—Simplifying the Accounting for Income Taxes (Topic 740). The amendments in this update simplify the accounting for income taxes by removing certain exceptions to the general principles as well as clarifying and amending existing guidance to improve consistent application. For public entities the guidance was effective for annual reporting periods beginning after December 15, 2020 and for interim periods within those fiscal years. For non-public entities, the guidance is effective for annual reporting periods beginning after December 15, 2021 and for interim periods within years beginning after December 15, 2022, with early adoption permitted. Depending on the amendment, adoption may be applied on the retrospective, modified retrospective, or prospective basis. The Company plans to adopt the new standard effective January 1, 2022. The Company is currently evaluating the impact that the adoption of ASU 2019-12 will have on its consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848)—Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), which intends to address accounting consequences that could result from the global markets’ anticipated transition away from the use of the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. The amendments within ASU 2020-04 provide operational expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions to affected by reference rate reform if certain criteria are met. The amendments within ASU 2020-04 apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of the reference rate reform. The amendments in ASC 2020-04 are effective immediately and may be applied through December 31, 2022. As there are no current borrowings under the New Revolving Credit Facility, as defined below, there is currently no impact related to the adoption of ASU 2020-04. If the Company draws down on the New Revolving Credit Facility, the Company will assess the impact of the adoption of this guidance on its consolidated financial statements.
3. Revenue
Revenue Disaggregated
The Company disaggregates revenue from contracts with customers by reportable segment, as the Company believes it best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors and is consistent with the manner in which the Company operates the business. The Company generates a significant majority of its revenue in the Enterprise Solutions segment from transaction and usage-based revenue and a significant majority of its revenue in the SMB Solutions segment from subscription revenue.
Refer to Note 16—Segment and Geographic Information for the table that depicts disaggregated revenue by segment.
Contract Assets and Liabilities
Contract assets are rights to consideration in exchange for goods or services that the entity has transferred to a customer when that right is conditional on something other than the passage of time. Contract assets are transferred to accounts
9
receivable once the rights become unconditional. The Company did not have contract assets as of September 30, 2021 or December 31, 2020.
Contract liabilities (deferred revenue) primarily consist of billings and payments received in advance of revenue recognition. The Company primarily bills and collects payments from customers for its services in advance on a monthly, quarterly, or annual basis. Contract liabilities are recognized as revenue when services are performed and all other revenue recognition criteria have been met. Amounts expected to be recognized as revenue within 12 months of the balance sheet date are classified as current deferred revenue and amounts expected to be recognized as revenue beyond twelve months of the balance sheet date are classified as non-current deferred revenue. Deferred revenue (current and non-current) was $5.9 million and $0.2 million as of September 30, 2021, respectively. Deferred revenue (current and non-current) was $4.8 million and $0.2 million as of December 31, 2020, respectively. During the nine months ended September 30, 2021, the Company recognized revenue of $4.7 million from the deferred revenue balance as of December 31, 2020.
Remaining Performance Obligations
ASC 606 requires disclosure of the aggregate amount of the transaction price allocated to unsatisfied performance obligations. As permitted by ASC 606, the Company has elected to exclude from this disclosure any contracts with an original duration of one year or less and any variable consideration that meets specified criteria. For contracts greater than one year in length, the Company’s most significant performance obligations consist of variable consideration. Such variable consideration meets the specified criteria for the disclosure exclusion; therefore, the majority of the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied is variable consideration that is not required for this disclosure.
4. Net Loss Per Share
Basic net loss per share is calculated by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per share is calculated by dividing net loss by the sum of the weighted average number of common shares and potentially dilutive securities outstanding during the period using the treasury stock method. For the periods in which the Company incurs a net loss, the effect of the Company’s outstanding common stock equivalents is not included in the calculation of diluted net loss per share as the effect would be anti-dilutive. The following table sets forth the computation of basic and diluted net loss per share:
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
||||||||||
|
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
|
|
(in thousands, except share and per share amounts) |
|
|||||||||||||
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Net loss |
|
$ |
(8,292 |
) |
|
$ |
(469 |
) |
|
$ |
(8,018 |
) |
|
$ |
(6,858 |
) |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Weighted average common shares outstanding, basic |
|
|
149,031,242 |
|
|
|
145,900,628 |
|
|
|
148,200,589 |
|
|
|
145,155,933 |
|
|
Effect of potential dilutive common shares |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Weighted average common shares outstanding, diluted |
|
|
149,031,242 |
|
|
|
145,900,628 |
|
|
|
148,200,589 |
|
|
|
145,155,933 |
|
|
Net loss per share, basic |
|
$ |
(0.06 |
) |
|
$ |
(0.00 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.05 |
) |
|
Net loss per share, diluted |
|
$ |
(0.06 |
) |
|
$ |
(0.00 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.05 |
) |
The Company excluded the following potential common shares, presented based on amounts outstanding at each period end, from the computation of diluted net loss per share for the periods indicated because including them would have had an anti-dilutive effect:
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
||||||||||
|
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
Options to purchase common shares |
|
|
11,205,066 |
|
|
|
10,142,297 |
|
|
|
11,205,066 |
|
|
|
10,142,297 |
|
|
Unvested restricted stock units |
|
|
288,455 |
|
|
|
— |
|
|
|
288,455 |
|
|
|
— |
|
|
Total |
|
|
11,493,521 |
|
|
|
10,142,297 |
|
|
|
11,493,521 |
|
|
|
10,142,297 |
|
10
5. Acquisitions
2020 Acquisitions
Payment Service Network, Inc.
On January 2, 2020, the Company consummated a stock purchase agreement with Payment Service Network, Inc. (“PSN”) and certain other parties to acquire 100% of the outstanding equity interests of PSN for a purchase price of $24.6 million. PSN is a SaaS electronic billing and payment provider that provides online billing and end-user communication across multiple industries, including utilities and municipalities.
The PSN acquisition was accounted for as a purchase of a business under ASC 805, Business Combinations (“ASC 805”). Under the acquisition method of accounting, the assets and liabilities of PSN were recorded as of the acquisition date, at their respective fair values. The purchase consideration of $24.6 million reflected a net cash payment of $20.2 million, contingent consideration of $4.4 million representing the fair value of potential payments to the former shareholders of PSN, and a working capital adjustment of $0.1 million owed to the Company. The former shareholders of PSN are eligible to receive up to $6.5 million upon achievement of certain earnout targets.
The Company recognized a contingent consideration liability equal to the acquisition date fair value of expected contingent payments. The Company remeasures the contingent consideration liability at each reporting period until the liability is fully settled and recognizes changes in fair value through contingent consideration net expense within the Company's unaudited condensed consolidated statements of operations and comprehensive loss. The Company uses a Monte Carlo simulation model in its estimates, and significant assumptions and estimates utilized in the model include the forecasted net recurring revenue, net recurring revenue volatility, and discount rate. During the nine months ended September 30, 2021 and 2020, the Company paid $1.9 million and $1.5 million, respectively, upon achievement of earnout targets. As of September 30, 2021 and December 31, 2020, the Company estimated the remaining fair value of the contingent consideration to be $2.9 million and $3.4 million, respectively.
The final allocation of the purchase price was as follows (in thousands):
Customer relationships were valued using the income approach. Significant assumptions and estimates utilized in the model include the customer attrition rate and discount rate. The developed technology and tradename intangibles were valued using a relief from royalty method, which considers both the market approach and the income approach. Significant assumptions and estimates utilized in the model include the royalty and discount rates. Acquired intangible assets are amortized over their estimated useful lives based on the pattern of consumption of the economic benefits of the intangible asset or, if that pattern cannot be determined, on a straight-line basis.
Goodwill was recognized for the excess purchase price over the fair value of the net assets acquired. Goodwill is primarily attributable to the workforce of the acquired business (which is not eligible for separate recognition as an identifiable
11
intangible asset) and synergies expected to arise from the acquisition. Goodwill resulting from the acquisition of PSN is not deductible for tax purposes.
The operating results of PSN have been included in the consolidated financial statements beginning on the acquisition date, and pro forma information has not been presented, as the operating results of PSN are not material. Acquisition-related costs related to the acquisition of PSN are not material for the periods presented.
Track Your Hours, LLC
On April 3, 2020, the Company consummated an equity purchase agreement with Track Your Hours, LLC (“TYH”) and its sole owner to acquire 100% of the outstanding equity interests of TYH. TYH is a leading provider of software for tracking progress and hours for students and trainees who are in process of obtaining their licensure as marriage and family therapists, licensed clinical social workers, and licensed professional clinical counselors. The acquisition of TYH was accounted for as a purchase of a business under ASC 805. The total consideration for this acquisition was $5.5 million, comprised of $5.3 million of cash paid, net of cash acquired, and contingent consideration with a fair value of $0.2 million at the time of the acquisition. In allocating the total purchase consideration for this acquisition based on estimated fair values, the Company recorded goodwill of $3.2 million and identifiable intangible assets of $2.6 million. Goodwill is primarily attributable to future economic benefits expected to arise from the utilization of the intangible assets as well as the economic benefits expected from the workforce. Intangible assets acquired consisted of customer relationships valued using the income approach and developed technology and marketing relations valued using a relief from royalty method. Goodwill resulting from this acquisition is not deductible for tax purposes. The operating results of TYH have been included in the consolidated financial statements beginning on the acquisition date, and pro forma information has not been presented, as the operating results of TYH are not material. Acquisition-related costs related to the acquisition of TYH are not material for the periods presented.
6. Fair Value Measurements
The following tables present the Company’s fair value hierarchy for its assets and liabilities that were measured at fair value on a recurring basis (in thousands):
|
|
|
September 30, 2021 |
|
|||||||||||||
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Cash equivalents - money market funds |
|
$ |
205,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
205,000 |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Contingent consideration liability |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
2,867 |
|
|
$ |
2,867 |
|
|
|
|
December 31, 2020 |
|
|||||||||||||
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Cash equivalents - money market funds |
|
$ |
4,405 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
4,405 |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Contingent consideration liability |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
3,365 |
|
|
$ |
3,365 |
|
Money market funds held as of September 30, 2021 and December 31, 2020 were valued by the Company based on quoted market prices, which represent a Level 1 measurement within the fair value hierarchy. There were no transfers into or out of Level 3 during the periods presented.
The Company’s recurring fair value measurements using Level 3 inputs relate to the Company’s contingent consideration liability, as the significant inputs to the valuation are not observable in the market. Changes in the fair value of the Company’s contingent consideration liability were as follows (in thousands):
|
Balance as of December 31, 2020 |
|
$ |
3,365 |
|
|
Payment of contingent consideration |
|
|
(1,868 |
) |
|
Change in fair value |
|
|
1,370 |
|
|
Balance as of September 30, 2021 |
|
$ |
2,867 |
|
As of September 30, 2021, the maximum amount of future contingent consideration (undiscounted) that the Company could be required to pay associated with its prior acquisitions was $4.0 million.
12
7. Goodwill and Acquired Intangible Assets
The carrying amount of goodwill was $425.7 million as of September 30, 2021 and December 31, 2020, related to goodwill from the Company’s acquisitions. Changes in the carrying amount of goodwill by reportable segment through September 30, 2021 are as follows (in thousands):
|
|
|
Enterprise Solutions |
|
|
SMB Solutions |
|
|
Total |
|
|||
|
Balance as of December 31, 2020 |
|
$ |
218,658 |
|
|
$ |
207,019 |
|
|
$ |
425,677 |
|
|
Goodwill acquired |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Balance as of September 30, 2021 |
|
$ |
218,658 |
|
|
$ |
207,019 |
|
|
$ |
425,677 |
|
Goodwill is not amortized, but instead is reviewed for impairment at least annually or more frequently when events and circumstances occur indicating that the recorded goodwill may be impaired. To date, the Company has had no impairments to goodwill.
Acquired intangible assets of the Company consisted of the following (in thousands):
|
|
|
|
|
|
September 30, 2021 |
|
||||||||||
|
|
|
Weighted Average
|
|
|
Gross Carrying Value |
|
|
Accumulated Amortization |
|
|
Net Carrying Value |
|
||||
|
|
|
(in years) |
|
|
|
|
|
|
|
|
|
|
||||
|
Customer relationships |
|
|
10.0 |
|
|
$ |
82,841 |
|
|
$ |
(20,988 |
) |
|
$ |
61,853 |
|
|
Developed technology |
|
|
7.0 |
|
|
|
42,913 |
|
|
|
(15,773 |
) |
|
|
27,140 |
|
|
Tradenames |
|
|
5.0 |
|
|
|
5,824 |
|
|
|
(2,997 |
) |
|
|
2,827 |
|
|
|
|
|
|
|
$ |
131,578 |
|
|
$ |
(39,758 |
) |
|
$ |
91,820 |
|
|
|
|
|
|
|
|
December 31, 2020 |
|
||||||||||
|
|
|
Weighted Average
|
|
|
Gross Carrying Value |
|
|
Accumulated Amortization |
|
|
Net Carrying Value |
|
||||
|
|
|
(in years) |
|
|
|
|
|
|
|
|
|
|
||||
|
Customer relationships |
|
|
10.0 |
|
|
$ |
82,841 |
|
|
$ |
(14,775 |
) |
|
$ |
68,066 |
|
|
Developed technology |
|
|
7.0 |
|
|
|
42,913 |
|
|
|
(11,160 |
) |
|
|
31,753 |
|
|
Tradenames |
|
|
5.0 |
|
|
|
5,824 |
|
|
|
(2,123 |
) |
|
|
3,701 |
|
|
|
|
|
|
|
$ |
131,578 |
|
|
$ |
(28,058 |
) |
|
$ |
103,520 |
|
|
The Company recorded amortization expense of $3.9 million for both the three months ended September 30, 2021 and 2020; and $11.7 million and $11.6 million during the nine months ended September 30, 2021 and 2020, respectively. Amortization of developed technology is recorded within cost of revenue, while amortization of customer relationships and tradenames is recorded within amortization of intangible assets within the Company’s unaudited condensed consolidated statements of operations and comprehensive loss. Future estimated amortization expense of the Company’s intangible assets as of September 30, 2021 is expected to be as follows (in thousands):
8. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
|
|
|
September 30, |
|
|
December 31, |
|
||
|
|
|
2021 |
|
|
2020 |
|
||
|
Accrued employee compensation and benefits |
|
$ |
11,767 |
|
|
$ |
7,073 |
|
|
Accrued consulting and professional fees |
|
|
4,996 |
|
|
|
619 |
|
|
Accrued processing fees |
|
|
2,633 |
|
|
|
1,101 |
|
|
Accrued channel partner fees |
|
|
2,112 |
|
|
|
1,615 |
|
|
Accrued sales tax |
|
|
468 |
|
|
|
2,019 |
|
|
Accrued interest payable |
|
|
2 |
|
|
|
794 |
|
|
Accrued restructuring |
|
|
302 |
|
|
|
565 |
|
|
Other |
|
|
2,402 |
|
|
|
2,180 |
|
|
Total |
|
$ |
24,682 |
|
|
$ |
15,966 |
|
9. Debt
The Company's long-term debt consisted of the following (in thousands):
|
|
|
December 31, |
|
|
|
|
|
2020 |
|
|
|
Principal amount of long-term debt |
|
$ |
111,671 |
|
|
Less: Current portion of long-term debt |
|
|
— |
|
|
Long-term debt, net of current portion |
|
|
111,671 |
|
|
Less: Debt issuance costs, net of accretion |
|
|
(1,471 |
) |
|
Long-term debt, net of debt issuance costs and current portion |
|
$ |
110,200 |
|
As of September 30, 2021, the Company had no long-term debt outstanding.
New Revolving Credit Facility
On September 27, 2021, the Company entered into a revolving credit agreement (“New Revolving Credit Facility”) with JPMorgan Chase Bank, N.A. as administrative agent and certain other lenders. The New Revolving Credit Facility allows the Company to borrow up to $75.0 million, $7.5 million of which may be comprised of a letter of credit facility. The New Revolving Credit Facility will mature on September 27, 2026 and proceeds of the borrowings under the New Revolving Credit Facility will be used for general corporate purposes. In conjunction with the New Revolving Credit Facility, the Company incurred debt issuance costs in the amount of $1.2 million, which were recorded within other assets on the unaudited condensed consolidated balance sheets and are being amortized into interest expense over the life of the New Revolving Credit Facility. The New Revolving Credit Facility requires the Company to pay a commitment fee in respect of unused revolving credit facility commitments of 0.25% per annum. The commitment fee is recorded as a component of interest expense within the Company's unaudited condensed consolidated statement of operations and comprehensive loss. As of September 30, 2021, the Company has not drawn upon the New Revolving Credit Facility.
The New Revolving Credit Facility contains certain financial maintenance covenants, which require us to not exceed certain specified total net leverage ratios at the end of each fiscal quarter. As of September 30, 2021, the Company was in compliance with all financial covenants under the New Revolving Credit Facility.
Credit Facilities
On February 11, 2019, in connection with the InvoiceCloud Acquisition, the Company entered into a credit agreement (“Credit Agreement”) with Ares Capital Corporation as administrative agent and collateral agent, and certain other lenders, which provided for a $75.0 million aggregate principal amount senior secured term loan facility (“Initial Term Loan Facility”), a $35.0 million senior secured delayed draw term loan facility (“Delayed Draw Term Loan Facility”), and a $7.5 million senior secured revolving credit facility (“Revolving Credit Facility"). The Company collectively refers to the Initial Term Loan Facility, the Delayed Draw Term Loan Facility, and the Revolving Credit Facility as the Credit Facilities. On September 27, 2021, the Company used a portion of the net proceeds from its IPO to repay in full the outstanding borrowings of $114.2 million under the Credit Facilities. In connection with this repayment, the Company incurred a loss on debt extinguishment of $1.2 million, which is included within interest expense within the Company's unaudited
14
condensed consolidated statement of operations and comprehensive loss. The loss on debt extinguishment primarily consists of a write-off of unamortized debt issuance costs associated with the Credit Facilities.
The previous Credit Agreement provided for a Revolving Credit Facility with maximum available borrowings of $7.5 million. In September 2019, a letter of credit was issued related to one of the Company’s leases in the amount of $2.1 million which reduced the amount of borrowings available under the previously Revolving Credit Facility. As of September 27, 2021, the Credit Agreement, which included the Revolving Credit Facility, was terminated and the outstanding letter of credit was cash collateralized for $2.2 million.
10. Stockholders' Equity
Initial Public Offering
On September 27, 2021, the Company completed its IPO, in which the Company issued and sold 13,620,054 shares of common stock at a public offering price of $26.00 per share, including 620,054 shares issued upon the exercise of the underwriters' option to purchase additional shares. The Company raised net proceeds of $326.3 million after deducting the underwriting discounts of $22.1 million and offering expenses of $5.7 million.
Corporate Conversion
Immediately prior to effectiveness of the Company’s IPO registration statement on Form S-1, EngageSmart, LLC, a Delaware limited liability company, converted into a Delaware corporation pursuant to a statutory conversion, which changed the Company’s name to EngageSmart, Inc. (“Corporate Conversion”). As part of the Corporate Conversion, each Class A-1 share, Class A-2 share, and Class A-3 share, in each case, of EngageSmart, LLC was converted on a 1:1 basis into Class A-1 common stock, Class A-2 common stock and Class A-3 common stock, in each case, of the Company, respectively, with the same rights and obligations that existed under the limited liability company agreement of EngageSmart, LLC (the “LLC Agreement”).
Under the LLC Agreement, Class A-2 holders, were entitled to certain cash distributions that General Atlantic would have otherwise been entitled to receive if General Atlantic had received a pre-established dollar threshold in connection with and/or following certain exit events (“CVR Obligation”). Following the Corporate Conversion, each share of (i) Class A-1 common stock was reclassified into 0.9398 shares of common stock, (ii) Class A-2 common stock was reclassified into 1.1102 shares of common stock, and (iii) Class A-3 common stock was reclassified into 1 share of common stock (collectively, the “Common Stock Reclassifications”). The conversion ratio for each Common Stock Reclassification reflected the difference in value of the shares as a result of the CVR Obligation. Pursuant to the Company’s amended and restated certificate of incorporation, no fractional shares resulting from the conversion of Class A-2 common stock to common stock were to be issued and, in lieu of the fractional shares, each holder of Class A-2 common stock who would otherwise be entitled to fractional shares were entitled to an amount in cash (the “Fractional Share Payout”).
Following the Common Stock Reclassifications, General Atlantic, the sole former holder of Class A-1 common stock (which were formerly Class A-1 shares of EngageSmart, LLC) subscribed for 1,662,917 additional shares of common stock in the Company, with the value of each share based on the public offering price of the shares of common stock sold by the Company in the IPO. As consideration for the additional shares of common stock, General Atlantic contributed capital to the Company in an amount equal to $43.2 million in order for the Company to satisfy its obligation in full for the Fractional Share Payout. The Fractional Share Payout settled the former CVR Obligation of the Company under the LLC Agreement.
Additionally, certain of our executive officers and other employees, among others, currently hold CVR Units, under the CVR Plan, as defined in Note 13 - Commitments and Contingencies. The CVR Plan was amended to reflect the Corporate Conversion and the CVR Units will otherwise remain subject to the same terms and conditions applicable to the CVR Units immediately prior to the Company’s IPO. Following the Common Stock Reclassifications, General Atlantic subscribed for 288,344 additional shares of common stock in the Company, with the value of each share based on the public offering price of the shares of common stock sold by the Company in the IPO. As consideration for the additional shares of common stock, General Atlantic entered into a promissory note with the Company which requires General Atlantic to make a capital contribution to the Company equal to the amount of any payments made by the Company to holders of CVR Units pursuant to the CVR Plan, which such payments would be triggered by the same exit events specified under the LLC Agreement.
15
Stock Split
On September 10, 2021, the Company effected a 1-for-3 forward stock split of its common shares. In connection with the forward stock split, each issued and outstanding common share, automatically became three common shares.
Preferred Stock
In connection with the Company's IPO in September 2021, the Company's amended and restated certificate of incorporation and amended and restated bylaws became effective, which authorized the issuance of 10,000,000 shares of preferred stock with a par value of $0.001 with rights and preferences, including voting rights, designated from time to time by the Board of Directors. As of September 30, 2021, no shares of preferred stock were issued or outstanding.
Common Stock
In connection with the Company's IPO in September 2021, the Company's amended and restated certificate of incorporation and amended and restated bylaws became effective, with authorized the issuance of 650,000,000 shares of common stock with a par value of $0.001. As of September 30, 2021, there were 161,601,915 shares of common stock issued and outstanding.
11. Stock-based Compensation
2021 Incentive Award Plan
In September 2021, the Company’s Board of Directors adopted, and its stockholders approved, the 2021 Incentive Award Plan (“2021 Plan”), which became effective in connection with the IPO. The 2021 Plan provides for granting stock options, including incentive stock options ("ISOs"), nonqualified stock options ("NSOs"), restricted stock, dividend equivalents, restricted stock units ("RSUs"), other stock-based awards, and cash awards to eligible employees, consultants and directors. A total of 14,798,186 shares of the Company’s common stock have been reserved for issuance under the 2021 Plan. The number of shares initially available for issuance will be increased annually on January 1 of each calendar year beginning in 2022 and ending in 2031, equal to the lesser of (i) 5% of the shares of our common stock outstanding on the final day of the immediately preceding calendar year or (ii) a smaller number of shares as determined by our Board of Directors. As of September 30, 2021, there were 14,509,731 remaining shares available for the Company to grant under the 2021 Plan.
The Company’s Amended and Restated 2015 Stock Option Plan ("2015 Plan”) provided for the granting of ISOs and NSOs to the Company's employees, consultants, and nonemployee directors. In conjunction with the effectiveness of the 2021 Plan, the Company’s Board of Directors voted that no further awards would be granted under the 2015 Plan but any awards under the 2015 Plan that are outstanding as of the date of the IPO shall remain outstanding and continue to be subject to the terms and conditions of the 2015 Plan.
Stock-based awards granted to employees generally vest over a four-year period, and, in the case of stock options, expire ten years from the date of grant.
2021 Employee Stock Purchase Plan
In September 2021, the Company’s Board of Directors adopted, and its stockholders approved, the 2021 Employee Stock Purchase Plan (“2021 ESPP”), which became effective in connection with the IPO. The 2021 ESPP authorizes the issuance of shares of common stock pursuant to purchase rights granted to employees. A total of 2,219,728 shares of the Company’s common stock have been reserved for future issuance under the 2021 ESPP. The number of shares available for issuance under the 2021 ESPP will be annually increased on January 1 of each calendar year beginning in 2022 and ending in 2031, by an amount equal to the lesser of: (i) 1% of the aggregate number of shares of our common stock outstanding on the final day of the immediately preceding calendar year or (ii) such smaller number of shares as is determined by our Board of Directors. As of September 30, 2021, the Company has not commenced any offering period under the 2021 ESPP.
Stock Options
The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing model, which requires the input of subjective assumptions, including the risk-free interest rate, expected volatility, expected dividend yield and expected term. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. The Company estimates its expected share volatility based on the historical volatility of a publicly traded set of peer companies. Expected dividend yield is based on the fact that the Company has never paid cash dividends and does not expect to pay
16
any cash dividends in the foreseeable future. The expected term of the Company’s options has been determined based on the average of the vesting term and the contractual lives of all options awarded.
The following table presents, on a weighted average basis, the assumptions used in the Black-Scholes option-pricing model to determine the grant-date fair value of options granted:
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
Fair value of common stock/shares |
|
$ |
17.23 |
|
|
$ |
3.65 |
|
|
$ |
7.67 |
|
|
$ |
3.05 |
|
|
Risk-free interest rate |
|
|
1.2 |
% |
|
|
0.5 |
% |
|
|
1.2 |
% |
|
|
0.5 |
% |
|
Expected volatility |
|
|
28.9 |
% |
|
|
26.9 |
% |
|
|
27.3 |
% |
|
|
26.7 |
% |
|
Expected dividend yield |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Expected term (in years) |
|
|
7.3 |
|
|
|
8.1 |
|
|
|
9.3 |
|
|
|
8.1 |
|
The following table summarizes the Company’s option activity for the nine months ended September 30, 2021:
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
||||
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
||||
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
||||
|
|
|
Number |
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
||||
|
|
|
of Shares |
|
|
Price |
|
|
Term |
|
|
Value |
|
||||
|
|
|
|
|
|
|
|
|
(in years) |
|
|
(in thousands) |
|
||||
|
Outstanding as of December 31, 2020 |
|
|
9,333,218 |
|
|
$ |
2.72 |
|
|
|
8.41 |
|
|
$ |
16,882 |
|
|
Granted |
|
|
3,005,910 |
|
|
|
8.58 |
|
|
|
|
|
|
|
||
|
Exercised |
|
|
(573,726 |
) |
|
|
1.86 |
|
|
|
|
|
|
|
||
|
Forfeited |
|
|
(560,336 |
) |
|
|
4.37 |
|
|
|
|
|
|
|
||
|
Outstanding as of September 30, 2021 |
|
|
11,205,066 |
|
|
$ |
4.26 |
|
|
|
8.25 |
|
|
$ |
333,965 |
|
|
Options exercisable as of September 30, 2021 |
|
|
3,990,681 |
|
|
$ |
2.47 |
|
|
|
7.27 |
|
|
$ |
126,081 |
|
The aggregate intrinsic value of options represents the difference between the exercise price of the options and the fair value of the Company's common stock. The total intrinsic value of options exercised during the three months ended September 30, 2021 and 2020 was $1.5 million and $0.7 million, respectively. The total intrinsic value of options exercised during the nine months ended September 30, 2021 and 2020 was $3.3 million and $6.2 million, respectively.
The weighted average grant date fair value per share of options granted during the three months ended September 30, 2021 and 2020, was $5.59, and $1.20, respectively. The weighted average grant date fair value per share of options granted during the nine months ended September 30, 2021 and 2020, was $2.39, and $0.82, respectively.
As of September 30, 2021, there was $17.3 million of unrecognized stock-based compensation expense related to unvested stock options that is expected to be recognized over a weighted-average period of 2.8 years.
Restricted Stock Units
The Company recognize stock-based compensation expense over the vesting term of restricted stock units. The fair value is measured based upon the number of units and the closing price of the Company’s common stock underlying such units on the dates of grant. Upon vesting and settlement, each restricted stock unit entitles the holder to receive one share of common stock. The following table summarizes the Company's restricted stock unit activity for the nine months ended September 30, 2021:
|
|
|
|
|
|
Weighted |
|
||
|
|
|
|
|
|
Average |
|
||
|
|
|
Number |
|
|
Grant Date |
|
||
|
|
|
of Shares |
|
|
Fair Value |
|
||
|
Outstanding as of December 31, 2020 |
|
|
— |
|
|
$ |
- |
|
|
Granted |
|
|
288,455 |
|
|
|
26.00 |
|
|
Exercised |
|
|
— |
|
|
|
— |
|
|
Forfeited |
|
|
— |
|
|
|
— |
|
|
Outstanding as of September 30, 2021 |
|
|
288,455 |
|
|
$ |
26.00 |
|
17
As of September 30, 2021, there was $7.5 million of unrecognized stock-based compensation expense related to unvested restricted stock units that is expected to be recognized over a weighted-average period of 3.9 years.
Stock-based Compensation Expense
Stock-based compensation expense is reflected in the unaudited condensed consolidated statement of operations and comprehensive loss as follows (in thousands):
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
Cost of revenue |
|
$ |
152 |
|
|
$ |
4 |
|
|
$ |
160 |
|
|
$ |
11 |
|
|
General and administrative |
|
|
5,738 |
|
|
|
133 |
|
|
|
6,192 |
|
|
|
384 |
|
|
Selling and marketing |
|
|
506 |
|
|
|
20 |
|
|
|
569 |
|
|
|
60 |
|
|
Research and development |
|
|
207 |
|
|
|
9 |
|
|
|
242 |
|
|
|
17 |
|
|
Total |
|
$ |
6,603 |
|
|
$ |
166 |
|
|
$ |
7,163 |
|
|
$ |
472 |
|
Award Modification and Acceleration of Expense
In June 2021, the Company entered into an amended employment agreement with an employee. Under the terms of the amended agreement, the employee would continue to vest in his outstanding equity awards, despite changes to his day to day responsibilities over time. As a result of the employment change, certain awards were considered to be modified in accordance with ASC 718, Compensation- Stock Compensation. This resulted in a $12.1 million increase in unamortized stock-based compensation expense, which will be recognized over the remaining weighted-average period of the modified awards of 2.6 years.
Upon the Company's IPO in September 2021, as specified in the 2015 Plan, all awards with performance-based vesting conditions converted into awards with service-based vesting, with vesting measured from each awards' respective grant date. During the third quarter of 2021, the Company recognized $5.7 million of accelerated stock-based compensation expense related to awards with performance-based vesting conditions that converted into service-based vesting, of which $3.6 million related to the above mentioned modified awards.
12. Income Taxes
The Company's effective income tax rates were 7.5% and 28.3% for the three months ended September 30, 2021 and 2020, respectively. The Company's effective income tax rates were 7.2% and 29.8% for the nine months ended September 30, 2021 and 2020, respectively. The effective tax rates for the three and nine months ended September 30, 2021 were lower than the statutory rate of 21.0% due to stock-based compensation adjustments, acquisition earnout payments, and other permanent items. The effective tax rates for the three and nine months ended September 30, 2020 were higher than the statutory rate of 21.0% due to the impact of state income taxes, as well as permanent adjustments and excess benefits from stock-based compensation.
13. Commitments and Contingencies
Operating Leases
The Company is party to various non-cancellable operating leases that expire at varying dates through November 2030. As of September 30, 2021 and December 30, 2020, the Company maintains a letter of credit for a security deposit of $2.1 million in conjunction with one of its leases. On September 27, 2021, the Credit Agreement, which included the Revolving Credit Facility, was terminated and the outstanding letter of credit was cash collateralized for $2.2 million (Refer to Note 9 – Debt).
The Company has a seven-year operating lease for office space in Los Angeles, California, entered into in 2018. In July 2020, the Company abandoned the office space. Refer to Note 14 – Restructuring for additional information regarding the restructuring charge and liability associated with exiting this office location.
The Company’s lease agreements may include lease incentives, payment escalations, and rent holidays, which are accrued or deferred as appropriate, such that rent expense for each lease is recognized on a straight-line basis over the respective term of occupancy. As of September 30, 2021 and December 31, 2020, the Company had deferred rent of $4.4 million and $1.7 million, respectively. The short-term portion of the deferred rent is included within accrued expenses and other currently liabilities and the long-term portion is included within other long-term liabilities in the accompanying unaudited condensed consolidated balance sheets.
18
Rent expense for the three months ended September 30, 2021 and 2020, was $0.8 million and $1.1 million, respectively. Rent expense for the nine months ended September 30, 2021 and 2020, was $3.1 million and $2.8 million, respectively. Rent expense was recorded within cost of revenue, general and administrative, selling and marketing and research and development expense lines in the Company’s unaudited condensed consolidated statement of operations.
Future minimum payments under operating leases as of September 30, 2021 are as follows (in thousands):
|
|
|
|
|
|
|
Remainder of 2021 |
|
$ |
1,249 |
|
|
2022 |
|
|
5,476 |
|
|
2023 |
|
|
5,592 |
|
|
2024 |
|
|
5,334 |
|
|
2025 |
|
|
4,358 |
|
|
Thereafter |
|
|
18,776 |
|
|
|
|
$ |
40,785 |
|
As of September 30, 2021, the Company subleased certain office space to third parties, for which sublease income will offset the future lease payments in the table above. Total sublease income under contractual terms is $2.2 million, with both the sublease and related underlying lease expiring in May 2025.
Other Non-Cancellable Commitments
As of September 30, 2021, the Company had non-cancellable commitments to vendors primarily consisting of subscriptions to third party software products. Obligations under contracts that are cancellable or with a remaining term of 12 months or less are not included. As of September 30, 2021, future minimum payments under other non-cancellable agreements were $1.7 million, of which $0.3 million, $0.7 million, $0.5 million and $0.2 million are expected to be paid by December 31, 2021, 2022, 2023 and 2024, respectively.
Contingent Value Payments
In connection with the InvoiceCloud Acquisition, a CVR Bonus Award Plan (“CVR Plan”) was established for the benefit of option holders as of February 11, 2019, in the event that holders of the Company’s Class A-1 common shares receive cash distributions in connection with an Exit Event of at least $889.1 million (the “Performance Threshold”). Certain of our executive officers and other employees, among others, currently hold CVR Unit Awards, under the CVR Plan, which we refer to as CVR Units. Subject to the achievement of the Performance Threshold, CVR Units entitle the holder, subject generally to the holder’s continued employment through the date of payment, to a pro-rata portion of a bonus pool (based on a participant’s share of CVR Units held). The maximum amount of this bonus pool was capped at $9.5 million, of which, $7.5 million remains outstanding as of September 30, 2021. No compensation expense has been recognized in relation to the CVR Plan as the Company has determined that an Exit Event is not probable as of September 30, 2021.
In connection with the Company’s IPO, the CVR Plan was amended to reflect the Corporate Conversion (refer to Note 10 - Stockholders' Equity) and the CVR Units will remain subject to the same terms and conditions applicable immediately prior to the Company’s IPO. Following the Common Stock Reclassifications, General Atlantic subscribed and received 288,344 additional shares of common stock in the Company, with the value of each share based on the public offering price of the shares of common stock sold by the Company in the IPO. As consideration for the additional shares of common stock, General Atlantic entered into a promissory note with the Company, which requires General Atlantic to make a capital contribution to the Company equal to the amount of any future payments to be made by the Company to holders of CVR Units pursuant to the CVR Plan, which such payments would be triggered by the same exit events specified under the LLC Agreement. In the event the CVR Units are forfeited or the Performance Threshold is not met, General Atlantic will not be required to make any payments under the promissory note and will keep the shares issued.
Indemnification Agreements
In the normal course of business, the Company may provide indemnification of varying scope and terms to third parties and may enter into commitments and guarantees (“Agreements”) under which it may be required to make payments. The duration of these Agreements varies, and in certain cases, may be indefinite with no limit to the Company’s maximum potential payment exposure. In addition, the Company has obligations with certain members of its board of directors and certain executive officers that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. To date, the Company has not incurred any material costs as a result of such indemnifications. The Company does not believe that the outcome of any claims under indemnification arrangements will have a material effect on its financial position, results of operations or cash flows, and it has not accrued any liabilities related to such obligations in its unaudited condensed consolidated financial statements as of September 30, 2021 and December 31, 2020, respectively.
19
Legal Proceedings
The Company is from time to time subject to various other legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. The Company routinely assesses its current litigation and/or threatened litigation as to the probability of ultimately incurring a liability and records its best estimate of the ultimate loss if reasonably possible to estimate, in situations where the Company assesses the likelihood of loss as probable. While the outcome of these claims cannot be predicted with certainty, the Company believes that these pending or threatened legal proceeding or claims could not have a material impact on the Company’s unaudited condensed consolidated financial statements.
14. Restructuring
In July 2020, the Company relocated certain of its operations and incurred an initial restructuring charge of $2.4 million related to abandoning office space in Los Angeles, California. During the nine months ended September 30, 2021, Company recorded a $0.2 million reversal in restructuring expense related to a change in the present value of future sublease income, due to the execution of a sublease agreement in August 2021. This reversal in expense was recorded within restructuring charges in the Company’s unaudited condensed consolidated statement of operations and comprehensive loss. The following table summarizes the restructuring activity for the nine months ended September 30, 2021 (in thousands):
|
|
|
Facility |
|
|
|
|
|
Related Costs |
|
|
|
Accrued restructuring as of December 31, 2020 |
|
$ |
2,252 |
|
|
Charges |
|
|
(241 |
) |
|
Cash payments |
|
|
(825 |
) |
|
Other |
|
|
41 |
|
|
Accrued restructuring as of September 30, 2021 |
|
$ |
1,227 |
|
As of September 30, 2021, the remaining restructuring liability was $1.2 million, of which $0.3 million was included within accrued expenses and other current liabilities and $0.9 million was included within other long-term liabilities within the Company’s unaudited condensed consolidated balance sheets. The restructuring liability will be reduced by net cash payments required under the original term of the lease, through the remaining term of the lease, which expires in May 2025.
15. Related Parties
In 2019, the Company assumed unsecured notes payable in the aggregate amount of $3.0 million (the “GC Notes”) and $2.9 million (“IVR Note”), respectively, with two individuals that are former shareholders, one of which is a former employee and the other is a current employee of Global Cloud, Ltd. (“GC”) and individuals that are former shareholders and former employees of IVR Technologies Group, LLC (“IVR”), respectively. The GC Notes and IVR Note bore interest at a rate of 7% and 8% per annum, respectively, and required interest-only payments with the outstanding principal amount and any accrued but unpaid interest due on the maturity date of March 12, 2021 and January 16, 2021, respectively. During the nine months ended September 30, 2021, the Company repaid in full the outstanding principal balance of the GC Notes and IVR Note, which totaled $5.9 million. These amounts are disclosed within cash flows from financing activities within the unaudited condensed consolidated statements of cash flows.
Within its unaudited condensed consolidated statements of operations and comprehensive loss, the Company recognized interest expense related to the GC Notes and IVR Note of less than $0.1 million and $0.3 million during the nine months ended September 30, 2021 and 2020, respectively. The Company made cash interest payments related to the GC Notes and IVR Note of $0.2 million and $0.3 million during the nine months ended September 30, 2021 and 2020, respectively. As of December 31, 2020, the Company had recorded accrued interest payable of $0.1 million related to the GC Notes and IVR Note.
16. Segment and Geographic Information
Segment Information
The Company has determined that its chief executive officer is its chief operating decision maker (“CODM”) and the Company is organized into two reportable segments: Enterprise Solutions and SMB Solutions. The reportable segments were determined based on how the CODM reviews business performance and makes decisions about resources to be allocated.
20
The Enterprise Solutions segment is primarily engaged in providing SaaS solutions that simplify customer-client engagement primarily through electronic billing and digital payments. Enterprise solutions are built to address the unique needs of specific verticals: Health & Wellness, Government, Utilities, Financial Services, and Giving. For the Enterprise Solutions segment, the Company integrates directly with its customers’ core software systems and utilizes a partner-assisted direct sales model for purposes of its go-to-market strategy. For the nine months ended September 30, 2021, this segment generated 50% of total revenue.
The SMB Solutions segment is primarily engaged in providing end-to-end practice management solutions geared toward the wellness industry. For the SMB Solutions segment, the Company primarily relies on a free-trial to paid customer sales model and generates interest for its offerings through a combination of search engine optimization, word-of-mouth, paid customer referrals, and search engine marketing. For the nine months ended September 30, 2021, this segment generated 50% of total revenue.
The CODM evaluates segment operating performance using revenue and Adjusted EBITDA, as defined below, from reportable segments to make resource allocation decisions and evaluate segment performance. Adjusted EBITDA assists management in comparing the Company’s performance on a consistent basis for purposes of business decision-making. The Company defines Adjusted EBITDA as net loss excluding interest expense, net; benefit for income taxes; depreciation; and amortization of intangible assets, as further adjusted for transaction-related expenses, fair value adjustment of acquired deferred revenue, stock/equity-based compensation, and restructuring charges. Adjusted EBITDA from reportable segments excludes unallocated corporate costs which are primarily comprised of costs for accounting, finance, legal, human resources and costs for certain executives supporting overall business strategy and execution.
The following table sets forth the revenue and Adjusted EBITDA results attributable to each reportable segment and includes a reconciliation of the totals reported for the reportable segments to the applicable line items in the Company’s accompanying unaudited condensed consolidated statements of operations and comprehensive loss (in thousands):
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Enterprise Solutions |
|
$ |
27,277 |
|
|
$ |
21,771 |
|
|
$ |
76,991 |
|
|
$ |
59,039 |
|
|
SMB Solutions |
|
|
28,216 |
|
|
|
17,255 |
|
|
|
77,673 |
|
|
|
42,521 |
|
|
Total revenue |
|
|
55,493 |
|
|
|
39,026 |
|
|
|
154,664 |
|
|
|
101,560 |
|
|
Adjusted EBITDA |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Enterprise Solutions |
|
|
3,119 |
|
|
|
4,454 |
|
|
|
9,695 |
|
|
|
7,375 |
|
|
SMB Solutions |
|
|
10,080 |
|
|
|
7,166 |
|
|
|
27,402 |
|
|
|
14,346 |
|
|
Total Adjusted EBITDA from reportable segments |
|
|
13,199 |
|
|
|
11,620 |
|
|
|
37,097 |
|
|
|
21,721 |
|
|
Unallocated corporate expenses |
|
|
(4,527 |
) |
|
|
(2,700 |
) |
|
|
(12,742 |
) |
|
|
(7,516 |
) |
|
Total Adjusted EBITDA |
|
|
8,672 |
|
|
|
8,920 |
|
|
|
24,355 |
|
|
|
14,205 |
|
|
Reconciling items: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Interest expense, net |
|
|
(3,486 |
) |
|
|
(2,390 |
) |
|
|
(8,086 |
) |
|
|
(7,498 |
) |
|
Amortization of intangible assets |
|
|
(3,901 |
) |
|
|
(3,900 |
) |
|
|
(11,701 |
) |
|
|
(11,623 |
) |
|
Depreciation |
|
|
(933 |
) |
|
|
(349 |
) |
|
|
(1,919 |
) |
|
|
(876 |
) |
|
Transaction-related expenses |
|
|
(3,014 |
) |
|
|
(176 |
) |
|
|
(4,246 |
) |
|
|
(634 |
) |
|
Fair value adjustment of acquired deferred revenue |
|
|
(28 |
) |
|
|
(159 |
) |
|
|
(122 |
) |
|
|
(444 |
) |
|
Stock/equity-based compensation |
|
|
(6,603 |
) |
|
|
(166 |
) |
|
|
(7,163 |
) |
|
|
(472 |
) |
|
Restructuring charges |
|
|
330 |
|
|
|
(2,434 |
) |
|
|
241 |
|
|
|
(2,434 |
) |
|
Loss before income taxes |
|
|
(8,963 |
) |
|
|
(654 |
) |
|
|
(8,641 |
) |
|
|
(9,776 |
) |
|
Benefit for income taxes |
|
|
(671 |
) |
|
|
(185 |
) |
|
|
(623 |
) |
|
|
(2,918 |
) |
|
Net loss |
|
$ |
(8,292 |
) |
|
$ |
(469 |
) |
|
$ |
(8,018 |
) |
|
$ |
(6,858 |
) |
The Company’s CODM does not separately evaluate assets by segment, and therefore assets by segment are not presented.
Geographic Information
For the nine months ended September 30, 2021 and 2020, revenues by geographic region are not disclosed as revenue outside the United States does not exceed 10% of total revenue.
21
The Company does not disclose geographic information for long-lived assets as long-lived assets located outside the United States do not exceed 10% of total assets.
22
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q, as well as our consolidated financial statements and related notes included in our final prospectus filed with the Securities and Exchange Commission (the “SEC”) pursuant to Rule 424(b) under the Securities Act of 1933, as amended (“Securities Act”), (File No. 333-259101) on September 24, 2021 (“Final Prospectus”). This discussion, particularly information with respect to our future results of operations or financial condition, business strategy and plans, and objectives of management for future operations, includes forward-looking statements that involve risks and uncertainties as described under the heading “Special Note Regarding Forward-Looking Statements” in this Quarterly Report on Form 10-Q. You should review the disclosure in Part II-Item 1A. "Risk Factors" in this Quarterly Report on Form 10-Q for a discussion of important factors that could cause our actual results to differ materially from those anticipated in these forward-looking statements.
Overview
We are a leading provider of vertically tailored customer engagement software and integrated payments solutions. We offer single instance, multi-tenant, true Software-as-a-Service ("SaaS") vertical solutions that are designed to simplify our customers’ engagement with their clients by driving digital adoption and self-service. We serve customers across five core verticals: Health & Wellness, Government, Utilities, Financial Services, and Giving. Our SaaS solutions are purpose-built for each vertical we serve and they simplify and automate mission-critical workflows such as scheduling, client onboarding, client communication, paperless billing, and electronic payment processing. Our solutions transform our customers’ digital engagement and empower them to manage, improve, and grow their businesses.
Our vertically-tailored solutions include software and payment tools that automate mission-critical business workflows for customers across our verticals. Our value proposition is focused on transforming our customers’ digital engagement through four core SaaS solutions, including:
Our Business Segments
We have two reportable segments, Enterprise Solutions and SMB Solutions. The chief operating decision maker (“CODM”), which is our chief executive officer, evaluates segment operating performance using revenue and Adjusted EBITDA from reportable segments to make resource allocation decisions and evaluate segment performance.
23
Our Revenue Model
We primarily generate two types of revenue: (i) subscription revenue and (ii) transaction and usage-based revenue.
Our goal is to drive digital adoption of our software solutions, and our transaction and usage-based revenue aligns our success with our customers’ success. The more our customers and their clients accelerate digital adoption, the more our revenue increases.
Recent Developments
On September 27, 2021, we completed our initial public offering ("IPO"), in which we issued and sold 13,620,054 shares of common stock at a public offering price of $26.00 per share, including 620,054 shares issued upon the exercise of the underwriters' option to purchase additional shares. We raised net proceeds of $326.3 million, after deducting the underwriting discount of $22.1 million and offering expenses of $5.7 million. Additionally, certain existing shareholders sold an aggregate of 3,112,446 shares at the same price, resulting in net proceeds to the selling stockholders of $75.9 million. On September 27, 2021, we used a portion of the net proceeds from our IPO to repay in full the outstanding borrowings of $114.2 million under our Credit Facilities, as defined below.
On September 27, 2021, we entered into a revolving credit agreement (“New Revolving Credit Facility”) which allows us to borrow up to $75.0 million, $7.5 million of which may be comprised of a letter of credit facility. The New Revolving Credit Facility will mature on September 27, 2026 and proceeds of the borrowings under the New Revolving Credit Facility will be used for general corporate purposes. As of September 30, 2021, we have not drawn upon the New Revolving Credit Facility.
Impact of COVID-19 on Our Business
Our customers and partners were impacted and will continue to be impacted by the COVID-19 pandemic, which ultimately affects our business operations and results. The impact of COVID-19 differed across the verticals we serve. For our SMB Solutions segment, clinicians accelerated adoption of our practice management software as they transitioned to virtual healthcare. Our pre-built features such as telehealth, online scheduling, AutoPay, and secure messaging proved to be invaluable to our customers. For our Enterprise Solutions segment, COVID-19 accelerated adoption of our online and automatic payment features, and we were able to provide customers the digital engagement and electronic payment capabilities they needed to serve their clients. On the other hand, certain solutions experienced a slowdown in usage in 2020. For example, elective procedures and nonessential hospital visits were delayed or canceled, and charities and nonprofits were unable to host large, in-person events given shelter-in-place policies. These headwinds were partially offset by our ability to offer digital engagement, such as virtual fundraising and online donations, which enabled our customers to continue hosting events. During the second quarter of 2021, the impact of the COVID-19 pandemic on our solutions began to decrease and our operating results began to normalize.
The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations, cash flows, and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted. Given the evolving nature of COVID-19, we will continue to closely monitor the pandemic’s impact on both the verticals we serve and our business specifically. We will continue to prioritize the safety of our employees, customers, their clients and communities in which we operate. Refer to Part II, Item 1A, “Risk Factors – Risks related to our business and industry – The COVID-19 pandemic could have a material adverse impact on our employees, customers, partners, clients and other key stakeholders, which could materially and adversely impact our business, operating results and financial condition.”
24
Key Business Metric and Non-GAAP Financial Measures
We review the following key business metric and non-GAAP financial measures to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions. Accordingly, we believe our key business metric and non-GAAP financial measures provide useful information to investors and others in understanding and evaluating our results of operations in the same manner as our management team. Our key business metric and non-GAAP financial measures are presented for supplemental informational purposes only, should not be considered a substitute for financial information presented in accordance with GAAP and may be different from similarly titled metrics or measures presented by other companies.
Transactions Processed
We define Transactions Processed as the number of accepted payment transactions, such as credit card and debit card transactions, ACH payments, emerging electronic payments, other communication, text messaging and interactive voice response transactions, and other payment transaction types, which are facilitated through our solutions during a given period. We believe Transactions Processed is a useful key business metric for investors because it directly correlates with transaction and usage-based revenue. We use Transactions Processed to evaluate changes in transaction and usage-based revenue over time.
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
||||||||||
|
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
|
|
(in millions) |
|
|||||||||||||
|
Transactions Processed |
|
|
28.6 |
|
|
|
20.5 |
|
|
|
80.2 |
|
|
|
57.2 |
|
The increase in Transactions Processed for the three and nine months ended September 30, 2021, as compared to the corresponding period in 2020, was driven by the addition of new customers and increased digital payment adoption among existing customers.
Adjusted EBITDA and Adjusted EBITDA Margin
We define Adjusted EBITDA as net loss excluding interest expense, net; benefit for income taxes; depreciation; and amortization of intangible assets, as further adjusted for transaction-related expenses, fair value adjustment of acquired deferred revenue, stock/equity-based compensation, and restructuring charges. We define Adjusted EBITDA Margin as Adjusted EBITDA divided by revenue plus the fair value adjustment of acquired deferred revenue. We believe that Adjusted EBITDA and Adjusted EBITDA Margin, when taken collectively with our GAAP results, may be helpful to investors because it provides consistency and comparability with past financial performance and assists in comparisons with other companies, some of which use similar non-GAAP financial measures to supplement their GAAP results.
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
||||||||||
|
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
|
|
(in thousands, except percentages) |
|
|||||||||||||
|
Net loss |
|
$ |
(8,292 |
) |
|
$ |
(469 |
) |
|
$ |
(8,018 |
) |
|
$ |
(6,858 |
) |
|
Net loss margin |
|
|
(14.9 |
)% |
|
|
(1.2 |
)% |
|
|
(5.2 |
)% |
|
|
(6.8 |
)% |
|
Adjusted EBITDA |
|
$ |
8,672 |
|
|
$ |
8,920 |
|
|
$ |
24,355 |
|
|
$ |
14,205 |
|
|
Adjusted EBITDA Margin |
|
|
15.6 |
% |
|
|
22.8 |
% |
|
|
15.7 |
% |
|
|
13.9 |
% |
Adjusted Gross Profit and Adjusted Gross Margin
We define Adjusted Gross Profit as gross profit as adjusted for fair value adjustment of acquired deferred revenue, amortization of intangible assets, stock/equity-based compensation, and transaction-related expenses. We define Adjusted Gross Margin as Adjusted Gross Profit divided by revenue plus the fair value adjustment of acquired deferred revenue. We believe that Adjusted Gross Profit and Adjusted Gross Margin, when taken collectively with our GAAP results, may be helpful to investors because it provides consistency and comparability with past financial performance and assists in comparisons with other companies, some of which use similar non-GAAP financial measures to supplement their GAAP results.
25
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
||||||||||
|
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
|
|
(in thousands, except percentages) |
|
|||||||||||||
|
Gross profit |
|
$ |
41,256 |
|
|
$ |
29,519 |
|
|
$ |
114,929 |
|
|
$ |
75,173 |
|
|
Gross profit margin |
|
|
74.3 |
% |
|
|
75.6 |
% |
|
|
74.3 |
% |
|
|
74.0 |
% |
|
Adjusted Gross Profit |
|
$ |
43,004 |
|
|
$ |
31,253 |
|
|
$ |
119,907 |
|
|
$ |
80,322 |
|
|
Adjusted Gross Margin |
|
|
77.5 |
% |
|
|
79.8 |
% |
|
|
77.5 |
% |
|
|
78.7 |
% |
Management uses Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Gross Profit, and Adjusted Gross Margin:
By providing these non-GAAP financial measures, together with a reconciliation to the most directly comparable GAAP measure, we believe we are enhancing investors’ understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing our strategic initiatives. Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Gross Profit, and Adjusted Gross Margin have limitations as analytical tools, and should not be considered in isolation, or as an alternative to, or a substitute for net loss, gross profit, or other financial statement data presented in our consolidated financial statements as indicators of financial performance. Some of the limitations are:
Reconciliations of Non-GAAP Financial Measures
The following tables present the reconciliations for each non-GAAP financial measure to the most directly comparable financial measure calculated and presented in accordance with GAAP.
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
|
|
(in thousands, except percentages) |
|
|||||||||||||
|
Net loss |
|
$ |
(8,292 |
) |
|
$ |
(469 |
) |
|
$ |
(8,018 |
) |
|
$ |
(6,858 |
) |
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Benefit for income taxes |
|
|
(671 |
) |
|
|
(185 |
) |
|
|
(623 |
) |
|
|
(2,918 |
) |
|
Interest expense, net |
|
|
3,486 |
|
|
|
2,390 |
|
|
|
8,086 |
|
|
|
7,498 |
|
|
Amortization of intangible assets |
|
|
3,901 |
|
|
|
3,900 |
|
|
|
11,701 |
|
|
|
11,623 |
|
|
Depreciation |
|
|
933 |
|
|
|
349 |
|
|
|
1,919 |
|
|
|
876 |
|
|
Fair value adjustment of acquired deferred revenue |
|
|
28 |
|
|
|
159 |
|
|
|
122 |
|
|
|
444 |
|
|
Stock/equity-based compensation |
|
|
6,603 |
|
|
|
166 |
|
|
|
7,163 |
|
|
|
472 |
|
|
Restructuring charges |
|
|
(330 |
) |
|
|
2,434 |
|
|
|
(241 |
) |
|
|
2,434 |
|
|
Transaction-related expense |
|
|
3,014 |
|
|
|
176 |
|
|
|
4,246 |
|
|
|
634 |
|
|
Adjusted EBITDA |
|
$ |
8,672 |
|
|
$ |
8,920 |
|
|
$ |
24,355 |
|
|
$ |
14,205 |
|
|
Adjusted EBITDA Margin |
|
|
15.6 |
% |
|
|
22.8 |
% |
|
|
15.7 |
% |
|
|
13.9 |
% |
26
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
|
|
(in thousands, except percentages) |
|
|||||||||||||
|
Gross profit |
|
$ |
41,256 |
|
|
$ |
29,519 |
|
|
$ |
114,929 |
|
|
$ |
75,173 |
|
|
Gross margin |
|
|
74.3 |
% |
|
|
75.6 |
% |
|
|
74.3 |
% |
|
|
74.0 |
% |
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Fair value adjustment of acquired deferred revenue |
|
|
28 |
|
|
|
159 |
|
|
|
122 |
|
|
|
444 |
|
|
Amortization of intangible assets |
|
|
1,539 |
|
|
|
1,538 |
|
|
|
4,615 |
|
|
|
4,595 |
|
|
Stock/equity-based compensation |
|
|
152 |
|
|
|
4 |
|
|
|
160 |
|
|
|
11 |
|
|
Transaction-related expense |
|
|
29 |
|
|
|
33 |
|
|
|
81 |
|
|
|
99 |
|
|
Adjusted Gross Profit |
|
$ |
43,004 |
|
|
$ |
31,253 |
|
|
$ |
119,907 |
|
|
$ |
80,322 |
|
|
Adjusted Gross Margin |
|
|
77.5 |
% |
|
|
79.8 |
% |
|
|
77.5 |
% |
|
|
78.7 |
% |
Components of Results of Operations
Revenue
We generate revenue primarily from providing access to our SaaS solutions via subscription and transaction and usage-based fees for services provided through such solutions. To a lesser extent, we also generate revenue from the sale of implementation and other SaaS solutions, and the sale of hardware.
Cost of Revenue
Cost of revenue primarily consists of personnel-related expenses for our customer support and operations teams, certain variable transaction related costs, amortization of intangible assets related to acquired developed technology, and hosting and data storage costs associated with infrastructure and platform environments. We expect that cost of revenue will increase in absolute dollars, but it may fluctuate as a percentage of revenue from period to period as we continue to invest in growing our business across our segments.
Operating Expenses
General and Administrative
General and administrative expenses consist primarily of personnel-related expenses, professional fees, consulting costs, software costs and non-income tax-related expenses. We expect to incur additional general and administrative expenses as a result of operating as a public company and to support the anticipated growth of our business. We expect that general and administrative expenses will increase, but they may fluctuate as a percentage of revenue from period to period. Over the longer term, we expect general and administrative expenses to decrease as a percentage of revenue as we leverage the scale of our business.
Selling and Marketing
Selling and marketing expenses consist primarily of personnel-related expenses, inclusive of sales commission expense, fees paid to third-party partners, and costs to market and promote our solutions through advertisements and marketing events. We expect our selling and marketing expense to increase in absolute dollars as we continue to invest in new customer acquisition and retention efforts, but they may fluctuate as a percentage of revenue from period to period.
Research and Development
Research and development expenses consist primarily of personnel-related expenses, third-party consulting costs, and software tools associated with developing new products and features or enhancing existing products. Costs associated with developing new products and features that qualify as internal use software are capitalized and amortized. We expect our research and development expenses to increase in absolute dollars, but they may fluctuate as a percentage of revenue from period to period as we expand our research and development team to develop new products and enhance existing products.
Contingent Consideration Net Expense
Contingent consideration net expense consists of increases or decreases in the fair value of our contingent consideration liabilities. We remeasure the fair value of potential future payments based upon the achievement levels of remaining targets at each subsequent reporting period until the contingent liabilities are settled or have expired.
27
Restructuring Charges
Restructuring charges consist of charges related to our restructuring efforts associated with relocating certain operations. Refer to Note 14 - Restructuring to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information.
Amortization of Intangible Assets
Amortization of intangible assets, within operating expenses, consists primarily of amortization of customer relationships and tradenames assets acquired as part of a business combination. We amortize acquired intangible assets over their estimated useful lives based on the pattern of consumption of the economic benefits or, if that pattern cannot be readily determined, on a straight-line basis.
Other Expense
Interest Expense
Interest expense consists of interest expense on our long-term and related party debt as well as costs incurred to extinguish debt.
Results of Operations
The following table sets forth, for the periods presented, each line item from our unaudited condensed consolidated statements of operations on a percentage of revenue basis. The period-to-period comparison of financial results is not necessarily indicative of future results. The information contained in the table below should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q.
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
2020 |
|
|||||
|
|
|
% |
|
|
% |
|
|
% |
|
|
% |
|
||||
|
|
|
(% of total revenue) |
|
|||||||||||||
|
Revenue |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
Cost of revenue |
|
|
25.7 |
% |
|
|
24.4 |
% |
|
|
25.7 |
% |
|
|
26.0 |
% |
|
Gross profit |
|
|
74.3 |
% |
|
|
75.6 |
% |
|
|
74.3 |
% |
|
|
74.0 |
% |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
General and administrative |
|
|
27.5 |
% |
|
|
14.7 |
% |
|
|
20.7 |
% |
|
|
17.8 |
% |
|
Selling and marketing |
|
|
34.4 |
% |
|
|
30.6 |
% |
|
|
33.1 |
% |
|
|
34.3 |
% |
|
Research and development |
|
|
16.5 |
% |
|
|
13.5 |
% |
|
|
15.5 |
% |
|
|
14.8 |
% |
|
Contingent consideration net expense |
|
|
2.1 |
% |
|
|
— |
% |
|
|
0.9 |
% |
|
|
— |
% |
|
Restructuring charges |
|
|
(0.6 |
)% |
|
|
6.2 |
% |
|
|
(0.2 |
)% |
|
|
2.4 |
% |
|
Amortization of intangible assets |
|
|
4.3 |
% |
|
|
6.1 |
% |
|
|
4.6 |
% |
|
|
6.9 |
% |
|
Total operating expenses |
|
|
84.2 |
% |
|
|
71.1 |
% |
|
|
74.6 |
% |
|
|
76.3 |
% |
|
(Loss) income from operations |
|
|
(9.8 |
)% |
|
|
4.5 |
% |
|
|
(0.3 |
)% |
|
|
(2.2 |
)% |
|
Other income (expense), net: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Interest expense, including related party interest |
|
|
(6.3 |
)% |
|
|
(6.1 |
)% |
|
|
(5.2 |
)% |
|
|
(7.4 |
)% |
|
Other (expense) income, net |
|
|
(0.1 |
)% |
|
|
(0.1 |
)% |
|
|
(0.1 |
)% |
|
|
0.0 |
% |
|
Total other income (expense), net |
|
|
(6.3 |
)% |
|
|
(6.2 |
)% |
|
|
(5.3 |
)% |
|
|
(7.4 |
)% |
|
Loss before income taxes |
|
|
(16.2 |
)% |
|
|
(1.7 |
)% |
|
|
(5.6 |
)% |
|
|
(9.6 |
)% |
|
Benefit for income taxes |
|
|
(1.2 |
)% |
|
|
(0.5 |
)% |
|
|
(0.4 |
)% |
|
|
(2.9 |
)% |
|
Net loss and comprehensive loss |
|
|
(14.9 |
)% |
|
|
(1.2 |
)% |
|
|
(5.2 |
)% |
|
|
(6.8 |
)% |
28
Comparison of the Three and Nine Months Ended September 30, 2021 and 2020
The following tables set forth our results of operations for the periods presented:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||||||||||||||||||
|
|
2021 |
|
|
2020 |
|
|
Change |
|
|
2021 |
|
|
2020 |
|
|
Change |
|
||||||||||||||
|
|
Amount |
|
|
Amount |
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
Amount |
|
|
Amount |
|
|
% |
|
||||||||
|
|
(in thousands, except percentages) |
|
|||||||||||||||||||||||||||||
|
Revenue |
$ |
55,493 |
|
|
$ |
39,026 |
|
|
$ |
16,467 |
|
|
|
42.2 |
% |
|
$ |
154,664 |
|
|
$ |
101,560 |
|
|
$ |
53,104 |
|
|
|
52.3 |
% |
|
Cost of revenue |
|
14,237 |
|
|
|
9,507 |
|
|
|
4,730 |
|
|
|
49.8 |
% |
|
|
39,735 |
|
|
|
26,387 |
|
|
|
13,348 |
|
|
|
50.6 |
% |
|
Gross profit |
|
41,256 |
|
|
|
29,519 |
|
|
|
11,737 |
|
|
|
39.8 |
% |
|
|
114,929 |
|
|
|
75,173 |
|
|
|
39,756 |
|
|
|
52.9 |
% |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
General and administrative |
|
15,287 |
|
|
|
5,726 |
|
|
|
9,561 |
|
|
|
167.0 |
% |
|
|
31,990 |
|
|
|
18,053 |
|
|
|
13,937 |
|
|
|
77.2 |
% |
|
Selling and marketing |
|
19,096 |
|
|
|
11,947 |
|
|
|
7,149 |
|
|
|
59.8 |
% |
|
|
51,224 |
|
|
|
34,868 |
|
|
|
16,356 |
|
|
|
46.9 |
% |
|
Research and development |
|
9,132 |
|
|
|
5,284 |
|
|
|
3,848 |
|
|
|
72.8 |
% |
|
|
23,947 |
|
|
|
15,065 |
|
|
|
8,882 |
|
|
|
59.0 |
% |
|
Contingent consideration net expense |
|
1,157 |
|
|
|
— |
|
|
|
1,157 |
|
|
|
100.0 |
% |
|
|
1,370 |
|
|
|
— |
|
|
|
1,370 |
|
|
|
100.0 |
% |
|
Restructuring charges |
|
(330 |
) |
|
|
2,434 |
|
|
|
(2,764 |
) |
|
|
(113.6 |
)% |
|
|
(241 |
) |
|
|
2,434 |
|
|
|
(2,675 |
) |
|
|
(109.9 |
)% |
|
Amortization of intangible assets |
|
2,362 |
|
|
|
2,362 |
|
|
|
— |
|
|
|
— |
% |
|
|
7,086 |
|
|
|
7,028 |
|
|
|
58 |
|
|
|
0.8 |
% |
|
Total operating expenses |
|
46,704 |
|
|
|
27,753 |
|
|
|
18,951 |
|
|
|
68.3 |
% |
|
|
115,376 |
|
|
|
77,448 |
|
|
|
37,928 |
|
|
|
49.0 |
% |
|
(Loss) income from operations |
|
(5,448 |
) |
|
|
1,766 |
|
|
|
(7,214 |
) |
|
|
(408.5 |
)% |
|
|
(447 |
) |
|
|
(2,275 |
) |
|
|
1,828 |
|
|
|
(80.4 |
)% |
|
Other income (expense), net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Interest expense, including related party interest |
|
(3,487 |
) |
|
|
(2,390 |
) |
|
|
(1,097 |
) |
|
|
45.9 |
% |
|
|
(8,087 |
) |
|
|
(7,503 |
) |
|
|
(584 |
) |
|
|
7.8 |
% |
|
Other (expense) income, net |
|
(28 |
) |
|
|
(30 |
) |
|
|
2 |
|
|
|
(6.7 |
)% |
|
|
(107 |
) |
|
|
2 |
|
|
|
(109 |
) |
|
|
(5,450.0 |
)% |
|
Total other income (expense), net |
|
(3,515 |
) |
|
|
(2,420 |
) |
|
|
(1,095 |
) |
|
|
45.2 |
% |
|
|
(8,194 |
) |
|
|
(7,501 |
) |
|
|
(693 |
) |
|
|
9.2 |
% |
|
Loss before income taxes |
|
(8,963 |
) |
|
|
(654 |
) |
|
|
(8,309 |
) |
|
|
1,270.5 |
% |
|
|
(8,641 |
) |
|
|
(9,776 |
) |
|
|
1,135 |
|
|
|
(11.6 |
)% |
|
Benefit for income taxes |
|
(671 |
) |
|
|
(185 |
) |
|
|
(486 |
) |
|
|
262.7 |
% |
|
|
(623 |
) |
|
|
(2,918 |
) |
|
|
2,295 |
|
|
|
(78.6 |
)% |
|
Net loss and comprehensive loss |
$ |
(8,292 |
) |
|
$ |
(469 |
) |
|
$ |
(7,823 |
) |
|
|
1,668.0 |
% |
|
$ |
(8,018 |
) |
|
$ |
(6,858 |
) |
|
$ |
(1,160 |
) |
|
|
16.9 |
% |
Revenue
Revenue increased $16.5 million and $53.1 million for the three and nine month periods ended September 30, 2021, respectively, as compared to the corresponding periods in 2020, primarily due to (i) an increase in customers, which grew from 55,386 as of September 30, 2020 to 77,363 as of September 30, 2021, primarily attributable to our SMB Solutions segment, and (ii) an increase in Transactions Processed, which grew year over year by 8.1 million and 22.9 million for the three and nine month periods ended September 30, 2021, respectively, primarily driven by our Enterprise Solutions segment, and to a lesser extent our SMB Solutions segment.
Cost of revenue
Cost of revenue increased $4.7 million for the three month period ended September 30, 2021, as compared to the three month period ended September 30, 2020, primarily related to an increase of $2.1 million in personnel-related costs, driven by headcount growth within our customer support departments needed to sustain the increased demand for our solutions, and an increase of $1.9 million in certain variable transaction related and hosting costs due to higher usage of our solutions.
Cost of revenue increased $13.3 million for the nine month period ended September 30, 2021, as compared to the nine month period ended September 30, 2020, primarily related to an increase of $5.4 million in personnel-related costs, driven by headcount growth within our customer support departments needed to sustain the increased demand for our solutions, and an increase of $6.0 million in certain variable transaction related and hosting costs due to higher usage of our solutions.
General and administrative expenses
General and administrative expenses increased $9.6 million for the three month period ended September 30, 2021, as compared to the three month period ended September 30, 2020, primarily due to an increase of $7.7 million in personnel-related costs, driven by an increase of $5.6 million in stock-based compensation expense as well as increased headcount to support overall growth and to expand our infrastructure to support public company operations. In addition, professional fees associated with legal, accounting, and other services increased $1.3 million related to our IPO as well as increased costs required to support operating as a public company.
General and administrative expenses increased $13.9 million for the nine month period ended September 30, 2021, as compared to the nine month period ended September 30, 2020, primarily due to an increase of $10.6 million in personnel-related costs, driven by an increase of $5.8 million in stock-based compensation expense as well as increased headcount to support overall growth and to expand our infrastructure to support public company operations. In addition, professional
29
fees associated with legal, accounting, and other services increased $3.3 million related to our IPO as well as increased costs required to support operating as a public company.
Selling and marketing expenses
Selling and marketing expenses increased $7.1 million for the three month period ended September 30, 2021, as compared to the three month period ended September 30, 2020, primarily due to an increase of $3.0 million in personnel-related costs associated with headcount growth, an increase of $1.4 million in fees paid to third-party channel partners, and an increase of $1.3 million in advertising and other marketing-related spend utilized to drive new customer additions.
Selling and marketing expenses increased $16.4 million for the nine month period ended September 30, 2021, as compared to the nine month period ended September 30, 2020, primarily due to an increase of $7.5 million in personnel-related costs associated with headcount growth, an increase of $3.8 million in fees paid to third-party channel partners, and an increase of $2.8 million in advertising and other marketing-related spend utilized to drive new customer additions.
Research and development expenses
Research and development expenses increased $3.8 million for the three month period ended September 30, 2021, as compared to the three month period ended September 30, 2020, primarily due to an increase of $3.1 million in personnel-related costs associated with headcount growth and an increase of $0.4 million in third-party consulting costs. Headcount growth and the increase in usage of third-party consultants was associated with enhancing the functionality and ease of use of our solutions.
Research and development expenses increased $8.9 million for the nine month period ended September 30, 2021, as compared to the nine month period ended September 30, 2020, primarily due to an increase of $6.8 million in personnel-related costs associated with headcount growth and an increase of $1.4 million in third-party consulting costs. Headcount growth and the increase in usage of third-party consultants was associated with enhancing the functionality and ease of use of our solutions.
Contingent consideration net expense
Contingent consideration expense was $1.2 million for the three months ended September 30, 2021, and there was no contingent consideration expense recorded for the three months ended September 30, 2020. The increase in contingent consideration expense relates to the change in fair value of the contingent consideration liability.
Contingent consideration expense was $1.4 million for the nine months ended September 30, 2021, and there was no contingent consideration expense recorded for the nine months ended September 30, 2020. The increase in contingent consideration expense relates to the change in fair value of the contingent consideration liability.
Restructuring charges
Restructuring charges decreased $2.8 million for the three month period ended September 30, 2021, as compared to the three month period ended September 30, 2020. During the three month period ended September 30, 2020, the Company recorded a $2.4 million restructuring charge associated with a lease exited in the third quarter of 2020. During the three month period ended September 30, 2021, the Company recorded a $0.3 million reversal in restructuring expense associated with a change to sublease assumptions used to calculate the revised restructuring liability, as the Company executed a sublease agreement in August 2021.
Restructuring charges decreased $2.7 million for the nine month period ended September 30, 2021, as compared to the nine month period ended September 30, 2020. During the nine month period ended September 30, 2020, the Company recorded a $2.4 million restructuring charge associated with a lease exited in the third quarter of 2020. During the nine month period ended September 30, 2021, the Company recorded a $0.2 million reversal in restructuring expense associated with a change to sublease assumptions used to calculate the revised restructuring liability.
Amortization of intangible assets
Amortization of intangible assets, within operating expenses, remained consistent for the three and nine months ended September 30, 2021, as compared to the three months ended September 30, 2020.
Interest expense
Interest expense increased $1.1 million for the three month period ended September 30, 2021, as compared to the three month period ended September 30, 2020, primarily related to a loss on debt extinguishment of $1.2 million recorded within interest expense. On September 27, 2021, the Company utilized a portion of the net proceeds from the IPO to extinguish the outstanding borrowings under our Credit Facilities, as defined below. The loss on debt extinguishment primarily consists of a write-off of unamortized debt issuance costs associated with our Credit Facilities.
30
Interest expense increased $0.6 million for the nine month period ended September 30, 2021, as compared to the nine month period ended September 30, 2020, primarily related to a loss on debt extinguishment of $1.2 million recorded within interest expense, offset by a $0.2 million reduction in interest expense related to the maturity of the related party notes in the first quarter of 2021.
Benefit for income taxes
The benefit for income taxes was $0.7 million during the three months ended September 30, 2021, as compared to $0.2 million for the three months ended September 30, 2020, an increase of $0.5 million. Our effective income tax rate was 7.5% for the three months ended September 30, 2021, compared to 28.3% for the three months ended September 30, 2020. The effective tax rate for the three months ended September 30, 2021 was lower than the statutory rate of 21.0% due to stock-based compensation adjustments and other permanent items. The effective tax rate for the three months ended September 30, 2020 was higher than the statutory rate of 21.0% due to the impact of state income taxes as well as permanent adjustments and excess benefits from stock-based compensation.
The benefit for income taxes was $0.6 million during the nine months ended September 30, 2021, as compared to $2.9 million for the nine months ended September 30, 2020, a decrease of $2.3 million. Our effective income tax rate was 7.2% for the nine months ended September 30, 2021, compared to 29.8% for the nine months ended September 30, 2020. The effective tax rate for the nine months ended September 30, 2021 was lower than the statutory rate of 21.0% due to stock-based compensation adjustments, acquisition earnout payments, and other permanent items. The effective tax rate for the nine months ended September 30, 2020 was higher than the statutory rate of 21.0% due to the impact of state income taxes as well as permanent adjustments and excess benefits from stock-based compensation.
Segment Information
Our reportable segments have been determined in accordance with Accounting Standards Codification, or ASC, 280, Segment Reporting. Currently, we have two reportable segments: Enterprise Solutions and SMB Solutions. The CODM, which is our chief executive officer, evaluates segment operating performance using revenue and Adjusted EBITDA from reportable segments to make resource allocation decisions and evaluate segment performance. We define Adjusted EBITDA as net loss excluding interest expense, net; benefit for income taxes; depreciation; and amortization of intangible assets, as further adjusted for transaction-related expenses, fair value adjustment of acquired deferred revenue, stock/equity-based compensation, and restructuring charges. Adjusted EBITDA from reportable segments excludes unallocated corporate costs which are primarily comprised of costs for accounting, finance, legal, human resources and costs for certain executives supporting overall business strategy and execution.
Adjusted EBITDA from reportable segments is a non-GAAP measure. Refer to “Key Business Metric and Non-GAAP Financial Measures” for a reconciliation of Adjusted EBITDA, a non-GAAP measure, to net loss, the most directly comparable financial measure calculated and presented in accordance with GAAP.
31
Comparison of the Three and Nine Months Ended September 30, 2021 and 2020
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
||||||||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
|
(in thousands, except share and per share amounts) |
|
|||||||||||||
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
||||
|
Enterprise Solutions |
$ |
27,277 |
|
|
$ |
21,771 |
|
|
$ |
76,991 |
|
|
$ |
59,039 |
|
|
SMB Solutions |
|
28,216 |
|
|
|
17,255 |
|
|
|
77,673 |
|
|
|
42,521 |
|
|
Total revenue |
|
55,493 |
|
|
|
39,026 |
|
|
|
154,664 |
|
|
|
101,560 |
|
|
Adjusted EBITDA |
|
|
|
|
|
|
|
|
|
|
|
||||
|
Enterprise Solutions |
|
3,119 |
|
|
|
4,454 |
|
|
|
9,695 |
|
|
|
7,375 |
|
|
SMB Solutions |
|
10,080 |
|
|
|
7,166 |
|
|
|
27,402 |
|
|
|
14,346 |
|
|
Total Adjusted EBITDA from reportable segments |
|
13,199 |
|
|
|
11,620 |
|
|
|
37,097 |
|
|
|
21,721 |
|
|
Unallocated corporate expenses |
|
(4,527 |
) |
|
|
(2,700 |
) |
|
|
(12,742 |
) |
|
|
(7,516 |
) |
|
Total Adjusted EBITDA |
|
8,672 |
|
|
|
8,920 |
|
|
|
24,355 |
|
|
|
14,205 |
|
|
Reconciling items: |
|
|
|
|
|
|
|
|
|
|
|
||||
|
Interest expense, net |
|
(3,486 |
) |
|
|
(2,390 |
) |
|
|
(8,086 |
) |
|
|
(7,498 |
) |
|
Amortization of intangible assets |
|
(3,901 |
) |
|
|
(3,900 |
) |
|
|
(11,701 |
) |
|
|
(11,623 |
) |
|
Depreciation |
|
(933 |
) |
|
|
(349 |
) |
|
|
(1,919 |
) |
|
|
(876 |
) |
|
Transaction-related expenses |
|
(3,014 |
) |
|
|
(176 |
) |
|
|
(4,246 |
) |
|
|
(634 |
) |
|
Fair value adjustment of acquired deferred revenue |
|
(28 |
) |
|
|
(159 |
) |
|
|
(122 |
) |
|
|
(444 |
) |
|
Stock/equity-based compensation |
|
(6,603 |
) |
|
|
(166 |
) |
|
|
(7,163 |
) |
|
|
(472 |
) |
|
Restructuring charges |
|
330 |
|
|
|
(2,434 |
) |
|
|
241 |
|
|
|
(2,434 |
) |
|
Loss before income taxes |
|
(8,963 |
) |
|
|
(654 |
) |
|
|
(8,641 |
) |
|
|
(9,776 |
) |
|
Benefit for income taxes |
|
(671 |
) |
|
|
(185 |
) |
|
|
(623 |
) |
|
|
(2,918 |
) |
|
Net loss |
$ |
(8,292 |
) |
|
$ |
(469 |
) |
|
$ |
(8,018 |
) |
|
$ |
(6,858 |
) |
|
Net loss margin |
|
(14.9 |
)% |
|
|
(1.2 |
)% |
|
|
(5.2 |
)% |
|
|
(6.8 |
)% |
|
Adjusted EBITDA Margin - Enterprise Solutions |
|
11.4 |
% |
|
|
20.5 |
% |
|
|
12.6 |
% |
|
|
12.5 |
% |
|
Adjusted EBITDA Margin - SMB Solutions |
|
35.7 |
% |
|
|
41.2 |
% |
|
|
35.2 |
% |
|
|
33.5 |
% |
Revenue
Revenue for the Enterprise Solutions segment increased $5.5 million and $18.0 million for the three and nine month periods ended September 30, 2021, as compared to the three and nine month periods ended September 30, 2020, respectively. The increase in revenue in the Enterprise Solutions segment is primarily attributable to an increase in Transactions Processed.
Revenue for the SMB Solutions segment increased $11.0 million and $35.2 million for the three and nine month periods ended September 30, 2021, as compared to the three and nine month periods ended September 30, 2020, respectively. The increase in revenue in the SMB Solutions segment is primarily attributable to an increase in customers and due to the utilization of additional services by existing customers.
Adjusted EBITDA
Adjusted EBITDA margin for the Enterprise Solutions segment declined from 20.5% for the three month period ended September 30, 2020 to 11.4% for the three month period ended September 30, 2021. Given the uncertainty surrounding the COVID-19 pandemic, we temporarily reduced certain areas of discretionary spend in the third quarter of 2020, which contributed to a higher Adjusted EBITDA margin. In addition to the COVID-19 impact in the third quarter of 2020, the decline was driven primarily by investments in headcount for our sales, support and operations teams, incremental marketing programs to drive adoption as well as spend associated with third party channel partners.
Adjusted EBITDA margin for the Enterprise Solutions segment increased slightly from 12.5% for the nine month period ended September 30, 2020 to 12.6% for the nine months ended September 30, 2021. The slight increase was driven by efficiencies in general and administration personnel costs, partially offset by incremental investments in our sales and marketing costs to drive new customer acquisition and deliver increased adoption with existing customers.
Adjusted EBITDA margin for the SMB Solutions segment declined from 41.2% for the three month period ended September 30, 2020 to 35.7% for the three month period ended September 30, 2021. The decline was driven primarily by our investment in research and development headcount to drive product leadership as well as incremental costs associated with the migration to a new Telehealth back-end provider.
Adjusted EBITDA margin for the SMB Solutions segment increased from 33.5% for the nine month period ended September 30, 2020 to 35.2% for the nine months ended September 30, 2021. The improvement was driven primarily by the decline in marketing spend as a percentage of revenue year over year, which was due to elevated trial volume and the associated cost of paid search marketing at the start of the COVID-19 pandemic. These efficiencies were partially offset
32
by our investment in research and development headcount to continue to drive product leadership and incremental costs associated with the migration to a new Telehealth back-end provider.
Liquidity and Capital Resources
As of September 30, 2021 and December 31, 2020, we had cash and cash equivalents of $253.8 million and $29.4 million, respectively, which were primarily held for working capital purposes. Our primary source of funds has been, and we expect it to continue to be, cash generated from our net revenues, supplemented through debt financing and sale of our equity securities. We believe our existing cash and cash equivalents, cash provided by operations and access to our New Revolving Credit Facility will be sufficient to meet our working capital and capital expenditures needs for at least the next 12 months.
In September 27, 2021, we completed our IPO, in which we issued and sold 13,620,054 shares of common stock at a price of $26.00 per share. We raised net proceeds of $326.3 million from the IPO after deducting the underwriting discounts of $22.1 million and offering expenses of $5.7 million.
On September 27, 2021, we entered into a New Revolving Credit Facility which allows us to borrow up to $75.0 million, $7.5 million of which may be comprised of a letter of credit facility. The New Revolving Credit Facility will mature on September 27, 2026 and proceeds of any borrowings under the New Revolving Credit Facility will be used for general corporate purposes. As of September 30, 2021, we have not drawn upon the New Revolving Credit Facility. The New Revolving Credit Facility contains certain financial maintenance covenants, which require us to not exceed certain specified total net leverage ratios at the end of each fiscal quarter. As of September 30, 2021, we were in compliance with all financial covenants under the New Revolving Credit Facility.
On February 11, 2019, we entered into a credit agreement (“Credit Agreement”) with Ares Capital Corporation as administrative agent and collateral agent, and certain other lenders, which provides for a $75.0 million aggregate principal amount senior secured term loan facility (“Initial Term Loan Facility”), a $35.0 million senior secured delayed draw term loan facility (“Delayed Draw Term Loan Facility”), and a $7.5 million senior secured revolving credit facility (“Revolving Credit Facility”). We collectively refer to the Initial Term Loan Facility, the Delayed Draw Term Loan Facility, and the Revolving Credit Facility as the Credit Facilities. On September 27, 2021, we used a portion of the net proceeds from our IPO to repay in full the outstanding borrowings of $114.2 million under our Credit Facilities.
To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may be required to seek additional equity or debt financing. The sale of additional equity would result in additional dilution to our stockholders. The incurrence of debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations. There can be no assurances that we will be able to raise additional capital. In the event that additional financing is required from outside sources, we may not be able to negotiate terms acceptable to us or at all. If we are unable to raise additional capital when required, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, results of operations, financial condition, and cash flows would be adversely affected.
Cash flows
The following table summarizes our cash flows for the periods presented:
|
|
|
Nine Months Ended
|
|
|||||
|
|
|
2021 |
|
|
2020 |
|
||
|
|
|
(in thousands) |
|
|||||
|
Net cash provided by operating activities |
|
$ |
20,354 |
|
|
$ |
9,987 |
|
|
Net cash used in investing activities |
|
|
(3,190 |
) |
|
|
(29,421 |
) |
|
Net cash provided by financing activities |
|
|
207,310 |
|
|
|
33,201 |
|
Cash flows from operating activities
Our primary source of operating cash is revenue generated from subscription and transaction and usage-based fees associated with our SaaS solutions. Our primary uses of operating cash are personnel-related costs and payments to our vendors. Our cash flows from operating activities are impacted by the amount of our net income (loss), revenue and customer growth, changes in working capital accounts, the timing of payments to vendors and add-backs of non-cash expense items such as depreciation and amortization, stock-based compensation expense, deferred income taxes, and non-cash interest expense.
Net cash provided by operating activities increased $10.4 million for the nine month period ended September 30, 2021, as compared to the nine month period ended September 30, 2020, primarily due to a $11.4 million increase in net income
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(loss) adjusted for non-cash items, partially offset by a decrease in $1.0 million in cash generated from the change in operating asset and liability accounts.
Cash flows from investing activities
Investing activities primarily consist of payments made related to the acquisition of businesses and capital expenditures.
Net cash flows from investing activities increased $26.2 million for the nine month period ended September 30, 2021, as compared to the nine month period ended September 30, 2020. The increase in cash flows from investing was driven by $25.5 million of cash paid for acquisitions during the nine months ended September 30, 2020, which did not occur in the nine months ended September 30, 2021 and a $0.7 million decrease in capital expenditures.
Cash flows from financing activities
Financing activities primarily consist of net proceeds from the issuance of common stock, payment of offering costs, proceeds and repayments on long-term and related party debt, and proceeds from the exercise of stock/equity-based options.
Net cash provided by financing activities increased $174.1 million for the nine month period ended September 30, 2021, as compared to the nine month period ended September 30, 2020.
During the nine months ended September 30, 2021, cash provided by financing activities was $207.3 million, which was primarily driven by $332.0 million of net proceeds from the issuance of common stock upon our IPO and $1.1 million of proceeds from issuance of stock options, offset by $114.2 million used to repay long-term debt, $5.9 million used to repay related party notes, $2.9 million of payments related to our offering costs, contingent consideration payments of $1.9 million, and payments of debt issuance costs of $0.7 million.
During the nine months ended September 30, 2020, cash provided by financing activities was $33.2 million, which was primarily driven by $31.3 million of proceeds from issuance of long-term debt and $3.5 million of proceeds from the exercise of equity-based options, offset by contingent consideration payments of $1.5 million.
Contractual obligations and commitments
The following table summarizes our contractual obligations and commitments as of September 30, 2021:
|
|
|
Payments due by period(1) |
|
|||||||||||||||||
|
|
|
Total |
|
|
Less than 1 year |
|
|
1 to 3 years |
|
|
4 to 5 years |
|
|
More than 5 years |
|
|||||
|
|
|
(in thousands) |
|
|||||||||||||||||
|
Operating leases |
|
$ |
40,785 |
|
|
$ |
5,342 |
|
|
$ |
11,021 |
|
|
$ |
8,639 |
|
|
$ |
15,783 |
|
|
Other long-term obligations |
|
|
1,744 |
|
|
|
906 |
|
|
|
838 |
|
|
|
— |
|
|
|
— |
|
|
Total contractual obligations |
|
$ |
42,529 |
|
|
$ |
6,248 |
|
|
$ |
11,859 |
|
|
$ |
8,639 |
|
|
$ |
15,783 |
|
The commitments under our operating lease obligations shown above consist primarily of lease payments for our Braintree, Massachusetts corporate headquarters, and our offices in Santa Monica, California, Los Angeles, California and Marlborough, Massachusetts.
Additionally, we have non-cancellable commitments to vendors primarily consisting of subscriptions to third party software products.
For additional discussion on our operating leases and other non-cancellable commitments, refer to Note 13—Commitment and Contingencies to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Off-balance sheet arrangements
We did not have any off-balance sheet arrangements as of September 30, 2021.
Critical Accounting Policies and Estimates
Our unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q are prepared in accordance with GAAP. The preparation of our financial statements
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requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods, as well as related disclosures. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities and the amount of revenue and expenses that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and any such differences may be material.
There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates as described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our Final Prospectus, except as noted in Note 2 - Summary of Significant Accounting Policies to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Recent accounting pronouncements
Refer to Note 2—Summary of Significant Accounting Policies to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a description of recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted.
JOBS Act
We currently qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Accordingly, we have the option to adopt new or revised accounting guidance either (i) within the same periods as those otherwise applicable to non-emerging growth companies or (ii) within the same time periods as private companies. We have elected to delay the adoption of new or revised accounting standards, and as a result, we may not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Our utilization of these transition periods may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the transition periods afforded under the JOBS Act.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market risk represents the risk of loss that may impact our financial position because of adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of exposure resulting from potential changes in interest rates or inflation.
Interest Rate Risk
Our exposure to market risk associated with changes in interest rates relates primarily to our New Revolving Credit Facility, which allows us to borrow up to $75.0 million. Borrowings under the New Revolving Credit Facility will bear interest at a rate equal to, at the Borrower’s option, either (a) a LIBOR rate determined by reference to the cost of funds for Eurodollar deposits for the interest period relevant to such borrowing, adjusted for certain additional costs or (b) a base rate determined by reference to the highest of (i) federal funds rate plus 0.50%, (ii) the prime rate quoted by the Wall Street Journal or (iii) the one month adjusted LIBOR plus 1.00%, in each case plus an applicable margin. Since we have not yet drawn upon our New Revolving Credit Facility and we do not have any outstanding borrowings as of September 30, 2021, a hypothetical 100 basis point increase or decrease in variable interest rates would not have a material impact on interest expense.
Our cash and cash equivalents as of September 30, 2021 and December 31, 2020 consisted of $253.8 million and $29.4 million, respectively. Such interest-earning instruments carry a degree of interest rate risk. The goals of our investment policy are liquidity and capital preservation. We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate exposure. We believe that we do not have any material exposure to changes in the fair value of these assets as a result of changes in interest rates due to the short-term nature of our cash or cash equivalents.
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 become subject to significant inflationary pressures, we may not be able to fully offset such higher costs with increased revenue. Our inability or failure to do so could harm our business, financial condition, and results of operations.
Item 4. Controls and Procedures.
Inherent Limitations on Effectiveness of Controls
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, and as a result of the material weakness described below, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2021, our disclosure controls and procedures were not effective at the reasonable assurance level.
Material Weaknesses
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual and interim financial statements will not be detected or prevented on a timely basis.
In connection with the preparation of our consolidated financial statements for the year ended December 31, 2020, we identified deficiencies related to a lack of certain defined processes and controls over information technology, in the areas of access management, segregation of duties, change management, data governance and program development, and a lack of certain defined processes and controls over the financial statement close process. These deficiencies, when aggregated, are a material weakness and could result in a material misstatement to our financial statements that may not be able to be prevents or detected.
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Remediation Measures
We are compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404(a) of Sarbanes-Oxley Act and we are taking steps to remediate the material weakness. The finalization of our remediation measures is ongoing and includes the following:
While we believe these efforts will remediate the material weaknesses, these material weaknesses cannot be considered fully remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
Changes in Internal Control over Financial Reporting
We are taking actions to remediate the material weakness relating to our internal control over financial reporting. Other than the changes to our internal control over financial reporting described in “Remediation Measures” above, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we have been and may become involved in legal proceedings arising in the ordinary course of our business. Although the results of litigation and claims cannot be predicted with certainty, we are not presently involved in any legal proceeding in which the outcome, if determined adversely to us, would be expected to have a material adverse effect on our business, operating results, or financial condition. 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.
Item 1A. Risk Factors.
Our business involves significant risks, some of which are described below. You should carefully consider the risks and uncertainties described below, together with all of the other information in this Quarterly Report on Form 10-Q, as well as our audited financial statements and related notes as disclosed in our prospectus, dated September 22, 2021, filed with the Securities and Exchange Commission (“SEC”) in accordance with Rule 424(b) of the Securities Act (the “Final Prospectus”) in connection with our initial public offering (“IPO”). The risks and uncertainties described below are not the only ones we face. Additional risk and uncertainties that we are unaware of or that we deem immaterial may also become important factors that adversely affect our business. The realization of any of these risks and uncertainties could have a material adverse effect on our reputation, business, financial condition, results of operations, growth and future prospects as well as our ability to accomplish our strategic objectives. In that event, the market price of our common stock could decline and you could lose part or all of your investment.
Risks Related to our Business and Industry
Our rapid growth may not be sustainable or indicative of our future growth.
Our recent rapid growth may not be sustainable or indicative of our future growth. Even though the number of customers who use our solutions has grown rapidly in recent years, there can be no assurance that we will be able to attract new customers or retain existing customers. Our ability to attract new customers, retain revenue from existing customers, or increase adoption of our solutions by both new and existing customers is impacted by a number of factors, including:
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Our business could be harmed if we fail to manage our infrastructure to support future growth.
The rapid growth we have experienced in our business places significant demands on our operational infrastructure. The scalability and flexibility of our solutions depend on the functionality of our technology and network infrastructure and its ability to handle increased traffic and demand for bandwidth. The growth in the number of customers and their clients using our solutions has increased the amount of data that we process. Any problems with the transmission of increased data could result in harm to our brand or reputation. Moreover, as our business grows, we will need to devote additional resources to improving our operational infrastructure and continuing to enhance its scalability in order to maintain the performance of our solutions, including customer support, risk and compliance operations, and other SaaS solutions services. Any failure of or delay in these efforts could result in service interruptions, impaired system performance, and reduced customer and client satisfaction. If sustained or repeated, these performance issues could reduce the attractiveness of our solutions to our customers and could result in lost customer opportunities and higher attrition rates, any of which could hurt our revenue growth, customer loyalty and our reputation. Even if our efforts to scale our business are successful, they will be expensive and complex, and require the dedication of significant management time and attention. We could also face inefficiencies or service disruptions as a result of our efforts to scale our internal infrastructure. We cannot be sure that the expansion and improvements to our internal infrastructure will be effectively implemented on a timely basis, if at all, and such failures could adversely affect our business, operating results, and financial condition.
Moreover, our rapid growth has placed, and will likely continue to place, a significant strain on our managerial, administrative, operational, financial, and other resources. We grew from approximately 420 full-time employees as of December 31, 2019 to more than 773 full-time employees as of September 30, 2021. We intend to further expand our overall business, including headcount, with no assurance that our revenue will continue to grow or grow sufficiently to offset the costs associated with increased headcount. As we grow, we will be required to continue to improve our operational and financial controls and reporting procedures, and we may not be able to do so effectively. Furthermore, some members of our management do not have significant experience managing a large public company, so our management may not be able to manage such growth effectively. In managing our growing operations, we are also subject to the risks of over-hiring, over-compensating our employees, and over-expanding our operating infrastructure. As a result, we may be unable to manage our expenses effectively in the future, which may negatively impact our gross profit or operating income.
In addition, we believe that an important contributor to our success has been our corporate culture, which we believe fosters innovation and is rooted in a philosophy of aligning our success with that of our customers. As a result of our rapid growth, a significant portion of our employees have been with us for fewer than three years. As we continue to grow and develop the infrastructure of a public company, we must effectively integrate, develop and motivate a growing number of new employees, who are dispersed geographically, primarily in the U.S. Our geographically dispersed workforce may make it more difficult for our management to manage our growth effectively and preserve our corporate culture. In addition, we must preserve our ability to execute quickly in further developing our solutions and implementing new features and tools. As a result, we may find it difficult to maintain 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 recruit and retain personnel, to continue to perform at current levels, or to execute our business strategy effectively and efficiently.
Our risk management efforts may not be effective to prevent fraudulent activities, which could expose us to material financial losses and liability and otherwise harm our business.
We offer solutions that, among other things, automate the entire bill payment lifecycle, providing electronic bill presentment, client engagement, and payment processing for a large number of customers and clients. For some of our solutions, we share in the responsibility of verifying the identity of our customers and monitoring transactions for fraud. We
39
and our customers have been in the past and will continue to be targeted by parties who seek to commit acts of financial fraud using techniques such as stolen identities and bank accounts, compromised business email accounts, employee or insider fraud, account takeover, false applications, and check fraud. We have in the past, and may in the future, suffer losses from acts of financial fraud committed by or against our customers, partners, clients, employees, or other third-parties.
The techniques used to attempt to perpetrate fraud through our solutions are continually evolving, and we expend considerable resources to continue to monitor and combat them. In addition, when we introduce new products and functionality, or expand existing products, we may not be able to identify all risks created by the new products or functionality. Our risk management policies, procedures, techniques, and processes may not be sufficient to identify all of the risks to which we are exposed, to enable us to prevent or mitigate the risks we have identified, or to identify additional risks to which we may become subject in the future. Furthermore, our risk management policies, procedures, techniques, and processes may contain errors, or our employees or agents may commit mistakes or errors in judgment, as a result of which we may suffer large financial losses. The software-driven and highly automated nature of our solutions could enable criminals and those committing fraud to cause significant losses to our business. As greater numbers of customers, partners, and clients use our solutions, our exposure to material risk of losses from a single user, or from a small number of users, will increase.
Our current business and anticipated growth will continue to place significant demands on our risk management efforts, and we will need to continue developing and improving our existing risk management infrastructure, policies, procedures, techniques, and processes. As techniques used to perpetrate fraud evolve, we may need to modify our solutions to mitigate fraud risks. As our business grows and becomes more complex, we may be less able to forecast and carry appropriate reserves on our books for fraud related losses. Further, these types of fraudulent activities on our solutions can also expose us to civil and criminal liability and governmental and regulatory sanctions as well as potentially cause us to be in breach of our contractual obligations to our third-party partners.
If we are unable to attract new customers or convert trial customers into paying customers, our revenue growth and operating results will be adversely affected.
To increase our revenue, we must continue to attract new customers and increase sales to those customers. As our market matures, our solutions evolve, and competitors introduce lower cost or differentiated products or services that are perceived to compete with our solutions, our ability to sell our solutions could be impaired.
Similarly, our sales could be adversely affected if customers or users perceive that features incorporated into alternative products reduce the need for our solutions or if they prefer to purchase products that are bundled with offerings by other companies. Further, in an effort to attract new customers, we may offer simpler, lower-priced solutions, which may reduce our profitability.
We rely upon our marketing strategy, most significantly in our SimplePractice solution, of offering risk-free trials of our solutions, and other inbound, digital marketing strategies to generate sales opportunities. Converting these trial customers to paid customers often requires extensive follow-up and engagement. Many prospective customers never convert from the trial version of our solutions to a paid version of our solutions. Further, we often depend on individuals within an organization who initiate the trial versions of our solutions being able to convince decision makers within their organization to convert to a paid version. To the extent that these users do not become, or are unable to convince others to become, paying customers, we will not realize the intended benefits of this marketing strategy, and our ability to grow our revenue, particularly in our SMB Solutions segment, will be adversely affected. As a result of these and other factors, we may be unable to attract new customers, which would have an adverse effect on our business, revenue, gross margins, and operating results.
If we are not able to introduce new features or services successfully and to make enhancements to our solutions, our business and results of operations could be adversely affected.
Our ability to attract new customers and increase revenue from existing customers depends in part on our ability to enhance and improve our solutions and to introduce new features and services. For example, we introduced Monarch in 2021, which reinvents how clinicians connect with therapy seekers through an online marketplace. To grow our business and remain competitive, we must continue to enhance our solutions and develop features that reflect the constantly evolving nature of technology and our customers’ needs. The success of SimplePractice, InvoiceCloud, and any other solutions, products, enhancements, or developments depends on several factors: our anticipation of market changes, demands, and product features, including timely product introduction and conclusion, sufficient customer demand, cost effectiveness in our product development efforts and the proliferation of new technologies that are able to deliver competitive offerings at lower prices, more efficiently, more conveniently or more securely. In addition, because our solutions are designed to operate with a variety of systems, applications, data, and devices, we will need to continuously modify and enhance our solutions to keep pace with changes and updates in such systems. We may not be successful in
40
developing these modifications and enhancements. Furthermore, the addition of features to our solutions will increase our research and development expenses. Any new features that we develop may not be introduced in a timely or cost-effective manner or may not achieve the market acceptance necessary to generate sufficient revenue to justify the related expenses. It is difficult to predict customer adoption of new features. Such uncertainty limits our ability to forecast our future results of operations and subjects us to several challenges, including our ability to plan for and model future growth. If we cannot address such uncertainties and successfully develop new features, enhance our solutions, or otherwise overcome technological challenges and competing technologies, our business and results of operations could be adversely affected.
We also offer certain additional services such as integration and training. If we cannot introduce new solutions or enhance our existing solutions to keep pace with changes in our customers’ deployment strategies, we may not be able to attract new customers, retain existing customers, and expand their use of our software or secure renewal contracts, which are important for the future of our business.
Our business, financial condition, and results of operations depend substantially on our customers renewing their contracts for our solutions with us and expanding their use of our solutions. Any decline in our customer renewals or failure to convince our customers to broaden their use of solutions and related services would harm our business, results of operations, and financial condition.
Our solutions are term-based. In our Enterprise Solutions segment, the majority of our contracts are three year terms, but we have many contracts which must be renewed on a quarterly basis. In our SMB Solutions segment, substantially all of our contracts must be renewed on a monthly basis. In order for us to maintain or improve our results of operations, it is important that our customers do not terminate their contracts with us, renew their contracts with us when their terms expire, and renew on the same or more favorable terms. For our transaction-based arrangements, it is important that our customers process significant volume with us. Our customers have no obligation to renew their contracts with us, and we may not be able to accurately predict customer renewal rates. In addition, the growth of our business depends in part on our customers expanding their use of solutions. Historically, some of our customers have elected not to renew their contracts with us for a variety of reasons, including as a result of changes in their strategic IT priorities, budgets, costs and, in some instances, due to competing offerings. Our renewal rates may also decline or fluctuate as a result of a number of other factors, including our customers’ satisfaction or dissatisfaction with our solutions or our pricing, the effectiveness of our customer support services, mergers and acquisitions affecting our customer base, global economic conditions, and the other risk factors described herein. Our ability to sell additional functionality to our existing customers may require more sophisticated and costly sales efforts, especially for our larger customers with more senior management and established procurement functions. As a result, we cannot assure you that customers will renew their contracts with us or increase their usage of our solutions. If our customers do not renew their contracts with us or renew on less favorable terms or if we are unable to expand our customers’ use of our solutions, our business, results of operations, and financial condition may be adversely affected.
We have incurred net losses on an annual basis since we were founded, anticipate increasing our operating expenses in the future, and may not achieve or sustain profitability.
We have incurred significant operating losses since our inception. For the nine months ended September 30, 2021 and 2020, we had a net loss of $8.0 million and $6.9 million, respectively, and loss from operations of $0.5 million and $2.3 million, respectively. Our operating expenses may increase substantially in the foreseeable future as we continue to expend financial resources to grow our business, including to build new products and add features and functionality to existing products; expand our salesforce and marketing to win new customers; expand into new verticals; pursue strategic acquisitions or strategic investments; improve our technology infrastructure, including systems architecture, scalability, availability, performance and network security; comply with laws and regulations; purchase directors’ and officers’ liability insurance for public companies; and invest in general administration, including increased legal and accounting expenses associated with being a public company. The increased costs associated with these and other investments we may make in our business may fail to generate the expected benefits. If we are unable to increase our revenue at a rate sufficient to offset the expected increase in our costs, our business, operating results, and financial condition will be harmed, and we may not be able to achieve or, if achieved, maintain profitability over the long term. In particular, we expect net loss may increase and Adjusted EBITDA may decline in the near-term as we incur increased operating costs associated with being a public company.
If we fail to adapt and respond effectively to rapidly changing technology, evolving industry standards and regulations, and changing business needs, requirements, or preferences, our products may become less competitive, and our growth rate could decline.
The market for our solutions is relatively new and subject to ongoing technological change, evolving industry standards and payment methods, shifting laws and regulations, and changing customer and client needs, requirements, and preferences. The success of our business will depend, in part, on our ability to adapt and respond effectively to these
41
changes on a timely basis, including launching new solutions. The success of any new solutions, or any enhancements or modifications to existing solutions, depends on several factors, including the timely completion, introduction, and market acceptance of such solutions, enhancements, and modifications. If we are unable to enhance our solutions or develop new solutions that keep pace with technological and regulatory change and achieve market acceptance, or if new technologies emerge that are able to deliver competitive solutions at lower prices, more efficiently, more conveniently or more securely than our products, our business, operating results and financial condition would be adversely affected. Moreover, we may experience delays in the development and introduction of new solutions due to the effects of the COVID-19 pandemic. Furthermore, modifications to our existing solutions or technology will increase our research and development expenses. Any of the foregoing could reduce the demand for our services, result in customer, partner and client dissatisfaction and adversely affect our business.
Real or perceived errors, failures or bugs in our solutions could adversely affect our business, results of operations, financial condition, and growth prospects.
Our solutions are complex, and therefore, undetected errors, failures or bugs have occurred in the past and may occur in the future. Our solutions are used in IT environments with different operating systems, system management software, applications, devices, databases, servers, storage, middleware, custom and third-party applications and equipment and networking configurations, which has in the past caused, and may in the future cause, errors or failures in the IT environment into which our solutions are deployed. This diversity increases the likelihood of errors or failures in those IT environments. Despite testing by us, real or perceived errors, failures or bugs may not be found until our customers use our solutions. Real or perceived errors, failures or bugs in our products could result in negative publicity, loss of or delay in market acceptance of our solutions and harm our brand, weakening of our competitive position, claims by customers for losses sustained by them or failure to meet the stated service level commitments in our customer agreements. In such an event, we may be required, or may choose (and have in the past chosen), for customer relations or other reasons, to expend significant additional resources in order to help correct the problem. Any errors, failures or bugs in our software could impair our ability to attract new customers, retain existing customers or expand their use of our software, which would adversely affect our business, results of operations and financial condition.
We may face intense competition, which could limit our ability to maintain or expand market share within our industry, and if we do not maintain or expand our market share our business, financial condition, and operating results will be harmed.
We may face intense competition, which could limit our ability to maintain or expand market share within our industry, and if we do not maintain or expand our market share our business, financial condition, and operating results will be harmed. The market for vertically-tailored, customer engagement software and integrated payments is highly fragmented. We primarily compete with manual processes, point solution vendors, and legacy and modern solution providers. As costs fall and technology improves, increased market saturation may change the competitive landscape in favor of competitors with greater scale than we currently possess.
For our SimplePractice solution, we primarily compete against pen and paper, point solution vendors, and a number of horizontal and vertically-specialized solutions, including practice management software providers. For our solutions in our Enterprise Solutions segment, we primarily compete against bill presentment and payment systems internally developed by financial institutions, as well as legacy and modern solution providers. Some of our competitors have greater name recognition, longer operating histories and significantly greater resources than we do. As a result, our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards, or customer requirements. In addition, current and potential competitors have established, and may in the future establish, cooperative relationships with vendors of complementary products, technologies or services to increase the availability of their products to the marketplace. Accordingly, new competitors or alliances may emerge that have greater market share, larger customer bases, more widely adopted proprietary technologies, greater marketing expertise, greater financial resources and larger sales forces than we have, which could put us at a competitive disadvantage.
Further, in light of these advantages, even if our solutions are more effective than the offerings of our competitors, current or potential customers might accept our competitors’ offerings in lieu of purchasing our solutions.
We also compete on the basis of price. We may be subject to pricing pressures as a result of, among other things, competition within the industry, consolidation of our customers, government action, and financial stress experienced by our customers. If our pricing experiences significant downward pressure or clients acquire or develop competing solutions and services, our business will be less profitable and our results of operations will be adversely affected.
We cannot be certain that we will be able to retain our current customers or expand our customer base in this competitive environment. If we do not retain current customers or expand our customer base, or if we have to renegotiate existing contracts, our business, financial condition, and results of operations will be harmed. If one or more of our competitors or potential competitors were to merge or partner with another of our competitors, the change in the competitive landscape
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could also adversely affect our ability to compete effectively and could harm our business, financial condition, and results of operations.
If we are unsuccessful in establishing, growing or maintaining strategic partnerships, our ability to compete could be impaired, and our operating results may suffer.
We rely on integration of our various solutions into third-party software products, including customer information systems, enterprise risk management systems and accounting systems, which enables us to power such software products’ capabilities. We also rely on strategic partnerships to refer new customers to our solutions in our Enterprise Solutions segment, where we rely on a few strategic partners to help us generate a significant portion of the revenue for certain of our solutions. Although our relationships with strategic partners are independent of one another, if our reputation in the industries in which we operate were to suffer, or if we were unable to establish relationships with new strategic partners and grow our relationships with existing strategic partners, our growth prospects would weaken and our business, financial position, and operating results may be adversely affected. In addition, we have revenue sharing arrangements with certain of our strategic partners. If our strategic partners request a greater percentage of revenue from their referrals, our operating results will be adversely impacted.
To grow our business, we will seek to expand our existing relationships and establish additional relationships with our partners. Establishing such relationships, particularly with core system providers and other large enterprises, entails extensive sales and marketing efforts with no guarantee of success. Sales and marketing to large organizations involve risks that may not be present, or that are present to a lesser extent, with sales and marketing to other, smaller organizations. We must invest significant time educating and selling to multiple management and technical decision-makers to obtain their support. In addition, we may be required to meet wide-ranging and detailed ancillary requirements. For example, insurance and consumer finance organizations generally require us to submit to an exhaustive security audit, given the sensitivity and importance of storing customer billing and payment data on our solutions. Adoption is also frequently subject to budget constraints and unplanned administrative, processing and other delays, including considerable efforts to negotiate and document relationships. Further, deployment of solutions and integration with partners’ software requires significant efforts. If we are unable to increase adoption of our solutions by partners and manage the costs associated with marketing our solutions to potential partners and integrating with their systems, our business, operating results and financial condition may be adversely affected. In addition, if we are unsuccessful in establishing, growing or maintaining partnerships, our ability to compete could be impaired, and our operating results may suffer. If we lost one or more of our largest partnerships, we could also lose associated customer relationships or payment channels and our business, operating results and financial condition could be harmed.
We expect fluctuations in our quarterly operating results, making it difficult to project future results, and if we fail to meet the expectations of securities analysts or investors with respect to our operating results, the market price of our common stock could decline.
Our rapid growth makes it difficult for us to forecast our future operating results. Our quarterly operating results have fluctuated in the past and are expected to fluctuate in the future due to a variety of factors, many of which are outside of our control. As a result, our past results may not be indicative of our future performance.
In addition to the other risks described herein, factors that may affect our operating results include the following:
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Any of these and other factors, or the cumulative effect of some of these factors, may cause our operating results to vary significantly. In addition, we expect to incur significant additional expenses due to the increased costs of operating as a public company. If the assumptions used to plan our business are incorrect, our revenue may fail to meet our expectations and we may fail to meet profitability expectations. Further, if our quarterly operating results fall below the expectations of investors and securities analysts who follow our common stock, the price of our common stock could decline substantially, and we could face costly lawsuits, including securities class action lawsuits.
We have in the past and may in the future acquire or invest in companies, which may divert our management’s attention and result in additional dilution to our stockholders. We may be unable to integrate acquired businesses and technologies successfully or achieve the expected benefits of such acquisitions.
Our success will depend, in part, on our ability to grow our business in response to changing technologies, customer demands and competitive pressures. In some circumstances, we may choose to do so through the acquisition of businesses and technologies rather than through internal development. The identification of suitable acquisition candidates can be difficult, time-consuming and costly, and we may not be able to successfully complete identified acquisitions. The risks we face in connection with acquisitions include:
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The occurrence of any of these risks could have an adverse effect on our business, results of operations and financial condition.
In addition, we face a variety of tax risks related to acquisitions, including that we may be required to make tax withholdings in various jurisdictions in connection with such transactions or as part of our continuing operations following a transaction, and that the companies or businesses we acquire may cause us to alter our international tax structure or otherwise create more complexity with respect to tax matters. Additionally, while we typically include indemnification provisions in our definitive agreements related to acquisitions and other strategic transactions, these indemnification provisions may be insufficient in the event that tax liabilities are greater than expected or in areas that are not fully covered by indemnification. If we are unable to adequately predict and address such tax issues as they arise, our business, financial condition, and results of operations could be adversely affected.
We derive most of our revenue from InvoiceCloud and SimplePractice.
We derive most of our revenue from our InvoiceCloud and SimplePractice solutions, which comprised, in the aggregate, over 88% and 86% of our revenue for the nine months ended September 30, 2021 and 2020, respectively. Our InvoiceCloud and SimplePractice solutions are sold in the highly competitive markets of billing/payments and healthcare, respectively, and there can be no assurance that we will be able to continue to compete effectively in such markets in the future. Because we derive a significant majority of our revenue from our InvoiceCloud and SimplePractice solutions, any material decline in revenue derived from those solutions would have a material adverse impact on our business, results of operations and financial condition.
The COVID-19 pandemic could have a material adverse impact on our employees, customers, partners, clients and other key stakeholders, which could materially and adversely impact our business, operating results and financial condition.
The COVID-19 pandemic and efforts to control its spread have significantly curtailed the movement of people, goods and services in the United States, where we generate substantially all of our revenue, and worldwide, where we may target future growth. It has also caused extreme societal, economic and financial market volatility, resulting in business shutdowns and a global economic downturn. The magnitude and duration of the COVID-19 pandemic and the magnitude and duration of its effect on business activity cannot be predicted with any certainty. In addition, as the COVID-19 pandemic subsides, we cannot predict how our business may be impacted.
In light of the uncertainty relating to the spread of COVID-19, we have taken precautionary measures intended to reduce the risk of the virus spreading to our employees, customers and partners, and we may take further precautionary measures. In particular, governmental authorities have at times instituted, and in the future may again institute, shelter-in-place policies and other restrictions in many jurisdictions in which we operate, including in Massachusetts, where our headquarters are located, and California, Texas, and other states where we maintain significant operations, which policies and restrictions have required us to implement remote working capabilities and temporarily eliminate corporate travel. Even as shelter-in-place policies or other governmental restrictions are lifted, we are taking, and expect to continue to take, a measured and careful approach to having employees return to offices and travel for business. These precautionary measures and policies could negatively impact employee productivity, training and collaboration or otherwise disrupt our business operations. In addition, such restrictions impact certain of our sales efforts, marketing efforts and implementations, adversely affecting the effectiveness of such efforts in some cases and potentially inhibiting future growth.
Our customers and partners were impacted and will continue to be impacted by the COVID-19 pandemic, which ultimately affects our business operations and results. The impact of COVID-19 differed across the verticals we serve. For our solutions in our SMB Solutions segment, clinicians accelerated adoption of our practice management software as they transitioned to virtual healthcare. Our pre-built features like telehealth, online scheduling, AutoPay, and secure messaging proved to be invaluable to our customers. For our solutions in our Enterprise Solutions segment, COVID-19 accelerated adoption of our online and automatic payment features, and we were able to provide customers the digital engagement and electronic payment capabilities they needed to serve their clients. On the other hand, certain solutions experienced a slowdown in usage in 2020. For example, elective procedures and nonessential hospital visits were delayed or canceled,
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and charities and nonprofits were unable to host large, in-person events given shelter-in-place policies. These headwinds were partially offset by our ability to offer digital engagement, such as virtual fundraising and online donations, which enabled our customers to continue hosting events.
Further, the extent and duration of working remotely exposes us, customers, partners and others with whom we have business relationships to increased risks of security breaches or incidents. The increase in remote working may also result in privacy, data protection, data security, and fraud risks, and our understanding of applicable legal and regulatory requirements, as well as the latest guidance from regulatory authorities in connection with the COVID-19 pandemic, may be subject to legal or regulatory challenge, particularly as regulatory guidance evolves in response to pandemic-related developments. Furthermore, we may need to enhance the security of our solutions, our data and our internal IT infrastructure, which may require us to expend additional resources and may not be successful.
More generally, the COVID-19 pandemic has adversely affected economies and financial markets globally, potentially leading to a prolonged economic downturn, which could decrease technology spending, lengthen sales and implementation cycles, and adversely affect demand for our products and harm our business and operating results. The COVID-19 pandemic may delay, or prevent us from making collections and disrupt our ability to develop or enhance offerings. As the COVID-19 pandemic persists, government authorities and companies may continue to implement or reimpose restrictions or policies that could adversely impact consumer spending and payment volumes, global capital markets, the global economy and the market price of our common stock.
We are subject to economic risk, the business cycles and credit risk of our customers, partners and their clients, and the overall level of consumer, business and government spending, which could negatively affect our business, operating results and financial condition.
Industries in which we operate depend heavily on the overall level of consumer, business and government spending. We are exposed to general economic conditions that affect consumer confidence, consumer spending, consumer discretionary income and changes in consumer purchasing habits. A sustained deterioration in general economic conditions in the markets in which we operate or increases in interest rates may adversely affect our financial performance by reducing the number or average payment amounts of transactions made using electronic bill payments, reducing the number of customers that use our SimplePractice solution, and reducing other types of transactions through our solutions. Relatedly, a reduction in the amount of consumer spending could result in a decrease in our revenue and profit. For example, if our customers present fewer bills to clients using electronic billing or clients making electronic bill payments spend less per transaction, we will have fewer transactions relying on our solutions or lower transaction amounts, each of which would contribute to lower revenue. Additionally, in our SimplePractice solution, despite the cost benefits that we believe our practice management solutions provide, prospective healthcare provider customers may delay contract decisions or be reluctant to make any material changes in their established business methods based upon the economic climate. With a reduction in tax revenue, state and federal government healthcare programs, including reimbursement programs such as Medicaid or initiatives under the Patient Protection and Affordable Care Act (the “ACA”), may be reduced or eliminated, which could negatively impact the payments that our healthcare provider customers receive. These developments could have a material adverse impact on our business, operating results and financial condition.
Further, a downturn in the economy could force our customers or partners or their clients to close or declare bankruptcy, resulting in lower revenue and earnings for us and greater exposure to potential credit losses and future transaction declines. We have a certain amount of fixed and other costs, including rent and salaries, which could limit our ability to quickly adjust costs and respond to changes in our business and the economy. We are also subject to the risks of inflation, which may increase our costs, and we may not be able to charge more for our solutions to offset the increase in costs. Changes in economic conditions could also adversely affect our future revenue and profit and cause a materially adverse effect on our business, operating results and financial condition.
Interruptions or performance problems associated with our technology and infrastructure may adversely affect our business, results of operations and financial condition.
Our continued growth depends in part on the ability of our existing customers and new customers to access our solutions at any time and within an acceptable amount of time. We have in the past, and may in the future, experience service disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes or failures, human or software errors, malicious acts, terrorism or capacity constraints. Capacity constraints could be due to a number of potential causes including technical failures, natural disasters, fraud or security attacks. In some instances, we may not be able to identify and/or remedy the cause or causes of these performance problems within an acceptable period of time. It may become increasingly difficult to maintain and improve our performance as our solutions and customer implementations become more complex. If our solutions are unavailable or if our customers are unable to access features of our solutions within a reasonable amount of time or at all, or if other performance problems occur, our business, results of operations and financial conditions may be adversely affected.
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We depend on third-party payment processors to process bill payments made through our solutions and our business, operating results and reputation could be harmed if we experience service interruptions related to our payment processors or additional consolidation among payment processors increases prices.
We depend on third-party payment processors to process bill payments made through our solutions, including payments made by or though credit and debit cards, ACH transfers, eChecks and PayPal. The per-transaction settlement fees we pay under our agreements are significant. Rapid industry consolidation and reduced competition among payment processors could lead to higher settlement fees that we are not able to pass along to our customers. We also rely on payment processors to collect and store payment card information and provide certain fraud detection services. Our multi-year agreements with payment processors contain industry-standard terms and conditions, including technical requirements for the facilitation of payments and the settlement of transactions and chargebacks. These agreements also obligate us to comply with payment networks’ security standards and guidelines, and to reimburse the payment processors for any fines they are assessed by payment networks as a result of any Payment Network Rule violations by us.
If any of our third-party payment processors were to terminate their relationship with us or cease providing us or our customers with payment processing services, whether as a result of a failure by us to meet our contractual obligations or for other reasons, or if any of them were to refuse to renew its agreement with us on commercially reasonable terms, we would need to engage one or more alternate payment processors. In that case, we could experience service interruptions and incur significant expenses in transitioning to or arranging for replacement payment processing services. Such interruptions could also negatively impact our reputation and our relationships with existing or potential customers and partners, as well as, under certain contracts with our customers, cause us to become obligated to provide service credits or refunds under our service level commitments. Likewise, our third-party payment processors have in the past and may in the future experience outages that have and may cause the temporarily loss of the ability to process transactions through our solutions. If any of our third-party payment processors fails to meet our standards and expectations, becomes compromised or suffers errors, outages or vulnerabilities, the ability to process transactions through our solutions may be interrupted or suspended until such issues have been remedied or we have engaged one or more alternate payment processors.
We might not implement our growth strategies successfully which would limit our growth and cause our stock price to decline.
Our future profitability will depend, in part, on our ability to implement successfully our growth strategies. We expect to invest substantial amounts to:
Our investment in these programs will affect adversely our short-term profitability. Additionally, we may fail to implement successfully these programs or to increase substantially adoption of our electronic payment method by customers who pay for the service. This would impact revenues adversely and cause our business to suffer.
We depend and rely upon SaaS technologies from third parties to operate our business, and interruptions or performance problems with these technologies may adversely affect our business and results of operations.
We rely on hosted SaaS applications from third parties in order to operate critical functions of our business, including enterprise resource planning, order management, contract management billing, project management, and accounting and other operational activities. Some of these applications have in the past, and may in the future, become unavailable due to extended outages or interruptions and may also be no longer available on commercially reasonable terms. If that happens, our expenses could increase, our ability to manage finances could be interrupted and our processes for managing sales of our solutions and supporting our customers could be impaired until equivalent services, if available, are identified, obtained and implemented, all of which could adversely affect our business.
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If we cannot maintain our company culture as we grow, our success and our business and competitive position may be harmed.
Engaged employees are imperative to achieving excellent customer service and strong company performance. We strive to hire exceptionally talented people who embrace our culture because it is critical to our success. Any failure to preserve our culture could negatively affect our ability to retain and recruit personnel, which is critical to our growth, and to effectively focus on and pursue our corporate objectives. As we grow and develop the infrastructure of a public company, we may find it difficult to maintain these important aspects of our culture. If we fail to maintain our company culture, our business and competitive position may be harmed.
We rely on the performance of senior management team and highly skilled personnel; if we are unable to retain or motivate key personnel or hire, retain and motivate qualified personnel, our business would be harmed.
We believe our success has depended, and continues to depend, on the efforts and talents of our senior management team, and our highly skilled team members, including our sales personnel, customer services personnel and software engineers. We do not maintain key man insurance on any of our executive officers or key employees, except for our Chief Executive Officer and another employee. From time to time, there may be changes in our senior management team resulting from the termination or departure of our executive officers and key employees. Many members of our senior management team is employed on an at-will basis, which means that they could terminate their employment with us at any time. The loss of any of our senior management could adversely affect our ability to build on the efforts they have undertaken and to execute our business plan, and we may not be able to find adequate replacements. We cannot ensure that we will be able to retain the services of any members of our senior management.
Our ability to successfully pursue our growth strategy also depends on our ability to attract, motivate, retain and train other personnel. Competition for well-qualified personnel in all aspects of our business, including sales personnel, customer services personnel and software engineers, is intense. Our recruiting efforts focus on elite organizations and our primary recruiting competition are well-known, high-paying technology companies. Our continued ability to compete effectively depends on our ability to attract new employees and to retain and motivate existing employees. New hires require significant training and time before they achieve full productivity, particularly in new or developing sales territories. Our recent hires and planned hires may not become as productive as quickly as we expect, and we may be unable to hire or retain sufficient numbers of qualified individuals in the future in the markets where we do business. If we do not succeed in attracting well-qualified employees or retaining and motivating existing employees, our business would be adversely affected.
The market for our solutions may develop more slowly or differently than we expect.
It is difficult to predict customer adoption rates and demand for our products, the entry of competitive products or the future growth rate and size of the cloud-based software and SaaS business software markets. The expansion of these markets depends on a number of factors, including: the cost, performance, and perceived value associated with cloud-based and SaaS business software as an alternative to legacy systems, as well as the ability of cloud-based software and SaaS providers to address heightened data security and privacy concerns. If we have a security incident or other cloud-based software and SaaS providers experience security incidents, loss of customer data, disruptions in delivery or other similar problems, which is an increasing focus of the public and investors in recent years, the market for these applications as a whole, including our solutions, may be negatively affected. If cloud-based and SaaS business software does not continue to achieve market acceptance, or there is a reduction in demand caused by a lack of customer acceptance, technological challenges, weakening economic conditions, data security or privacy concerns, governmental regulation, competing technologies and products, or decreases in information technology spending or otherwise, the market for our solutions might not continue to develop or might develop more slowly than we expect, which would adversely affect our business, financial condition, and results of operations.
The healthcare industry, which we primarily serve through our SimplePractice and HealthPay24 solutions, is rapidly evolving and the market for technology-enabled services that empower healthcare consumers is relatively immature and unproven. If we are not successful in promoting the benefits of our solutions in this industry, our growth may be limited.
The market for our healthcare-related solutions, which we primarily serve through our SimplePractice and HealthPay24 solutions, is subject to rapid and significant changes. The market for technology-enabled services that empower healthcare consumers is characterized by rapid technological change, new product and service introductions, increasing patient financial responsibility, consumerism and engagement, the ongoing shift to value-based care and reimbursement models, and the entrance of non-traditional competitors. In addition, there may be a limited-time opportunity to achieve and maintain a significant share of this market due in part to the rapidly evolving nature of the healthcare and technology industries and the substantial resources available to our existing and potential competitors. The market for
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technology-enabled services that empower healthcare consumers is relatively new and unproven, and it is uncertain whether this market will achieve and sustain high levels of demand and market adoption.
In order to remain competitive, we are continually involved in a number of projects to compete with new market entrants by developing new services, growing our customer base and penetrating new markets. Some of these projects include the expansion of our integration capabilities with additional solutions. These projects carry risks, such as cost overruns, delays in delivery, performance problems and lack of acceptance by our customers. Our integration partners may also decide to develop and offer their own solutions that are similar to our own.
Our success depends on providing high-quality solutions that healthcare providers use to improve clinical, financial and operational performance and which are used and positively received by patients. If we cannot adapt to rapidly evolving industry standards, technology and increasingly sophisticated and varied healthcare provider and patient needs, our existing technology could become undesirable, obsolete or harm our reputation. For example, the COVID-19 pandemic rapidly accelerated the adoption of telehealth technology by healthcare providers, patients, employers, health plans and other health industry participants, and we expect the regulatory environment for virtual healthcare solutions to continue to evolve. We must continue to invest significant resources in our personnel and technology in a timely and cost-effective manner in order to enhance our existing solutions and introduce new high-quality solutions that existing customers and potential new customers will want. Our operating results would also suffer if our innovations are not responsive to the needs of our existing customers or potential new customers, are not appropriately timed with market opportunity, are not effectively brought to market or significantly increase our operating costs. If our new or modified product and service innovations are not responsive to the preferences of healthcare providers and their patients, emerging industry standards or regulatory changes, are not appropriately timed with market opportunity or are not effectively brought to market, we may lose existing customers or be unable to obtain new customers and our results of operations may suffer.
In addition, we have limited insight into trends that might develop and affect our business. We might make errors in predicting and reacting to relevant business, legal and regulatory trends and healthcare changes, which could harm our business. If any of these events occur, it could materially adversely affect our business, financial condition or results of operations.
Finally, our competitors may have the ability to devote more financial and operational resources than we can to developing new technologies and services, including services that provide improved operating functionality, and adding features to their existing service offerings. If successful, their development efforts could render our services less desirable, resulting in the loss of our existing customers or a reduction in the fees we generate from our solutions.
If we fail to offer high-quality customer support, if we experience complaints regarding our customer support or if our support is more expensive than anticipated, our business and reputation could suffer.
Customers rely on our customer support services to resolve issues and realize the full benefits provided by our solutions. High-quality support is also important to maintain and drive further adoption by our existing customers and their clients. Certain of our solutions provide customer support to customers primarily over email, with some additional support provided over chat and through our solutions. If we do not help our customers and their clients quickly resolve issues and provide effective ongoing support, or if our support personnel or methods of providing support are insufficient to meet the needs of our customers and their clients, our ability to retain customers, increase adoption by our existing customers and acquire new customers could suffer, and our reputation with existing or potential customers could be harmed. In addition, customer and client complaints or negative publicity about our customer service could diminish confidence in and use of our products or services. Effective customer service requires significant expenses, which, if not managed properly, could negatively impact our profitability. If we are not able to meet the customer support needs of our customers and their clients during the hours that we currently provide support, we may need to increase our support coverage and provide additional support by other means and methods, which may reduce our profitability.
If the fees we charge are unacceptable to our customers or their clients, our business, operating results and financial condition could be harmed.
We generate our revenue by either charging customers fees on a per-transaction basis or on a subscription basis. As the market for our solutions mature, or as new or existing competitors introduce new solutions that compete with ours, we may experience pricing pressure and be unable to renew our agreements with existing customers or attract new customers at fee levels that are consistent with our pricing models and operating budget. Our pricing strategies for new products we introduce may prove to be unappealing to our customers, and our competitors could choose to bundle certain offerings that are competitive with ours and offer them at lower prices. If this were to occur, it is possible that we would have to change our pricing strategies or reduce our prices, which could harm our business, operating results and financial condition.
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Further, particularly in our Enterprise Solutions segment, a portion of our revenue is generated from customers that elect to pass on transaction fees to clients in the form of convenience fees. In certain markets, such as utilities and municipalities, convenience fees are commonplace. Despite the fact that such fees are relatively standard, they are often met with negative client perception, which could lead to heightened regulatory scrutiny and further pricing pressure or the use of our service or revenue may decline if alternative payment approaches with lower costs to the customer and equal or better convenience emerge than our existing online bill payment and convenience fee monetization model.
Indemnity provisions in various agreements to which we are party potentially expose us to substantial liability for infringement, misappropriation or other violation of intellectual property rights, data protection and other losses.
In the normal course of business, we may provide indemnification of varying scope and terms to third parties and may enter into commitments and guarantees under which we may be required to make payments. The duration of these agreements varies, and in certain cases, may be indefinite with no limit to our maximum potential payment exposure. Large payments under these agreements could harm our business, financial condition, and results of operations. In addition, although we carry general liability insurance, our insurance may not be adequate to indemnify us for all liability that may be imposed or otherwise protect us from liabilities or damages with respect to claims alleging compromises of customer data, and any such coverage may not continue to be available to us on acceptable terms or at all.
Our solutions must integrate with a variety of operating systems, and the hardware that enables clients to accept payment cards must interoperate with third-party mobile devices utilizing those operating systems. If we are unable to ensure that our solutions interoperate with such operating systems and devices, our business may be materially and adversely affected.
We are dependent on the ability of our solutions to integrate with a variety of operating systems, as well as web browsers that we do not control. Any changes in these systems that degrade the functionality of our solutions, impose additional costs or requirements on us, or give preferential treatment to competitors’ services, including their own services, could materially and adversely affect usage of our solutions. In addition, we rely on app marketplaces, such as the Apple App Store and Google Play, to drive downloads of our mobile apps. Apple, Google, or other operators of app marketplaces regularly make changes to their marketplaces, and those changes may make access to our solutions more difficult. In the event that it is difficult for our customers to access and use our solutions, our business may be materially and adversely affected.
We rely on Internet infrastructure, bandwidth providers, data center providers, other third parties and our own systems for providing our solutions to our customers, and any failure or interruption in the services provided by these third parties or our own systems could expose us to litigation and negatively impact our relationships with clients, adversely affecting our brand and our business.
Our ability to deliver our solutions is dependent on the development and maintenance of the infrastructure of the Internet and other telecommunications services by third parties. This includes maintenance of a reliable network connection with the necessary speed, data capacity and security for providing reliable Internet access and services and reliable telephone and facsimile services. Our services are designed to operate without interruption in accordance with our service level commitments.
However, we have experienced limited interruptions in these systems in the past, including server failures that temporarily slow down the performance of our services, and we may experience more significant interruptions in the future. We rely on internal systems as well as third-party suppliers, including cloud providers, to provide our services. Interruptions in these systems, whether due to system failures, computer viruses, physical or electronic break-ins or other catastrophic events, could affect the security or availability of our services and prevent or inhibit the ability of our partners to access our services. In the event of a catastrophic event with respect to one or more of these systems or facilities, we may experience an extended period of system unavailability, which could result in substantial costs to remedy those problems or negatively impact our relationship with our customers, our business, results of operations and financial condition. To operate without interruption, both we and our service providers must guard against:
Any disruption in the network access, telecommunications or co-location services provided by third-party providers or any failure of or by third- party providers’ systems or our own systems to handle current or higher volume of use could
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significantly harm our business. We exercise limited control over our third-party suppliers, which increases our vulnerability to problems with services they provide. We have experienced failures by third-party providers’ systems which resulted in a limited interruption of our system, although this failure did not result in any claims against us. Any errors, failures, interruptions or delays experienced in connection with these third-party technologies and information services or our own systems could negatively impact our relationships with customers and adversely affect our business and could expose us to third-party liabilities.
Although we maintain insurance for our business, the coverage under our policies may not be adequate to compensate us for all losses that may occur. In addition, we cannot provide assurance that we will continue to be able to obtain adequate insurance coverage at an acceptable cost.
The reliability and performance of our Internet connections may be harmed by increased usage or by denial-of-service attacks. The Internet has experienced a variety of outages and other delays as a result of damages to portions of its infrastructure, and it could face outages and delays in the future. These outages and delays could reduce the level of Internet usage as well as the availability of the Internet to us for delivery of our Internet-based services.
Any future litigation, investigations or similar matters, or adverse facts and developments related thereto, could adversely affect our business, operating results and financial condition.
We have in the past and/or may in the future become subject to legal proceedings, claims, investigations, regulatory proceedings, or similar matters or actions that arise in the ordinary course of business, such as claims brought by our customers or their clients in connection with commercial disputes, employment claims made by our current or former employees, or claims regarding misappropriation of client data. In addition, the payment networks could impose fines on us or our third-party payment processor(s). Further, state or federal regulators could make inquiries and/or conduct investigations with respect to one or more of our solutions. Even if such claims do not have merit, litigation, investigations, regulatory proceedings, or similar matters might result in substantial costs and may divert management’s attention and resources, which might seriously harm our business, operating results and financial condition. Insurance might not cover such matters, might not provide sufficient payments to cover all the costs to resolve one or more such matters and might not continue to be available on terms acceptable to us. A claim brought against us that is uninsured or underinsured could result in unanticipated costs, thereby reducing our operating results and leading analysts or potential investors to reduce their expectations of our performance, which could reduce the market price of our common stock.
We rely on Microsoft Azure and Amazon Web Services for a substantial portion of our computing, storage, data processing, networking, and other services. Any disruption of or interference with our use of Microsoft Azure, Amazon Web Services or other third-party services could adversely affect our business, financial condition, and results of operations.
We rely on Microsoft Azure and Amazon Web Services for a substantial portion of our computing, storage, data processing, networking, and other services. Any significant disruption of, or interference with, our use of Microsoft Azure or Amazon Web Services could adversely affect our business, financial condition, and results of operations. Microsoft Azure and Amazon Web Services have broad discretion to change and interpret the terms of service and other policies with respect to us, and those actions may be unfavorable to our business operations. Microsoft Azure and Amazon Web Services may also take actions beyond our control that could seriously harm our business, including discontinuing or limiting our access to one or more services, increasing pricing terms, terminating or seeking to terminate our contractual relationship altogether, or altering how we are able to process data in a way that is unfavorable or costly to us. Although we expect that we could obtain similar services from other third parties, if our arrangements with Microsoft Azure or Amazon Web Services were terminated, we could experience interruptions on our platform and in our ability to make our content available to users, as well as delays and additional expenses in arranging for alternative cloud infrastructure services. Any transition of the cloud services currently provided by Microsoft Azure or Amazon Web Services to another cloud provider would be difficult to implement and will cause us to incur significant time and expense.
Additionally, we are vulnerable to service interruptions experienced by Microsoft Azure, Amazon Web Services, and other providers, and we have in the past, and expect in the future, to experience interruptions, delays, or outages in service availability in the future due to a variety of factors, including infrastructure changes, human, hardware or software errors, hosting disruptions, and capacity constraints. Outages and capacity constraints could arise from a number of causes such as technical failures, natural disasters, fraud or security attacks. The level of service provided by these providers, or regular or prolonged interruptions in that service, could also affect the use of, and our users’ satisfaction with, our solutions and could harm our business and reputation. In addition, hosting costs will increase as user engagement grows, which could harm our business if we are unable to grow our revenue faster than the cost of using these services or the services of other providers. Any of these factors could further reduce our revenue or subject us to liability, any of which could adversely affect our business, financial condition, and results of operations.
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If we are not able to develop, maintain and enhance awareness of our brands, our business, results of operations and financial condition may be adversely affected.
We believe that developing, maintaining, and enhancing awareness of our brands in a cost-effective manner, particularly among existing partners and new partners who refer customers to us, is critical to achieving acceptance of our solutions and attracting new customers. Brand promotion activities may not generate customer awareness or increase revenue, and even if such activities do, any increase in revenue may not offset the expenses we incur in building our brands. For instance, our investments in our brands, particularly our relationships with our referral partners, and customer engagement and education may not generate a sufficient financial return. If we fail to successfully promote and maintain our brands, or continue to incur substantial expenses, we may fail to attract or retain customers necessary to realize a sufficient return on our brand-building efforts, or to achieve the widespread brand awareness that is critical for broad customer adoption of our solutions.
Our revenue is sensitive to shifts in payment methods.
A majority of our revenue is derived from transaction fees from our Enterprise and SMB Solutions segments, which are either absorbed by customers or paid by their clients, and the majority of bills paid through our solutions are paid via credit or debit cards. In general, we receive more revenue for card-based payments than for electronic check and ACH payments. Accordingly, if more clients start paying their bills through our solutions by electronic check, ACH or other payment methods with lower transaction fees, it could materially impact our operating results.
If we fail to meet our service level commitments, we could be obligated to provide credits or refunds or face contract terminations, which could adversely affect our business, operating results and financial condition.
Certain of our agreements with our customers and partners contain service level commitments, including commitments regarding the accuracy of information and data we provide and how quickly we will respond to support inquiries. We have in the past, and may in the future, be unable to meet our stated service level commitments and/or suffer extended periods of unavailability or downtime. If we are unable to meet our stated service level commitments and/or suffer extended periods of unavailability or downtime, we may have to provide our customers and partners with service credits or refunds. In addition, certain customers could shift to using a different solution such that we would no longer be their exclusive payment provider and we could also face contract terminations, either of which would adversely affect our future revenue. Further, any extended service outages could adversely affect our reputation, revenue and operating results.
Our use of international contractors subject us to additional risks which could have an adverse effect on our business, operating results and financial condition.
While primarily all of our employees are based in the United States, we have attempted to control our operating expenses by utilizing lower cost contractors and third-parties in foreign countries such as Ukraine, Jamaica, and Costa Rica and we may in the future expand our reliance on offshore labor to other countries. For example, we outsource certain of our call center operations to a third-party company in Jamaica. Countries outside of the United States may be subject to relatively higher degrees of political and social instability and may lack the infrastructure to withstand political unrest or natural disasters. The occurrence of natural disasters, pandemics, such as COVID-19, or political or economic instability in these countries could interfere with work performed by these labor sources, or could result in our having to replace or reduce these labor sources. Our vendors in other countries could potentially shut down suddenly for any reason, including financial problems or personnel issues. Such disruptions could decrease efficiency, increase our costs and have an adverse effect on our business or results of operations.
The practice of utilizing contractors based in foreign countries has come under increased scrutiny in the United States. Governmental authorities could seek to impose financial costs or restrictions on foreign companies providing services to customers or companies in the United States. Governmental authorities may attempt to prohibit or otherwise discourage us from sourcing services from offshore labor.
The U.S. Foreign Corrupt Practices Act of 1977, as amended, and other applicable anti-corruption laws and regulations prohibit certain types of payments by our employees, vendors and agents. Any violation of the applicable anti-corruption laws or regulations by us, our subsidiaries or our local agents could expose us to significant penalties, fines, settlements, costs and consent orders that may curtail or restrict our business as it is currently conducted and could have an adverse effect on our business, financial condition or results of operations.
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Risks Related to our Legal and Regulatory Environment
We are required to comply with payment network operating rules, procedures and standards, and changes to such rules, procedures or standards, or payment network fees, could harm our business.
Payment networks, such as Visa, Mastercard, American Express, NACHA and INTERAC, establish their own operating rules, procedures and standards (the “Payment Network Rules”), that allocate liabilities and responsibilities among the payment networks and their participants. These rules, procedures and standards, including the Payment Card Industry Data Security Standard, (“PCI-DSS”), govern a variety of areas, including how consumers may use their cards, the security features of cards, security standards for processing, data protection, information security, and allocation of liability for certain acts or omissions, including liability in the event of a data breach. Participants are subject to audits by the payment networks to ensure compliance with applicable rules and standards.
Pursuant to our agreements with third-party payment processors we are required to comply with Payment Network Rules and have agreed to reimburse our third-party payment processors for any fines they are assessed by payment networks as a result of any Payment Network Rule violations by us. We may also be directly liable to the payment networks for any Payment Network Rule violations by us. The payment networks set and interpret the Payment Network Rules, and could adopt new operating rules, procedures or standards or interpret or reinterpret existing rules, procedures and standards that we or our processors might find difficult or even impossible to follow or comply with or costly to implement. These changes may be made for any number of reasons, including as a result of changes in the regulatory environment, to maintain or attract new participants or to serve the strategic initiatives of the networks, and may impose additional costs and expenses on or be disadvantageous to certain participants. For example, changes in the Payment Network Rules regarding chargebacks may affect our ability to dispute chargebacks and the amount of losses we incur from chargebacks. If we fail to make such changes or otherwise resolve the issue with the payment networks, the networks could pass on fines and assessments in respect of fraud or chargebacks related to our customers or disqualify the processing of transactions through our platform if satisfactory controls are not maintained, which could have a material adverse effect on our business, operating results and financial condition. We also may seek to introduce new payment-related products in the future, which may entail additional compliance with the Payment Network Rules. As a result of any violations of the current Payment Network Rules or new rules being implemented, the networks may fine, penalize, or suspend the registration of participants for certain acts or omissions or the failure of the participants to comply with applicable rules, procedures and standards, existing customers, partners or other third parties may cease using or referring our services, prospective customers, partners or other third parties may choose to terminate negotiations with us, or delay or choose not to consider the use of our platform for their processing needs, and the networks could refuse to allow the processing of payments through our platform through their networks. Any of the foregoing could materially adversely impact our business, operating results and financial condition.
From time to time, these networks increase the fees that they charge third-party payment processors. Our third-party payment processors have, in the past, and may, in the future, pass those fees onto us. We could attempt to pass these increases along to our customers, but this strategy might result in the loss of customers to competing solutions. If competitive practices prevent us from passing along the higher fees to our customers in the future, we may have to absorb all or a portion of such increases, which may reduce our revenue and earnings. In addition, interchange and other fees are subject to increased scrutiny by governmental agencies, and new laws or regulations could require greater pricing transparency of the breakdown in fees or fee limitations, which could lead to increased price-based competition, lower margins and higher rates of customer attrition and negatively affect our business, operating results and financial condition. As a result of any increased fees, such payments could become prohibitively expensive for us or for our customers.
In connection with the operation of our business, we may collect, store, transfer, and otherwise process certain personal data and personally identifiable information. As a result, our business is subject to a variety of governmental and industry regulations, as well as other obligations related to privacy, data protection and information security. Any actual or perceived failure to comply with such obligations could result in litigation, fines, penalties, increased costs or adverse publicity and reputational damage that may negatively affect the value of our business and decrease the market price of our common stock.
We receive, store and process personal information and other sensitive or confidential customer data. In addition, we receive, store, handle, transmit, use and otherwise process personal and business information and other data from and about actual and prospective customers, as well as our employees and service providers. A wide variety of state, national, and international laws and regulations apply to our collection, use, retention, protection, disclosure, transfer, and other processing of personal information, with oversight by governmental authorities, including the U.S. Federal Trade Commission (“FTC”) and various state local and foreign agencies Our data processing activities are also subject to contractual obligations and industry standard requirements. The legislative and regulatory landscapes for privacy, data protection and information security continue to evolve in jurisdictions worldwide which could affect our business. Failure to
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comply with any of these laws or regulations could result in litigation, enforcement actions, damages, fines, penalties or adverse publicity and reputational damage, any of which could have a material adverse effect on our business, operating results and financial condition.
In the United States, various laws and regulations apply to the security, collection, processing, storage, use, disclosure and other processing of certain types of data, including, among others, the Electronic Communications Privacy Act, the Computer Fraud and Abuse Act, the Health Insurance Portability and Accountability Act of 1996 as amended by the Health Information Technology for Economic and Clinical Health Act of 2009 (collectively, “HIPAA”), and state laws relating to privacy and data security. Additionally, the FTC and many state attorneys general have interpreted and are continuing to interpret federal and state consumer protection laws to impose standards for the online collection, use, dissemination, processing and security of data.
All states in which we operate have laws that protect the privacy and security of sensitive and personal data. Certain U.S. state laws may be more stringent or broader in scope, or offer greater individual rights, with respect to sensitive and personal information than international, federal, or other state laws, and such laws may differ from each other, which may complicate compliance efforts. For example, the California Consumer Privacy Act (the “CCPA”), which became operative on January 1, 2020 and became enforceable by the California Attorney General on July 1, 2020, along with related regulations which came into force on August 14, 2020, gives California consumers expanded privacy rights and protections, including the right to access and delete certain personal information, opt-out of certain sales of personal information and receive detailed information about how their personal information is collected, used and shared. The CCPA provides for civil penalties for violations and a private right of action for data breaches. This private right of action may increase the likelihood of, and risks associated with, data breach litigation. While certain information that we maintain in our role as a “business associate” under HIPAA may be exempt from the CCPA, other personal information that we process outside of our role as a HIPAA business associate for or about California consumers may be subject to the CCPA. Many of the CCPA’s requirements as applied to personal information of a business’s employees and related individuals are subject to a moratorium set to expire on January 1, 2023. The expiration of the moratorium may increase our compliance costs and our exposure to public and regulatory scrutiny, costly litigation, fines and penalties.
The CCPA has also been amended on multiple occasions, including as recently as March 15, 2021. Additionally, a new privacy law, the California Privacy Rights Act (the “CPRA”) was passed in November 2020. Effective beginning on January 1, 2023, the CPRA imposes additional obligations on companies covered by the legislation and will significantly modify the CCPA, including by expanding California residents’ rights with respect to certain sensitive personal information. The CPRA also creates a new state agency that will be vested with authority to implement and enforce the CCPA and the CPRA. The interpretation and enforcement of the CCPA and many aspects of the CPRA remain unclear, and the effects of the CCPA and the CPRA are potentially significant. Provisions of the CCPA and CPRA may require us to modify our data collection or processing practices and policies and to incur substantial costs and expenses in an effort to comply and increase our potential exposure to regulatory enforcement and sanctions and litigation.
Certain other state laws impose similar privacy obligations, and all 50 states have laws including obligations to provide notification to affected individuals, state officers, and others in the event of security breaches involving unauthorized access to personal information. Further, the CCPA has prompted the enactment of several new state laws or amendments of existing state laws. For example, on March 2, 2021, Virginia enacted the Consumer Data Protection Act (“CDPA”) a comprehensive privacy statute that shares similarities with the CCPA, CPRA, and legislation proposed in other states. Some observers have noted that the CCPA, CPRA, and CDPA could mark the beginning of a trend toward more stringent privacy legislation in other U.S. states and have prompted a number of proposals for new federal and state-level privacy legislation. This legislation, if passed, may add additional complexity require additional investment of resources in compliance programs, adversely impact our business strategies and increase our potential liability. To the extent multiple state-level laws are introduced with inconsistent or conflicting standards and there is no federal law to preempt such laws, compliance with such laws could be difficult and costly to achieve and we could be subject to fines and penalties in the event of non-compliance.
We are also subject to certain obligations under HIPAA, as well as certain state laws and related contractual obligations concerning the privacy and security of medical or health-related information. Among other provisions, HIPAA imposes obligations on certain healthcare providers, health plans and healthcare clearing houses (“covered entities”) relating to the privacy and security of protected health information (“PHI”). Under HIPAA, before disclosing PHI to a service provider for a business purpose, the covered entity must enter into a written agreement with the service provider (“business associate”) relating to HIPAA privacy and security requirements. In addition to our obligations under these agreements with our covered entity customers, we may also be directly liable for compliance with certain HIPAA provisions. Among other things, HIPAA requires business associates to: (1) maintain physical and technical and administrative safeguards to prevent PHI from misuse, (2) report security incidents and other inappropriate uses or disclosures of the information to the covered entity and (3) assist covered entities with certain of their duties under HIPAA, including responding to an individual’s request to access, correct, restrict, or provide accounting of disclosures related to PHI that a covered entity,
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and an associated business associate, maintains about that individual. We have policies and safeguards in place intended to protect health information as required by HIPAA and have processes in place to assist us in complying with applicable laws and regulations regarding the protection of this data and responding to any security incidents. Ongoing implementation and oversight of these measures involves significant time, effort and expense and we may have to dedicate additional time and resources to ensure compliance with HIPAA requirements. In addition, HIPAA requirements, and enforcement priorities, are subject to change, which may expose us to additional regulatory scrutiny and increase our costs for compliance. For example, on December 10, 2020, the Office of Civil Rights (“OCR”) within the Department of Health and Human Services (“HHS”), issued a Notice of Proposed Rulemaking (“NPRM”), which would, among other things, reduce the length of time for a covered entity to respond to an individual’s right of access request.
For covered entities (i.e., certain of our customers), HIPAA mandates individual notification in instances of breaches of PHI and specifies that such notifications must be made “without unreasonable delay and in no case later than 60 calendar days after discovery of the breach,” though many state breach notification laws require notifications to be provided sooner. If a breach affects 500 patients or more, it must be reported to U.S. Department of Health and Human Services, or HHS, without unreasonable delay, and HHS will post the name of the breaching entity on its public website. Breaches affecting 500 individuals or more in the same state or jurisdiction must also be reported to the local media. If a breach involves fewer than 500 people, the covered entity must record it in a log and notify HHS at least annually. In our role as a business associate, although HIPAA mandates only that the business associate provide notice of the breach of PHI to the covered entity, some of our customer agreements may require that we provide notifications to the affected individuals and regulators on the covered entity’s behalf. Any notifications, including notifications to the public, could harm our business, financial condition, results of operations, and prospects.
Penalties for failure to comply with a requirement of HIPAA vary significantly depending on the failure and could include requiring corrective actions, resolution agreements, and/or imposing civil monetary or criminal penalties. HIPAA also authorizes state attorneys general to file suit under HIPAA on behalf of state residents. Courts can award damages, costs and attorneys’ fees related to violations of HIPAA in such cases. While HIPAA does not create a private right of action allowing individuals to sue us in civil court for HIPAA violations, its standards have been used as the basis for a duty of care claim in state civil suits such as those for negligence or recklessness in the misuse or breach of PHI. In addition, many states in which we operate and in which our customers are located also have laws that protect the privacy and security of health information, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts. Where state laws are more protective, we have to comply with the stricter provisions. In addition to imposing fines and penalties upon violators, some of these state laws also afford private rights of action to individuals who believe their personal information has been misused, such as the CCPA.
Internationally, virtually every jurisdiction in which we operate has established its own data security, privacy and data protection legal frameworks with which our clients and partners must comply. For our clients and partners to comply with these various laws, rules, and regulations, our clients and partners may require us to enter into data processing agreements that may require us to implement certain privacy and data protection obligations. Failure to comply with and implement these contractual data protection obligations could result in breach of contract claims.
In particular, the EU General Data Protection Regulation and UK General Data Protection Regulation and UK Data Protection Act 2018 (together, the “GDPR”) regulates transfers of personal data subject to the GDPR to third countries that have not been found to provide adequate protection for such personal data, including the United States. Under the GDPR, a data exporter must implement appropriate safeguards such as the Standard Contractual Clauses (“SCCs”) approved by the European Commission (in the case of transfers from the European Economic Area (“EEA”)) or by the Information Commissioner’s Office (in the case of transfers from the UK) unless a specific derogation applies. Our clients or partners subject to the GDPR will need to comply with these requirements and may require us to enter into SCCs which require us to implement certain privacy obligations. Failure to implement these contractual obligations could result in breach of contract claims, expose us to third party beneficiary claims from data subjects, and to regulatory action by European data protection authorities. In July 2020 the European Court of Justice invalidated the EU-US Privacy Shield framework (an adequacy decision approved by the European Commission for transfers to the United States), which provided a mechanism for the transfer of data from European Union member states to the United States, on the grounds that the EU-US Privacy Shield failed to offer adequate protections to EU personal information transferred to the United States. The European Court also advised that SCCs were not alone sufficient to protect personal data transferred to the third countries such as the United States. Use of the data transfer mechanisms such as SCCs must now be assessed on a case-by-case basis by data exporters, with the assistance of data importers where required, taking into account the legal regime applicable in the destination country, in particular applicable surveillance laws and rights of individuals. Further, on June 4, 2021 the European Commission finalized new versions of the SCCs, with the Implementing Decision set to take effect on June 27, 2021. Under the Implementing Decision, organizations that rely on Standard Contractual Clauses to transfer data will have until December 27, 2022 to update any existing agreements, or any new agreements executed before September 27, 2021. As a result of this continued legislative activity and to comply with the Implementing
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Decision and the new Standard Contractual Clauses, our clients and partners may require us to enter into the new SCCs which will require us to implement additional safeguards to further enhance the security of data transferred out of the EEA/UK, which could increase our compliance costs, expose us to further liability for any breach of contract claims and therefore adversely affect our business .We may also experience hesitancy, reluctance, or refusal by European or multi-national customers to continue to use our products due to the potential risk exposure to such customers as a result of shifting business sentiment in the EEA regarding international data transfers and the data protection obligations imposed on them. We may find it necessary to establish systems to maintain personal data originating from the EEA in the EEA, which may involve substantial expense and may cause us to need to divert resources from other aspects of our business, all of which may adversely affect our business. We and our customers may face a risk of enforcement actions taken by European data protection authorities until the time, if any, that personal data transfers to us and by us from the EEA are legitimized under European law.
Changing definitions of personal information and information may also limit or inhibit our ability to operate or expand our business, including limiting strategic partnerships that may involve the sharing of data. Also, some jurisdictions require that certain types of data be retained on servers within these jurisdictions. Our failure to comply with applicable laws, directives, and regulations may result in enforcement action against us, including fines, and damage to our reputation, any of which may have an adverse effect on our business and operating results. The scope and interpretation of the laws and regulations relating to privacy, data protection and information security that are or may be applicable to us are often uncertain and may be conflicting, as a result of the rapidly evolving regulatory framework for privacy issues worldwide. It is possible that these laws may be interpreted and applied in a manner that is inconsistent with our existing data management practices, solutions or capabilities. As a result of the laws that are or may be applicable to us, and due to the sensitive nature of the information we collect, we have implemented policies and procedures to preserve and protect our data and our platform users’ data against loss, misuse, corruption, misappropriation caused by systems failures or unauthorized access. If our policies, procedures or measures relating to privacy, data protection, information security or the processing of data for marketing purposes or consumer communications fail to comply with laws, regulations, policies, legal obligations or industry standards, we may be subject to governmental enforcement actions, litigation, regulatory investigations, fines, penalties and negative publicity, and could cause our application providers, clients and partners to lose trust in us, and have an adverse effect on our business, operating results and financial condition.
In addition to government regulation, privacy advocates and industry groups may propose new and different self-regulatory standards that may apply to us. One example of such a self-regulatory standard is the Payment Card Industry Data Security Standard, which relates to the processing of payment card information. In the event we are required to comply with the PCI-DSS but fail to do so, fines and other penalties could result, and we may suffer reputational harm and damage to our business. Further, our customers may expect us to comply with more stringent privacy and data security requirements than those imposed by laws, regulations or self-regulatory requirements, and we may be obligated contractually to comply with additional or different standards relating to our handling or protection of data on or by our offerings. Because the interpretation and application of privacy, data protection and information security laws, regulations, rules and other standards are still uncertain, it is possible that these laws, rules, regulations and other actual or alleged legal obligations, such as contractual or self-regulatory obligations, may be interpreted and applied in a manner that is inconsistent with our existing data management practices or the functionality of our platform. If so, in addition to the possibility of fines, lawsuits and other claims, we could be required to fundamentally change our business activities and practices or modify our software, which could have an adverse effect on our business.
Further, any failure or perceived failure by us, or any third parties with which we do business, to comply with laws, regulations, policies (including our publicly posted privacy policies), procedures, measures, legal or contractual obligations, industry standards or regulatory guidance relating to privacy, data protection or information security may result in governmental investigations and enforcement actions, litigation, fines and penalties, or adverse publicity, and could cause our clients and partners to lose trust in us, which could have an adverse effect on our reputation, business, operating results and financial condition. We expect that there will continue to be new proposed laws, regulations and industry standards relating to privacy, data protection, information security, marketing and consumer communications, and we cannot predict the impact such future laws, regulations and standards may have on our business. Future laws, regulations, standards and other obligations or any changed interpretation of existing laws or regulations may be inconsistent among jurisdictions and may conflict with our current or future practices, which could impair our ability to develop and market new functionality and maintain and grow our client base and increase revenue. Future restrictions on the collection, use, processing, storage, sharing or disclosure of various types of data, including financial information and other personal data, or additional requirements for express or implied consent of our clients, partners or consumers for the collection, use, processing, storage, sharing and disclosure of such information could require us to incur additional costs or modify our platform, possibly in a material manner, and could limit our ability to develop new functionality. Complying with these requirements and changing our policies and practices may be onerous and costly, and we may not be able to respond quickly or effectively to regulatory, legislative and other developments.
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If we are not able to comply with these laws or regulations, or if we become liable under these laws or regulations, we could be directly harmed, including through fines and litigation, 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 discontinue certain products, which would negatively affect our business, operating results and financial condition. In addition, the increased attention focused upon liability issues as a result of lawsuits and legislative proposals could harm our reputation or otherwise adversely affect the growth of our business. Furthermore, any costs incurred as a result of this potential liability could harm our operating results.
If our healthcare-related solutions fail to provide accurate and timely information, or if our content or any other element of our solutions is associated with faulty clinical decisions or treatment, we could have liability to healthcare provider customers or patients, which could adversely affect our business, results of operations and financial condition.
Our healthcare-related solutions and related content are utilized by our healthcare provider customers in managing the administrative tasks related to their practice, including making patient information, such as medical histories, treatment plans, medical conditions and the use of particular medications, easily accessible for the providers. If our healthcare-related solutions or content fail to provide accurate and timely information that are relied on by our healthcare provider customers and are associated with faulty clinical decisions or treatment, then healthcare provider customers or their patients could assert claims against us that could result in substantial costs to us, harm our reputation in the industry and cause demand for our services to decline, which could adversely affect our business, results of operations and financial condition.
If we or our healthcare provider customers fail to comply with federal and state laws governing submission of false or fraudulent claims to government healthcare programs or financial relationships among healthcare providers, we or our healthcare provider customers may be subject to civil and criminal penalties or loss of eligibility to participate in government healthcare programs.
As a participant in the healthcare industry, our operations and relationships, and those of our healthcare and wellness provider customers, are regulated by a number of federal, state, and local governmental agencies. The impact of these regulations can adversely affect us. In addition, the inability of our healthcare provider customers to use our technology solutions in a manner that complies with those laws and regulations could affect the marketability of our technology solutions or even expose us to claims, litigation and substantial liability. A number of federal and state laws, including anti-kickback restrictions and laws prohibiting the submission of false or fraudulent claims, apply to healthcare providers and others that make, offer, seek or receive referrals or payments for items or services that may be paid for by any federal or state healthcare program and, in some instances, any private program. These laws are complex, and their application to our specific healthcare solutions, services, and relationships may not be clear and may be applied to our business in ways that we do not anticipate. Of particular importance are the following:
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Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available, it is possible that some of our business activities could be subject to challenge under one or more of such laws. These laws are complex and may change rapidly, and their application to our specific healthcare-related solutions, services, and relationships may not be clear and may be applied to our business in ways we do not anticipate. New payment structures, for example, such as accountable care organizations and other arrangements involving combinations of healthcare providers who share savings, potentially implicate anti-kickback and other fraud and abuse laws. In addition, errors created by our proprietary solutions that relate to entry, formatting, preparation or transmission of claims or reporting of quality or other data pursuant to value-based purchasing initiatives may be alleged or determined to cause the submission of false claims or otherwise be in violation of these laws.
If our EHR software, technology, practice management solutions or billing, coding, claims submission and other solutions, our marketing activities, or our financial arrangements with physicians and other licensed healthcare professionals in the position to refer business to us are found to be in violation of any of the government regulations that apply to us, we may be subject to substantial penalties, including administrative, civil and criminal penalties, damages, fines, disgorgement, the curtailment or restructuring of operations, additional integrity oversight and reporting obligations, exclusion from participation in federal and state healthcare programs and imprisonment, any of which could adversely affect our business, results of operations or financial condition. Any action against us or our customers for violation of these laws or regulations, even if we successfully defend against it, could cause us to incur significant legal expenses, divert our management’s attention from the operation of our business and result in adverse publicity, any of which could adversely affect demand for our solutions, invalidate all or portions of some of our contracts with our customers, require us to change or terminate some portions of our business, require us to refund portions of our revenue, cause us to be disqualified from serving customers doing business with government payors, and give our customers the right to terminate our contracts with them, any one of which could have an adverse effect on our business.
If our healthcare-related solutions fail to provide accurate billing and coding information, then healthcare provider customers or third parties, including government regulators, could assert claims against us that could result in substantial costs and harm to us.
Our SimplePractice solution allows clinicians to efficiently optimize patient outcomes by adding an assessment from a robust template library to a patient’s profile or adding a diagnosis and an ICD-10 code from an auto-populated list developed from information we source from the American Psychiatric Association and the Centers for Medicare & Medicaid Services rather than create a treatment plan from scratch. Clinicians can also access Wiley Treatment Planners to choose from over 1,000 pre-written treatment goals, objectives, and interventions organized by commonly encountered problems in treating patients who seek mental health care. Even though we advise our health care provider customers that they are responsible for confirming the accuracy of such pre-populated information, if our healthcare-related solutions cause our healthcare provider customers to provide inaccurate billing and coding information and result in the submission of incorrect requests for payment, then healthcare provider customers or third parties, including government regulators, could assert claims against us that could result in substantial costs and harm to us.
Healthcare reform efforts in the U.S. are highly dynamic, subject to frequent change, and can be interpreted and enforced differently by new administrations, which can adversely affect our business.
Many of the federal healthcare reform initiatives of the last decade have impacted us and our healthcare provider customers and continue to evolve. The American Reinvestment & Recovery Act (“ARRA”), passed in 2009, included the “Health Information Technology for Economic and Clinical Health (“HITECH Act”). The HITECH Act introduced an incentive program linked to the “meaningful use” of EHR technology, an effort led by the Centers for Medicare & Medicaid Services (“CMS”) and the Office of the National Coordinator for Health IT (“ONC”). The ACA, passed in 2010, extended these incentive payments.
Currently, our SimplePractice solution includes an electronic medical records service that is not certified as EHR technology and we do not have a current intention to cause the certification of such solution. If we decide in the future to certify our EHR technology, we will need to comply with various standards and specifications that will be subject to change and to interpretation by the entities designated to certify our electronic healthcare technology. Additionally, if our services are not compliant with these evolving regulatory requirements, our market position and sales could be impaired, and we may have to invest significantly in changes to our solutions. Further, we could bear financial risk if we are alleged to have not appropriately complied with these regulations, even if the allegations are untrue.
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The Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”), enacted on April 16, 2015, established a new payment framework, called the Quality Payment Program, which modifies certain Medicare payments under the Medicare Physician Fee Schedule to “eligible clinicians,” including physicians and other practitioners. Under MACRA, eligible clinicians must participate in either the Merit-Based Incentive Payment System (“MIPS”) or Advanced Alternative Payment Model (“Advanced APM”). MIPS generally consolidates three programs: the Physician Quality Reporting System, the Value-based Payment Modifier program, and the Medicare EHR incentive program. Under this consolidated system, eligible clinicians report on metrics related to quality, clinical practice improvement activities and the use of certified EHR technology. Eligible clinicians may receive a positive or negative payment adjustment based on their reported metrics as compared to their peers. Eligible clinicians are not required to participate in MIPS if they are part of an Advanced APM, which can include certain accountable care organizations and other new payment models. CMS has structured these programs to incentivize clinicians to join Advanced APMs instead of participating in MIPS, though its results to date have been mixed. As such, the implications of MACRA and MIPS are uncertain and will depend on future regulatory activity and healthcare provider activity in the marketplace. If in the future we decide to position our solutions for MACRA and MIPS, compliance with applicable standards will need to be continuously monitored, and there can be no assurances that we will be able to maintain such standards and compliance. Any failure to successfully adapt our solutions either to MACRA and MIPS, or to the shift towards Advanced APMs and other value-based payment models, could have a material effect on our business, results of operations and financial condition.
Government programs, such as MIPS, have been implemented to accelerate the adoption and utilization of EHRs. Changes to government incentive programs related to EHRs could materially impact healthcare providers’ decisions to implement EHR systems or have other impacts that would be unfavorable to our business.
There have been and continue to be a number of legislative initiatives to contain healthcare costs. By way of example, the ACA made a number of substantial changes in the way healthcare is financed by both governmental and private insurers. Since its enactment, there have been judicial, executive and Congressional challenges to certain aspects of the ACA, and on June 17, 2021, the U.S. Supreme Court dismissed the most recent judicial challenge to the ACA brought by several states without specifically ruling on the constitutionality of the ACA. Prior to the Supreme Court’s decision, President Biden had issued an executive order relating to the ACA, including an instruction to certain governmental agencies to review and reconsider their existing policies and rules that limit access to healthcare. It is unclear how healthcare reform measures enacted by Congress or implemented by the Biden administration or other challenges to the ACA, if any, will impact the ACA. Additional state and federal healthcare policies and reform measures adopted in the future could have a material adverse impact on our customers and, as a result, our operational results or the manner in which we operate our business.
The adoption of interoperability standards and regulations regarding information blocking could have unexpected consequences for our business.
With the passing of the MACRA in 2015, the U.S. Congress declared it a national objective to achieve widespread exchange of health information through interoperable certified EHR technology nationwide by December 31, 2018. The 21st Century Cures Act (“Cures Act”), which was passed and signed into law in December 2016, includes provisions related to data interoperability, information blocking and patient access. In May 2020, ONC and CMS finalized and issued complementary rules that are intended to clarify provisions of the Cures Act regarding interoperability and information blocking, and include, among other things, requirements surrounding information blocking, changes to ONC’s health IT certification program and requirements that CMS-regulated payors make relevant claims/care data and provider directory information available through standardized patient access and provider directory application programming interfaces that connect to provider EHRs. The companion rules will transform the way in which healthcare providers, health IT developers, health information exchanges/health information networks (“HIEs/HINs”), and health plans share patient information, and create significant new requirements for healthcare industry participants. For example, the ONC rule, which went into effect on April 5, 2021, prohibits healthcare providers, health IT developers of certified health IT, and HIEs/HINs from engaging in practices that are likely to interfere with, prevent, materially discourage, or otherwise inhibit the access, exchange or use of electronic health information (“EHI”), also known as “information blocking.” To further support access and exchange of EHI, the ONC rule identifies eight “reasonable and necessary activities” as exceptions to information blocking activities, as long as specific conditions are met. From April 5, 2021, developers of EHRs and other health IT products, such as us, are subject to the “information blocking” condition of certification under the ONC rule, which includes a number of new certification and maintenance of certification requirements that have to be met in order to maintain approved federal government certification status. Meeting and maintaining this certification status will require additional development costs. We have made and continue to make investments in building data interoperability capabilities, and continue to evaluate the potential impact of the CMS and ONC final rules, and we anticipate significant impacts from the new information blocking rules. We also expect expanded surveillance by federal agencies of certified HIT and its use by our customers. Under the Cures Act, the U.S. Department of Health and Human Services (“HHS”) has the regulatory authority to investigate and assess civil monetary penalties of up to $1,000,000 against certified health IT
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developers found to be in violation of “information blocking.” Any failure to comply with these rules could have a material adverse effect on our business, results of operations and financial condition.
Our and our customers’ and partners’ communications with existing and potential clients are subject to laws regulating telephone and email marketing practices, and our or their failure to comply with such communications laws could adversely affect our business, operating results, and financial condition and significantly harm our reputation.
Our platform enables our customers and partners to communicate directly with their clients, including via email, text messages and telephone calls. Our platform also enables recording and monitoring of calls between our customers and partners and their clients for training and quality assurance purposes. On occasion, we also send communications directly to clients. These activities are subject to a variety of U.S. state and federal laws, rules, and regulations, such as the Telephone Consumer Protection Act of 1991 (the “TCPA”), the CAN-SPAM Act of 2003 (the “CAN-SPAM Act”), and others related to telemarketing, recording, and monitoring of communications. The TCPA prohibits companies from making telemarketing calls to numbers listed in the Federal Do-Not-Call Registry and imposes other obligations and limitations on making phone calls and sending text messages to consumers. The CAN-SPAM Act regulates commercial email messages and specifies penalties for the transmission of commercial email messages that do not comply with certain requirements, such as providing an opt-out mechanism for stopping future emails from senders. The TCPA, the CAN-SPAM Act and other communications laws, rules, and regulations are subject to varying interpretations by courts and governmental authorities and often require subjective interpretation, making it difficult to predict their application and therefore making compliance efforts more challenging. We and our customers and partners may be required to comply with these and similar laws, rules, and regulations. To comply with these laws, rules, and regulations, in some cases we rely on our customers and partners to obtain legally required consents from their consumers to receive communications sent using our platform. We cannot, however, be certain that our or their efforts to comply will always be successful. Our business could be adversely affected by changes to the application or interpretation of existing laws, rules and regulations governing our platform’s communication capabilities, or the enactment of new laws, rules and regulations, and by our and our customers’ and partners’ failure to comply with such laws, rules and regulations in using our platform. If any of these laws, rules or regulations were to significantly restrict our or our customers’ or partners’ ability to use our platform to communicate with existing and potential clients, we may not be able to develop adequate alternative communication modules for our platform. Further, our or our customers’ or partners’ non-compliance with these laws, rules, and regulations could result in significant financial penalties, litigation, including class action litigation, consent decrees and injunctions, adverse publicity, and other negative consequences, any of which could adversely affect our business, operating results, and financial condition and significantly harm our reputation.
Our business is subject to a wide variety of laws and regulations. Liabilities or loss of business resulting from any actual or perceived failure to comply with laws and regulations, and regulatory or judicial interpretations thereof, including payments and other financial services-related laws and regulations, and increased costs or loss of business associated with compliance with those laws and regulations, could have an adverse effect on our business.
We are subject to a wide variety of local, state, federal, and international laws, rules, regulations, licensing and other authorization schemes, and industry standards in the United States. These laws, rules, regulations, licensing and other authorization schemes, and industry standards govern numerous areas that are important and material to our business. In addition to privacy, data protection and information security, export control, import, economic and trade sanctions, and anti-money laundering and counter-terror financing-related laws, rules, and regulations, our business is also subject to, without limitation, laws, rules, and regulations applicable to securities, labor and employment, immigration, competition, and marketing and communications practices.
In addition, the laws, rules, regulations, licensing and other authorization schemes, and industry standards that govern our business, both directly and through our relationships with banks, payment networks, payment processors, and other financial services partners, include, or may in the future include, those relating to payments services, such as payment processing and settlement services, escheatment, and compliance with PCI-DSS, a set of requirements designed to ensure that all companies that process, store or transmit payment card information maintain a secure environment to protect cardholder data. These laws, rules, regulations, licensing and other authorization schemes, and industry standards are administered and enforced by multiple authorities and governing bodies in the United States, including the Department of the Treasury, self-regulatory organizations, and numerous state and local governmental authorities and regulatory agencies.
Laws, rules, regulations, licensing and other authorization schemes, and industry standards applicable to our business are increasing in number and subject to change and evolving interpretations and application, including by means of legislative changes, executive orders, and regulatory and judicial interpretations, and it can be difficult to predict how they may be
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applied to our business and the way we conduct our operations, particularly as we introduce new solutions and expand into new geographies.
We may not be able to respond quickly or effectively to regulatory, legislative, judicial, and other developments, and these changes may in turn impair our ability to offer our existing or planned solutions and increase our cost of doing business.
There can be no assurance that we and our employees and/or contractors will not violate or fail to comply with applicable laws, rules, regulations, licensing and other authorization schemes, and industry standards, or interpretations thereof, or will not otherwise face regulatory scrutiny for our historical and/or ongoing compliance with such laws, rules, regulations, or interpretations. Any failure or perceived failure by us or our employees or contractors to comply with existing or new laws, rules, regulations, licensing or other authorization schemes, industry standards, or orders of any governmental or regulatory authority (including changes to or expansion of the interpretation of those laws, regulations, standards or orders), may, among other things:
Further, the complexity of U.S. federal and state regulatory and enforcement regimes could result in a single event giving rise to many overlapping investigations and legal and regulatory proceedings by multiple government authorities in different jurisdictions.
Any of the foregoing could, individually or in the aggregate, harm our reputation as a trusted provider, damage our brand and business, cause us to lose existing customers and partners, prevent us from obtaining new customers and partners, require us to expend significant funds to remedy problems caused by breaches and to avert further breaches, expose us to legal risk and potential liability, and adversely affect our business, operating results and financial condition.
Currently, we do not possess any permits, licenses or other authorizations from financial regulators. We believe the licensing and authorization requirements of federal and state regulatory agencies that regulate or supervise banks, payment processors, or other financial institutions or providers of payment services do not apply to us. While our business itself, and our related activities, are not currently subject to financial services-related regulation, the banks and payment processors that we partner with operate in a highly regulated landscape and there is a risk that those laws and regulations could become directly applicable to us and/or our contractual compliance with certain legal and regulatory obligations could become increasingly difficult and costly. As we expand into new jurisdictions, the number of foreign laws, rules, regulations, licensing and other authorization schemes and standards governing our business and activities will expand as well. In addition, as our business and products and services continue to develop and expand, we may become subject to additional laws, rules, regulations, licensing and other authorization schemes and standards. We may not always be able to accurately predict the scope or applicability of certain laws, rules, regulations, licensing and other authorization schemes or standards to our business and related activities, particularly as we expand into new areas of operations, which could have a significant negative effect on our existing business and our ability to pursue future plans.
In the future, as a result of the laws, rules and regulations that are or may become applicable to our business, we could be subject to investigations, inspections, examinations, and supervision, and resulting liability, including governmental fines, restrictions on our business, or other sanctions, and we could be forced to cease conducting certain aspects of our business with residents of certain jurisdictions, be forced to change our business practices in certain jurisdictions or be required to obtain additional licenses, certifications or regulatory approvals. There can be no assurance that we will be able to successfully implement changes to our business practices or obtain or maintain any such licenses, certifications or regulatory approvals, and, even if we were able to do so, there could be substantial costs and potential product changes involved in obtaining, maintaining and renewing such licenses, certifications and approvals, which could have a material and adverse effect on our business. In addition, we could be subject to fines or other enforcement action if we are found to violate disclosure, reporting, anti-money laundering, capitalization, corporate governance or other requirements of such licenses, certifications or approvals. These factors could impose substantial additional costs, involve considerable delay to
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the development or provision of our products or services, require significant and costly operational changes or prevent us from providing our products or services in any given market.
We are subject to laws and regulations regarding export control, import, economic and trade sanctions, anti-money laundering, and counter-terror financing that could impair our ability to compete in international markets or subject us to criminal or civil liability if we violate them.
Our solutions are subject to export control laws and regulations, including the Export Administration Regulations administered by the U.S. Department of Commerce, and our activities may be subject to trade and economic sanctions, including U.S. economic and trade sanctions administered by the U.S. Department of Treasury’s Office of Foreign Assets Control (“OFAC”), which we collectively refer to as trade controls. As such, a license may be required to export or re-export our products, or provide related services, to certain countries and customers. Further, our products incorporating encryption functionality may be subject to special controls applying to encryption items or certain reporting requirements. The process for obtaining necessary licenses may be time-consuming or unsuccessful, potentially causing delays in sales or losses of sales opportunities.
If our solutions are accessed from a sanctioned country in violation of trade and economic sanctions, we could be subject to fines or other enforcement action. Although we have no knowledge that our activities have resulted in violations of trade controls, any failure by us or our partners to comply with applicable laws and regulations would have negative consequences for us, including reputational harm, government investigations and penalties.
In addition, various countries regulate the import of certain encryption technology, including through import permit and license requirements, and have enacted laws that could limit our ability to distribute our products or could limit customers’ ability to implement our products in those countries. Changes in our products or changes in export and import regulations in such countries may create delays in the introduction of our products into international markets, prevent customers with international operations from deploying our products globally or, in some cases, prevent or delay the export or import of our products to certain countries, governments or persons altogether. Any change in export or import laws or regulations, economic sanctions or related legislation, shift in the enforcement or scope of existing export, import or sanctions laws or regulations, or change in the countries, governments, persons or technologies targeted by such export, import or sanctions laws or regulations, could result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential customers with international operations. Any decreased use of our products or limitation on our ability to export to or sell our products in international markets could adversely affect our business, operating results and financial condition.
Pursuant to agreements with certain of our third party payment processors, we also have obligations under anti-money laundering and counter-terrorist financing laws and regulations. There has been increased scrutiny in the United States and globally regarding compliance with these laws and regulations, which may require us to further revise or expand our compliance program, including the procedures we use to verify the identity of our customers, to comply with our contractual obligations.
We are subject to anti-corruption, anti-bribery and similar laws, and non-compliance with such laws can subject us to criminal or civil liability and harm our business.
We are subject to the FCPA, U.S. domestic bribery laws and other anti-corruption laws. Anti-corruption and anti-bribery laws have been enforced aggressively in recent years and are interpreted broadly to generally prohibit companies, their employees and their third-party intermediaries from authorizing, offering or providing, directly or indirectly, improper payments or benefits to recipients in the public sector. These laws also require that we keep accurate books and records and maintain internal controls and compliance procedures designed to prevent any such actions. Although we currently only maintain operations in the United States, we utilize contractors outside of the United States and if we increase our international cross-border operations abroad, we may engage with business partners and third-party intermediaries to market our services and to obtain necessary permits, licenses and other regulatory approvals. Our operations are dependent in part upon transmission bandwidth provided by third-party network providers and access to co-location facilities to house our servers, which in some countries may be state owned. Similarly, some of our customers may be state-owned, in each case exposing us to potential risks. In addition, we or our third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities. We can be held liable for the corrupt or other illegal activities of these third-party intermediaries, our employees, representatives, contractors, partners and agents, even if we do not explicitly authorize such activities. We cannot assure you that all of our employees and agents will not take actions in violation of our policies and applicable law, for which we may be ultimately held responsible. As we increase our international operations, our risks under these laws may increase.
Detecting, investigating and resolving actual or alleged violations of anti-corruption laws can require a significant diversion of time, resources and attention from management. In addition, noncompliance with anti-corruption or anti-bribery laws could subject us to whistleblower complaints, investigations, sanctions, settlements, prosecution, enforcement actions,
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fines, damages, other civil or criminal penalties, injunctions, suspension or debarment from contracting with certain persons, reputational harm, adverse media coverage and other collateral consequences. If any subpoenas are received or investigations are launched, or governmental or other sanctions are imposed, or if we do not prevail in any possible civil or criminal proceeding, our business, operating results and financial condition could be materially harmed.
Risks Related to our Technology and Intellectual Property
If we are unable to ensure that our solutions interoperate with a variety of software suites, applications and other technologies that are developed by others, including our partners, or if there are performance issues with such third-party systems, our solutions will not operate effectively, we may become less competitive and our business, operating results and financial condition may be harmed.
Our solutions must integrate with a variety of software suites, applications and other technologies that are developed by third parties, and we need to continuously modify and enhance our solutions to adapt to changes in such software and other technologies. In particular, we have developed our solutions to be able to easily integrate with key third-party applications of our software partners. We are typically subject to standard terms and conditions of providers of software or other technology, which govern the distribution and operation of such software and other technologies and are subject to change by such providers from time to time. Our business will be harmed if any provider of such software or other technologies:
For example, to deliver a comprehensive solution, our solutions integrate with offerings of popular software providers, including Oracle and SAP, through application programming interfaces (“APIs”) made available by these software providers. If any providers of software or other technologies change the features of their APIs, discontinue their support of such APIs, restrict our access to their APIs or alter the terms governing their use in a manner that is adverse to our business, we will not be able to provide synchronization capabilities, which could significantly diminish the value of our solutions and harm our business, operating results and financial condition.
Third-party services and products are constantly evolving, and we may not be able to modify our solutions to assure its compatibility with that of other third parties as they continue to develop or emerge in the future, or we may not be able to make such modifications in a timely and cost-effective manner. In addition, some of our competitors may be able to disrupt the operations or compatibility of our solutions with their products or services, or exert strong business influence on our ability to, and terms on which we, operate our solutions. Should any of our competitors modify their products or standards in a manner that degrades the functionality of our solutions or gives preferential treatment to our competitors or competitive products, whether to enhance their competitive position or for any other reason, the interoperability of our solutions with these products could decrease and our business, results of operations and financial condition would be harmed. If we are not permitted or able to integrate with these and other third-party software suites, applications and other technologies in the future, our business, results of operations and financial condition would be harmed.
Furthermore, the functionality of our solutions also depends on our and our partners’ ability to integrate our solutions with their offerings. These partners periodically update and change their systems, and although we have been able to adapt our solutions to their evolving needs in the past, there can be no guarantee that we will be able to do so in the future or in a way such that our customers or partners or their clients are satisfied with the quality of work performed by us or with the technical support services rendered. In particular, if we are unable to adapt to the needs of our partners’ platforms, software and solutions, our customers’ and partners’ operations may be disrupted, which could result in disputes with our customers or partners or their clients or other third parties and additional costs to address the situation. Additionally, our customers and partners may terminate their relationship with us and we may lose access to large numbers of customer referrals as a result.
Any negative publicity related to our solutions, regardless of its accuracy or whether the ultimate cause of any poor performance actually results from our solutions, or from the systems of our customers, partners or clients, may adversely affect our reputation, business, operating results and financial condition.
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Interruptions or delays in the services provided by our third-party data centers or internet service providers could impair the delivery of our solutions. Any changes in the systems that these providers make available to us that degrade the functionality of our solutions, impose additional costs or requirements on us, or give preferential treatment to competitors’ services, including their own services, could materially and adversely affect usage of our solutions.
Our third-party service providers are ultimately responsible for maintaining their own network security, disaster recovery and system management procedures, and our review processes for such providers may be insufficient to identify, prevent or mitigate adverse events. The owners and operators of our current and future hosting facilities do not guarantee that our customers’ or partners’ or their clients’ access to our solutions will be uninterrupted, error-free or secure. We or our third-party service providers have in the past, may in the future experience, website disruptions, outages and other performance problems. We have periodically experienced service disruptions in the past, and we cannot assure you that we will not experience service interruptions or delays in the future. We depend on our third-party service providers to protect their infrastructure against damage, interruption and other performance problems, maintain their respective configuration, architecture and interconnection specifications and protect information stored by such providers, as well as on internet service providers to transmit data. We may also incur significant costs for using alternative equipment or taking other actions in preparation for, or in reaction to, events that damage the data storage services we use.
Although we have disaster recovery plans that use multiple data storage locations, any incident affecting their infrastructure that may be caused by fire, flood, severe storm, earthquake, power loss, telecommunications failures, unauthorized entry or intrusion, sabotage, criminal acts, intentional acts of vandalism and other misconduct, computer viruses and disabling devices, natural disasters, military actions, terrorist attacks, negligence, infrastructure changes, human or software errors, fraud, spikes in customer, partner or client usage and denial of service issues, hardware failures, improper operation, data loss, compromise or corruption, cybersecurity attacks, wars, hurricanes, tornadoes and other similar events beyond our control could negatively affect our solutions. In some instances, we may not be able to identify the cause or causes of these performance problems within an acceptable period of time. Any prolonged service disruption affecting our solutions for any of the foregoing reasons could result in lengthy interruptions in the delivery of our solutions, cause system interruptions, prevent our customers, partners or clients from accessing their accounts online, damage our reputation with current and potential customers, partners or clients, expose us to liability, cause us to lose customers, partners or clients, cause the loss of critical data, prevent us from supporting our platform, products or services, result in regulatory investigations, enforcement actions and litigation or cause us to incur additional expense in investigating, remediating and responding to these disruptions and arranging for new facilities and support or otherwise harm our business.
Also, in the event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur. System failures or outages, including any potential disruptions due to significantly increased global demand on certain cloud-based systems during the COVID-19 pandemic, could compromise our ability to perform these functions in a timely manner, which could harm our ability to conduct business or delay our financial reporting. Such failures could adversely affect our operating results and financial condition. In addition, certain of our third-party service providers are required to notify us if they experience a security breach or unauthorized disclosure of certain personal information, or, in some cases, confidential data or information of ours or our customers, partners or clients, and their failure to timely notify us of such a breach or disclosure may cause us to incur significant costs or otherwise harm our business.
Our solutions are accessed by many customers, partners and clients, often at the same time. As we continue to expand the number of our customers, partners and clients, and products available through our solutions, we may not be able to scale our technology to accommodate the increased capacity requirements, which may result in interruptions or delays in service. In addition, the failure of data centers, internet service providers or other third-party service providers to meet our capacity requirements could result in interruptions or delays in access to our solutions or impede our ability to grow our business and scale our operations. If our third-party infrastructure service agreements are terminated, or there is a lapse of service, interruption of internet service provider connectivity, or damage to data centers, we could experience interruptions in access to our solutions as well as delays and additional expense in arranging new facilities and services.
We also depend on third-party internet-hosting providers and continuous and uninterrupted access to the internet through third-party bandwidth providers to operate our business. If we lose the services of one or more of our internet-hosting or bandwidth providers for any reason or if their services are disrupted, for example due to viruses, ransomware, denial of service or other attacks on their systems, or due to human error, intentional bad acts, power loss, hardware failures, telecommunications failures, fires, wars, terrorist attacks, floods, earthquakes, hurricanes, tornadoes or similar catastrophic events, we could experience disruption in our ability to offer our solutions and adverse perception of our solutions’ reliability, or we could be required to retain the services of replacement providers, which could increase our operating costs and materially and adversely affect our business, operating results and financial condition.
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Furthermore, prolonged interruption in the availability, or reduction in the speed or other functionality, of our solutions could materially harm our reputation and business. Frequent or persistent interruptions in accessing our solutions could cause customers, partners or clients to believe that our solutions are unreliable, leading them to switch to our competitors or to avoid our solutions, and could permanently harm our reputation and business.
Additionally, as our customers and partners and their clients may use our solutions for critical transactions, any errors, defects or other infrastructure problems could result in damage to such customers’, partners’ or clients’ businesses. These customers, partners and clients could seek significant compensation from us for their losses and our insurance policies may be insufficient to cover a claim. Even if unsuccessful, this type of claim may be time-consuming and costly for us to defend. Any of the foregoing could have a material adverse effect on our business, operating results and financial condition.
We may experience software and technology defects, undetected errors, development delays or other performance problems in our software and other technology used as part of our solutions, which could damage customer and partner relations, harm our reputation, result in significant costs to us, decrease our potential profitability and expose us to substantial liability.
Our software and other technology used as part of our solutions may contain undetected errors, viruses or defects when implemented or when new functionality is released, as we may modify, enhance, upgrade and implement new systems, procedures and controls to reflect changes in our business, technological advancements and changing industry trends. Despite extensive testing, from time to time we have discovered and may in the future discover defects or errors in our solutions. Any performance problems or defects in our solutions could materially and adversely affect our business, operating results and financial conditions. Defects, errors or other similar performance problems or disruptions, whether in connection with day-to-day operations or otherwise, could be costly for us, adversely affect our customers’ or partners’ businesses, harm our reputation and result in reduced sales or a loss of, or delay in, the market acceptance of our solutions. In addition, if we have any such errors, defects or other performance problems, our customers or partners could seek to terminate, or elect not to renew, their contracts with us, delay or withhold payment or make claims against us. Any of these actions could result in liability, lost business, increased insurance costs, difficulty in collecting accounts receivable, costly litigation or adverse publicity, which could materially and adversely affect our business, operating results and financial condition. Additionally, our software uses open-source software and any defects or security vulnerabilities in such open-source software could materially and adversely affect our business, operating results and financial condition. In addition, we rely on technologies and software supplied by third parties that may also contain undetected errors, viruses or defects. Software defects and errors or delays in electronic bill presentment or our facilitation of payment processing could result in additional development costs, diversion of technical and other resources from our other development efforts, loss of credibility with current or potential customers, partners and clients, harm to our reputation and exposure to liability claims, any of which could result in a material adverse effect on our business, operating results and financial condition.
We use open source software in our solutions, which may pose particular risks to our proprietary software in a manner that could subject us to litigation or other actions, negatively affect our ability to sell our products or otherwise adversely affect our business, operating results and financial condition.
Our solutions incorporate software modules licensed to us by third-party authors under “open source” licenses, and we expect to continue to incorporate open source software in our solutions in the future. Some open source licenses have so called “copy-left” provisions, which may require those who distribute open source software as part of their own software product to provide the source code to their software to licensees, and may also prohibit charging fees to licensees in connection with the licensing of the software product.
While we try to use open-source code in a manner that we believe does not subject our proprietary solutions to copy-left provisions, the terms of many open source licenses to which we are subject have not been interpreted by U.S. or foreign courts, and there is a risk that these licenses could be construed in a way that could impose unanticipated conditions or restrictions on our ability to provide, or distribute our solutions related to, the open source software subject to those licenses. In addition, the public availability of such software may make it easier for others to compromise our solutions. Although we generally monitor our use of open source software to avoid subjecting our solutions to conditions we do not intend and to try to ensure that none is used in a manner that would require us to disclose our proprietary source code or that would otherwise breach the terms of an open source agreement, such use could inadvertently occur, or could be claimed to have occurred, in part because open source license terms are often ambiguous. Moreover, we cannot assure you that our processes for controlling our use of open source software in our solutions will be effective. From time to time, there have been claims challenging the ownership of open source software against companies that incorporate it into their products. Likewise, we could become subject to lawsuits and face claims from third parties claiming ownership of, or demanding release of, any open source software or derivative works that we have developed using such software, which could include our proprietary source code, or otherwise seeking to enforce the terms of the applicable open source
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license. These claims could result in litigation and could require us to make our software source code freely available, purchase a costly license or cease offering the implicated solutions. Litigation could be costly for us to defend, have a negative effect on our business, operating results and financial condition or require us to devote additional research and development resources to change our products. If we are held to have breached or failed to fully comply with all the terms and conditions of an open source software license, we could face infringement or other liability, or be required to seek costly licenses from third parties, to continue providing our offerings on terms that are not economically feasible, to re-engineer our solutions (which could involve substantial time and resources), to discontinue or delay the provision of our offerings if re-engineering could not be accomplished on a timely basis or to make generally available, in source code form, our proprietary code, any of which could adversely affect our business, operating results and financial condition.
In addition to risks related to complying with applicable license requirements, a release of our proprietary code could also allow our competitors to create similar offerings with lower development effort and time and ultimately could result in a loss of our competitive advantages. Furthermore, use and distribution of open source software may entail greater risks than use of third-party commercial software, as open source licensors generally do not provide support, warranties, indemnification or other contractual protections regarding infringement claims or the quality of the code.
If we fail to adequately obtain, maintain, protect or enforce our intellectual property and proprietary rights, our competitive position could be impaired, our reputation could be harmed and we may lose valuable assets, generate less revenue and incur costly litigation to protect our rights.
Our success is dependent, in part, upon protecting our intellectual property and proprietary technology. We rely on a combination of patent, copyright, trademark and trade secret laws, as well as contractual provisions with our employees, independent contractors, consultants and third parties with whom we have relationships to establish and protect our intellectual property and proprietary rights. However, the steps we take to protect our intellectual property may be inadequate, may not afford complete protection and may not adequately permit us to gain or keep any competitive advantage. Further, despite our efforts to obtain and maintain intellectual property rights, we cannot guarantee that we will be able to prevent unauthorized use or disclosure of our confidential information, intellectual property or technology, and we may not have adequate remedies in the event of unauthorized use or disclosure of our confidential information, intellectual property or technology.
Various factors outside our control pose a threat to our intellectual property rights, as well as to our products, services and technologies. Although we have been issued patents in the United States and have additional patent applications pending, we may be unable to obtain patent protection for the technology covered in our patent applications or obtain the coverage originally sought. In addition, our existing patents, as well as the patents we obtain in the future may not provide us with competitive advantages or may be successfully challenged by third parties, which could result in them being narrowed in scope or declared invalid or unenforceable. For example, it is possible that third parties, including our competitors, may obtain patents relating to technologies that overlap or compete with our technology. If third parties obtain patent protection with respect to such technologies, they may assert that our technology infringes their patents and seek to charge us a licensing fee or otherwise preclude the use of our technology or file suit against us. We also may allow certain of our registered intellectual property rights, or our pending applications for intellectual property rights, to lapse or to become abandoned if we determine that obtaining or maintaining the applicable registered intellectual property rights is not worthwhile. Despite our efforts to protect our intellectual property and proprietary rights, there can be no guarantee that such rights will be sufficient to protect against others offering products or services that are substantially similar to ours, independently developing similar products, duplicating any of our products, designing around our patents, adopting trade names or domain names similar to ours, or attempting to copy aspects of our technology and using information that we consider proprietary to compete with us, thereby impeding our ability to promote our solutions and possibly leading to customer or client confusion.
Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy, reverse engineer or otherwise obtain and use our products, technology, systems, methods, processes, intellectual property and other information that we regard as proprietary to create solutions that compete with ours. Policing unauthorized use of intellectual property and technology can be expensive and time consuming, and regardless of what measures we take, we cannot guarantee that we will be able to detect unauthorized uses. Even if we detect unauthorized uses, we cannot be certain that we will be able to successfully enforce our intellectual property, particularly in foreign countries where the laws may not protect our proprietary rights as comprehensively as in the United States, if at all. Litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others, which could result in substantial costs and diversion of our resources. Further, our enforcement efforts may be met with defenses and counterclaims challenging the validity and enforceability of our intellectual property rights or may result in a court determining that our intellectual property rights are unenforceable. Any changes in, or unexpected interpretations of, intellectual property laws may also compromise our ability to enforce our intellectual property rights. Failure to obtain or maintain protection of our trade secrets or other proprietary information could harm our competitive position and materially and adversely affect our business, operating results and financial condition.
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In addition, while we rely in part on confidentiality and intellectual property assignment agreements with our employees and contractors involved in the development of material intellectual property for us, which place restrictions on the employees’ and contractors’ use and disclosure of this intellectual property these agreements may not be self-executing, sufficient in scope or enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements. We cannot guarantee that we have entered into such agreements with each person or entity that may have or have had access to our trade secrets or proprietary information or otherwise developed intellectual property for us, including our technology and processes. Individuals that were involved in the development of intellectual property for us or who had access to our intellectual property but who are not subject to invention assignment agreements may make adverse ownership claims to our current and future intellectual property. Further, these agreements may be breached, and as a result, our trade secrets and other proprietary information may be disclosed or become known to our competitors, which could cause us to lose any competitive advantage, and we may not have adequate remedies for such breaches. Additionally, to the extent that our employees, independent contractors or other third parties with whom we do business use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting works of authorship, know-how and inventions. The loss of trade secret protection could make it easier for third parties to compete with our solutions by copying functionality.
Obtain and maintaining effective patent, copyright, trademark, service mark, trade secret and domain name protection is time-consuming and expensive. Accordingly, we do not and may not own registered trademarks for all trademarks and logos used in our business in the jurisdictions in which we operate or may operate in the future. We may also choose not to seek patent protection for all patentable inventions, and we have chosen not to seek the registration of copyrights in our software solutions. Further, we have and may in the future employ individuals who previously were employed by our competitors, and, as a result, those competitors may bring claims against such individuals or us alleging their intellectual property rights have been infringed, misappropriated or otherwise violated.
We and our customers and partners and their clients and other third parties that use our solutions obtain, provide and process a large amount of sensitive and personal data. Any real or perceived improper or unauthorized use of, disclosure of or access to such data could harm our reputation as a trusted brand, as well as have a material adverse effect on our business, operating results and financial condition.
We and our customers and partners and their clients and the third-party vendors and data centers that we use obtain, provide and process large amounts of sensitive and personal data, including data provided by and related to clients and their transactions, as well as other data of the counterparties to their payments. We face risks, including to our reputation as a trusted brand, in the handling and protection of this data, and these risks will increase as our business continues to expand to include new products and technologies.
Cybersecurity threats and attacks, privacy and security breaches, insider threats or other incidents and malicious internet-based activity continue to increase generally, evolve in nature and become more sophisticated, and providers of cloud-based services have frequently been targeted by such attacks, particularly in the financial technology sector. These cybersecurity challenges, including threats to our own IT infrastructure or those of our customers or partners or their clients or third-party service providers, may take a variety of forms ranging from stolen bank accounts, business email compromise, customer employee fraud, account takeover, check fraud or cybersecurity attacks, to “mega breaches” targeted against cloud-based services and other hosted software, which could be initiated by individual or groups of hackers or sophisticated cyber criminals. A cybersecurity incident or breach could result in loss, compromise, corruption or disclosure of confidential information, intellectual property and sensitive and personal data or data we rely on to provide our solutions and impair our ability to provide our solutions and meet our customers’ or partners’ or their clients’ requirements, or cause production downtimes and compromised data. We may be unable to anticipate or prevent techniques used in the future to obtain unauthorized access or to sabotage systems because they change frequently and often are not detected until after an incident has occurred. As we increase our customer base and our brand becomes more widely known and recognized, third parties may increasingly seek to compromise our security controls or gain unauthorized access to our sensitive corporate information or our customers’ or partners’ or their clients’ sensitive and personal data. Information security risks for technology companies such as ours have significantly increased in recent years in part because of the proliferation of new technologies, the use of the internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists and other external parties as well as nation-state and nation-state-supported actors. Additionally, geopolitical events and resulting government activity could lead to information security threats and attacks by affected jurisdictions and their sympathizers. Given our business and the industries in which we operate, we believe that we are likely to continue to be a target of such threats and attacks.
We have administrative, technical and physical security measures in place, and we have policies and procedures in place to contractually require service providers to whom we disclose data to implement and maintain reasonable privacy, data protection and information security measures. However, if our privacy protection, data protection or information security
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measures or those of the previously mentioned third parties are inadequate or are breached as a result of third-party action, employee or contractor error, malfeasance, malware, phishing, hacking attacks, system error, software bugs or defects in our products, trickery, process failure, or otherwise, and, as a result, there is improper disclosure of, or someone obtains unauthorized access to or exfiltrates funds or sensitive and personal data, including personally identifiable information, on our systems or our partners’ systems, or if we suffer a ransomware or advanced persistent threat attack, or if any of the foregoing is reported or perceived to have occurred, our reputation and business could be damaged. Recent high-profile security breaches and related disclosures of sensitive and personal data suggest that the risk of such events is significant, even if privacy, data protection and information security measures are implemented and enforced. If sensitive and personal data is lost or improperly disclosed or threatened to be disclosed, we could incur significant costs associated with remediation and the implementation of additional security measures, and may incur significant liability and financial loss and be subject to regulatory scrutiny, investigations, proceedings and penalties.
In addition, because we leverage third-party service providers, including cloud, software, data center and other critical technology vendors to deliver our solutions to our customers, partners or clients and their customers, we rely heavily on the data security technology practices and policies adopted by these third-party service providers. Such third-party service providers have access to sensitive and personal data and other data about our customers, partners and employees, as well as clients using our solutions to pay the bills of our customers, and some of these providers in turn subcontract with other third-party service providers. Our ability to monitor our third-party service providers’ data security is limited. There have been and may continue to be significant supply chain attacks, and we cannot guarantee that our or our third-party service providers’ software or systems have not been breached or that they do not contain exploitable defects or bugs that could result in a breach of or disruption to our systems or the systems of third parties that support us and our services. A vulnerability in our third-party service providers’ software or systems, a failure of our third-party service providers’ safeguards, policies or procedures, or a breach of a third-party service provider’s software or systems could result in the compromise of the confidentiality, integrity or availability of our systems or the data housed in our third-party solutions. Techniques used to sabotage or obtain unauthorized access to systems are constantly evolving and our third-party service providers may face difficulties or delays in identifying breaches and compromises, and notifying us of any such breaches and compromises. This could cause us to face delays in responding to any such breach or compromise and providing any required notifications to clients or other third parties.
In addition, certain of our partners conduct regular audits of our cybersecurity program, and if any of them were to conclude that our systems and procedures are insufficiently rigorous, they could terminate their relationships with us, and our financial results and business would be adversely affected. Under our terms of service and our contracts with strategic partners, if there is a breach of payment information that we store, we could be liable to the partner for their losses and related expenses. Additionally, if our own confidential business information were improperly disclosed, our business could be materially and adversely affected. A core aspect of our business is the reliability and security of our solutions. Any perceived or actual breach of security, regardless of how it occurs or the extent of the breach, could have a significant impact on our reputation as a trusted brand, cause us to lose existing customers, partners and clients, prevent us from obtaining new customers, partners and clients, require us to expend significant funds to remedy problems caused by breaches and implement measures to prevent further breaches, and expose us to legal risk and potential liability including those resulting from governmental or regulatory investigations, class action litigation, indemnity obligations, damages for contract breach or penalties for violation of security obligations and costs associated with remediation, such as fraud monitoring and forensics, all of which could divert resources and attention of our management and key personnel away from our business operations and materially and adversely affect our business, operating results and financial condition. Any actual or perceived security breach at a third-party service provider providing services to us or our customers, partners or clients could have similar effects. Further, as the current COVID-19 pandemic continues to result in a significant number of people working from home, these cybersecurity risks may be heightened by an increased attack surface across our business and those of our partners and service providers. We cannot guarantee that our efforts, or the efforts of those upon whom we rely and partner with, will be successful in preventing any such information security incidents or protecting sensitive and personal data that they obtain and process on our behalf.
Federal and state regulations may require us or our customers or partners to notify governmental entities and individuals of data security incidents involving certain types of personal and sensitive data or information technology systems. Security compromises experienced by others in our industry, our customers or partners or their clients, our third-party service providers or us may lead to public disclosures and widespread negative publicity. Any security compromise in our industry, whether actual or perceived, could erode client, customer or partner confidence in the effectiveness of our security measures, negatively impact our ability to attract new customers, partners and clients, cause existing customers, partners and clients to elect not to renew or expand their use of our solutions or subject us to third-party lawsuits, regulatory fines or other actions or liabilities, which could materially and adversely affect our business, operating results and financial condition.
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In addition, some of our customers and partners contractually require notification of data security compromises and include representations and warranties in their contracts with us that our solutions comply with certain legal and technical standards related to data security and privacy and meet certain service levels. In our contracts, a data security compromise or operational disruption impacting us or one of our critical vendors, or system unavailability or damage due to other circumstances, may constitute a material breach and give rise to a customer’s or partner’s right to terminate their contract with us. In these circumstances, it may be difficult or impossible to cure such a breach in order to prevent customers or partners from potentially terminating their contracts with us. Furthermore, although our contracts typically include limitations on our potential liability, we cannot ensure that such limitations of liability would be adequate or apply to data security compromises.
While we maintain cybersecurity insurance, our insurance may be insufficient or may not cover all liabilities incurred by such attacks. We also cannot be certain that our insurance coverage will be adequate for data handling or data security liabilities actually incurred, that insurance will continue to be available to us on economically reasonable terms, or at all, or that any insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, litigation to pursue claims under our insurance policies or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, or denials of coverage, could have a material adverse effect on our business, reputation, operating results and financial condition.
We may in the future become subject to claims of intellectual property infringement or other intellectual property disputes, which are costly and time-consuming to defend against or pursue, and may subject us to significant liability and increased costs of doing business.
We may in the future become subject to and involved in lawsuits, disputes, legal proceedings or claims by third parties that we have infringed, misappropriated or otherwise violated their intellectual property. Even if we believe that particular intellectual property-related claims are without merit, litigation may be necessary to defend against these allegations. The ultimate outcome of any allegation is often uncertain and, regardless of the outcome, lawsuits, with or without merit, are time-consuming and expensive to resolve and they divert management’s time and attention and require us to, among other things, redesign or stop providing our solutions, pay substantial amounts to satisfy judgments or settle claims or lawsuits, pay substantial royalty or licensing fees, or satisfy indemnification obligations that we have with certain parties with whom we have commercial relationships. Although we carry insurance, our insurance may not cover potential claims of this type or may not be adequate to indemnify us for all liability that may be imposed. We cannot predict the outcome of lawsuits and cannot assure you that the results of any such actions will not have an adverse effect on our business, operating results or financial condition.
Companies in the software and technology industries, including some of our current and potential competitors, own significant numbers of patents, copyrights, trademarks and trade secrets and frequently enter into litigation based on allegations of infringement or other violations of intellectual property rights. In addition, many of these companies have the capability to dedicate greater resources to enforce their intellectual property rights and to defend claims that may be brought against them. We cannot guarantee that our technologies will be able to withstand any third-party claims against their use. There is also a risk that the litigation may also involve patent holding companies or other adverse patent owners that have no relevant product revenue, and therefore, our patents may provide little or no deterrence as we would not be able to assert them against such entities or individuals. If a third party is able to obtain an injunction preventing us from accessing such third party’s intellectual property rights, or if we cannot license or develop alternative technology for any infringing aspect of our business, we would be forced to limit or stop sales of our products or cease business activities related to such intellectual property. Any inability to license third-party technology in the future would have an adverse effect on our business or operating results and would adversely affect our ability to compete. We could also face trade name or trademark or service mark infringement claims brought by owners of other registered or unregistered trademarks or service marks, including trademarks or service marks that may incorporate variations of our brand names. Any such claims could damage our reputation, force us to rebrand and could adversely affect our growth prospects
We also are, and may in the future become, contractually obligated to indemnify our customers and partners in the event of infringement, misappropriation or other violation of a third party’s intellectual property rights. Responding to such claims, regardless of their merit, can be time-consuming, costly to defend and damaging to our reputation and brand.
Our business depends in part on intellectual property and proprietary rights and technology licensed from or otherwise made available to us by third parties.
Some of our business relies on key technologies developed or licensed by third parties. These third-party software components may become obsolete, defective or incompatible with future versions of our services, relationships with the third-party licensors or technology providers may deteriorate, or our agreements with the third-party licensors or technology providers may expire or be terminated. Additionally, some of these licenses or other grants of rights may not be available to us in the future on terms that are acceptable, or at all, or that allow our solutions to remain competitive.
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Our inability to obtain licenses or rights on favorable terms could have a material and adverse effect on our business and results of operations. Furthermore, incorporating intellectual property or proprietary rights licensed from or otherwise made available to us by third parties on a non-exclusive basis in our solutions could limit our ability to protect the intellectual property and proprietary rights in our services and our ability to restrict third parties from developing, selling or otherwise providing similar or competitive technology using the same third-party intellectual property or proprietary rights.
We believe we have all the necessary licenses and other grants of rights from third parties to use technology and software that we do not own. A third party could, however, allege that we are infringing its rights, which may deter our ability to obtain licenses or other grants of rights on commercially reasonable terms from the third party, if at all, or cause the third party to commence litigation against us. Our failure to obtain necessary licenses or other rights, or litigation or claims arising out of intellectual property matters, may harm or restrict our business. Even if we were able to obtain a license or other grant of rights, it could be non-exclusive, thereby giving our competitors and other third parties access to the same technologies licensed to or otherwise made available to us. In addition, we could be found liable for significant monetary damages, including treble damages and attorneys’ fees, if we are found to have willfully infringed a patent or other intellectual property right. Any such litigation or the failure to obtain any necessary licenses or other rights could adversely impact our business, financial position, results of operations and liquidity.
Risks Related to Taxation Matters
Our ability to utilize our net operating loss carryforwards and certain other tax attributes to offset taxable income or taxes may be limited.
As of December 31, 2020, we had U.S. federal and state net operating loss carryforwards of $47.7 million and $38.3 million, respectively. The federal net operating loss carryforwards will expire at various dates beginning in 2032. State net operating loss carryforwards will expire at various dates beginning in 2023. As of December 31, 2020, the Company had federal and state net operating losses that do not expire of $37.6 million and $4.2 million, respectively that are included in the cumulative balances above. Portions of these net operating loss carryforwards could expire unused and be unavailable to offset future income tax liabilities. Under the legislation enacted in 2017, commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”), as modified by the Coronavirus Aid, Relief, and Economic Security (the “CARES Act”), U.S. federal net operating losses incurred in taxable years beginning after December 31, 2017, may be carried forward indefinitely, but the deductibility of such federal net operating losses in taxable years beginning after December 31, 2020, is limited. It is uncertain how various states will respond to the Tax Act and the CARES Act. For state income tax purposes, there may be periods during which the use of net operating loss carryforwards is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed.
In addition, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, and corresponding provisions of state law, if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50% change, by value, in its equity ownership over a three-year period, the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income or taxes may be limited. The completion of this offering, together with other transactions that have occurred since our inception, may trigger such an ownership change pursuant to Section 382. We may experience ownership changes as a result of subsequent shifts in our stock ownership, some of which may be outside of our control. If an ownership change occurs and our ability to use our net operating loss carryforwards is materially limited, it would harm our future results of operations by effectively increasing our future tax obligations.
Changes in our effective tax rate or tax liability may have an adverse effect on our results of operations.
We are subject to income taxes in the United States. Our effective tax rate could be adversely affected due to several factors, including:
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New income or other tax laws or regulations could be enacted at any time, which could adversely affect our business operations and financial performance. Further, existing tax laws and regulations could be interpreted, modified, or applied adversely to us. For example, the Tax Act enacted many significant changes to the U.S. tax laws. Future guidance from the IRS and other tax authorities with respect to the Tax Act may affect us, and certain aspects of the Tax Act could be repealed or modified in future legislation. For example, the CARES Act modified certain provisions of the Tax Act. Changes in corporate tax rates, the realization of net operating losses, and other deferred tax assets relating to our operations, the taxation of foreign earnings, and the deductibility of expenses under the Tax Act or future reform legislation could have a material impact on the value of our deferred tax assets and could increase our future U.S. tax expense.
New tax legislation may impact our results of operations and financial condition.
The U.S. government may enact significant changes to the taxation of business entities including, among others, an increase in the corporate income tax rate and the imposition of minimum taxes or surtaxes on certain types of income. The likelihood of these changes being enacted or implemented is unclear. We are currently unable to predict whether such changes will occur. If such changes are enacted or implemented, we are currently unable to predict the ultimate impact on our business.
Taxing authorities may successfully assert that we should have collected or in the future should collect sales and use, value added or similar taxes, and any such assessments could adversely affect our business, financial condition, and results of operations.
Sales and use, value added and similar tax laws and rates vary greatly by jurisdiction. Certain jurisdictions in which we do not collect such taxes may assert that such taxes are applicable or that our presence in such jurisdictions is sufficient to require us to collect taxes, which could result in tax assessments, penalties and interest, and we may be required to collect such taxes in the future. Such tax assessments, penalties and interest or future requirements may adversely affect our financial condition and results of operations. Further, in June 2018, the Supreme Court held in South Dakota v. Wayfair, Inc. that states could impose sales tax collection obligations on out-of-state sellers even if those sellers lack any physical presence within the states imposing the sales taxes. Under the Wayfair decision, a person requires only a “substantial nexus” with the taxing state before the state may subject the person to sales tax collection obligations therein. An increasing number of states (both before and after the publication of the Wayfair decision) have considered or adopted laws that attempt to impose sales tax collection obligations on out-of-state sellers. The Supreme Court’s Wayfair decision has removed a significant impediment to the enactment and enforcement of these laws, and it is possible that states may seek to tax out-of-state sellers on sales that occurred in prior tax years, which could create additional administrative burdens for us, put us at a competitive disadvantage if such states do not impose similar obligations on our competitors, and decrease our future sales, which could adversely affect our business, financial condition, and results of operations.
Risks Related to our Indebtedness
Our debt obligations contain restrictions that impact our business and expose us to risks that could materially adversely affect our liquidity and financial condition.
As of September 30, 2021, we had no outstanding indebtedness. We may incur additional indebtedness in the future, including borrowings under the New Revolving Credit Facility. Our indebtedness could have significant effects on our business, such as:
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In addition, if we incur debt we may not be able to generate sufficient cash flow from our operations to repay our indebtedness when it becomes due and to meet our other cash needs. If we are not able to pay our borrowings as they become due, we will be required to pursue one or more alternative strategies, such as selling assets, refinancing or restructuring our indebtedness or selling additional debt or equity securities. We may not be able to refinance our debt or sell additional debt or equity securities or our assets on favorable terms, if at all, and if we must sell our assets, it may negatively affect our business, financial condition, and results of operations.
Restrictions imposed by our indebtedness may materially limit our ability to operate our business and finance our future operations or capital needs.
The terms of our New Revolving Credit Facility restrict, us and our restricted subsidiaries from engaging in specified types of transactions. These covenants restrict our ability, and that of our restricted subsidiaries, to, among other things:
A breach of any of these covenants, or any other covenant in the documents governing our New Revolving Credit Facilities, could result in a default or event of default under our New Revolving Credit Facilities. In the event of any event of default under our New Revolving Credit Facilities, the applicable lenders or agents could elect to terminate borrowing commitments and declare all borrowings and loans outstanding thereunder, together with accrued and unpaid interest and any fees and other obligations, to be immediately due and payable. In addition, or in the alternative, the applicable lenders or agents could exercise their rights under the security documents entered into in connection with our New Revolving Credit Facilities. We have pledged substantially all of our assets as collateral securing our New Revolving Credit Facilities and any such exercise of remedies on any material portion of such collateral would likely materially adversely affect our business, financial condition or results of operations.
If we were unable to repay or otherwise refinance these borrowings and loans when due, and the applicable lenders proceeded against the collateral granted to them to secure that indebtedness, we may be forced into bankruptcy or liquidation. In the event the applicable lenders accelerate the repayment of our borrowings, we may not have sufficient assets to repay that indebtedness. Any acceleration of amounts due under our New Revolving Credit Facilities or other outstanding indebtedness would also likely have a material adverse effect on us.
Our New Revolving Credit Facility requires us to maintain a maximum total net leverage ratio. Our ability to borrow under our Credit Facilities depends on our compliance with these financial covenants. Events beyond our control, including changes in general economic and business conditions, may affect our ability to satisfy the financial covenant. We cannot assure you that we will satisfy the financial covenant in the future, or that our lenders will waive any failure to satisfy the financial covenant.
The London Interbank Offered Rate calculation method may change and LIBOR is expected to be phased out after 2021.
Interest under our New Revolving Credit Facility may be calculated based on the London Interbank Offered Rate (“LIBOR”). On July 27, 2017, the U.K.’s Financial Conduct Authority (the authority that administers LIBOR) announced that it intends to phase out LIBOR by the end of 2023. It is unclear whether new methods of calculating LIBOR will be established such that it continues to exist after 2021, or if alternative rates or benchmarks will be adopted. Changes in the method of calculating LIBOR, or the replacement of LIBOR with an alternative rate or benchmark, may adversely affect interest rates and result in higher borrowing costs. This could materially and adversely affect our results of operations, cash flows, and liquidity. We cannot predict the effect of the potential changes to LIBOR or the establishment and use of alternative rates or benchmarks. We may need to renegotiate our New Credit Facility or incur other indebtedness, and changes in the method of calculating LIBOR, or the use of an alternative rate or benchmark, may negatively impact the
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terms of such renegotiated credit facility or such other indebtedness. If changes are made to the method of calculating LIBOR or LIBOR ceases to exist, we may need to amend certain contracts and cannot predict what alternative rate or benchmark would be negotiated. This may result in an increase to our interest expense.
Risks Related to Ownership of our Common Stock
Our stock price may fluctuate significantly and purchasers of our common stock could incur substantial losses.
The market price of our common stock could vary significantly as a result of a number of factors, some of which are beyond our control. In the event of a drop in the market price of our common stock, you could lose a substantial part or all of your investment in our common stock. The following factors could affect our stock price:
The stock markets in general have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock. Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. Such litigation, if instituted against us, could result in very substantial costs, divert our management’s attention and resources and harm our business, financial condition, and results of operations.
Our ability to raise capital in the future may be limited.
Our business and operations may consume resources faster than we anticipate. In the future, we may need to raise additional funds through the issuance of new equity securities, debt or a combination of both. Additional financing may not
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be available on favorable terms or at all. If adequate funds are not available on acceptable terms, we may be unable to fund our capital requirements. If we issue new debt securities, the debt holders would have rights senior to holders of our common stock to make claims on our assets and the terms of any debt could restrict our operations, including our ability to pay dividends on our common stock. If we issue additional equity securities or securities convertible into equity securities, existing stockholders will experience dilution and the new equity securities could have rights senior to those of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, you bear the risk of our future securities offerings reducing the market price of our common stock and diluting their interest.
We do not generate any revenue and rely on dividends, distributions, and other payments, advances, and transfers of funds from our subsidiaries to meet its obligations.
We are a holding company that does not conduct any material revenue-generating business operations of our own. As a result, we are largely dependent upon cash dividends and distributions and other transfers, including for payments in respect of our indebtedness, from our subsidiaries to meet our obligations. The ability of our subsidiaries to pay cash dividends and/or make loans or advances to us will be dependent upon their respective abilities to achieve sufficient cash flows after satisfying their respective cash requirements to enable the payment of such dividends or the making of such loans or advances. The agreements governing the indebtedness of our subsidiaries impose restrictions on our subsidiaries’ ability to pay dividends or other distributions to us. See “Management’s discussion and analysis of financial condition and results of operations—Liquidity, and capital resources.” Each of our subsidiaries is a distinct legal entity, and under certain circumstances legal and contractual restrictions may limit our ability to obtain cash from them and we may be limited in our ability to cause any future joint ventures to distribute their earnings to us. The deterioration of the earnings from, or other available assets of, our subsidiaries for any reason could also limit or impair their ability to pay dividends or other distributions to us.
We are an “emerging growth company,” and are able take advantage of reduced disclosure requirements applicable to “emerging growth companies,” which could make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act, and have taken advantage of certain exemptions from various disclosure requirements applicable to companies that are not “emerging growth companies.” These exemptions include reduced disclosure obligations regarding executive compensation and historical financial statements. In addition, “emerging growth companies” can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards. As a result, our consolidated financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
We cannot predict if investors will find our common stock less attractive because we rely on these exemptions. If some investors find our common stock less attractive as a result of any choices to reduce disclosure, there may be a less active trading market for our common stock and our stock price may decline or become more volatile and it may be difficult for us to raise additional capital if and when we need it.
We incur, and expect to continue to incur, significant costs and devote substantial management time as a result of operating as a public company, particularly after we are no longer an “emerging growth company.”
As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, as well as rules and regulations subsequently implemented by the SEC, and the NYSE, our stock exchange, including the establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. The rules governing management’s assessment of our internal control over financial reporting are complex and require significant documentation, testing and possible remediation. Compliance with these requirements has increased our legal and financial compliance costs and made some activities more time consuming and costly. In addition, our management and other personnel will need to divert attention from operational and other business matters to devote substantial time to these public company requirements. In particular, we expect to continue incurring significant expenses and devote substantial management effort toward ensuring compliance with the requirements of the Sarbanes-Oxley Act. In that regard, we may need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. Furthermore, these rules and regulations require us to incur legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified people to serve on our board of directors, our board committees or as executive officers.
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Once we cease to be an “emerging growth company,” we will not be entitled to the exemptions provided in the JOBS Act. After we are no longer an “emerging growth company,” we expect to incur additional management time and cost to comply with the more stringent reporting requirements applicable to companies that are deemed accelerated filers or large accelerated filers, including complying with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act.
We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of such costs.
We may be subject to securities litigation, which is expensive and could divert management attention.
The market price of our common stock may be volatile and, in the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.
We have identified a material weakness in our internal control over financial reporting. If our remediation of the material weakness is not effective, or we fail to develop and maintain effective internal controls over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable laws and regulations could be impaired.
As we prepared the financial statements that are included in our Final Prospectus, our management has determined that we have a material weakness in our internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
Specifically, the deficiencies we identified relate to a lack of certain defined processes and controls over information technology, in the areas of access management, segregation of duties, change management, data governance and program development, and defined processes and controls over the financial statement close process. These deficiencies, when aggregated, are a material weakness and could result in a material misstatement to our financial statements that may not be able to be prevented or detected. As a private company, we did not have sufficient resources assigned to ensure the necessary processes and controls to effectively implement information technology and financial statement close controls required of a public company.
We are taking the following actions to remediate this material weakness:
We cannot assure you the measures we are taking to remediate the material weakness will be sufficient or that they will prevent future material weaknesses. Additional material weaknesses or failure to maintain effective internal control over financial reporting could cause us to fail to meet our reporting obligations as a public company and may result in a restatement of our financial statements for prior periods.
Our independent registered public accounting firm is not required to attest to the effectiveness of our internal control over financial reporting until after we are no longer an “emerging growth company” as defined in the JOBS Act. At such time, our independent registered public accounting firm may issue a report that is adverse in the event in the event our internal controls over financial reporting do not operate effectively. If we are not able to complete our initial assessment of our internal controls and otherwise implement the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner or with adequate compliance, our independent registered public accounting firm may not be able to certify as to the effectiveness of our internal controls over financial reporting. Any failure to implement and maintain effective internal control over financial reporting also could adversely affect the results of periodic management evaluations and annual
75
independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we will eventually be required to include in our periodic reports that are filed with the SEC. If we are unable to remediate our existing material weakness or identify additional material weaknesses and are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting once we are no longer an emerging growth company, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities, which could require additional financial and management resources.
General Atlantic (IC), L.P. (“General Atlantic”) has significant influence over EngageSmart, including control over decisions that require the approval of stockholders, which could limit your ability to influence the outcome of matters submitted to stockholders for a vote.
As of September 30, 2021, General Atlantic owns approximately 60% of the outstanding shares of our common stock. As long as General Atlantic owns or controls a majority of our outstanding voting power, General Atlantic will have the ability to exercise substantial control over all corporate actions requiring stockholder approval, irrespective of how our other stockholders may vote, including:
Moreover, ownership of our shares by General Atlantic may also adversely affect the trading price for our common stock to the extent investors perceive disadvantages in owning shares of a company with a controlling stockholder. For example, the concentration of ownership held by General Atlantic could delay, defer, or prevent a change in control of our company or impede a merger, takeover, or other business combination which may otherwise be favorable for us. In addition, directors appointed by General Atlantic currently comprise a majority of the members of our board of directors. General Atlantic is also in the business of making investments in companies and may, from time to time, acquire interests in businesses that directly or indirectly compete with our business, as well as businesses that are significant existing or potential customers. Some of the companies in which General Atlantic invests may compete with us. General Atlantic may acquire or seek to acquire assets complementary to our business that we seek to acquire and, as a result, those acquisition opportunities may not be available to us or may be more expensive for us to pursue, and as a result, the interests of General Atlantic may not coincide with the interests of our other stockholders. So long as General Atlantic continues to directly or indirectly own a significant amount of our equity, even if such amount is less than 50%, General Atlantic will continue to be able to substantially influence or effectively control our ability to enter into corporate transactions.
We are a “controlled company” within the meaning of the NYSE rules and, as a result, qualify for and intend to rely on exemptions from certain corporate governance requirements.
General Atlantic controls a majority of the voting power of our outstanding voting stock, and as a result we are a controlled company within the meaning of the NYSE corporate governance standards. Under the NYSE rules, a company of which more than 50% of the voting power is held by another person or group of persons acting together is a controlled company and may elect not to comply with certain corporate governance requirements, including the requirements that:
We may utilize these exemptions as long as we remain a controlled company. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NYSE. After we cease to be a “controlled company,” we will be required to comply with the above referenced requirements within one year.
76
Anti-takeover provisions contained in our charter documents and Delaware law could prevent a takeover that stockholders consider favorable and could also reduce the market price of our stock.
Our amended and restated certificate of incorporation (the “Amended Charter”) and our amended and our bylaws (“Bylaws”) contain provisions that could delay or prevent a change in control of our company. These provisions could also make it more difficult for stockholders to elect directors and take other corporate actions. These provisions include:
These and other provisions in our Amended Charter and our Bylaws and under Delaware law could discourage potential takeover attempts, reduce the price investors might be willing to pay in the future for shares of our common stock, and result in the market price of our common stock being lower than it would be without these provisions.
Our Amended Charter provides that certain courts in the State of Delaware or the federal district courts of the United States for certain types of lawsuits will be the sole and exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.
Our Amended Charter provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware is the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors or officers to us or our stockholders, creditors, or other constituents (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law (“DGCL”) or of our certificate of incorporation or our bylaws, or (iv) any action asserting a claim related to or involving the Company that is governed by the internal affairs doctrine. The exclusive forum provision provides that it will not apply to claims arising under the Securities Act of 1933, as amended, (the “Securities Act”), the Exchange Act or other federal securities laws for which there is exclusive federal or concurrent federal and state jurisdiction. Unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act.
77
Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock will be deemed to have notice of and, to the fullest extent permitted by law, to have consented to the provisions of our certificate of incorporation described above. Although we believe this exclusive forum provision benefits us by providing increased consistency in the application of Delaware law and federal securities laws in the types of lawsuits to which each applies, the choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, other employees or stockholders, which may discourage such lawsuits against us and our directors, officers, other employees or stockholders. However, the enforceability of similar forum provisions in other companies’ certificates of incorporation has been challenged in legal proceedings. If a court were to find the exclusive choice of forum provision contained in our certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could materially adversely affect our business, financial condition, and results of operations.
You may be diluted by the future issuance of additional common stock or convertible securities in connection with our incentive plans, acquisitions or otherwise, which could adversely affect our stock price.
As of September 30, 2021, we have 488,398,085 shares of common stock authorized but unissued. Our certificate of incorporation authorizes us to issue these shares of common stock and options, rights, warrants and appreciation rights relating to common stock for the consideration and on the terms and conditions established by our board of directors in its sole discretion, whether in connection with acquisitions or otherwise. As of September 30, 2021, we have approximately 11,205,066 options outstanding, which are exercisable into approximately 11,205,066 shares of common stock. As of September 30, 2021, we have 288,455 restricted stock units outstanding. As of September 30, 2021, we have 14,509,731 remaining available for future grant under our 2021 Plan. Any common stock that we issue, including under our 2021 Plan or other equity incentive plans that we may adopt in the future, as well as under outstanding options would dilute the percentage ownership held by the investors who purchase common stock.
From time to time in the future, we may also issue additional shares of our common stock or securities convertible into common stock pursuant to a variety of transactions, including acquisitions. Our issuance of additional shares of our common stock or securities convertible into our common stock would dilute your ownership of us and the sale of a significant amount of such shares in the public market could adversely affect prevailing market prices of our common stock.
Future sales of our common stock in the public market, or the perception in the public market that such sales may occur, could reduce our stock price.
As of September 30, 2021, we had 161,601,915 shares of common stock outstanding. The number of outstanding shares of common stock includes 144,869,415 shares beneficially owned by General Atlantic and certain of our employees, that are “restricted securities,” as defined under Rule 144 under the Securities Act, and eligible for sale in the public market subject to the requirements of Rule 144. Each of our officers and directors, General Atlantic and all of our other existing stockholders have agreed that (subject to certain exceptions, including early release provisions, as described below), for a period of 180 days after the date of the Final Prospectus, we and they will not, without the prior written consent of J.P. Morgan Securities LLC and Goldman Sachs & Co. LLC, dispose of any shares of common stock or any securities convertible into or exchangeable for our common stock. Following the expiration of the applicable lock-up period, all of the issued and outstanding shares of our common stock will be eligible for future sale, subject to the applicable volume, manner of sale, holding periods, and other limitations of Rule 144. The underwriters may, in their sole discretion, release all or any portion of the shares subject to lock-up agreements at any time and for any reason. In addition, General Atlantic, Summit, Robert P. Bennett, our Chief Executive Officer and a director, and certain other stockholders have certain rights to require us to register the sale of common stock held by such stockholders, including in connection with underwritten offerings. Sales of significant amounts of stock in the public market upon expiration of lock-up agreements, the perception that such sales may occur, or early release of any lock-up agreements, could adversely affect prevailing market prices of our common stock or make it more difficult for you to sell your shares of common stock at a time and price that you deem appropriate.
The forgoing lock-up agreements will expire, for employee stockholder’s, with respect to a number of shares equal to 20% of the aggregate number of shares of common stock owned by each holder or issuable upon exercise of vested equity awards owned by each holder immediately prior to the commencement of trading as of the, upon the commencement of the third trading day after the Company announces it earnings by a press release by a press release issued through a major news service or this Quarterly Report on Form 10-Q.
We do not anticipate paying dividends on our common stock in the foreseeable future and, consequently, your ability to achieve a return on your investment will depend on appreciation of the value of our common stock.
We do not anticipate paying any dividends in the foreseeable future on our common stock. We intend to retain all future earnings for the operation and expansion of our business and the repayment of outstanding debt. Our New Revolving
78
Credit Facility contains, and any future indebtedness likely will contain, restrictive covenants that impose significant operating and financial restrictions on us, including restrictions on us and our ability to pay dividends and make other restricted payments. As a result, any return to stockholders will be limited to any appreciation in the value of our common stock, which is not certain. While we may change this policy at some point in the future, we cannot assure you that we will make such a change.
If securities or industry analysts do not publish research or reports about our business or publish negative reports, our stock price could decline.
The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us, our business or our market. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if one or more of the analysts who cover our company issues adverse or misleading research or reports regarding us, our business model, our stock performance or our market, or if our operating results do not meet their expectations, our stock price could decline.
We may issue preferred securities, the terms of which could adversely affect the voting power or value of our common stock.
Our certificate of incorporation authorizes us to issue, without the approval of our stockholders, one or more classes or series of preferred securities having such designations, preferences, limitations, and relative rights, including preferences over our common stock respecting dividends and distributions, as our board of directors may determine. The terms of one or more classes or series of preferred securities could adversely impact the voting power or value of our common stock. For example, we might grant holders of preferred securities the right to elect some number of our directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences we might assign to holders of preferred securities could affect the residual value of the common stock.
General Risk Factors
The requirements of being a public company may strain our resources, divert management’s attention, and affect our ability to attract and retain executive management and qualified board members.
As a public company, we are subject to the reporting requirements of the Exchange Act, the listing standards of the NYSE, and other applicable securities rules and regulations. We expect that the requirements of these rules and regulations will continue to increase our legal, accounting, and financial compliance costs, make some activities more difficult, time-consuming and costly, and place significant strain on our personnel, systems, and resources. Furthermore, several members of our management team do not have prior experience in running a public company. For example, the Exchange Act requires, among other things, that we file annual, quarterly, and current reports with respect to our business and results of operations. As a result of the complexity involved in complying with the rules and regulations applicable to public companies, our management’s attention may be diverted from other business concerns, which could harm our business, financial condition, and results of operations. Although we have already hired additional employees to assist us in complying with these requirements, we may need to hire more employees in the future or engage outside consultants, which will increase our operating expenses. In addition, changing laws, regulations, and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs, and making some activities more time-consuming. These laws, regulations, and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest substantial resources to comply with evolving laws, regulations, and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from business operations to compliance activities. If our efforts to comply with new laws, regulations, and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed. Being a public company that is subject to these new rules and regulations has made it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly members who can serve on our audit committee and compensation committee, and qualified executive officers. As a result of the disclosure obligations required of a public company, our business and financial condition will become more visible, which may result in an increased risk of threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business, financial condition, and results of operations would be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and
79
resources necessary to resolve them, would divert the resources of our management and harm our business, financial condition, and results of operations.
Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States.
GAAP is subject to interpretation by the Financial Accounting Standards Board (“FASB”), the SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. The accounting for our business is complicated, particularly in the area of revenue recognition, and is subject to change based on the evolution of our business model, interpretations of relevant accounting principles, enforcement of existing or new regulations, and changes in SEC or other agency policies, rules, regulations, and interpretations of accounting regulations. Changes to our business model and accounting methods, principles, or interpretations could result in changes to our consolidated financial statements, including changes in revenue and expenses in any period, or in certain categories of revenue and expenses moving to different periods, may result in materially different financial results, and may require that we change how we process, analyze, and report financial information and our financial reporting controls.
If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our results of operations could be adversely affected.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of our consolidated financial statements, and the reported amounts of expenses during the reporting periods. We base our estimates on historical experience, known trends and other market-specific or other relevant factors that we believe to be reasonable under the circumstances, as provided in the section titled “Management’s discussion and analysis of financial condition and results of operations—Critical accounting policies and estimates.” The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities, and equity, and the amount of revenue and expenses. Significant estimates and judgments involve: revenue recognition, valuation of goodwill and intangible assets, valuation of contingent consideration liabilities, and the valuation of common stock/shares and equity-based awards. Our results of operations may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our results of operations to fall below the expectations of securities analysts and investors, resulting in a decline in the market price of our common stock.
80
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a) Sale of Unregistered Securities; Purchases of Equity Securities by the Issuer or Affiliated Purchaser
On September 27, 2021, we filed a registration statement on Form S-8 covering shares of common stock issuable upon the exercise of outstanding options under the Company’s Amended and Restated 2009 Equity Incentive Plan (the “2009 Plan”) and the Company’s Amended and Restated 2015 Stock Option Plan (“2015 Plan”).
From July 1, 2021 until September 27, 2021 (the date of the filing of our registration statement on Form S-8), we granted employees options to purchase an aggregate of 698,010 shares of our common stock to employees under our 2015 Plan, at exercise prices ranging from $17.34 to $18.67 per share.
From July 1, 2021 until September 27, 2021 (the date of the filing of our registration statement on Form S-8), we issued and sold to our employees an aggregate of 99,860 shares of common stock upon the exercise of options issued under our 2009 Plan and 2015 Plan at exercise prices ranging from $0.51 to $3.46 per share, for an aggregate of $0.2 million.
From July 1, 2021 until September 27, 2021 (the date of the filing of our registration statement on Form S-8), we repurchased and retired an aggregate of 74,529 shares of common stock under our 2015 Plan for an aggregate of $0.1 million. The following table is a summary of our repurchases:
|
Period |
|
(a) Total number of shares (or units) purchased |
|
|
(b) Average price paid per share (or unit) |
|
|
(c) Total number of shares (or units) purchased as part of a publicly announced plans or programs |
|
|
(d) Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs |
|
||||
|
July 1, 2021 - July 31, 2021 |
|
|
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
August 1, 2021 - August 31, 2021 |
|
|
74,529 |
|
|
$ |
0.68 |
|
|
$ |
- |
|
|
$ |
- |
|
|
September 1, 2021 - September 30, 2021 |
|
|
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
74,529 |
|
|
|
|
|
$ |
- |
|
|
|
|
||
Unless otherwise stated, the issuances of the above securities were deemed to be exempt from registration under the Securities Act in reliance upon Section 4(a)(2) of the Securities Act or Regulation D promulgated thereunder as transactions by an issuer not involving any public offering. Individuals who purchased securities as described above represented their intention 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 affixed to the share certificates issued in such transactions. None of the foregoing transactions involved any underwriters, underwriting discounts or commissions or any public offering.
b) Use of Proceeds
On September 27, 2021, we completed our IPO, in which we issued and sold 13,620,054 shares of common stock at a public offering price of $26.00 per share, including 620,054 shares issued upon the exercise of the underwriters' option to purchase additional shares. We raised net proceeds to us of $326.3 million, after deducting the underwriting discount of $22.1 million and offering expenses of $5.7 million. No payments for such expenses were made directly or indirectly to (i) any of our officers or directors or their associates, (ii) any persons owning 10% or more of any class of our equity securities or (iii) any of our affiliates.
Additionally, certain existing stockholders sold an aggregate of 3,112,446 shares at the same price, resulting in net proceeds to the selling stockholders of $75.9 million. All shares sold were registered pursuant to a registration statement on Form S-1 (File No. 333-259101), as amended (the “Registration Statement”), declared effective by the SEC on September 22, 2021. J.P. Morgan Securities LLC and Goldman & Co, LLC acted as representatives of the underwriters for the offering. The offering terminated after the sale of all securities registered pursuant to the Registration Statement.
On September 27, 2021, we used a portion of the net proceeds from our IPO to repay in full the outstanding borrowings of $114.2 million under our Credit Facilities. There has been no material change in the expected use of the net proceeds from our IPO as described in our Final Prospectus.
(c) Issuer Purchases of Equity Securities
Not Applicable.
Item 3. Defaults Upon Senior Securities.
None.
81
Item 4. Mine Safety Disclosures.
Not Applicable.
Item 5. Other Information.
Not Applicable.
82
Item 6. Exhibits.
|
|
|
Incorporated by Reference |
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|||
|
Exhibit Number |
Exhibit Description |
Form |
File No. |
Exhibit |
Filing Date |
Filed / Furnished Herewith |
|
2.1 |
|
|
|
|
* |
|
|
2.2 |
|
|
|
|
* |
|
|
2.3 |
|
|
|
|
* |
|
|
3.1 |
Amended and Restated Certificate of Incorporation of EngageSmart, Inc. |
|
|
|
|
* |
|
3.2 |
|
|
|
|
* |
|
|
4.1 |
Specimen Common Stock Certificate evidencing the shares of common stock. |
S-1/A |
333-259101 |
4.3 |
9/13/2021 |
|
|
10.1 |
8-K |
001-40835 |
10.1 |
9/27/2021 |
|
|
|
10.2 |
|
|
|
|
* |
|
|
10.3 |
|
|
|
|
* |
|
|
10.4 |
Amended and Restated EngageSmart, Inc. CVR Bonus Award Plan. |
S-1/A |
333-259101 |
10.4 |
9/16/2021 |
|
|
10.5 |
S-1/A |
333-259101 |
10.15 |
9/16/2021 |
|
|
|
10.6 |
Employment Agreement dated September 13, 2021, by and between EngageSmart, LLC and Robert Bennett. |
S-1/A |
333-259101 |
10.11 |
9/13/2021 |
|
|
10.7 |
Employment Agreement dated September 13, 2021, by and between EngageSmart, LLC and Cassandra Hudson. |
S-1/A |
333-259101 |
10.12 |
9/13/2021 |
|
|
10.8 |
Non-Employee Director Compensation Policy of EngageSmart, Inc. |
S-1/A |
333-259101 |
10.13 |
9/13/2021 |
|
|
10.9 |
S-1/A |
333-259101 |
10.16 |
9/13/2021 |
|
|
|
10.10 |
Form of Restricted Stock Unit Grant Notice and Agreement under the 2021 Incentive Award Plan. |
S-1/A |
333-259101 |
10.17 |
9/16/2021 |
|
|
10.11 |
Form of Stock Option Grant Notice and Agreement under the 2021 Incentive Award Plan. |
S-1/A |
333-259101 |
10.18 |
9/13/2021 |
|
|
10.12 |
S-1/A |
333-259101 |
10.19 |
9/13/2021 |
|
|
|
10.13 |
|
|
|
|
* |
|
|
10.14 |
|
|
|
|
* |
|
|
31.1 |
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a). |
|
|
|
|
* |
|
31.2 |
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a). |
|
|
|
|
* |
|
32.1 |
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350. |
|
|
|
|
** |
|
32.2 |
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350. |
|
|
|
|
** |
|
101.INS |
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
|
|
|
|
* |
|
101.SCH |
Inline XBRL Taxonomy Extension Schema Document |
|
|
|
|
* |
|
101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
|
* |
|
101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
|
* |
|
101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
|
* |
|
101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
|
* |
|
104 |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
|
|
|
|
* |
|
|
|
|
|
|
|
|
|
* |
Filed herewith. |
|
|
|
|
|
|
** |
Furnished herewith. |
|
|
|
|
|
83
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
EngageSmart, Inc. |
|
|
|
|
|
|
|
Date: November 10, 2021 |
|
By: |
/s/ Robert P. Bennett |
|
|
|
|
Robert P. Bennett |
|
|
|
|
Chief Executive Officer |
|
|
|
|
|
|
Date: November 10, 2021 |
|
By: |
/s/ Cassandra Hudson |
|
|
|
|
Cassandra Hudson |
|
|
|
|
Chief Financial Officer |
|
|
|
|
|
84
Exhibit 2.1
PLAN OF CONVERSION
Converting
EngageSmart, LLC
(a Delaware limited liability company)
to
EngageSmart, Inc.
(a Delaware corporation)
THIS PLAN OF CONVERSION (this “Plan”), dated as of September 22, 2021, is hereby adopted and approved by EngageSmart, LLC, a limited liability company formed under the laws of Delaware (the “LLC”), to set forth the terms, conditions and procedures governing the conversion of the LLC to a Delaware corporation to be named EngageSmart, Inc. (the “Corporation”) pursuant to Section 18-216 of the Delaware Limited Liability Company Act (the “DLLCA”) and Section 265 of the Delaware General Corporation Law (the “DGCL”). Capitalized terms used herein and not otherwise defined herein shall have the respective meanings ascribed to such terms in the Second Amended and Restated Limited Liability Company Agreement of the LLC, dated as of February 11, 2019 (the “LLC Agreement”), by and among the LLC and the Members.
WHEREAS, the LLC is a limited liability company formed and existing under the laws of the State of Delaware and is currently governed by and operating under the LLC Agreement;
WHEREAS, the Board of the LLC (the “Board”), in connection with a proposed public offering (the “IPO”) of common stock by the Corporation (as defined below), has determined that it is in the best interests of the LLC for the LLC to convert to a Delaware corporation pursuant to Section 18-216 of the DLLCA and Section 265 of the DGCL upon the terms and conditions and in accordance with the procedures set forth herein, and the Board has authorized and approved the IPO and the Conversion (as defined below) and the execution, delivery and filing of any and all instruments, certificates and documents necessary or desirable in connection therewith;
WHEREAS, pursuant to Section 13.1 of the LLC Agreement, the Board and the requisite Shareholders have approved and adopted this Plan, the Conversion (as defined below) and the other transactions contemplated by this Plan; and
WHEREAS, in connection with the Conversion, (i) all outstanding limited liability company interests of the LLC, which are represented by Class A-1 Common Shares (as defined in the LLC Agreement), shall be converted into shares of Class A-1 Common Stock (as defined below) as provided in this Plan and the Certificate of Incorporation, (ii) all outstanding limited liability company interests of the LLC, which are represented by Class A-2 Common Shares (as defined in the LLC Agreement), shall be converted into shares of Class A-2 Common Stock (as defined below) as provided in this Plan and the Certificate of Incorporation and (iii) all outstanding limited liability company interests of the LLC, which are represented by Class A-3 Common Shares (as defined in the LLC Agreement), shall be converted into shares of Class A-3 Common Stock (as defined below) as provided in this Plan and the Certificate of Incorporation.
1
|
NOW, THEREFORE, the LLC does hereby adopt this Plan to effectuate the conversion of the LLC to the Corporation as follows:
2
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(i) each Class A-1 Common Share of the LLC that is outstanding immediately prior to the Effective Time shall be converted into one (1) share of Class A-1 common stock, par value $0.001 per share, of the Corporation (“Class A-1 Common Stock”), and as of the Effective Time each such share of Class A-1 Common Stock shall be duly and validly issued, fully paid and nonassessable;
(ii) each Class A-2 Common Share of the LLC that is outstanding immediately prior to the Effective Time shall be converted into one (1) share of Class A-2 Common Stock (“Class A-2 Common Stock”) and as of the Effective Time each such share of Class A-2 Common Stock shall be duly and validly issued, fully paid and nonassessable; and
(iii) each Class A-3 Common Share of the LLC that is outstanding immediately prior to the Effective Time shall be converted into one (1) share of Class A-3 Common Stock (“Class A-3 Common Stock”) and as of the Effective
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Time each such share of Class A-3 Common Stock shall be duly and validly issued, fully paid and nonassessable.
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IN WITNESS WHEREOF, the LLC has caused this Plan to be executed by its duly authorized representative as of the date first stated above.
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EngageSmart, LLC
By: /s/ Robert P. Bennett
Name: Robert P. Bennett
Title: Chief Executive Officer
[Signature Page to Plan of Conversion]
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Exhibit 2.2
PLAN OF REORGANIZATION
of
EngageSmart, Inc.
(a Delaware corporation)
THIS PLAN OF REORGANIZATION (this “Plan”), dated as of September 22, 2021, is hereby adopted and approved by EngageSmart, Inc. (the “Corporation”), a corporation formed under the laws of Delaware (the “Corporation”), to set forth the terms, conditions and procedures governing the reorganization of the Corporation. Capitalized terms used herein and not otherwise defined herein shall have the respective meanings ascribed to such terms in the certificate of incorporated that was filed with the Secretary of State of the State of Delaware (the “Secretary of State”) on September 22, 2021 (the “Interim Certificate of Incorporation”).
WHEREAS, the Corporation was converted from a Delaware limited liability company to a Delaware corporation by filing a certificate of conversion and the Interim Certificate of Incorporation with the Secretary of State and, following such conversion, is a corporation incorporated and existing under the laws of the State of Delaware and is currently governed by and operating under the Interim Certificate of Incorporation, the Bylaws (as defined below) and the General Corporation Law of the State of Delaware (the “DGCL”);
WHEREAS, the Board of the Corporation (the “Board”), in connection with a proposed public offering (the “IPO”) of Common Stock (as defined below) by the Corporation, has determined that it is in the best interests of the Corporation and its stockholders, upon the terms and conditions and in accordance with the procedures set forth herein, to authorize and approve, the IPO and the Reorganization (as defined below) and the execution, delivery and filing of any and all instruments, certificates and documents necessary or desirable in connection therewith;
WHEREAS, the Board and the requisite Shareholders have approved and adopted this Plan, the Reorganization and the other transactions contemplated by this Plan; and
WHEREAS, in connection with the Reorganization, (i) all outstanding Class A-1 Common Stock (as defined in the Interim Certificate of Incorporation) shall be reclassified into shares of Common Stock as provided in this Plan and the Public Company Certificate of Incorporation (as defined below), (ii) all outstanding Class A-2 Common Stock (as defined in the Interim Certificate of Incorporation) shall be reclassified into shares of Common Stock as provided in this Plan and the Public Company Certificate of Incorporation and (iii) all Class A-3 Common Stock (as defined in the Interim Certificate of Incorporation) shall be reclassified into shares of Common Stock as provided in this Plan and the Public Company Certificate of Incorporation.
NOW, THEREFORE, the Corporation does hereby adopt this Plan to effectuate the Reorganization as follows:
1. Reorganization; Effect of Reorganization. Upon the filing and effectiveness of the Public Company Certificate of Incorporation, each share of Class A-1 Common Stock will be
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converted into 0.9398 shares of Common Stock of the Corporation (the “Common Stock”), each share of Class A-2 Common Stock will be converted into 1.1102 shares of Common Stock (with cash being provided in lieu of each fractional share in the amount of each fractional share multiplied by the price at the which the shares of Common Stock shall be sold in connection with the IPO) and each share of Class A-3 Common Stock will be converted into one share of Common Stock. Following the effectiveness of the Public Company Certificate of Incorporation, the former holders of Class A-1 Common Stock will enter into two subscription agreements to subscribe for, in aggregate, 1,951,261 shares of Common Stock in exchange for cash (based on the price at the which the shares of Common Stock will be sold to the public in connection with the IPO) and a promissory note. Collectively, the transactions referred to in this paragraph 1 are the “Reorganization.”
2. Public Company Certificate of Incorporation; Effective Time. The Reorganization shall be effective upon the filing with the Secretary of State of the State of Delaware of a duly executed Certificate of Incorporation of the Corporation, in the form of Exhibit A attached hereto (the “Public Company Certificate of Incorporation”) or at such later time as may be specified in the Public Company Certificate of Incorporation (such time of effectiveness, the “Effective Time”). From and after the Effective Time, the Public Company Certificate of Incorporation of the Corporation shall be in the form attached hereto as Exhibit A, until thereafter amended and/or restated in accordance with the terms thereof and the DGCL.
3. Effect of the Reclassification on Equity Interests in the Corporation.
(a) Reclassification of Outstanding Securities. At the Effective Time, automatically by virtue of the Reclassification and without any further action on the part of the Corporation or any holder of Common Stock in the Corporation:
(i) each share of Class A-1 Common Stock that is outstanding immediately prior to the Effective Time shall be converted into 0.9398 share of common stock, par value $0.001 per share, of the Corporation (“Common Stock”), and as of the Effective Time each such share of Common Stock shall be duly and validly issued, fully paid and nonassessable;
(ii) each share of Class A-2 Common Stock that is outstanding immediately prior to the Effective Time shall be converted into 1.1102 share of Common Stock (with cash being provided in lieu of each fractional share in the amount of each fractional share multiplied by the price at the which the shares of Common Stock shall be sold in connection with the IPO), and as of the Effective Time each such share of Common Stock shall be duly and validly issued, fully paid and nonassessable; and
(iii) each share of Class A-3 Common Stock that is outstanding immediately prior to the Effective Time shall be converted into (1) one share of Common Stock, and as of the Effective Time each such share of Common Stock shall be duly and validly issued, fully paid and nonassessable.
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(b) No Further Ownership Rights in Class A-1 Common Stock, Class A-2 Common Stock and Class A-3 Common Stock. All shares of Common Stock (and, with respect to the shares of Class A-2 Common Stock, the cash provided in lieu of each fractional share) into which the Class A-1 Common Stock, Class A-2 Common Stock and Class A-3 Common Stock of the Corporation are reclassified pursuant to the Reorganization in accordance with the terms of this Plan shall be deemed to have been issued in full satisfaction of all rights pertaining to such Class A-1 Common Stock, Class A-2 Common Stock and Class A-3 Common Stock in the Corporation. Immediately following the Effective Time, Class A-1 Common Stock, Class A-2 Common Stock and Class A-3 Common Stock of the Corporation shall cease to exist, and the holder of such shares immediately prior to the Effective Time shall cease to have any rights with respect thereto.
(c) No Impact on Vesting Restrictions and Repurchase Rights. The conversion of Class A-1 Common Stock, Class A-2 Common Stock and Class A-3 Common Stock pursuant to Public Company Certificate of Incorporation will not limit, impair or otherwise modify any vesting restrictions or repurchase rights with respect to any equity issued by the Corporation to any officer or employee of the Corporation or any other person, which vesting restrictions and repurchase rights shall continue to apply to the shares of Common Stock issued hereby to any such persons until the expiration of such vesting restrictions and repurchase rights in accordance with their terms.
(d) Registration in Book-Entry. Shares of Common Stock issued in connection with the reclassification shall be uncertificated, and the Corporation shall register, or cause to be registered, such shares into which each outstanding shares of Class A-1 Common Stock, Class A-2 Common Stock and Class A-3 Common Stock shall have been reclassified as a result of the reclassification in book-entry form.
4. Implementation and Interpretation; Termination and Amendment. This Plan shall be implemented and interpreted by the Board, (a) each of which shall have full power and authority, subject to applicable law, to delegate and assign any matters covered hereunder to any other party(ies), including, without limitation, any officers of the Corporation, as the case may be, and (b) the interpretations and decisions of which shall be final, binding, and conclusive on all parties. The Board at any time prior to the Effective Time may terminate, amend or modify this Plan. Upon such termination of this Plan, if the Public Company Certificate of Incorporation have been filed with the Secretary of State of the State of Delaware, but have not become effective, any person or entity that was authorized to execute, deliver and file such certificates may execute, deliver and file a Certificate of Termination of such certificates.
5. Third Party Beneficiaries. This Plan shall not confer any rights or remedies upon any person or entity other than as express provided herein.
6. Severability. Whenever possible, each provision of this Plan will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Plan is held to be prohibited by or invalid under applicable law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Plan.
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7. Governing Law. This Plan shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to the conflicts of laws rules of such state.
8. Tax Treatment. The parties hereby agree and acknowledge that for U.S. federal income tax purposes (i) the Reorganization is intended to qualify as a reorganization within the meaning of Section 368(a)(1)(E) of the Internal Revenue Code of 1986, as amended (the “Code”), (ii) this Plan is intended to constitute and the parties hereby adopt this Plan as a “plan or reorganization” within the meaning of Treasury Regulation sections 1.368-2(g) and 1.368-3(a), and (iii) cash received in lieu of fractional share of Class A-2 Common Stock will either be treated as a distribution to which Section 301(c) of the Code applies or a distribution in part or full payment in exchange for shares of Class A-2 Common Stock pursuant to Section 302(a) of the Code. To the extent required to take a position, the parties hereby agree to file all applicable tax and other informational returns on a basis consistent with such characterization, unless otherwise required by a governmental authority as a result of a “determination” within the meaning of Section 1313(a) of the Code (or any similar provision of applicable state, local or non-U.S. tax law) or a change in applicable law after the date hereof.
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IN WITNESS WHEREOF, the Corporation has caused this Plan to be executed by its duly authorized representative as of the date first stated above.
EngageSmart, Inc.
By: /s/ Robert P. Bennett
Name: Robert P. Bennett
Title: Chief Executive Officer
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Exhibit 2.3
CERTIFICATE OF CONVERSION OF ENGAGESMART, LLC, A DELAWARE LIMITED LIABILITY COMPANY TO ENGAGESMART, INC., A DELAWARE CORPORATION
This Certificate of Conversion to Corporation, dated as of September 22, 2021 is being duly executed and filed by EngageSmart, LLC, a Delaware limited liability company (the “Company”), to convert the LLC to EngageSmart, Inc., a Delaware corporation (the “Corporation”), under the Delaware Limited Liability Company Act (6 Del. C. § 18-101, et seq.) and the General Corporation Law of the State of Delaware (8 Del. C. § 101, et seq.).
IN WITNESS WHEREOF, the undersigned has executed this Certificate of Conversion from a Limited Liability Company to a Corporation dated as of September 22, 2021.
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ENGAGESMART, LLC
By: /s/ Robert P. Bennett Name: Robert P. Bennett Title: Chief Executive Officer
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Exhibit 3.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
ENGAGESMART, INC.
* * * * *
The present name of the corporation is EngageSmart, Inc. The corporation was incorporated under the name EngageSmart, Inc. by the filing of its original Certificate of Incorporation with the Secretary of State of the State of Delaware on September 22, 2021. This Amended and Restated Certificate of Incorporation of the corporation (the “Certificate of Incorporation”), which restates and integrates and also further amends the provisions of the corporation’s certificate of incorporation, was duly adopted in accordance with the provisions of Sections 242 and 245 of the General Corporation Law of the State of Delaware and by the written consent of its stockholders in accordance with Section 228 of the General Corporation Law of the State of Delaware. The Certificate of Incorporation of the corporation is hereby amended, integrated and restated to read in its entirety as follows:
ARTICLE ONE
The name of the corporation is EngageSmart, Inc. (the “Corporation”).
ARTICLE TWO
The address of the Corporation’s registered office in the State of Delaware is 3411 Silverside Road, Tatnall Building #104, Wilmington, New Castle County, State of Delaware 19810. The name of its registered agent at such address is Corporate Creations Network Inc.
ARTICLE THREE
The nature and purpose of the business of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware (“DGCL”).
ARTICLE FOUR
Section 1. Authorized Shares. The total number of shares of all classes of capital stock which the Corporation shall have authority to issue is 660,000,000 shares, consisting of two classes as follows:
(a) 10,000,000 shares of Preferred Stock, par value $0.001 per share (the “Preferred Stock”); and
(b) 650,000,000 shares of Common Stock, par value $0.001 per share (the “Common Stock”).
The Preferred Stock and the Common Stock shall have the designations, rights, powers and preferences and the qualifications, restrictions and limitations thereof, if any, set forth below.
Section 2. Reclassification of Common Stock. Upon the filing and effectiveness of this Certificate of Incorporation with the Secretary of State of the State of Delaware (the “Effective Time”) and without any further action required by the Corporation or its stockholders:
(a) each share of Series A-1 Common Stock (as defined in the prior certificate of incorporation, the “Prior Certificate”) issued and outstanding or held in treasury immediately prior to the Effective Time shall be automatically reclassified into 0.9398 validly issued, fully paid and non-assessable share of Common Stock (the “Series A-1 Reclassification”);
(b) each share of Series A-2 Common Stock (as defined in the Prior Certificate) issued and outstanding or held in treasury immediately prior to the Effective Time shall be automatically reclassified into 1.1102 validly issued, fully paid and non-assessable shares of Common Stock (the “Series A-2 Reclassification”); and
(c) each share of Series A-3 Common Stock (as defined in the Prior Certificate) issued and outstanding or held in treasury immediately prior to the Effective Time shall be automatically reclassified into one (1) validly issued, fully paid and non-assessable share of Common Stock (the “Series A-3 Reclassification”).
With respect to the Series A-1 Reclassification and the Series A-3 Reclassification, no fractional shares of Common Stock shall be issued upon the Series A-1 Reclassification or the Series A-3 Reclassification, as applicable, and, in lieu of the fractional shares, each holder who would otherwise be entitled to fractional shares shall be entitled to an amount in cash, without interest and rounded down to the nearest cent, for all fractional shares resulting from the reclassification of such holder’s Series A-1 and Series A-3 Common Stock, as applicable (after aggregating all fractional shares to which such holder would be entitled as a result of the Series A-1 Reclassification or the Series A-3 Reclassification, as applicable) equal to the product of (i) the amount of the fractional share of Common Stock and (ii) the price at the which the shares of Common Stock shall be sold in connection with the Company’s initial public offering of its shares of Common Stock. With respect to the Series A-2 Reclassification, no fractional shares of Common Stock shall be issued upon the Series A-2 Reclassification and, in lieu of the fractional shares, each holder who would otherwise be entitled to fractional shares shall be entitled to an amount in cash, without interest and rounded down to the nearest cent, for each fractional share resulting from the reclassification of each Series A-2 Common Stock (without aggregating the fractional shares such holder receives as result of the Series A-2 Reclassification) equal to the product of (i) the amount of the fractional share of Common Stock and (ii) the price at the which the shares of Common Stock shall be sold in connection with the Company’s initial public offering of its shares of Common Stock.
Section 3. Preferred Stock. The Board of Directors of the Corporation (the “Board of Directors”) is authorized, subject to limitations prescribed by law, to provide, by resolution or resolutions for the issuance of shares of Preferred Stock in one or more series, and with respect
to each series, to establish the number of shares to be included in each such series, and to fix the voting powers (if any), designations, powers, preferences, and relative, participating, optional or other special rights, if any, of the shares of each such series, and any qualifications, limitations or restrictions thereof. The powers (including voting powers), preferences, and relative, participating, optional and other special rights of each series of Preferred Stock and the qualifications, limitations or restrictions thereof, if any, may differ from those of any and all other series at any time outstanding. Subject to the rights of the holders of any series of Preferred Stock, the number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the approval of the Board of Directors and by the affirmative vote of the holders of a majority in voting power of the outstanding shares of capital stock of the Corporation entitled to vote generally in an election of directors, without the separate vote of the holders of the Preferred Stock as a class, irrespective of the provisions of Section 242(b)(2) of the DGCL.
Section 4. Common Stock.
(a) Except as otherwise provided by the DGCL or this Certificate of Incorporation and subject to the rights of holders of any series of Preferred Stock then outstanding, all of the voting power of the stockholders of the Corporation shall be vested in the holders of the Common Stock. Each share of Common Stock shall entitle the holder thereof to one vote for each share held by such holder on all matters voted upon by the stockholders of the Corporation; provided, however, that, except as otherwise required by law, holders of Common Stock, as such, shall not be entitled to vote on any amendment to this Certificate of Incorporation (including any certificate of designation relating to any series of Preferred Stock) that relates solely to the terms of one or more outstanding series of Preferred Stock if the holders of such affected series are entitled, either separately or together with the holders of one or more other such series, to vote thereon pursuant to this Certificate of Incorporation (including any certificate of designation relating to any series of Preferred Stock) or pursuant to the DGCL.
(b) Except as otherwise required by law or expressly provided in this Certificate of Incorporation, each share of Common Stock shall have the same powers, rights and privileges and shall rank equally, share ratably and be identical in all respects as to all matters.
(c) Subject to the rights of the holders of any series of Preferred Stock then outstanding and to the other provisions of applicable law and this Certificate of Incorporation, holders of Common Stock shall be entitled to receive equally, on a per share basis, such dividends and other distributions in cash, securities or other property of the Corporation if, as and when declared thereon by the Board of Directors from time to time out of assets or funds of the Corporation legally available therefor.
(d) In the event of any liquidation, dissolution or winding up of the affairs of the Corporation, whether voluntary or involuntary, after payment or provision for payment of the Corporation’s debts and any other payments required by law and amounts payable upon shares of Preferred Stock ranking senior to the shares of Common Stock upon such
dissolution, liquidation or winding up, if any, the remaining net assets of the Corporation shall be distributed to the holders of shares of Common Stock and the holders of shares of any other class or series ranking equally with the shares of Common Stock upon such dissolution, liquidation or winding up, equally on a per share basis. A merger or consolidation of the Corporation with or into any other corporation or other entity, or a sale or conveyance of all or any part of the assets of the Corporation (which shall not in fact result in the liquidation of the Corporation and the distribution of assets to its stockholders) shall not be deemed to be a voluntary or involuntary liquidation or dissolution or winding up of the Corporation within the meaning of this Paragraph (d).
(e) No holder of shares of Common Stock shall be entitled to preemptive, subscription, conversion or redemption rights.
ARTICLE FIVE
Section 1. Board of Directors. Except as otherwise provided in this Certificate of Incorporation, the business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors.
Section 2. Number of Directors; Voting. Subject to any rights of the holders of any series of Preferred Stock then outstanding to elect additional directors under specified circumstances or otherwise, the number of directors which shall constitute the Board of Directors shall initially be eight (8) and, thereafter, shall be fixed from time to time exclusively by resolution of the Board. Each director shall be entitled to one (1) vote with respect to each matter before the Board of Directors, whether by meeting or pursuant to written consent.
Section 3. Classes of Directors. The directors of the Corporation, other than those who may be elected by the holders of any series of Preferred Stock, shall be divided into three classes, as nearly equal in number as possible, designated Class I, Class II and Class III.
Section 4. Election and Term of Office. Subject to the rights of the holders of any series of Preferred Stock then outstanding, directors shall be elected by a plurality of the votes cast. The term of office of the initial Class I directors shall expire at the first annual meeting of stockholders following the date the Common Stock is first publicly traded (the “IPO Date”), the term of office of the initial Class II directors shall expire at the second succeeding annual meeting of stockholders after the IPO Date and the term of office of the initial Class III directors shall expire at the third succeeding annual meeting of the stockholders after the IPO Date. For the purposes hereof, the Board of Directors may assign directors already in office to Class I, Class II and Class III, in accordance with the terms of that certain Stockholders Agreement, dated on or prior to the date of consummation of the initial public offering of the Corporation (as amended and/or restated or supplemented in accordance with its terms, the “Stockholders Agreement”), by and among the Corporation and the investors named therein. At each annual meeting of stockholders after the IPO Date, directors elected to replace those of a class whose terms expire at such annual meeting shall be elected to hold office until the third succeeding annual meeting after their election and until their respective successors shall have been duly elected and qualified. Each director shall hold office until the annual meeting of stockholders for
the year in which such director’s term expires and a successor is duly elected and qualified or until his or her earlier death, resignation or removal. Nothing in this Certificate of Incorporation shall preclude a director from serving consecutive terms. Elections of directors need not be by written ballot unless the Bylaws of the Corporation (as amended and/or restated the “Bylaws”) shall so provide.
Section 5. Newly-Created Directorships and Vacancies. Subject to the rights of the holders of any series of Preferred Stock then outstanding and except as otherwise set forth in the Stockholders’ Agreement, newly created directorships resulting from any increase in the authorized number of directors or any vacancies in the Board of Directors resulting from death, resignation, disqualification, removal from office or any other cause may be filled only by a majority of the directors then in office, although less than a quorum, or by a sole remaining director, and may not be filled in any other manner. A director elected or appointed to fill a vacancy shall serve for the unexpired term of his or her predecessor in office and until his or her successor is elected and qualified or until his or her earlier death, resignation or removal. A director elected or appointed to fill a position resulting from an increase in the number of directors shall hold office until the next election of the class for which such director shall have been elected or appointed and until his or her successor is elected and qualified, or until his or her earlier death, resignation or removal. No decrease in the authorized number of directors shall shorten the term of any incumbent director.
Section 6. Removal and Resignation of Directors. Subject to the rights of the holders of any series of Preferred Stock then outstanding and notwithstanding any other provision of this Certificate of Incorporation, directors may only be removed for cause and only upon the affirmative vote of stockholders representing at least sixty-six and two-thirds percent (662⁄3%) of the voting power of the then outstanding shares of Voting Stock, at a meeting of the Corporation’s stockholders called for that purpose. Any director may resign at any time upon written notice to the Corporation.
Section 7. Rights of Holders of Preferred Stock. During any period when the holders of any series of Preferred Stock, voting separately as a series or together with one or more series, have the right to elect additional directors, then upon commencement and for the duration of the period during which such right continues: (i) the then otherwise total authorized number of directors of the Corporation shall automatically be increased by such specified number of directors, and the holders of such Preferred Stock shall be entitled to elect the additional directors so provided for or fixed pursuant to said provisions, and (ii) each such additional director shall serve until such director’s successor shall have been duly elected and qualified, or until such director’s right to hold such office terminates pursuant to said provisions, whichever occurs earlier, subject to his or her earlier death, resignation, disqualification or removal. Except as otherwise provided by the Board of Directors in the resolution or resolutions establishing such series, whenever the holders of any series of Preferred Stock having such right to elect additional directors are divested of such right pursuant to the provisions of such stock, the terms of office of all such additional directors elected by the holders of such stock, or elected to fill any vacancies resulting from the death, resignation, disqualification or removal of such additional directors, shall forthwith terminate (in which case each such director thereupon shall cease to be qualified
as, and shall cease to be, a director) and the total authorized number of directors of the Corporation shall automatically be reduced accordingly.
Section 8. Advance Notice. Advance notice of stockholder nominations for the election of directors and of business to be brought by stockholders before any meeting of the stockholders of the Corporation shall be given in the manner provided in the Bylaws.
ARTICLE SIX
Section 1. Limitation of Liability.
(a) To the fullest extent permitted by the DGCL as it now exists or may hereafter be amended (but, in the case of any such amendment, only to the extent such amendment permits the Corporation to provide broader exculpation than permitted prior thereto), no director of the Corporation shall be liable to the Corporation or its stockholders for monetary damages arising from a breach of fiduciary duty as a director.
(b) Any amendment, repeal or modification of the foregoing paragraph shall not adversely affect any right or protection of a director of the Corporation existing at the time of such amendment, repeal or modification with respect to any act, omission or other matter occurring prior to such amendment, repeal or modification.
ARTICLE SEVEN
Section 1. Action by Written Consent. Prior to the first date (the “Stockholder Consent Trigger Date”) on which General Atlantic (IC), L.P., a Delaware limited partnership (together with its affiliated investment entities, the “GA Stockholder”) and its Affiliated Companies (as defined herein) cease to beneficially own in the aggregate (directly or indirectly) at least 40% of the Voting Stock, any action which is required or permitted to be taken by the Corporation’s stockholders may be taken without a meeting, without prior notice and without a vote if a consent or consents, setting forth the action so taken, is 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 of the Corporation’s stock entitled to vote thereon were present and voted and are delivered to the Corporation in the manner set forth in the DGCL. From and after the Stockholder Consent Trigger Date, any action required or permitted to be taken by the Corporation’s stockholders may be taken only at a duly called annual or special meeting of the Corporation’s stockholders and the power of stockholders to consent without a meeting is specifically denied; provided, however, that any action required or permitted to be taken by the holders of Preferred Stock, voting separately as a series or separately as a class with one or more other such series, may be taken without a meeting, without prior notice and without a vote, unless expressly prohibited in the resolutions creating such series of Preferred Stock.
Section 2. Special Meetings of Stockholders. Subject to the rights of the holders of any series of Preferred Stock then outstanding and to the requirements of applicable law, special meetings of stockholders of the Corporation may be called only (i) by or at the direction of the
Chairman of the Board of Directors or by the Board of Directors pursuant to a written resolution adopted by the affirmative vote of the majority of the total number of directors that the Corporation would have if there were no vacancies or (ii) prior to the Stockholder Consent Trigger Date, by the Chairman of the Board of Directors at the written request of the GA Stockholder. Any business transacted at any special meeting of stockholders shall be limited to the purpose or purposes stated in the notice of the meeting.
ARTICLE EIGHT
Section 1. Certain Acknowledgments. In recognition and anticipation that (i) certain of the directors, partners, principals, officers, members, managers and/or employees of the GA Stockholder or its Affiliated Companies (as defined below) or of Summit Partners Growth Equity Fund VIII-A, L.P., Summit Partners Growth Equity Fund VIII-B, L.P., Summit Partners Entrepreneur Advisors Fund I, L.P., Summit Investors I, LLC and Summit Investors I (UK), L.P. (together with its affiliated investment entities, the “Summit Stockholder”) or their Affiliated Companies may serve as directors or officers of the Corporation and (ii) each of the GA Stockholder and its Affiliated Companies and the Summit Stockholders and their Affiliated Companies engage and may continue to engage in the same or similar activities or related lines of business as those in which the Corporation, directly or indirectly, may engage and/or other business activities that overlap with or compete with those in which the Corporation, directly or indirectly, may engage, and (iii) that the Corporation and its Affiliated Companies may engage in material business transactions with the GA Stockholder and its Affiliated Companies or the Summit Stockholders and their Affiliated Companies, and that the Corporation is expected to benefit therefrom, the provisions of this ARTICLE EIGHT are set forth to regulate and define the conduct of certain affairs of the Corporation as they may involve the GA Stockholder and/or its Affiliated Companies and/or the Summit Stockholders and/or their Affiliated Companies and/or their respective directors, partners, principals, officers, members, managers and/or employees, including any of the foregoing who serve as officers or directors of the Corporation (collectively, the “Exempted Persons”), and the powers, rights, duties and liabilities of the Corporation and its officers, directors and stockholders in connection therewith. As used in this Certificate of Incorporation, “Affiliated Companies” shall mean (a) in respect of the GA Stockholder, any entity that controls, is controlled by or under common control with the GA Stockholder (other than the Corporation and any company that is controlled by the Corporation) and any investment entities managed by the GA Stockholder or any of its Affiliated Companies (as general partner, sole member or otherwise), (b) in respect of the Summit Stockholders, any entity that controls, is controlled by or under common control with the Summit Stockholders (other than the Corporation and any company that is controlled by the Corporation) and any investment entities managed by the Summit Stockholders or any of their Affiliated Companies (as general partner, sole member or otherwise) and (c) in respect of the Corporation, any company controlled by the Corporation.
Section 2. Competition and Corporate Opportunities. To the fullest extent permitted by applicable law, none of the GA Stockholder, its Affiliated Companies, the Summit Stockholders, their Affiliated Companies or any of the Exempted Persons shall have any fiduciary duty to refrain from engaging directly or indirectly in the same or similar business activities or lines of business as the Corporation or any of its Affiliated Companies, and none of the GA Stockholder,
its Affiliated Companies, the Summit Stockholders, their Affiliated Companies or any of the Exempted Persons shall be liable to the Corporation or its stockholders for breach of any fiduciary or other duty (whether contractual or otherwise) solely by reason of any such activities of the GA Stockholder, its Affiliated Companies, the Summit Stockholders, their Affiliated Persons or any of the Exempted Persons. To the fullest extent permitted by applicable law, the Corporation, on behalf of itself and its Affiliated Companies, renounces any interest or expectancy of the Corporation and its Affiliated Companies in, or in being offered an opportunity to participate in, business opportunities that are from time to time presented to the GA Stockholder, its Affiliated Companies, the Summit Stockholders, their Affiliated Persons or any of the Exempted Persons, even if the opportunity is one that the Corporation or its Affiliated Companies might reasonably be deemed to have pursued or had the ability or desire to pursue if granted the opportunity to do so, and each of the GA Stockholder, its Affiliated Companies, the Summit Stockholders, their Affiliated Persons and any of the Exempted Persons shall have no duty to communicate or offer such business opportunity to the Corporation or its Affiliated Companies and, to the fullest extent permitted by applicable law, shall not be liable to the Corporation, any of its Affiliated Companies or its stockholders for breach of any fiduciary or other duty (whether contractual or otherwise), as a director, officer or stockholder of the Corporation solely, by reason of the fact that the GA Stockholder, its Affiliated Companies, the Summit Stockholders, their Affiliated Persons or any of the Exempted Persons pursues or acquires such business opportunity, sells, assigns, transfers or directs such business opportunity to another person or fails to present such business opportunity, or information regarding such business opportunity, to the Corporation or any of its Affiliated Companies. For the avoidance of doubt, each of the GA Stockholder, its Affiliated Companies, the Summit Stockholders, their Affiliated Persons or the Exempted Persons shall, to the fullest extent permitted by law, have the right to, and shall have no duty (whether contractual or otherwise) not to, directly or indirectly: (A) engage in the same, similar or competing business activities or lines of business as the Corporation or its Affiliated Companies, (B) do business with any client or customer of the Corporation or its Affiliated Companies, or (C) make investments in competing businesses of the Corporation or its Affiliated Companies, and such acts shall not be deemed wrongful or improper. Notwithstanding anything to the contrary in this Section 2, the Corporation does not renounce any interest or expectancy it may have in any business opportunity that is expressly offered to any Exempted Person solely in his or her capacity as a director or officer of the Corporation.
Section 3. Certain Matters Deemed Not Corporate Opportunities. In addition to and notwithstanding the foregoing provisions of this ARTICLE EIGHT, a corporate opportunity shall not be deemed to be a potential corporate opportunity for the Corporation if it is a business opportunity the Corporation is not financially able or contractually permitted or legally able to undertake, or that is, from its nature, not in the line of the Corporation’s business or is of no practical advantage to it or that is one in which the Corporation has no interest or reasonable expectancy.
Section 4. Amendment of this Article. Notwithstanding anything to the contrary elsewhere contained in this Certificate of Incorporation, subject to the rights of the holders of any series of Preferred Stock then outstanding, and in addition to any vote required by applicable law, the affirmative vote of the holders of at least eighty percent (80%) of the voting power of
the then outstanding shares of Voting Stock, voting together as a single class, shall be required to alter, amend or repeal, or to adopt any provision inconsistent with, this ARTICLE EIGHT; provided however, that, to the fullest extent permitted by law, neither the alteration, amendment or repeal of this ARTICLE EIGHT nor the adoption of any provision of this Certificate of Incorporation inconsistent with this ARTICLE EIGHT shall apply to or have any effect on the liability or alleged liability of any Exempted Person for or with respect to any activities or opportunities which such Exempted Person becomes aware prior to such alteration, amendment, repeal or adoption.
Section 5. Deemed Notice. Any person or entity purchasing or otherwise acquiring or holding any interest in any shares of the Corporation shall be deemed to have notice of and to have consented to the provisions of this ARTICLE EIGHT.
ARTICLE NINE
Section 1. Section 203 of the DGCL. The Corporation expressly elects not to be governed by or otherwise subject to the provisions of Section 203 of the DGCL.
Section 2. Business Combinations with Interested Stockholders. Notwithstanding any other provision in this Certificate of Incorporation to the contrary, the Corporation shall not engage in any Business Combination (as defined hereinafter), at any point in time at which the Common Stock is registered under Section 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with any Interested Stockholder (as defined hereinafter) for a period of three years following the time that such stockholder became an Interested Stockholder, unless:
(a) prior to such time the Board of Directors approved either the Business Combination or the transaction which resulted in such stockholder becoming an Interested Stockholder;
(b) upon consummation of the transaction which resulted in such stockholder becoming an Interested Stockholder, such stockholder owned at least eighty-five percent (85%) of the Voting Stock of the Corporation outstanding at the time the transaction commenced, excluding for purposes of determining the Voting Stock outstanding (but not the outstanding Voting Stock owned by such Interested Stockholder) those shares owned (i) by Persons (as defined hereinafter) who are directors and also officers of the Corporation and (ii) employee stock plans of the Corporation 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
(c) at or subsequent to such time, the Business Combination is approved by the Board of Directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least sixty-six and two-thirds percent (662⁄3%) of the outstanding Voting Stock which is not owned by such Interested Stockholder.
Section 3. Exceptions to Prohibition on Interested Stockholder Transactions. The restrictions contained in this ARTICLE NINE shall not apply if:
(a) a stockholder becomes an Interested Stockholder inadvertently and (i) as soon as practicable divests itself of ownership of sufficient shares so that the stockholder ceases to be an Interested Stockholder; and (ii) would not, at any time within the three- year period immediately prior to a Business Combination between the Corporation and such stockholder, have been an Interested Stockholder but for the inadvertent acquisition of ownership; or
(b) the Business Combination is proposed prior to the consummation or abandonment of and subsequent to the earlier of the public announcement or the notice required hereunder of a proposed transaction which (i) constitutes one of the transactions described in the second sentence of this Section 3(b) of ARTICLE NINE; (ii) is with or by a Person who either was not an Interested Stockholder during the previous three years or who became an Interested Stockholder with the approval of the Board of Directors; and (iii) is approved or not opposed by a majority of the directors then in office (but not less than one) who were directors prior to any Person becoming an Interested Stockholder during the previous three years or were recommended for election or elected to succeed such directors by a majority of such directors. The proposed transactions referred to in the preceding sentence are limited to (x) a merger or consolidation of the Corporation (except for a merger in respect of which, pursuant to Section 251(f) of the DGCL, no vote of the stockholders of the Corporation is required); (y) a sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions), whether as part of a dissolution or otherwise, of assets of the Corporation or of any direct or indirect majority-owned subsidiary of the Corporation (other than to any direct or indirect wholly-owned subsidiary or to the Corporation) having an aggregate market value equal to fifty percent (50%) or more of either that aggregate market value of all of the assets of the Corporation determined on a consolidated basis or the aggregate market value of all the outstanding Stock (as defined hereinafter) of the Corporation; or (z) a proposed tender or exchange offer for fifty percent (50%) or more of the outstanding Voting Stock of the Corporation. The Corporation shall give not less than 20 days’ notice to all Interested Stockholders prior to the consummation of any of the transactions described in clause (x) or (y) of the second sentence of this Section 3(b) of ARTICLE NINE.
Section 4. Definitions. As used in this ARTICLE NINE only, and unless otherwise provided by the express terms of this ARTICLE NINE, the following terms shall have the meanings ascribed to them as set forth in this Section 4:
(a) “Affiliate” means a Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, another Person;
(b) “Associate,” when used to indicate a relationship with any Person, means: (i) any corporation, partnership, unincorporated association or other entity of which such
Person is a director, officer or partner or is, directly or indirectly, the owner of twenty percent (20%) or more of any class of Voting Stock; (ii) any trust or other estate in which such Person has at least a twenty percent (20%) beneficial interest or as to which such Person serves as trustee or in a similar fiduciary capacity; and (iii) any relative or spouse of such Person, or any relative of such spouse, who has the same residence as such Person;
(c) “Business Combination” means:
(i) any merger or consolidation of the Corporation or any direct or indirect majority-owned subsidiary of the Corporation with (A) the Interested Stockholder, or (B) any other corporation, partnership, unincorporated association or entity if the merger or consolidation is caused by the Interested Stockholder and as a result of such merger or consolidation Section 2 of this ARTICLE NINE is not applicable to the surviving entity;
(ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions), except proportionately as a stockholder of the Corporation, to or with the Interested Stockholder, whether as part of a dissolution or otherwise, of assets of the Corporation or of any direct or indirect majority-owned subsidiary of the Corporation which assets have an aggregate market value equal to ten percent (10%) or more of either the aggregate market value of all the assets of the Corporation determined on a consolidated basis or the aggregate market value of all the outstanding Stock of the Corporation;
(iii) any transaction which results in the issuance or transfer by the Corporation or by any direct or indirect majority-owned subsidiary of the Corporation of any Stock of the Corporation or of such subsidiary to the Interested Stockholder, except: (A) pursuant to the exercise, exchange or conversion of securities exercisable for, exchangeable for or convertible into Stock of the Corporation or any such subsidiary which securities were outstanding prior to the time that the Interested Stockholder became such; (B) pursuant to a merger under Section 251(g) of the DGCL; (C) pursuant to a dividend or distribution paid or made, or the exercise, exchange or conversion of securities exercisable for, exchangeable for or convertible into Stock of the Corporation or any such subsidiary which security is distributed, pro rata to all holders of a class or series of Stock of the Corporation subsequent to the time the Interested Stockholder became such; (D) pursuant to an exchange offer by the Corporation to purchase Stock made on the same terms to all holders of such Stock; or (E) any issuance or transfer of Stock by the Corporation; provided however, that in no case under items (C)-(E) of this Section 4(c)(iii) of ARTICLE NINE shall there be an increase in the Interested Stockholder’s proportionate share of the Stock of any class or series of the Corporation or of the Voting Stock of the Corporation;
(iv) any transaction involving the Corporation or any direct or indirect majority-owned subsidiary of the Corporation which has the effect, directly or
indirectly, of increasing the proportionate share of the Stock of any class or series, or securities convertible into the Stock of any class or series, of the Corporation or of any such subsidiary which is owned by the Interested Stockholder, except as a result of immaterial changes due to fractional share adjustments or as a result of any purchase or redemption of any shares of Stock not caused, directly or indirectly, by the Interested Stockholder; or
(v) any receipt by the Interested Stockholder of the benefit, directly or indirectly (except proportionately as a stockholder of the Corporation), of any loans, advances, guarantees, pledges or other financial benefits (other than those expressly permitted in Sections 4(c)(i)-(iv) of ARTICLE NINE) provided by or through the Corporation or any direct or indirect majority-owned subsidiary of the Corporation;
(d) “control,” including the terms “controlling,” “controlled by” and “under common control with,” means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of Voting Stock, by contract or otherwise. A Person who is the owner of twenty percent (20%) or more of the outstanding Voting Stock of any corporation, partnership, unincorporated association or other entity shall be presumed to have control of such entity, in the absence of proof by a preponderance of the evidence to the contrary; notwithstanding the foregoing, a presumption of control shall not apply where such Person holds Voting Stock, in good faith and not for the purpose of circumventing this ARTICLE NINE, as an agent, bank, broker, nominee, custodian or trustee for one or more owners who do not individually or as a group (as such term is used in Rule 13d‑5 under the Securities Exchange Act of 1934, as such Rule is in effect as of the date of this Certificate of Incorporation) have control of such entity;
(e) “Interested Stockholder” means any Person (other than the Corporation and any direct or indirect majority-owned subsidiary of the Corporation) that (i) is the owner of fifteen percent (15%) or more of the outstanding Voting Stock of the Corporation, or (ii) is an Affiliate or Associate of the Corporation and was the owner of fifteen percent (15%) or more of the outstanding Voting Stock of the Corporation at any time within the three-year period immediately prior to the date on which it is sought to be determined whether such Person is an Interested Stockholder, and the affiliates and associates of such Person. Notwithstanding anything in this ARTICLE NINE to the contrary, the term “Interested Stockholder” shall not include: (x) the GA Stockholder or any of its Affiliated Companies and any current or future affiliates of the foregoing (so long as such affiliate remains an affiliate), any of their direct or indirect transferees of at least 15% of the Corporation’s outstanding Common Stock or any other Person with whom any of the foregoing are acting as a group or in concert for the purpose of acquiring, holding, voting or disposing of shares of Stock of the Corporation, (y) any Person who would otherwise be an Interested Stockholder either in connection with or because of a transfer, sale, assignment, conveyance, hypothecation, encumbrance, or other disposition of five percent (5%) or more of the outstanding Voting Stock of the Corporation (in one transaction or a series of transactions) by the GA Stockholder or any of its affiliates or
associates to such Person; provided, however, that such Person was not an Interested Stockholder prior to such transfer, sale, assignment, conveyance, hypothecation, encumbrance, or other disposition; or (z) any Person whose ownership of shares in excess of the fifteen percent (15%) limitation set forth herein is the result of action taken solely by the Corporation, provided that, for purposes of this clause (z) only, such Person shall be an Interested Stockholder if thereafter such Person acquires additional shares of Voting Stock of the Corporation, except as a result of further action by the Corporation not caused, directly or indirectly, by such Person;
(f) “Owner,” including the terms “own” and “owned,” when used with respect to any Stock, means a Person that individually or with or through any of its Affiliates or Associates beneficially owns such Stock, directly or indirectly; or has (A) the right to acquire such Stock (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding, or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise; provided, however, that a Person shall not be deemed the owner of Stock tendered pursuant to a tender or exchange offer made by such Person or any of such Person’s Affiliates or Associates until such tendered Stock is accepted for purchase or exchange; or (B) the right to vote such Stock pursuant to any agreement, arrangement or understanding; provided, however, that a Person shall not be deemed the owner of any Stock because of such Person’s right to vote such Stock if the agreement, arrangement or understanding to vote such Stock arises solely from a revocable proxy or consent given in response to a proxy or consent solicitation made to 10 or more Persons; or (C) has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting (except voting pursuant to a revocable proxy or consent as described in (B) of this Section 4(f) of ARTICLE NINE), or disposing of such Stock with any other Person that beneficially owns, or whose affiliates or associates beneficially own, directly or indirectly, such Stock; provided, that, for the purpose of determining whether a Person is an Interested Stockholder, the Voting Stock of the Corporation deemed to be outstanding shall include Stock deemed to be owned by the Person through application of this definition of “owned” but shall not include any other unissued Stock of the Corporation which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise;
(g) “Person” means any individual, corporation, partnership, unincorporated association or other entity;
(h) “Stock” means, with respect to any corporation, any capital stock of such corporation and, with respect to any other entity, any equity interest of such entity; and
(i) “Voting Stock” means, with respect to any corporation, Stock of any class or series entitled to vote generally in the election of directors and, with respect to any entity that is not a corporation, any equity interest entitled to vote generally in the election of the governing body of such entity. Every reference to a percentage of Voting Stock shall refer to such percentage of the votes of such Voting Stock.
ARTICLE TEN
Section 1. Amendments to the Bylaws. In furtherance and not in limitation of the powers conferred by law, the Bylaws may be amended, altered or repealed and new bylaws made by (i) the Board or (ii) the stockholder by, in addition to any vote of the holders of any class or series of capital stock of the Corporation required herein (including any certificate of designation relating to any series of Preferred Stock), the Bylaws or applicable law, the affirmative vote of the holders of at least sixty-six and two-thirds percent (662⁄3%) of the voting power of the then outstanding Voting Stock, voting together as a single class.
Section 2. Amendments to this Certificate of Incorporation. Subject to the rights of holders of any series of Preferred Stock then outstanding, notwithstanding any other provision of this Certificate of Incorporation or the Bylaws, and in addition to any affirmative vote of the holders of any particular class or series of the capital stock required by law or otherwise, no provision of ARTICLE FIVE, ARTICLE SIX, ARTICLE SEVEN, ARTICLE NINE, ARTICLE TEN or ARTICLE ELEVEN of this Certificate of Incorporation may be altered, amended or repealed in any respect, nor may any provision of this Certificate of Incorporation or the Bylaws inconsistent therewith be adopted, unless in addition to any other vote required by this Certificate of Incorporation or otherwise required by law, such alteration, amendment, repeal or adoption is approved by (i) prior to the Stockholder Consent Trigger Date, the affirmative vote of holders of at least a majority of the voting power of all outstanding shares of Voting Stock and (ii) on or after the Stockholder Consent Trigger Date, the affirmative vote of holders of at least sixty-six and two-thirds percent (662⁄3%) of the voting power of all outstanding shares of Voting Stock, in each case, voting together as a single class.
ARTICLE ELEVEN
Section 1. Exclusive Forum. Unless this Corporation consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware (or, if the Court of Chancery does not have jurisdiction, the United States District Court for the District of Delaware) shall, to the fullest extent permitted by law, be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer, employee or stockholder of the Corporation to the Corporation or the Corporation’s stockholders, (iii) any action asserting a claim arising pursuant to any provision of the DGCL, this Certificate of Incorporation or Bylaws (as either may be amended or restated) or as to which the DGCL confers jurisdiction on the Court of Chancery of the State of Delaware or (iv) any action asserting a claim governed by the internal affairs doctrine; provided that for the avoidance of doubt, this provision, including for any “derivative action”, will not apply to suits to enforce a duty or liability created by the Securities Act of 1933, as amended (the “Securities Act”), the Exchange Act or any other claim for which there is exclusive or concurrent federal and state jurisdiction. Unless the Corporation consents in writing to the selection of an alternative forum, the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act.
Section 2. Notice. Any Person purchasing or otherwise acquiring or holding any interest in shares of capital stock of the Corporation (including, without limitation, shares of Common Stock) shall be deemed to have notice of and to have consented to the provisions of this ARTICLE ELEVEN.
ARTICLE TWELVE
If any provision or provisions of this Certificate of Incorporation shall be held to be invalid, illegal or unenforceable as applied to any circumstance for any reason whatsoever, the validity, legality and enforceability of such provisions in any other circumstance and of the remaining provisions of this Certificate of Incorporation (including, without limitation, each portion of any paragraph of this Certificate of Incorporation containing any such provision held to be invalid, illegal or unenforceable that is not itself held to be invalid, illegal or unenforceable) shall not, to the fullest extent permitted by applicable law, in any way be affected or impaired thereby.
IN WITNESS WHEREOF, EngageSmart, Inc. has caused this Amended and Restated Certificate of Incorporation to be executed by its duly authorized officer on this 22nd day of September, 2021.
ENGAGESMART, INC.
By: /s/ Charles Kallenbach
Name: Charles Kallenbach
Title: General Counsel and Secretary
Exhibit 3.2
BYLAWS
OF
ENGAGESMART, INC.
A Delaware corporation
(Adopted as of September 22, 2021)
EngageSmart, Inc. (the “Corporation”), pursuant to the provisions of Section 109 of the General Corporation Law of the State of Delaware (the “DGCL”), hereby adopts these Bylaws (these “Bylaws”):
ARTICLE I
OFFICES
Section 1. Offices. The Corporation may have an office or offices other than its registered office at such place or places, either within or outside the State of Delaware, as the Board of Directors of the Corporation (the “Board of Directors”) may from time to time determine or the business of the Corporation may require. The registered office of the Corporation in the State of Delaware shall be as stated in the Corporation’s certificate of incorporation as then in effect (the “Certificate of Incorporation”).
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Place of Meetings. The Board of Directors may designate a place, if any, either within or outside the State of Delaware, as the place of meeting for any annual meeting or for any special meeting of stockholders.
Section 2. Annual Meeting. An annual meeting of the stockholders shall be held at such date and time as is specified by resolution of the Board of Directors. At the annual meeting, stockholders shall elect directors and transact such other business as properly may be brought before the annual meeting pursuant to Section 11 of this ARTICLE II of these Bylaws. The Board of Directors may postpone, reschedule or cancel any annual meeting of stockholders previously scheduled by the Board of Directors.
Section 3. Special Meetings. Special meetings of the stockholders may only be called in the manner provided in the Certificate of Incorporation. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. The Board of Directors may postpone, reschedule or cancel any special meeting of stockholders previously scheduled by the Board of Directors.
Section 4. Notice of Meetings. Whenever stockholders are required or permitted to take action at a meeting, notice of the meeting shall be given that shall state the place, if any, date, and time of the meeting of the stockholders, the means of remote communications, if any, by which
stockholders and proxyholders not physically present may be deemed to be present in person and vote at such meeting, the record date for determining the stockholders entitled to vote at the meeting, if such date is different from the record date for determining stockholders entitled to notice of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be given, not less than 10 nor more than 60 days before the date on which the meeting is to be held, to each stockholder entitled to vote at such meeting as of the record date for determining the stockholders entitled to notice of the meeting, except as otherwise provided herein or required by law (meaning, here and hereinafter, as required from time to time by the DGCL) or the Certificate of Incorporation.
(a) Form of Notice. All such notices shall be delivered in writing or in any other manner permitted by the DGCL. If mailed, such notice shall be deemed given when deposited in the United States mail, postage prepaid, addressed to the stockholder at his, her or its address as the same appears on the records of the Corporation. If given by courier, such notice shall be deemed given at the earlier of when the notice is received or left at such stockholder’s address. Subject to the limitations of Section 4(c) of this ARTICLE II, if given by electronic transmission, such notice shall be deemed to be delivered: (i) if given by facsimile telecommunication, when directed to a number at which the stockholder has consented to receive notice by facsimile, (ii) if by electronic mail, when directed to such stockholder’s electronic mail address; (iii) if by a posting on an electronic network together with separate notice to the stockholder of such specific posting, upon the later of (x) such posting and (y) the giving of such separate notice; and (iv) if by any other form of electronic transmission, when directed to the stockholder. An affidavit of the secretary or an assistant secretary of the Corporation, the transfer agent of the Corporation or any other agent of the Corporation that the notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein.
(b) Waiver of Notice. Whenever notice is required to be given under any provisions of the DGCL, the Certificate of Incorporation or these Bylaws, a written waiver thereof, signed by the stockholder entitled to notice, or a waiver by electronic transmission given by the stockholder entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Neither the business to be transacted at, nor the purpose of, any meeting of the stockholders of the Corporation need be specified in any waiver of notice of such meeting. Attendance of a stockholder of the Corporation at a meeting of such stockholders shall constitute a waiver of notice of such meeting, except when the stockholder attends 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 and does not further participate in the meeting.
(c) Notice by Electronic Transmission. Without limiting the manner by which notice otherwise may be given effectively to stockholders of the Corporation pursuant to the DGCL, the Certificate of Incorporation or these Bylaws, any notice to stockholders of the Corporation given by the Corporation under any provision of the DGCL, the Certificate of Incorporation or these Bylaws shall be effective if given by electronic mail complying with the DGCL or other form of electronic transmission which other form has been consented to by the stockholder of the Corporation to whom the notice is given. Any such consent is revocable by the stockholder by notice to the Corporation. Notice may not be given by electronic transmission from and after the time: (i) the Corporation is unable to deliver by electronic transmission two (2)
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consecutive notices given by the Corporation; and (ii) such inability becomes known to the secretary or an assistant secretary of the Corporation or to the transfer agent or other person responsible for the giving of notice; provided, however, that the inadvertent failure to discover such inability shall not invalidate any meeting or other action. For purposes of these Bylaws, except as otherwise limited by applicable law, the term “electronic transmission” means any form of communication not directly involving the physical transmission of paper, including the use of, or participation in, one or more electronic networks or databases (including one or more distributed electronic networks), 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 recipient through an automated process.
Section 5. List of Stockholders. The Corporation shall prepare, at least 10 days before each meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, provided, however, if the record date for determining the stockholders entitled to vote is less than 10 days before the meeting date, the list shall reflect the stockholders entitled to vote as of the 10th day before the meeting date, arranged in alphabetical order and showing the address of each such stockholder and the number of shares registered in the name of each such stockholder. Nothing contained in this section shall require the Corporation to include electronic mail addresses or other electronic contact information on such list. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting for a period of at least 10 days prior to the meeting: (a) on a reasonably accessible electronic network, provided that the information required to gain access to such list is provided with the notice of the meeting, or (b) during ordinary business hours, at the principal place of business of the Corporation. In the event the Corporation determines to make the list available on an electronic network, the Corporation may take reasonable steps to ensure that such information is available only to stockholders of the Corporation. If the meeting is to be held at a place, 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. If the meeting is to be held solely by means of remote communication, then the list shall also be open to the examination of any stockholder during the whole time of the meeting on a reasonably accessible electronic network, and the information required to access such list shall be provided with the notice of the meeting. Except as otherwise provided by law, the list shall be the only evidence as to who are the stockholders entitled to examine the list of stockholders required by this Section 5 or to vote in person or by proxy at any meeting of stockholders.
Section 6. Quorum. The holders of a majority in voting power of the outstanding capital stock entitled to vote at the meeting, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders, except as otherwise provided by law, by the Certificate of Incorporation or these Bylaws. If a quorum is not present, the chairman of the meeting or the holders of a majority of the voting power present in person or represented by proxy at the meeting and entitled to vote at the meeting may adjourn the meeting to another time and/or place from time to time until a quorum shall be present in person or represented by proxy. When a specified item of business requires a vote by a class or series (if the Corporation shall then have outstanding shares of more than one class or series) voting as a separate class or series, the holders of a majority in voting power of the outstanding stock of such class or series shall constitute a quorum (as to such class or series) for the transaction of such item of business. A quorum once established at a meeting shall not be broken by the withdrawal of enough votes to leave less than a quorum.
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Section 7. Adjourned Meetings. Any meeting of stockholders, annual or special, may adjourn from time to time to reconvene at the same or some other place. When a meeting is adjourned to another time and place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than 30 days, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. If after the adjournment a new record date for stockholders entitled to vote is fixed for the adjourned meeting, the Board of Directors shall fix a new record date for notice of such adjourned meeting, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors and, except as otherwise required by law, shall not be more than 60 days nor less than 10 days before the date of such adjourned meeting, and shall give notice of the adjourned meeting to each stockholder of record entitled to vote at such adjourned meeting as of the record date fixed for notice of such adjourned meeting.
Section 8. Vote Required. When a quorum has been established, all matters other than the election of directors shall be determined by the affirmative vote of the holders of a majority in voting power of capital stock present in person or represented by proxy at the meeting and entitled to vote on the subject matter, unless by express provisions of an applicable law, the rules of any stock exchange upon which the Corporation’s securities are listed, any regulation applicable to the Corporation or its securities, the Certificate of Incorporation or these Bylaws a minimum or different vote is required, in which case such express provision shall govern and control the vote required on such matter. Except as otherwise provided in the Certificate of Incorporation, directors shall be elected by a plurality of the votes cast.
Section 9. Voting Rights. Except as otherwise provided by the DGCL or the Certificate of Incorporation, each stockholder entitled to vote at any meeting of stockholders shall be entitled to one vote in person or by proxy for each share of capital stock held by such stockholder which has voting power upon the matter in question. Voting at meetings of stockholders need not be by written ballot.
Section 10. Proxies. Each stockholder entitled to vote at a meeting of stockholders or to express consent to corporate action in writing without a meeting may authorize another person or persons to act for such stockholder by proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the Corporation generally.
Section 11. Advance Notice of Stockholder Business and Director Nominations.
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In addition, any stockholder who submits a notice pursuant to Section 11(a) of this ARTICLE II is required to update and supplement the information disclosed in such notice, if necessary, in accordance with Section 11(d) of this ARTICLE II.
(b) Nominations at Annual Meetings of Stockholders.
(i) Only persons who are nominated in accordance and compliance with the procedures set forth in this Section 11(b) of ARTICLE II shall be eligible for election to the Board of Directors at an annual meeting of stockholders.
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(ii) Nominations of persons for election to the Board of Directors of the Corporation may be made at an annual meeting of stockholders only (A) by or at the direction of the Board of Directors or any duly authorized committee thereof or (B) by any stockholder of the Corporation who (1) was a stockholder of record at the time of giving of notice provided for in this Section 11(b) of ARTICLE II and on the record date for determination of stockholders of the Corporation entitled to vote at the meeting, and at the time of the annual meeting, (2) is entitled to vote at the meeting and (3) complies with the notice procedures set forth in this Section 11(b) of ARTICLE II. For the avoidance of doubt, clause (B) of this Section 11(b)(ii) of ARTICLE II shall be the exclusive means for a stockholder to make nominations of persons for election to the Board of Directors at an annual meeting of stockholders (other than nominations made by the GA Stockholder and the GA Stockholder Affiliates at any time prior to the GA Stockholder Advance Notice Trigger Date). For nominations to be properly brought by a stockholder at an annual meeting of stockholders, the stockholder must have given timely notice thereof in proper written form as described in Section 11(b)(iii) of this ARTICLE II to the Secretary and the stockholder and the Stockholder Associated Person must have acted in accordance with the representations set forth in the Nomination Solicitation Statement required by these Bylaws. To be timely, a stockholder’s notice for the nomination of persons for election to the Board of Directors (other than such a notice by the GA Stockholder and the GA Stockholder Affiliates prior to the GA Stockholder Advance Notice Trigger Date which may be delivered at any time prior to the mailing of the definitive proxy statement pursuant to Section 14(a) of the Exchange Act related to the next annual meeting of stockholders) must be delivered to the Secretary at the principal executive offices of the Corporation in proper written form not less than ninety (90) days and not more than one hundred twenty (120) days prior to the first anniversary of the preceding year’s annual meeting of stockholders (which date shall, for purposes of the Corporation’s first annual meeting of stockholders after its shares of Common Stock are first publicly traded, be deemed to have occurred on June 4, 2021); provided, however, that if and only if the annual meeting is not scheduled to be held within a period that commences thirty (30) days before such anniversary date and ends thirty (30) days after such anniversary date, or if no annual meeting was held in the preceding year (other than for purposes of the Corporation’s first annual meeting of stockholders after its shares of Common Stock are first publicly traded), such stockholder’s notice must be delivered by the later of the tenth day following the day the Public Announcement of the date of the annual meeting is first made and the date which is ninety (90) days prior to the date of the annual meeting. In no event shall any adjournment or postponement of an annual meeting or the announcement thereof commence a new time period (or extend any time period) for the giving of a stockholder’s notice as described above. Notices delivered pursuant to this Section 11(b) of ARTICLE II will be deemed received on any given day if received prior to the Close of Business on such day (and otherwise on the next succeeding day). For the avoidance of doubt, a stockholder shall not be entitled to make additional or substitute nominations following the expiration of the time periods set forth in these Bylaws. The number of nominees a stockholder may nominate for election
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at the annual meeting (or in the case of a stockholder giving the notice on behalf of a beneficial owner, the number of nominees a stockholder may nominate for election at the annual meeting on behalf of such beneficial owner) shall not exceed the number of directors to be elected at such annual meeting.
(iii) To be in proper written form, a stockholder’s notice to the Secretary shall set forth:
(A) as to each person that the stockholder proposes to nominate for election or re-election as a director of the Corporation, (1) the name, age, business address and residence address of the person, (2) the principal occupation or employment of the person, (3) the class or series and number of shares of capital stock of the Corporation which are directly or indirectly owned beneficially or of record by the person, (4) the date such shares were acquired and the investment intent of such acquisition and (5) any other information relating to the person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with the solicitation of proxies or consents for a contested election of directors (even if an election contest or proxy solicitation is not involved), or is otherwise required, pursuant to Section 14 of the Exchange Act, and the rules, regulations and schedules promulgated thereunder (including such person’s written consent to being named in the Corporation’s proxy statement as a nominee of the stockholder, if applicable, and to serving as a director if elected),
(B) as to the stockholder giving the notice, the name and address of such stockholder, as they appear on the Corporation’s books, the name and address (if different from the Corporation’s books) of such proposing stockholder, and the name and address of any Stockholder Associated Person,
(C) the class or series and number of shares of stock of the Corporation which are directly or indirectly held of record or beneficially owned by such stockholder or by any Stockholder Associated Person with respect to the Corporation’s securities, a description of any Derivative Positions directly or indirectly held or beneficially held by the stockholder or any Stockholder Associated Person, and whether and the extent to which a Hedging Transaction has been entered into by or on behalf of such stockholder or any Stockholder Associated Person,
(D) a description of all arrangements or understandings (including financial transactions and direct or indirect compensation) between or among such stockholder or any Stockholder Associated Person and each proposed nominee and any other person or entity (including their names) pursuant to which the nomination(s) are to be made by such stockholder,
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(E) a representation that such stockholder is a holder of record of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the persons named in its notice,
(F) any other information relating to such stockholder or any Stockholder Associated Person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with the solicitation of proxies or consents for a contested election of directors (even if an election contest or proxy solicitation is not involved), or otherwise required, pursuant to Section 14 of the Exchange Act, and the rules, regulations and schedules promulgated thereunder, and
(G) a representation as to whether such stockholder or any Stockholder Associated Person intends or is part of a group which intends to deliver a proxy statement and/or form of proxy to the holders of a sufficient number of the Corporation’s outstanding shares reasonably believed by the stockholder or any Stockholder Associated Person, as the case may be, to elect each proposed nominee or otherwise to solicit proxies or votes from stockholders in support of the nomination (such representation, a “Nomination Solicitation Statement”).
In addition, any stockholder who submits a notice pursuant to this Section 11(b) of ARTICLE II is required to update and supplement the information disclosed in such notice, if necessary, in accordance with Section 11(d) of this ARTICLE II and shall comply with Section 11(f) of this ARTICLE II.
(iv) Notwithstanding anything in Section 11(b)(ii) of this ARTICLE II to the contrary, if the number of directors to be elected to the Board of Directors is increased effective after the time period for which nominations would otherwise be due under paragraph 11(b)(ii) of this Article II and there is no Public Announcement naming the nominees for additional directorships at least ten (10) days prior to the last day a stockholder may deliver a notice of nomination in accordance with Section 11(b)(ii), a stockholder’s notice required by Section 11(b)(ii) of this ARTICLE II shall also be considered timely, but only with respect to nominees for the additional directorships, if it shall be received by the Secretary at the principal executive offices of the Corporation not later than the Close of Business on the tenth day following the day on which such Public Announcement is first made by the Corporation.
(c) Special Meetings of Stockholders. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the notice of meeting. Only persons who are nominated in accordance and compliance with the procedures set forth in this Section 11(c) of ARTICLE II shall be eligible for election to the Board of Directors at a special meeting of stockholders at which directors are to be elected. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders
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at which directors are to be elected pursuant to the notice of meeting only (i) by or at the direction of the Board of Directors, any duly authorized committee thereof, or stockholders (if stockholders are permitted to call a special meeting of stockholders pursuant to Section 2 of Article EIGHT of the Certificate of Incorporation) or (ii) provided that the Board of Directors or stockholders (if stockholders are permitted to call a special meeting of stockholders pursuant to Section 2 of Article Eight of the Certificate of Incorporation) has determined that directors are to be elected at such special meeting, by any stockholder of the Corporation who (A) was a stockholder of record at the time of giving of notice provided for in this Section 11(c) of ARTICLE II and at the time of the special meeting, (B) is entitled to vote at the meeting and (C) complies with the notice procedures provided for in this Section 11(c) of ARTICLE II. For the avoidance of doubt, the foregoing clause (ii) of this Section 11(c) of ARTICLE II shall be the exclusive means for a stockholder to propose nominations of persons for election to the Board of Directors at a special meeting of stockholders at which directors are to be elected. For nominations to be properly brought by a stockholder at a special meeting of stockholders, the stockholder must have given timely notice thereof in proper written form as described in this Section 11(c) of ARTICLE II to the Secretary. To be timely, a stockholder’s notice for the nomination of persons for election to the Board of Directors (other than such a notice by the GA Stockholder prior to the GA Stockholder Advance Notice Trigger Date, which may be delivered at any time up to the later of (i) thirty-five (35) days prior to the special meeting of stockholders and (ii) the tenth day following the day on which a Public Announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting) must be received by the Secretary at the principal executive offices of the Corporation not earlier than the 120th day prior to such special meeting and not later than the Close of Business on the later of the 90th day prior to such special meeting or the tenth day following the day on which a Public Announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall any adjournment or postponement of a special meeting or the announcement thereof commence a new time period (or extend any time period) for the giving of a stockholder’s notice as described above. Notices delivered pursuant to this Section 11(c) of ARTICLE II will be deemed received on any given day if received prior to the Close of Business on such day (and otherwise on the next succeeding day). To be in proper written form, such stockholder’s notice shall set forth all of the information required by, and otherwise be in compliance with, Section 11(b)(iii) of this ARTICLE II. In addition, any stockholder who submits a notice pursuant to this Section 11(c) of ARTICLE II is required to update and supplement the information disclosed in such notice, if necessary, in accordance with Section 11(d) of this ARTICLE II and shall comply with Section 11(f) of this ARTICLE II.
(d) Update and Supplement of Stockholder’s Notice. Any stockholder who submits a notice of proposal for business or nomination for election pursuant to this Section 11 of ARTICLE II is required to update and supplement the information disclosed in such notice, if necessary, so that the information provided or required to be provided in such notice shall be true and correct as of the record date for determining the stockholders entitled to notice of the meeting of stockholders and as of the date that is ten (10) Business Days prior to such meeting of the stockholders or any adjournment or postponement thereof, and such update and supplement shall be received by the Secretary at the principal executive offices of the Corporation not later than the Close of Business on the fifth Business Day after the record date for the meeting of stockholders (in the case of the update and supplement required to be made as of the record date), and not later
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than the Close of Business on the eighth business day prior to the date for the meeting of stockholders or any adjournment or postponement thereof (in the case of the update and supplement required to be made as of ten (10) Business Days prior to the meeting of stockholders or any adjournment or postponement thereof).
(e) Definitions. For purposes of this Section 11 of ARTICLE II, the term:
(i) “Business Day” shall mean each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which banking institutions in New York, NY are authorized or obligated by law or executive order to close.
(ii) “Close of Business” shall mean 5:00 p.m. local time at the principal executive offices of the Corporation, and if an applicable deadline falls on the Close of Business on a day that is not a Business Day, then the applicable deadline shall be deemed to be the Close of Business on the immediately preceding Business Day.
(iii) “Derivative Positions” means, with respect to a stockholder or any Stockholder Associated Person, any derivative positions including, without limitation, any short position, profits interest, option, warrant, convertible security, stock appreciation right, or similar right with an exercise or conversion privilege or a settlement payment or mechanism at a price related to any class or series of shares of the Corporation or with a value derived in whole or in part from the value of any class or series of shares of the Corporation, whether or not such instrument or right shall be subject to settlement in the underlying class or series of capital stock of the Corporation or otherwise and any performance-related fees to which such stockholder or any Stockholder Associated Person is entitled based, directly or indirectly, on any increase or decrease in the value of shares of capital stock of the Corporation;
(iv) “Hedging Transaction” means, with respect to a stockholder or any Stockholder Associated Person, any hedging or other transaction (such as borrowed or loaned shares) or series of transactions, or any other agreement, arrangement or understanding, the effect or intent of which is to increase or decrease the voting power or economic or pecuniary interest of such stockholder or any Stockholder Associated Person with respect to the Corporation’s securities;
(v) “Public Announcement” means disclosure in a press release reported by the Dow Jones News Service, Associated Press, Business Wire, PR Newswire or comparable news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Sections 13, 14 or 15(d) of the Exchange Act; and
(vi) “Stockholder Associated Person” of any stockholder means (A) any person controlling, directly or indirectly, or acting in concert with, such stockholder, (B) any beneficial owner of shares of stock of the Corporation owned of record or beneficially by such stockholder or (C) any person directly or indirectly
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controlling, controlled by or under common control with such Stockholder Associated Person.
(f) Submission of Questionnaire, Representation and Agreement. To be qualified to be a nominee for election or re-election as a director of the Corporation, a person must deliver (in the case of a person nominated by a stockholder in accordance with Sections 11(b) or 11(c) of this ARTICLE II, in accordance with the time periods prescribed for delivery of notice under such sections) to the Secretary at the principal executive offices of the Corporation a written questionnaire with respect to the background and qualification of such person and the background of any other person or entity on whose behalf the nomination is being made (which questionnaire shall be provided by the Secretary upon written request of any stockholder of record identified by name within five Business Days of such written request) and a written representation and agreement (in the form provided by the Secretary upon written request of any stockholder of record identified by name within five Business Days of such written request) that such person (i) is not and will not become a party to (A) any agreement, arrangement or understanding with, and has not given any commitment or assurance to, any person or entity as to how such person, if elected as a director of the Corporation, will act or vote on any issue or question (a “Voting Commitment”) that has not been disclosed to the Corporation or (B) any Voting Commitment that could limit or interfere with such person’s ability to comply, if elected as a director of the Corporation, with such person’s fiduciary duties under applicable law, (ii) is not and will not become a party to any agreement, arrangement or understanding with any person or entity other than the Corporation with respect to any direct or indirect compensation, reimbursement or indemnification in connection with service or action as a director that has not been disclosed therein and (iii) would be in compliance, and if elected as a director of the Corporation will comply, with all applicable publicly disclosed corporate governance, conflict of interest, confidentiality and stock ownership and trading policies and guidelines of the Corporation.
(g) Update and Supplement of Nominee Information. The Corporation may also, as a condition to any such nomination or business being deemed properly brought before an annual meeting, require any Stockholder Associated Person or proposed nominee to deliver to the Secretary, within five Business Days of any such request, such other information as may reasonably be requested by the Corporation, including such other information as may be reasonably required by the Board, in its sole discretion, to determine (A) the eligibility of such proposed nominee to serve as a director of the Corporation, (B) whether such nominee qualifies as an “independent director” or “audit committee financial expert” under applicable law, Securities and Exchange Commission and stock exchange rules or regulation, or any publicly disclosed corporate governance guideline or committee charter of the Corporation and (C) such other information that the Board of Directors determines, in its sole discretion, could be material to a reasonable stockholder’s understanding of the independence, or lack thereof, of such nominee.
(h) Authority of Chairman; General Provisions. Except as otherwise provided by applicable law, the Certificate of Incorporation or these Bylaws, the chairman of the meeting shall have the power and duty to determine whether any nomination or other business proposed to be brought before the meeting was made or brought in accordance with the procedures set forth in these Bylaws (including whether the stockholder or Stockholder Associated Person, if any, on whose behalf the nomination or proposal is made or solicited (or is part of a group which solicited)
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or did not so solicit, as the case may be, proxies or votes in support of such stockholder’s nominee or proposal in compliance with such stockholder’s representation as required by Section 11(a)(iii)(G) or Section 11(b)(iii)(G), as applicable, of these Bylaws) and, if any nomination or other business is not made or brought in compliance with these Bylaws, to declare that such nomination or proposal of other business be disregarded and not acted upon. Notwithstanding the foregoing provisions of this Section 11, unless otherwise required by law, if the stockholder (or a qualified representative of the stockholder) does not appear at the annual or special meeting of stockholders of the Corporation to present a nomination or proposed business, such nomination shall be disregarded and such proposed business shall not be transacted, notwithstanding that proxies in respect of such vote may have been received by the Corporation. For purposes of this Section 11, to be considered a qualified representative of the stockholder, a person must be a duly authorized officer, manager or partner of such stockholder or must be authorized by a writing executed by such stockholder or an electronic transmission delivered by such stockholder to act for such stockholder as proxy at the meeting of stockholders and such person must produce such writing or electronic transmission, or a reliable reproduction of the writing or electronic transmission, at the meeting of stockholders.
(i) Compliance with Exchange Act. Notwithstanding the foregoing provisions of these Bylaws, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules, regulations and schedules promulgated thereunder with respect to the matters set forth in these Bylaws; provided, however, that any references in these Bylaws to the Exchange Act or the rules, regulations and schedules promulgated thereunder are not intended to and shall not limit the requirements applicable to any nomination or other business to be considered pursuant to Section 11 of this ARTICLE II.
(j) Effect on Other Rights. Nothing in these Bylaws shall be deemed to (A) affect any rights of the stockholders to request inclusion of proposals in the Corporation’s proxy statement pursuant to Rule 14a-8 under the Exchange Act, (B) confer upon any stockholder a right to have a nominee or any proposed business included in the Corporation’s proxy statement, except as set forth in the Certificate of Incorporation or these Bylaws, (C) affect any rights of the holders of any series of preferred stock to elect directors pursuant to any applicable provisions of the Certificate of Incorporation or (D) limit the exercise, the method or timing of the exercise of, the rights of any person granted by the Corporation to nominate directors (including pursuant to that Stockholders Agreement, dated on or prior to the date of consummation of the initial public offering of the Corporation (as amended and/or restated or supplemented from time to time, the “Stockholders Agreement”), by and among the Corporation and the investors named therein, which rights may be exercised without compliance with the provisions of this Section 11 of ARTICLE II.
Section 12. Fixing a Record Date for Stockholder Meetings. In order that the Corporation may determine the stockholders entitled to notice of any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than 60 days nor less than 10 days before the date of such meeting. If the Board of Directors so fixes a date, such date shall also be the record date for determining the stockholders entitled to vote at such meeting unless the Board of Directors
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determines, at the time it fixes such record date, that a later date on or before the date of the meeting shall be the date for making such determination. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be the Close of Business on the next day preceding the day on which notice is first given, or, if notice is waived, at the Close of Business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting in conformity herewith; and in such case shall also fix as the record date for stockholders entitled to notice of such adjourned meeting the same or an earlier date as that fixed for determination of stockholders entitled to vote in accordance with the foregoing provisions of this Section 12 at the adjourned meeting.
Section 13. Action by Stockholders Without a Meeting. So long as stockholders of the Corporation have the right to act by consent in accordance with Section 1 of ARTICLE EIGHT of the Certificate of Incorporation, the following provisions shall apply:
(a) Record Date. For the purpose of determining the stockholders entitled to consent to corporate action in writing or in an electronic transmission without a meeting as may be permitted by the Certificate of Incorporation or the certificate of designation relating to any outstanding class or series of preferred stock, the Board of Directors may fix a record date, which record date shall not precede the date on which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than ten (10) (or the maximum number permitted by applicable law) days after the date on which the resolution fixing the record date is adopted by the Board of Directors. Any stockholder of record seeking to have the stockholders authorize or take action by consent shall, by written notice delivered by hand to the Secretary at the Corporation’s principal place of business during regular business hours, request that the Board of Directors fix a record date, which notice shall include the text of any proposed resolutions. Notices delivered pursuant to Section 13(a) of this ARTICLE II will be deemed received on any given day only if received prior to the Close of Business on such day (and otherwise shall be deemed received on the next succeeding Business Day). The Board of Directors shall promptly, but in all events within ten (10) days after the date on which such written notice is properly delivered to and deemed received by the Secretary, adopt a resolution fixing the record date (unless a record date has previously been fixed by the Board of Directors pursuant to the first sentence of this Section 13(a)). If no record date has been fixed by the Board of Directors pursuant to this Section 13(a) or otherwise within ten (10) days of receipt of a valid request by a stockholder, the record date for determining stockholders entitled to consent to corporate action in writing or in electronic transmissions without a meeting, when no prior action by the Board of Directors is required pursuant to applicable law, shall be the first date after the expiration of such ten (10) day time period on which a signed consent setting forth the action taken or proposed to be taken is delivered to the Corporation pursuant to Section 13(b); provided, however, that if prior action by the Board of Directors is required by applicable law, the record date for determining stockholders entitled to consent to corporate action in writing or in electronic transmissions without a meeting shall in such an event be at the Close of Business on the day on which the Board of Directors adopts the resolution taking such prior action.
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(b) Generally. No consent shall be effective to take the corporate action referred to therein unless written or electronic consents signed by a sufficient number of stockholders to take such action are delivered to the Corporation, in the manner required by this Section 13 and applicable law, within sixty (60) (or the maximum number permitted by applicable law) days of the first date on which a consent is delivered to the Corporation in the manner required by applicable law and this Section 13. The validity of any consent executed by a proxy for a stockholder pursuant to an electronic transmission transmitted to such proxy holder by or upon the authorization of the stockholder shall be determined by or at the direction of the Secretary. A written record of the information upon which the person making such determination relied shall be made and kept in the records of the proceedings of the stockholders. Any such consent shall be inserted in the minute book as if it were the minutes of a meeting of stockholders. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given by the Corporation (at its expense) to those stockholders who have not consented in writing or by electronic transmission and who, if the action had been taken at a meeting, would have been entitled to notice of the meeting if the record date for notice of such meeting had been the date that consents signed by a sufficient number of holders to take the action were delivered to the Corporation.
Section 14. Conduct of Meetings.
(a) Generally. Meetings of stockholders shall be presided over by the Chairman of the Board, if any, or in the Chairman’s absence or disability, by the Chief Executive Officer, or in the Chief Executive Officer’s absence or disability, by the President, or in the President’s absence or disability, by a Vice President (in the order as determined by the Board of Directors), or in the absence or disability of the foregoing persons by a chairman designated by the Board of Directors, or in the absence or disability of such person, by a chairman chosen at the meeting. The Secretary shall act as secretary of the meeting, but in the Secretary’s absence or disability the chairman of the meeting may appoint any person to act as secretary of the meeting.
(b) Rules, Regulations and Procedures. The Board of Directors may adopt by resolution such rules, regulations and procedures for the conduct of any meeting of stockholders of the Corporation 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 proxyholders 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 Corporation, their duly authorized and constituted proxies or such other persons as the chairman of the meeting shall determine; (iv) restrictions on entry to the meeting after the time fixed for the commencement thereof; (v) limitations on the time allotted to questions or comments by participants; and (vi) restrictions on the use of mobile phones, audio or
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video recording devices and similar devices at the meeting. The chairman of the meeting of stockholders, in addition to making any other determinations that may be appropriate to the conduct of the meeting, shall, if the facts warrant, determine and declare to the meeting that a nomination or matter or business was not properly brought before the meeting and if such chairman should so determine, such chairman shall so declare to the meeting and any such matter or business not properly brought before the meeting shall not be transacted or considered. 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. The chairman of the meeting shall announce at the meeting when the polls for each matter to be voted upon at the meeting will be opened and closed. After the polls close, no ballots, proxies or votes or any revocations or changes thereto may be accepted. The chairman of the meeting shall have the power, right and authority, for any or no reason, to convene, recess and/or adjourn any meeting of stockholders.
(c) Inspectors of Elections. The Corporation may, and to the extent required by law shall, in advance of any meeting of stockholders, appoint one or more inspectors of election to act at the meeting and make a written report thereof. One or more other persons may be designated as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the chairman of the meeting shall appoint one or more inspectors to act at the meeting. Unless otherwise required by law, inspectors may be officers, employees or agents of the Corporation. No person who is a candidate for an office at an election may serve as an inspector at such election. Each inspector, before entering upon the discharge of such inspector’s duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of such inspector’s ability. The inspector shall have the duties prescribed by law and, when the vote is completed, shall make a certificate of the result of the vote taken and of such other facts as may be required by law.
ARTICLE III
DIRECTORS
Section 1. General Powers. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors.
Section 2. Annual Meetings. The annual meeting of the Board of Directors shall be held without other notice than this Bylaw immediately after, and at the same place as, the annual meeting of stockholders. In the event that the annual meeting of stockholders takes place by means of remote communications, the annual meeting of the Board of Directors shall be held at the principal offices of the Corporation immediately after the annual meeting of the stockholders.
Section 3. Regular Meetings and Special Meetings. Regular meetings, other than the annual meeting, of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by resolution of the Board of Directors and publicized among all directors. Special meetings of the Board of Directors may be called by (i) the Chairman of the Board, if any, (ii) by the Secretary upon the written request of a majority of the directors then in office or (iii) if the Board of Directors then includes a director nominated or designated for nomination by the GA Stockholder, by any director nominated or designated for
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nomination by the GA Stockholder, and in each case shall be held at the place, if any, on the date and at the time as he, she or they shall fix. Any and all business may be transacted at a special meeting of the Board of Directors.
Section 4. Notice of Meetings. Notice of regular meetings of the Board of Directors need not be given except as otherwise required by law or these Bylaws. Notice of each special meeting of the Board of Directors, and of each regular and annual meeting of the Board of Directors for which notice is required, shall be given by the Secretary as hereinafter provided in this Section 4. Such notice shall be state the date, time and place, if any, of the meeting. Notice of any special meeting, and of any regular or annual meeting for which notice is required, shall be given to each director at least (a) twenty-four (24) hours before the meeting if by telephone or by being personally delivered or sent by overnight courier, telecopy, electronic transmission, email or similar means or (b) five (5) days before the meeting if delivered by mail to the director’s residence or usual place of business. Such notice shall be deemed to be delivered when deposited in the United States mail so addressed, with postage prepaid, or when transmitted if sent by telex, telecopy, electronic transmission, email or similar means. Neither the business to be transacted at, nor the purpose of, any special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting.
Section 5. Waiver of Notice. Any director may waive notice of any meeting of directors by a writing signed by the director or by electronic transmission. Any member of the Board of Directors or any committee thereof who is present at a meeting shall have waived notice of such meeting except when such member attends 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 and does not further participate in the meeting. Such member shall be conclusively presumed to have assented to any action taken unless his or her dissent shall be entered in the minutes of the meeting or unless his or her written dissent to such action shall be filed with the person acting as the secretary of the meeting before the adjournment thereof or shall be forwarded by registered mail to the secretary of the Corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to any member who voted in favor of such action.
Section 6. Chairman of the Board, Quorum, Required Vote and Adjournment. The Board of Directors may elect, by the affirmative vote of a majority of the directors then in office (so long as a quorum is present), a Chairman of the Board. The Chairman of the Board must be a director and may be an officer of the Corporation. Subject to the provisions of these Bylaws and the direction of the Board of Directors, he or she shall perform all duties and have all powers which are commonly incident to the position of Chairman of the Board or which are delegated to him or her by the Board of Directors, preside at all meetings of the stockholders and Board of Directors at which he or she is present and have such powers and perform such duties as the Board of Directors may from time to time prescribe. If the Chairman of the Board is not present at a meeting of the Board of Directors, the Chief Executive Officer (if the Chief Executive Officer is a director and is not also the Chairman of the Board) shall preside at such meeting, and, if the Chief Executive Officer is not present at such meeting, a majority of the directors present at such meeting shall elect one of the directors present at the meeting to so preside. At all meetings of the Board of Directors, a majority of the directors then in office shall constitute a quorum for the transaction of business, provided, however, that a quorum shall never be less than one-third the total number of
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directors. Unless by express provision of an applicable law, the Certificate of Incorporation or these Bylaws a different vote is required, the vote of a majority of directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. At any meeting of the Board of Directors, business shall be transacted in such order and manner as the Board of Directors may from time to time determine. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may, to the fullest extent permitted by law, adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present.
Section 7. Committees.
Section 8. Action by Written Consent. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board of Directors or such committee, as the case may be, consent thereto in writing or by electronic transmission. After an action is taken, the consent or consents relating thereto shall be filed with the minutes of proceedings of the board or committee. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form.
Section 9. Compensation. The Board of Directors shall have the authority to fix the compensation, including fees, reimbursement of expenses and equity compensation, of directors for services to the Corporation in any capacity, including for attendance of meetings of the Board
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of Directors or participation on any committees. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor.
Section 10. Reliance on Books and Records. A member of the Board of Directors, or a member of any committee designated by the Board of Directors shall, in the performance of such member’s duties, be fully protected in relying in good faith upon records of the Corporation and upon such information, opinions, reports or statements presented to the Corporation by any of the Corporation’s officers or employees, or committees of the Board of Directors, or by any other person as to matters the member reasonably believes are within such other person’s professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation.
Section 11. Telephonic and Other Meetings. Unless restricted by the Certificate of Incorporation, any one or more members of the Board of Directors or any committee thereof may participate in a meeting of the Board of Directors or such committee by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other. Participation by such means shall constitute presence in person at a meeting.
ARTICLE IV
OFFICERS
Section 1. Number and Election. Subject to the authority of Chief Executive Officer to appoint officers as set forth in Section 11 of this Article IV, the officers of the Corporation shall be elected by the Board of Directors and shall consist of a Chief Executive Officer, a President, one or more Vice Presidents, a Secretary, a Chief Financial Officer, a Treasurer and such other officers and assistant officers as may be deemed necessary or desirable by the Board of Directors. Any number of offices may be held by the same person. In its discretion, the Board of Directors may choose not to fill any office for any period as it may deem advisable.
Section 2. Term of Office. Each officer shall hold office until a successor is duly elected and qualified or until his or her earlier death, resignation or removal as hereinafter provided.
Section 3. Removal. Any officer or agent of the Corporation may be removed with or without cause by the Board of Directors, a duly authorized committee thereof or by such officers as may be designated by a resolution of the Board of Directors, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Any officer appointed by the Chief Executive Officer in accordance with Section 11 of this Article IV may also be removed by the Chief Executive Officer in his or her sole discretion.
Section 4. Vacancies. Any vacancy occurring in any office because of death, resignation, removal, disqualification or otherwise may be filled by the Board of Directors or the Chief Executive Officer in accordance with Section 11 of this Article IV.
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Section 5. Compensation. Compensation of all executive officers shall be approved by the Board of Directors or a duly authorized committee thereof, and no officer shall be prevented from receiving such compensation by virtue of his or her also being a director of the Corporation.
Section 6. Chief Executive Officer. The Chief Executive Officer shall have the powers and perform the duties incident to that position. The Chief Executive Officer shall, in the absence of the Chairman of the Board, or if a Chairman of the Board shall not have been elected, preside at each meeting of (a) the Board of Directors if the Chief Executive Officer is a director and (b) the stockholders. Subject to the powers of the Board of Directors and the Chairman of the Board, the Chief Executive Officer shall be in general and active charge of the entire business and affairs of the Corporation, and shall be its chief policy making officer. The Chief Executive Officer shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or provided in these Bylaws. The Chief Executive Officer is authorized to execute bonds, mortgages and other contracts requiring a seal, under the seal of the Corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the Corporation. Whenever the President is unable to serve, by reason of sickness, absence or otherwise, the Chief Executive Officer shall perform all the duties and responsibilities and exercise all the powers of the President.
Section 7. The President. The President of the Corporation shall, subject to the powers of the Board of Directors, the Chairman of the Board and the Chief Executive Officer, have general charge of the business, affairs and property of the Corporation, and control over its officers, agents and employees. The President shall see that all orders and resolutions of the Board of Directors are carried into effect. The President is authorized to execute bonds, mortgages and other contracts requiring a seal, under the seal of the Corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the Corporation. The President shall, in the absence of the Chief Executive Officer, act with all of the powers and be subject to all of the restrictions of the Chief Executive Officer. The President shall have such other powers and perform such other duties as may be prescribed by the Chairman of the Board, the Chief Executive Officer, the Board of Directors or as may be provided in these Bylaws.
Section 8. Vice Presidents. The Vice President, or if there shall be more than one, the Vice Presidents, in the order determined by the Board of Directors or the Chairman of the Board, shall, perform such duties and have such powers as the Board of Directors, the Chairman of the Board, the Chief Executive Officer, the President or these Bylaws may, from time to time, prescribe. The Vice Presidents may also be designated as Executive Vice Presidents or Senior Vice Presidents, as the Board of Directors may from time to time prescribe.
Section 9. The Secretary and Assistant Secretaries. The Secretary shall attend all meetings of the Board of Directors (other than executive sessions thereof) and all meetings of the stockholders and record all the proceedings of the meetings in a book or books to be kept for that purpose or shall ensure that his or her designee attends each such meeting to act in such capacity. Under the Board of Directors’ supervision, the Secretary shall give, or cause to be given, all notices required to be given by these Bylaws or by law; shall have such powers and perform such duties
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as the Board of Directors, the Chairman of the Board, the Chief Executive Officer, the President or these Bylaws may, from time to time, prescribe; and shall have custody of the corporate seal of the Corporation. The Secretary, or an Assistant Secretary, shall have authority to affix the corporate seal to any instrument requiring it and when so affixed, it may be attested by his or her signature or by the signature of such Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing by his or her signature. The Assistant Secretary, or if there be more than one, any of the assistant secretaries, shall in the absence or disability of the Secretary, perform the duties and exercise the powers of the Secretary and shall perform such other duties and have such other powers as the Board of Directors, the Chairman of the Board, the Chief Executive Officer, the President, or Secretary may, from time to time, prescribe.
Section 10. The Chief Financial Officer and the Treasurer. The Chief Financial Officer shall have the custody of the corporate funds and securities; shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation as shall be necessary or desirable in accordance with applicable law or generally accepted accounting principles; shall deposit all monies and other valuable effects in the name and to the credit of the Corporation as may be ordered by the Chairman of the Board or the Board of Directors; shall receive, and give receipts for, moneys due and payable to the Corporation from any source whatsoever; shall cause the funds of the Corporation to be disbursed when such disbursements have been duly authorized, taking proper vouchers for such disbursements; and shall render to the Board of Directors, at its regular meeting or when the Board of Directors so requires, an account of the financial condition and operations of the Corporation; shall have such powers and perform such duties as the Board of Directors, the Chairman of the Board, the Chief Executive Officer, the President or these Bylaws may, from time to time, prescribe. The Treasurer, if any, shall in the absence or disability of the chief financial officer, perform the duties and exercise the powers of the chief financial officer, subject to the power of the board of directors. The Treasurer, if any, shall perform such other duties and have such other powers as the Board of Directors the Chairman of the Board, the Chief Executive Officer, the President or these Bylaws may, from time to time, prescribe.
Section 11. Appointed Officers. In addition to officers designated by the Board in accordance with this ARTICLE IV, the Chief Executive Officer shall have the authority to appoint other officers below the level of Board-appointed Vice President as the Chief Executive Officer may from time to time deem expedient and may designate for such officers titles that appropriately reflect their positions and responsibilities. Such appointed officers shall have such powers and shall perform such duties as may be assigned to them by the Chief Executive Officer or the senior officer to whom they report, consistent with corporate policies. An appointed officer shall serve until the earlier of such officer’s resignation or such officer’s removal by the Chief Executive Officer or the Board of Directors at any time, either with or without cause.
Section 12. Other Officers, Assistant Officers and Agents. Officers, assistant officers and agents, if any, other than those whose duties are provided for in these Bylaws, shall have such authority and perform such duties as may from time to time be prescribed by resolution of the Board of Directors and, to the extent not so provided, as generally pertain to their respective offices, subject to the control of the Board of Directors.
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Section 13. Officers’ Bonds or Other Security. If required by the Board of Directors, any officer of the Corporation shall give a bond or other security for the faithful performance of his duties, in such amount and with such surety as the Board of Directors may require.
Section 14. Delegation of Authority. The Board of Directors may by resolution delegate the powers and duties of any officer to any other officer or to any director, or to any other person whom it may select.
ARTICLE V
CERTIFICATES OF STOCK
Section 1. Form. The shares of stock of the Corporation shall be represented by certificates, provided that the Board of Directors may provide by resolution that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the Corporation. If shares are represented by certificates, the certificates shall be in such form as required by applicable law and as determined by the Board of Directors. Each certificate shall certify the number of shares owned by such holder in the Corporation and shall be signed by, or in the name of the Corporation by two authorized officers of the Corporation including, but not limited to, the Chairman of the Board (if an officer), Chief Executive Officer, Chief Financial Officer, the President, a Vice President, the Treasurer, the Secretary and an Assistant Secretary of the Corporation. Any or all signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed, or whose facsimile signature or signatures have been used on, any such certificate or certificates shall cease to be such officer, transfer agent or registrar of the Corporation whether because of death, resignation or otherwise before such certificate or certificates have been issued by the Corporation, such certificate or certificates may nevertheless be issued as though the person or persons who signed such certificate or certificates or whose facsimile signature or signatures have been used thereon had not ceased to be such officer, transfer agent or registrar of the Corporation at the date of issue. All certificates for shares shall be consecutively numbered or otherwise identified. The Board of Directors may appoint a bank or trust company organized under the laws of the United States or any state thereof to act as its transfer agent or registrar, or both in connection with the transfer of any class or series of securities of the Corporation. The Corporation, or its designated transfer agent or other agent, shall keep a book or set of books to be known as the stock transfer books of the Corporation, containing the name of each holder of record, together with such holder’s address and the number and class or series of shares held by such holder and the date of issue. When shares are represented by certificates, the Corporation shall issue and deliver to each holder to whom such shares have been issued or transferred, certificates representing the shares owned by such holder, and shares of stock of the Corporation shall only be transferred on the books of the Corporation by the holder of record thereof or by such holder’s attorney duly authorized in writing, upon surrender to the Corporation or its designated transfer agent or other agent of the certificate or certificates for such shares endorsed by the appropriate person or persons, with such evidence of the authenticity of such endorsement, transfer, authorization and other matters as the Corporation may reasonably require, and accompanied by all necessary stock transfer stamps. In that event, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate or certificates and record the transaction on its books. When shares are not represented by
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certificates, shares of stock of the Corporation shall only be transferred on the books of the Corporation by the holder of record thereof or by such holder’s attorney duly authorized in writing, with such evidence of the authenticity of such transfer, authorization and other matters as the Corporation may reasonably require, and accompanied by all necessary stock transfer stamps, and within a reasonable time after the issuance or transfer of such shares, the Corporation shall, if required by applicable law, send the holder to whom such shares have been issued or transferred a statement of the information required by applicable law. Unless otherwise provided by applicable law, the Certificate of Incorporation, or the Bylaws, the rights and obligations of the holders of uncertificated stock and the rights and obligations of the holders of certificates representing stock of the same class and series shall be identical.
Section 2. Lost Certificates. The Corporation may issue or direct a new certificate or certificates or uncertificated shares to be issued in place of any certificate or certificates previously issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the owner of the lost, stolen or destroyed certificate. When authorizing such issue of a new certificate or certificates or uncertificated shares, the Corporation may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his or her legal representative, to give the Corporation a bond in such sum as it may direct, sufficient to indemnify the Corporation against any claim that may be made against the Corporation on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares.
Section 3. Registered Stockholders. The Corporation shall be entitled to recognize the exclusive right of a person registered on its records as the owner of shares of stock to receive dividends, to vote, to receive notifications and otherwise to exercise all the rights and powers of an owner, except as otherwise required by applicable law. The Corporation shall not be bound to recognize any equitable or other claim to or interest in such share or shares of stock on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise required by applicable law.
Section 4. Fixing a Record Date for Purposes Other Than Stockholder Meetings or Actions by Consent. In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment or any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purposes of any other lawful action (other than stockholder meetings and stockholder consents which are expressly governed by Sections 12 and 13 of ARTICLE II hereof), the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than 60 days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the Close of Business on the day on which the Board of Directors adopts the resolution relating thereto.
ARTICLE VI
GENERAL PROVISIONS
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Section 1. Dividends. Subject to and in accordance with applicable law, the Certificate of Incorporation and any certificate of designation relating to any series of preferred stock, dividends upon the shares of capital stock of the Corporation may be declared and paid by the Board of Directors, in accordance with applicable law. Dividends may be paid in cash, in property or in shares of the Corporation’s capital stock, subject to the provisions of applicable law and the Certificate of Incorporation. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends a reserve or reserves for any proper purpose. The Board of Directors may modify or abolish any such reserves in the manner in which they were created.
Section 2. Checks, Notes, Drafts, Etc. All checks, notes, drafts or other orders for the payment of money of the Corporation shall be signed, endorsed or accepted in the name of the Corporation by such officer, officers, person or persons as from time to time may be designated by the Board of Directors or by an officer or officers authorized by the Board of Directors to make such designation.
Section 3. Contracts. In addition to the powers otherwise granted to officers pursuant to ARTICLE IV hereof, the Board of Directors may authorize any officer or officers, or any agent or agents, in the name and on behalf of the Corporation to enter into or execute and deliver any and all deeds, bonds, mortgages, contracts and other obligations or instruments, and such authority may be general or confined to specific instances.
Section 4. Fiscal Year. The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors.
Section 5. Corporate Seal. The Board of Directors may provide a corporate seal which shall be in the form of a circle and shall have inscribed thereon the name of the Corporation and the words “Corporate Seal, Delaware.” The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. Notwithstanding the foregoing, no seal shall be required by virtue of this Section.
Section 6. Voting Securities Owned By Corporation. Voting securities in any other corporation or entity held by the Corporation shall be voted by the Chairman of the Board, Chief Executive Officer, the President or the Chief Financial Officer, unless the Board of Directors specifically confers authority to vote with respect thereto, which authority may be general or confined to specific instances, upon some other person or officer. Any person authorized to vote securities shall have the power to appoint proxies, with general power of substitution.
Section 7. Facsimile Signatures. In addition to the provisions for use of facsimile signatures elsewhere specifically authorized in these Bylaws and subject to applicable law, facsimile and any other forms of electronic signatures of any officer or officers of the Corporation may be used.
Section 8. Section Headings. Section headings in these Bylaws are for convenience of reference only and shall not be given any substantive effect in limiting or otherwise construing any provision herein.
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Section 9. Inconsistent Provisions. In the event that any provision (or part thereof) of these Bylaws is or becomes inconsistent with any provision of the Certificate of Incorporation, the DGCL, any other applicable law or the Stockholder Agreement, the provision (or part thereof) of these Bylaws shall not be given any effect to the extent of such inconsistency but shall otherwise be given full force and effect.
ARTICLE VII
INDEMNIFICATION
Section 1. Right to Indemnification and Advancement. Each person who was or is made a party or is threatened to be made a party to or is otherwise involved (including involvement, without limitation, as a witness) in any actual or threatened action, suit or proceeding, whether civil, criminal, administrative or investigative (a “proceeding”), by reason of the fact that he or she is or was a director or officer (or serving in any similar capacity, including as a general partner) of the Corporation or any predecessor thereto or, while a director or officer (or serving in any similar capacity, including as a general partner) of the Corporation or any predecessor thereto, is or was serving at the request of the Corporation or any predecessor thereto as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan (an “indemnitee”), whether the basis of such proceeding is alleged action in an official capacity as a director or officer (or any similar capacity) or in any other capacity while serving as a director or officer (or any similar capacity), shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the DGCL, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than permitted prior thereto), against all expense, liability and loss (including attorneys’ fees and related disbursements, judgments, fines, excise taxes or penalties under the Employee Retirement Income Security Act of 1974, as amended from time to time (“ERISA”) and any other penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such indemnitee in connection therewith and such indemnification shall continue as to an indemnitee who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the indemnitee’s heirs, executors and administrators; provided, however, that, except as provided in this Section 2 of this ARTICLE VII with respect to proceedings to enforce rights to indemnification and advance of expenses (as defined below), the Corporation shall indemnify any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized in the specific case by the Board of Directors of the Corporation. The rights to indemnification and advance of expenses conferred in this Section 1 of ARTICLE VII shall be contract rights. In addition to the right to indemnification conferred herein, an indemnitee shall also have the right, to the fullest extent not prohibited by law, to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition (an “advance of expenses”); provided, however, that if and to the extent that the DGCL requires, an advance of expenses shall be made only upon delivery to the Corporation of an undertaking (an “undertaking”), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (a “final adjudication”) that such indemnitee is not entitled to be indemnified for such expenses under this Section 1 or otherwise. The Corporation may also, by action of its
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Board of Directors, provide indemnification and advancement to employees and agents of the Corporation. Any reference to an officer of the Corporation in this ARTICLE VII shall be deemed to refer exclusively to the Chairman of the Board of Directors, Chief Executive Officer, President, Secretary and Treasurer of the Corporation appointed pursuant to ARTICLE IV, and to any Vice President, Assistant Secretary, Assistant Treasurer or other officer of the Corporation appointed by the Board of Directors pursuant to ARTICLE IV of these By-laws, and any reference to an officer of any other enterprise shall be deemed to refer exclusively to an officer appointed by the board of directors or equivalent governing body of such other entity pursuant to the certificate of incorporation and bylaws or equivalent organizational documents of such other enterprise. The fact that any person who is or was an employee of the Corporation or an employee of any other enterprise has been given or has used the title of “Vice President” or any other title that could be construed to suggest or imply that such person is or may be an officer of the Corporation or of such other enterprise shall not result in such person being constituted as, or being deemed to be, an officer of the Corporation or of such other enterprise for purposes of this ARTICLE VII unless such person’s appointment to such office was approved by the board of directors pursuant to ARTICLE IV.
Section 2. Procedure for Indemnification. Any claim for indemnification or advance of expenses by an indemnitee under this Section 2 of ARTICLE VII shall be made promptly, and in any event within forty-five days (or, in the case of an advance of expenses, twenty days, provided that the director or officer has delivered the undertaking contemplated by Section 1 of this ARTICLE VII if required), upon the written request of the indemnitee. If the Corporation denies a written request for indemnification or advance of expenses, in whole or in part, or if payment in full pursuant to such request is not made within forty-five days (or, in the case of an advance of expenses, twenty days, provided that the indemnitee has delivered the undertaking contemplated by Section 1 of this ARTICLE VII if required), the right to indemnification or advances as granted by this ARTICLE VII shall be enforceable by the indemnitee in any court of competent jurisdiction. Such person’s costs and expenses incurred in connection with successfully establishing his or her right to indemnification or advance of expenses, in whole or in part, in any such action shall also be indemnified by the Corporation to the fullest extent permitted by applicable law. It shall be a defense to any such action (other than an action brought to enforce a claim for the advance of expenses where the undertaking required pursuant to Section 1 of this ARTICLE VII, if any, has been tendered to the Corporation) that the claimant has not met the applicable standard of conduct which make it permissible under the DGCL for the Corporation to indemnify the claimant for the amount claimed, but the burden of proof shall be on the Corporation to the fullest extent permitted by law. Neither the failure of the Corporation (including its Board of Directors, a committee thereof, independent legal counsel or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the DGCL, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct.
Section 3. Insurance. The Corporation may purchase and maintain insurance on its own behalf and on behalf of any person who is or was or has agreed to become a director, officer,
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employee or agent of the Corporation or is or was serving at the request of the Corporation as a director, officer, partner, member, trustee, administrator, employee or agent of another corporation, partnership, joint venture, limited liability company, trust or other enterprise against any expense, liability or loss asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the Corporation would have the power to indemnify such person against such expenses, liability or loss under the DGCL.
Section 4. Service for Subsidiaries. Any person serving as a director, officer, partner, member, trustee, administrator, employee or agent of another corporation, partnership, limited liability company, joint venture, trust or other enterprise, at least 50% of whose equity interests are owned by the Corporation (a “subsidiary” for purposes of this ARTICLE VII) shall be conclusively presumed to be serving in such capacity at the request of the Corporation.
Section 5. Reliance. Persons who after the date of the adoption of this provision become or remain directors or officers of the Corporation or who, while a director or officer of the Corporation, become or remain a director, officer, employee or agent of a subsidiary, shall be conclusively presumed to have relied on the rights to indemnity, advance of expenses and other rights contained in this ARTICLE VII in entering into or continuing such service. To the fullest extent permitted by law, the rights to indemnification and to the advance of expenses conferred in this ARTICLE VII shall apply to claims made against an indemnitee arising out of acts or omissions which occurred or occur both prior and subsequent to the adoption hereof. Any amendment, alteration or repeal of this ARTICLE VII that adversely affects any right of an indemnitee or its successors shall be prospective only and shall not limit, eliminate, or impair any such right with respect to any proceeding involving any occurrence or alleged occurrence of any action or omission to act that took place prior to such amendment or repeal.
Section 6. Non-Exclusivity of Rights; Continuation of Rights of Indemnification. The rights to indemnification and to the advance of expenses conferred in this ARTICLE VII shall not be exclusive of any other right which any person may have or hereafter acquire under the Certificate of Incorporation or under any statute, by-law, agreement, vote of stockholders or disinterested directors or otherwise. All rights to indemnification under this ARTICLE VII shall be deemed to be a contract between the Corporation and each director or officer of the Corporation who serves or served in such capacity at any time while this ARTICLE VII is in effect. Any repeal or modification of this ARTICLE VII or repeal or modification of relevant provisions of the DGCL or any other applicable laws shall not in any way diminish any rights to indemnification and advancement of expenses of such director or officer or the obligations of the Corporation arising hereunder with respect to any proceeding arising out of, or relating to, any actions, transactions or facts occurring prior to the final adoption of such repeal or modification.
Section 7. Merger or Consolidation. For purposes of this ARTICLE VII, references to the “Corporation” shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation,
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partnership, joint venture, trust or other enterprise, shall stand in the same position under this ARTICLE VII with respect to the resulting or surviving corporation as he or she would have with respect to such constituent corporation if its separate existence had continued.
Section 8. Savings Clause. To the fullest extent permitted by law, if this ARTICLE VII or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify and advance expenses to each person entitled to indemnification under Section 1 of this ARTICLE VII as to all expense, liability and loss (including attorneys’ fees and related disbursements, judgments, fines, ERISA excise taxes and penalties and any other penalties and amounts paid or to be paid in settlement) actually and reasonably incurred or suffered by such person and for which indemnification and advancement of expenses is available to such person pursuant to this ARTICLE VII to the fullest extent permitted by any applicable portion of this ARTICLE VII that shall not have been invalidated.
ARTICLE VIII
AMENDMENTS
These Bylaws may be amended, altered, changed or repealed or new Bylaws adopted only in accordance with Section 1 of ARTICLE TEN of the Certificate of Incorporation.
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Exhibit 10.2
ENGAGESMART, INC.
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (this “Agreement”) is made as of September 22, 2021, by and among EngageSmart, Inc., a Delaware corporation (the “Company”), General Atlantic (IC), L.P., a Delaware limited partnership (together with its affiliated investment entities, “General Atlantic”), Summit Partners Growth Equity Fund VIII-A, L.P., a Delaware limited partnership, Summit Partners Growth Equity Fund VIII-B, L.P., a Delaware limited partnership, Summit Partners Entrepreneur Advisors Fund I, L.P., a Delaware limited partnership, Summit Investors I, LLC, a Delaware limited liability company and Summit Investors I (UK), L.P., a Cayman Islands exempted limited partnership (collectively, “Summit”), and each of the investors listed on the signature pages hereto under the caption “Investors” (collectively, the “Investors” and individually, an “Investor”), and each other Person listed on the signature pages hereto under the caption “Other Holders” or who executes a Joinder as an “Other Holder” (collectively, the “Other Holders”). Except as otherwise specified herein, all capitalized terms used in this Agreement are defined in Exhibit A attached hereto.
In consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties to this Agreement hereby agree as follows:
Section 1 Demand Registrations.
(a) Requests for Registration. At any time and from time to time, the Investors or an Investor may, in each case, request registration under the Securities Act of all or any portion of their Registrable Securities on Form S-1 or any similar long-form registration statement (“Long-Form Registrations”) or on Form S-3 or any similar short-form registration statement (“Short-Form Registrations”) if available (any such requested registration, a “Demand Registration”). The Investor making the demand may request that any Demand Registration be made pursuant to Rule 415 under the Securities Act (a “Shelf Registration”) and (if the Company is a WKSI at the time any such request is submitted to the Company or will become one by the time of the filing of such Shelf Registration with the SEC) that such Shelf Registration be an automatic shelf registration statement (as defined in Rule 405 under the Securities Act) (an “Automatic Shelf Registration Statement”). Each request for a Demand Registration must specify the approximate number or dollar value of Registrable Securities requested to be registered by the requesting Holders and (if known) the intended method of distribution. Subject to Section 1(e), (i) General Atlantic will be entitled to request an unlimited number of Demand Registrations and Summit will be entitled to request one (1) Long-Form Registration and one (1) Short-Form Registration, in which the Company will pay all Registration Expenses, whether or not any such registration is consummated, provided that the aggregate anticipated offering price, net of any underwriting discounts or commissions, of each such offering is at least $100,000,000 and (ii) any Demand Registration may, at the Company’s option, include securities to be sold by the Company for its own account.
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(b) Notice to Other Holders. Within ten (10) days after receipt of any such request, the Company will give written notice of the Demand Registration to all other Holders and, subject to the terms of Section 1(e), will include in such Demand Registration (and in all related registrations and qualifications under state blue sky laws and in any related underwriting agreement) all Registrable Securities with respect to which the Company has received written requests for inclusion therein within ten (10) days after the receipt of the Company’s notice; provided that, with the consent of the Majority Participating Investors, which consent shall not be unreasonably withheld, conditioned or delayed, the Company may instead provide notice of the Demand Registration to all Other Holders within three (3) Business Days following the non-confidential filing of the registration statement with respect to the Demand Registration so long as such registration statement is not an Automatic Shelf Registration Statement.
(c) Form of Registrations. All Long‑Form Registrations will be underwritten registrations unless otherwise approved by the Majority Participating Investors. Demand Registrations will be Short-Form Registrations whenever the Company is permitted to use any applicable short form.
(d) Shelf Registrations.
(i) For so long as a registration statement for a Shelf Registration (a “Shelf Registration Statement”) is and remains effective, any Investor will have the right at any time or from time to time to elect to sell pursuant to an offering (including an underwritten offering, provided that the aggregate anticipated offering price, net of any underwriting discounts and commissions, of each such underwritten offering is at least $25,000,000, subject to Section 1(d)(v)) Registrable Securities available for sale pursuant to such registration statement (such Registrable Securities, the “Shelf Registrable Securities”), which may include Shelf Registrable Securities to be sold by the Investor. If any Investor desires to sell Registrable Securities pursuant to an underwritten offering, such Investor shall deliver to the Company a written notice (a “Shelf Offering Notice”) specifying the number of Shelf Registrable Securities that such Investor desires to sell pursuant to such underwritten offering (the “Shelf Offering”). As promptly as practicable, but in no event later than two (2) Business Days after receipt of a Shelf Offering Notice, the Company will give written notice of such Shelf Offering Notice to all other Holders of Shelf Registrable Securities that have been identified as selling stockholders in such Shelf Registration Statement and are otherwise permitted to sell in such Shelf Offering. The Company, subject to Section 1(e) and Section 7, will include in such Shelf Offering all Shelf Registrable Securities with respect to which the Company has received written requests for inclusion (which request will specify the maximum number of Shelf Registrable Securities intended to be disposed of by such Holder) within seven (7) days after the receipt of the Shelf Offering Notice. The Company will, as soon as reasonably practicable (and in any event within 20 days after the receipt of a Shelf Offering Notice), but subject to Section 1(e), use its reasonable best efforts to facilitate such Shelf Offering.
(ii) If any Investor wishes to engage in an underwritten block trade or bought deal off of a Shelf Registration Statement (either through filing an Automatic Shelf Registration Statement or through a take-down from an already existing Shelf Registration
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Statement) (each, an “Underwritten Block Trade”), then notwithstanding the time periods set forth in Section 1(d)(i), such Investor will notify the Company of the Underwritten Block Trade not less than two (2) Business Days prior to the day such offering is first anticipated to commence. The Company will promptly notify each other Holder of Investor Registrable Securities and, only if requested by the Majority Participating Investors, each Other Holder, of such Underwritten Block Trade and such notified Holders (each, a “Potential Participant”) may elect whether or not to participate no later than the next Business Day (i.e. one (1) Business Day prior to the day such offering is to commence), if the initiating Investor initially provides two (2) Business Days’ notice to the Company) (unless a longer period is agreed to by the Majority Participating Investors), and the Company will as expeditiously as possible use its reasonable best efforts to facilitate such Underwritten Block Trade (which may close as early as two (2) Business Days after the date it commences); provided further that, notwithstanding the provisions of Section 1(d)(i), no Holder (other than Holders of Investor Registrable Securities) will be permitted to participate in an Underwritten Block Trade without the written consent of the Majority Participating Investors. Any Potential Participant’s request to participate in an Underwritten Block Trade shall be binding on the Potential Participant; provided, that each such Potential Participant that elects to participate may condition its participation on the Underwritten Block Trade being completed within fifteen (15) Business Days of its acceptance at a price per share (after giving effect to any underwriters’ discounts or commissions) to such Potential Participant of not less than ninety percent (90%) of the closing price for the shares on their principal trading market on the Business Day immediately prior to such Potential Participant’s election to participate (the “Participation Conditions”).
(iii) Subject to the Participation Conditions (to the extent applicable), all determinations as to whether to complete any Shelf Offering and as to the timing, manner, price and other terms of any Shelf Offering contemplated by this Section 1(d) shall be determined by the Majority Participating Investors, and the Company shall use its reasonable best efforts to cause any Shelf Offering to occur as promptly as practicable.
(iv) The Company will, at the request of the Majority Participating Investors, file any prospectus supplement or any post-effective amendments and otherwise take any action necessary to include therein all disclosure and language deemed necessary or advisable by the Majority Participating Investors to effect such Shelf Offering.
(v) Subject to Section 1(e), General Atlantic will be entitled to submit an unlimited number of Shelf Offering Notices and Summit will be entitled to submit two (2) Shelf Offering Notices, provided that the aggregate anticipated offering price, net of any underwriting discounts and commissions, of each such offering is at least $25,000,000.
(e) Priority on Demand Registrations and Shelf Offerings. The Company will not include in any Demand Registration any securities which are not Registrable Securities or securities to be sold for the Company’s own account without the prior written consent of the Majority Participating Investors. If a Demand Registration or a Shelf Offering is an underwritten offering and the managing underwriters advise the Company in writing that in their reasonable and
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good faith opinion the number of Registrable Securities and (if permitted hereunder) other securities requested to be included in such offering exceeds the number of Registrable Securities and other securities (if any), which can be sold therein without adversely affecting the marketability, proposed offering price, timing or method of distribution of the offering, then the Company will include in such offering (prior to the inclusion of any securities which are not Registrable Securities): (i) first, the number of Investor Registrable Securities requested to be included which, in the reasonable and good faith opinion of such underwriters, can be sold, without any such adverse effect, pro rata among the Participating Investors on the basis of the number of Investor Registrable Securities owned by each such Participating Investor; (ii) second, the number of Registrable Securities requested to be included by Other Holders which, in the reasonable and good faith opinion of such underwriters, can be sold, without any such adverse effect, pro rata among the respective Other Holders on the basis of the number of Registrable Securities owned by each such Other Holder and (iii) third, the number of shares of Common Equity proposed to be included by the Company.
(f) Restrictions on Demand Registration and Shelf Offerings.
(i) The Company may postpone, for up to 90 days from the date of the request (the “Suspension Period”), the filing or the effectiveness of a registration statement for a Demand Registration or suspend the use of a prospectus that is part of a Shelf Registration Statement (and therefore suspend sales of the Shelf Registrable Securities) by providing written notice to the Holders, to be in the form of a certificate signed by the Company's chief executive officer or chief financial officer stating that matters contained in such certificate reflect the good faith judgment of the board of directors of the Company, if the following conditions are met: (A) the Company determines that the offer or sale of Registrable Securities would reasonably be expected to have a material adverse effect on any proposal or plan by the Company or any Subsidiary to engage in any material acquisition of assets or stock (other than in the ordinary course of business) or any material merger, consolidation, tender offer, recapitalization, reorganization, financing or other transaction involving the Company and (B) upon advice of counsel, the sale of Registrable Securities pursuant to the registration statement would require disclosure of material non-public information not otherwise required to be disclosed under applicable law, and either (x) the Company has a bona fide business purpose for preserving the confidentiality of such transaction, (y) disclosure would have a material adverse effect on the Company or the Company’s ability to consummate such transaction, or (z) such transaction renders the Company unable to comply with SEC requirements, in each case under circumstances that would make it impractical or inadvisable to cause the registration statement (or such filings) to become effective or to promptly amend or supplement the registration statement on a post effective basis, as applicable. The Company may delay or suspend the effectiveness of a Demand Registration or Shelf Registration Statement pursuant to this Section 1(f)(i) only once in any twelve (12)-month period (for avoidance of doubt, in addition to the Company’s rights and obligations under Section 4(a)(vi)); provided that the Company shall not register any securities for its own account or that of any other stockholder during such 90 day period other than pursuant to a registration relating to the sale of securities to employees of the Company or a subsidiary pursuant to a stock option, stock purchase, or similar plan.
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(ii) In the case of an event that causes the Company to suspend the use of a Shelf Registration Statement as set forth in paragraph (f)(i) above or pursuant to Section 4(a)(vi) (a “Suspension Event”), the Company will give a notice to the Holders whose Registrable Securities are registered pursuant to such Shelf Registration Statement (a “Suspension Notice”) to suspend sales of the Registrable Securities and such notice must state generally the basis for the notice and that such suspension will continue only for so long as the Suspension Event or its effect is continuing. Each Holder agrees not to effect any sales of its Registrable Securities pursuant to such Shelf Registration Statement (or such filings) at any time after it has received a Suspension Notice from the Company and prior to receipt of an End of Suspension Notice. A Holder may recommence effecting sales of the Registrable Securities pursuant to the Shelf Registration Statement (or such filings) following further written notice to such effect (an “End of Suspension Notice”) from the Company, which End of Suspension Notice will be given by the Company to the Holders promptly following the conclusion of any Suspension Event (and in any event during the permitted Suspension Period).
(g) Selection of Underwriters. The Majority Participating Investors will have the right to select the investment banker(s) and manager(s) to administer any underwritten offering in connection with any Demand Registration or Shelf Offering, provided that if any such offering includes securities to be sold by the Company for its own account, such selection shall be reasonably acceptable to the Company.
(h) Other Registration Rights. Except as provided in this Agreement, the Company will not grant to any Person(s) the right to request the Company or any Subsidiary to register any equity securities of the Company or any Subsidiary, or any securities convertible or exchangeable into or exercisable for such securities, without the prior written consent of the Majority Investors.
(i) Revocation of Demand Notice or Shelf Offering Notice. At any time prior to the effective date of the registration statement relating to a Demand Registration or the “pricing” of any offering relating to a Shelf Offering Notice, the Investors who initiated such Demand Registration or Shelf Offering may revoke such notice of a Demand Registration or Shelf Offering Notice on behalf of all Holders participating in such Demand Registration or Shelf Offering without liability to such Holders (including, for the avoidance of doubt, the other Participating Investors), in each case by providing written notice to the Company, provided, however, that any other Participating Investor that would otherwise have the right to request such Demand Registration or Shelf Offering in the first instance may in such case request the Company to continue with such Demand Registration or Shelf Offering with such other Investor taking the place of the Investor that originally made such Demand Registration or requested such Shelf Offering.
(j) Confidentiality. Each Holder agrees to treat as confidential the receipt of any notice hereunder (including notice of a Demand Registration, a Shelf Offering Notice and a Suspension Notice) and the information contained therein, and not to disclose or use the information contained in any such notice (or the existence thereof) without the prior written consent of the Company until such time as the information contained therein is or becomes
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available to the public generally (other than as a result of disclosure by such Holder in breach of the terms of this Agreement).
Section 2 Piggyback Registrations.
(a) Right to Piggyback. Whenever the Company proposes to register any of its equity securities under the Securities Act (including primary and secondary registrations, and other than pursuant to an Excluded Registration) (a “Piggyback Registration”), the Company will give prompt written notice (and in any event within three (3) Business Days after the public filing of the registration statement relating to the Piggyback Registration) to all Holders of its intention to effect such Piggyback Registration and, subject to the terms of Section 2(b) and Section 2(c), will include in such Piggyback Registration (and in all related registrations or qualifications under blue sky laws and in any related underwriting) all Registrable Securities with respect to which the Company has received written requests for inclusion therein within ten (10) days after delivery of the Company’s notice. Any Participating Investor may withdraw its request for inclusion at any time prior to executing the underwriting agreement, or if none, prior to the applicable registration statement becoming effective. For certainty, any Participating Investor who has withdrawn its request for inclusion shall nevertheless continue to have the right to include any Registrable Securities in any subsequent registration statement or registration statements as may be filed by the Company with respect to offerings of its securities, all upon the terms and conditions set forth herein.
(b) Priority on Primary Registrations. If a Piggyback Registration is an underwritten primary registration on behalf of the Company, and the managing underwriters advise the Company in writing that in their reasonable and good faith opinion the number of securities requested to be included in such registration exceeds the number which can be sold in such offering without adversely affecting the marketability, proposed offering price, timing or method of distribution of the offering, the Company will include in such registration (i) first, the securities the Company proposes to sell, (ii) second, the Registrable Securities requested to be included in such registration which, in the reasonable and good faith opinion of the underwriters, can be sold without any such adverse effect, pro rata among the Holders on the basis of the number of Registrable Securities owned by each such Holder, and (iii) third, other securities requested to be included in such registration which, in the reasonable and good faith opinion of the underwriters, can be sold without any such adverse effect.
(c) Priority on Secondary Registrations. If a Piggyback Registration is an underwritten secondary registration on behalf of holders of the Company’s equity securities (other than pursuant to Section 1 hereof), and the managing underwriters advise the Company in writing that in their reasonable and good faith opinion the number of securities requested to be included in such registration exceeds the number which can be sold in such offering without adversely affecting the marketability, proposed offering price, timing or method of distribution of the offering, the Company will include in such registration (i) first, the securities requested to be included therein by the holders initially requesting such registration and the Investor Registrable Securities requested to be included in such registration which, in the reasonable and good faith opinion of the underwriters, can be sold without any such adverse effect, (ii) second, the Registrable Securities requested to be included in such registration, pro rata among the other
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Holders on the basis of the number of Registrable Securities owned by each such Holder, which, in the reasonable and good faith opinion of the underwriters, can be sold without any such adverse effect, and (iii) third, other securities requested to be included in such registration which, in the reasonable and good faith opinion of the underwriters, can be sold without any such adverse effect.
(d) Right to Terminate Registration. The Company will have the right to terminate or withdraw any registration initiated by it under this Section 2, whether or not any holder of Registrable Securities has elected to include securities in such registration.
(e) Selection of Underwriters. If any Piggyback Registration is an underwritten offering under which the majority of the Common Equity proposed to be sold would be sold by the Company for its own account, then the Company will be entitled to select the investment banker(s) and manager(s) for such offering. If any Piggyback Registration is an underwritten offering under which less than a majority of the Common Equity proposed to be sold would be sold by the Company for its own account, then the selection of investment banker(s) and manager(s) for the offering must be approved by the Majority Participating Investors, which approval shall not be unreasonably withheld, conditioned, or delayed.
Section 3 Stockholder Lock-Up Agreements and Company Holdback Agreement.
(a) Stockholder Lock-up Agreements. In connection with any underwritten Public Offering, each Holder will enter into any lock-up, holdback or similar agreements requested by the underwriter(s) managing such offering, in each case with such modifications and exceptions as may be reasonably approved by the Majority Participating Investors (provided that such lock-up, holdback or similar agreements shall be on the same terms and conditions as any such agreement executed by the Majority Participating Investors unless otherwise agreed in writing by such other Holder or Holders). Without limiting the generality of the foregoing, each Holder hereby agrees that in connection with any Demand Registration, Shelf Offering or Piggyback Registration that is an underwritten Public Offering, not to (i) offer, sell, contract to sell, pledge or otherwise dispose of (including sales pursuant to Rule 144), directly or indirectly, any equity securities of the Company (including equity securities of the Company that may be deemed to be beneficially owned by such Holder in accordance with the rules and regulations of the SEC) (collectively, “Securities”), or any securities, options or rights convertible into or exchangeable or exercisable for Securities (collectively, “Other Securities”), (ii) enter into a transaction which would have the same effect as described in clause (i) above, (iii) enter into any swap, hedge or other arrangement that transfers, in whole or in part, any of the economic consequences or ownership of any Securities or Other Securities, whether such transaction is to be settled by delivery of such Securities or Other Securities, in cash or otherwise (each of (i), (ii) and (iii) above, a “Sale Transaction”), or (iv) publicly disclose the intention to enter into any Sale Transaction, commencing on the date on which the Company gives notice to the Holders that a preliminary prospectus has been circulated for such underwritten Public Offering or the “pricing” of such offering and continuing to the date that is (x) 180 days following the date of the final prospectus for such underwritten Public Offering in the case of the Company’s initial Public Offering, or (y) 90 days following the date of the final prospectus in the case of any other such underwritten Public Offering (each such period, or such shorter period as agreed to by the managing underwriters, a “Holdback Period”), in each case with such modifications and exceptions as may be approved by
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the Majority Investors; provided, that if following any such underwritten offering, the applicable underwriters consent to release any Holder from the requirements of the lock-up agreement entered into (in accordance with this Section 3(a)) between such Holder and such underwriters, with respect to all or a portion of such Holder’s securities covered by such lock-up agreement, such Holder shall not be subject to the restrictions in clauses (i) through (iv) of this paragraph with respect to such securities. The Company may impose stop-transfer instructions with respect to any Securities or Other Securities subject to the restrictions set forth in this Section 3(a) until the end of such Holdback Period.
(b) Company Holdback Agreement. The Company (i) will not file any registration statement for a Public Offering or cause any such registration statement to become effective, or effect any public sale or distribution of its Securities or Other Securities during any Holdback Period (other than as part of such underwritten Public Offering, or a registration on Form S-4 or Form S-8 or any successor or similar form which is (x) then in effect or (y) shall become effective upon the conversion, exchange or exercise of any then outstanding Other Securities) and (ii) will cause each holder of Securities and Other Securities (including each of its directors and executive officers) to agree not to effect any Sale Transaction during any Holdback Period, except as part of such underwritten registration (if otherwise permitted), unless approved in writing by the Majority Participating Investors and the underwriters managing the Public Offering and to enter into any customary lock-up, holdback or similar agreements requested by the underwriter(s) managing such offering, in each case with such customary modifications and exceptions as may be approved by the Majority Participating Investors.
Section 4 Registration Procedures.
(a) Company Obligations. Whenever the Holders have requested that any Registrable Securities be registered pursuant to this Agreement or have initiated a Shelf Offering, the Company will use its reasonable best efforts to effect the registration and the sale of such Registrable Securities in accordance with the intended method of disposition thereof, and pursuant thereto the Company will as soon as reasonably practicable:
(i) prepare and file with (or submit confidentially to) the SEC a registration statement, and all amendments and supplements thereto and related prospectuses, with respect to such Registrable Securities and use its reasonable best efforts to cause such registration statement to become effective, all in accordance with the Securities Act and all applicable rules and regulations promulgated thereunder (provided that before filing or confidentially submitting a registration statement or prospectus or any amendments or supplements thereto, the Company will furnish to the counsel selected by the Investors covered by such registration statement copies of all such documents proposed to be filed or submitted, which documents will be subject to the review and comment of such counsel);
(ii) notify each Holder of (A) the issuance by the SEC of any stop order suspending the effectiveness of any registration statement or the initiation of any proceedings for that purpose, (B) the receipt by the Company or its counsel of any notification with respect to the suspension of the qualification of the Registrable Securities
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for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose, and (C) the effectiveness of each registration statement filed hereunder;
(iii) prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for a period ending when all of the securities covered by such registration statement have been disposed of in accordance with the intended methods of distribution by the sellers thereof set forth in such registration statement (but not in any event before the expiration of any longer period required under the Securities Act or, if such registration statement relates to an underwritten Public Offering, such longer period as in the opinion of counsel for the underwriters a prospectus is required by law to be delivered in connection with the sale of Registrable Securities by an underwriter or dealer) and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement during such period in accordance with the intended methods of disposition by the sellers thereof set forth in such registration statement;
(iv) furnish, without charge, to each seller of Registrable Securities thereunder and each underwriter, if any, such number of copies of such registration statement, each amendment and supplement thereto, the prospectus included in such registration statement (including each preliminary prospectus) (in each case including all exhibits and documents incorporated by reference therein), each amendment and supplement thereto, each Free Writing Prospectus and such other documents as such seller or underwriter, if any, may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such seller (the Company hereby consenting to the use in accordance with all applicable laws of each such registration statement, each such amendment and supplement thereto, and each such prospectus (or preliminary prospectus or supplement thereto) or Free Writing Prospectus by each such seller of Registrable Securities and the underwriters, if any, in connection with the offering and sale of the Registrable Securities covered by such registration statement or prospectus);
(v) use its reasonable best efforts to register or qualify such Registrable Securities under such other securities or blue sky laws of such jurisdictions as any seller reasonably requests and do any and all other acts and things which may be reasonably necessary or advisable to enable such seller to consummate the disposition in such jurisdictions of the Registrable Securities owned by such seller (provided that the Company will not be required to (A) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this subparagraph, (B) consent to general service of process in any such jurisdiction or (C) subject itself to taxation in any such jurisdiction);
(vi) notify in writing each seller of such Registrable Securities (A) promptly after it receives notice thereof, of the date and time when such registration statement and each post-effective amendment thereto has become effective or a prospectus or supplement to any prospectus relating to a registration statement has been filed and when any registration or qualification has become effective under a state securities or blue sky
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law or any exemption thereunder has been obtained, (B) promptly after receipt thereof, of any request by the SEC for the amendment or supplementing of such registration statement or prospectus or for additional information, and (C) at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event or of any information or circumstances as a result of which the prospectus included in such registration statement contains an untrue statement of a material fact or omits any fact necessary to make the statements therein not misleading, and, subject to Section 1(f), if required by applicable law or to the extent requested by the Majority Participating Investors, the Company will use its reasonable best efforts to promptly prepare and file a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus will not contain an untrue statement of a material fact or omit to state any fact necessary to make the statements therein not misleading and (D) if at any time the representations and warranties of the Company in any underwriting agreement, securities sale agreement, or other similar agreement, relating to the offering shall cease to be true and correct;
(vii) (A) use reasonable best efforts to cause all such Registrable Securities to be listed on each securities exchange on which similar securities issued by the Company are then listed and, if not so listed, to be listed on a securities exchange and, without limiting the generality of the foregoing, to arrange for at least two market markers to register as such with respect to such Registrable Securities with FINRA, and (B) comply (and continue to comply) with the requirements of any self-regulatory organization applicable to the Company, including without limitation all corporate governance requirements;
(viii) provide a transfer agent and registrar for all such Registrable Securities and a CUSIP number for all such Registrable Securities, not later than the effective date of such registration statement;
(ix) enter into and perform such customary agreements (including, as applicable, underwriting agreements in customary form) and take all such other reasonable actions as the Majority Participating Investors or the underwriters, if any, reasonably request in order to expedite or facilitate the disposition of such Registrable Securities (including, without limitation, making available the executive officers of the Company and participating in “road shows,” investor presentations, marketing events and other selling efforts and effecting a stock or unit split or combination, recapitalization or reorganization);
(x) make available for inspection by any seller of Registrable Securities, any underwriter participating in any disposition or sale pursuant to such registration statement and any attorney, accountant or other agent retained by any such seller or underwriter, all financial and other records, pertinent corporate and business documents and properties of the Company as will be necessary to enable them to exercise their due diligence responsibility, and cause the Company’s officers, directors, employees, agents, representatives and independent accountants to supply all information reasonably requested by any such seller, underwriter, attorney, accountant or agent in connection with such registration statement and the disposition of such Registrable Securities pursuant thereto;
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(xi) take all reasonable actions to ensure that any Free Writing Prospectus utilized in connection with any Demand Registration or Piggyback Registration or Shelf Offering hereunder complies in all material respects with the Securities Act, is filed in accordance with the Securities Act to the extent required thereby, is retained in accordance with the Securities Act to the extent required thereby and, when taken together with the related prospectus, prospectus supplement and related documents, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading;
(xii) otherwise use its reasonable best efforts to comply with all applicable rules and regulations of the SEC, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve (12) months beginning with the first day of the Company’s first full calendar quarter after the effective date of the registration statement, which earnings statement will satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder;
(xiii) permit any Holder which, in its sole and exclusive judgment, might be deemed to be an underwriter or a controlling person of the Company, to participate in the preparation of such registration or comparable statement and to allow such Holder to provide language for insertion therein, in form and substance satisfactory to the Company, which in the reasonable judgment of such Holder and its counsel should be included;
(xiv) use reasonable best efforts to (A) make Short-Form Registration available for the sale of Registrable Securities and (B) prevent the issuance of any stop order suspending the effectiveness of a registration statement, or the issuance of any order suspending or preventing the use of any related prospectus or suspending the qualification of any Common Equity included in such registration statement for sale in any jurisdiction use, and in the event any such order is issued, reasonable best efforts to obtain promptly the withdrawal of such order;
(xv) use its reasonable best efforts to cause such Registrable Securities covered by such registration statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the sellers thereof to consummate the disposition of such Registrable Securities;
(xvi) cooperate with the Holders covered by the registration statement and the managing underwriter or agent, if any, to facilitate the timely preparation and delivery of certificates (not bearing any restrictive legends) representing securities to be sold under the registration statement, or the removal of any restrictive legends associated with any account at which such securities are held, and enable such securities to be in such denominations and registered in such names as the managing underwriter, or agent, if any, or such Holders may request;
(xvii) if requested by any managing underwriter, include in any prospectus or prospectus supplement updated financial or business information for the
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Company’s most recent period or current quarterly period (including estimated results or ranges of results) if required for purposes of marketing the offering in the view of the managing underwriter;
(xviii) take no direct or indirect action prohibited by Regulation M under the Exchange Act; provided, however, that to the extent that any prohibition is applicable to the Company, the Company will take such action as is necessary to make any such prohibition inapplicable;
(xix) (A) cooperate with each Holder covered by the registration statement and each underwriter or agent participating in the disposition of such Registrable Securities and their respective counsel in connection with the preparation and filing of applications, notices, registrations and responses to requests for additional information with FINRA, the New York Stock Exchange, Nasdaq Stock Market or any other national securities exchange on which the Common Equity is or is to be listed, and (B) to the extent required by the rules and regulations of FINRA, retain a Qualified Independent Underwriter acceptable to the managing underwriter;
(xx) in the case of any underwritten offering, use its reasonable best efforts to obtain, and deliver to the underwriter(s), in the manner and to the extent provided for in the applicable underwriting agreement, one or more cold comfort letters from the Company’s independent public accountants in customary form and covering such matters of the type customarily covered by cold comfort letters delivered to underwriters in an underwritten offering;
(xxi) use its reasonable best efforts to provide (A) a legal opinion of the Company’s outside counsel dated the effective date of such registration statement addressed to the Company addressing the validity of the Registrable Securities being offered thereby, (B) on the date that such Registrable Securities are delivered to the underwriters for sale in connection with a Demand Registration or Shelf Offering, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the closing date of the applicable sale, (1) one or more legal opinions of the Company’s outside counsel, dated such date, in form and substance as customarily given to underwriters in an underwritten public offering or, in the case of a non-underwritten offering, to the broker, placement agent or other agent of the Holders assisting in the sale of the Registrable Securities and (2) one or more “negative assurances letters” of the Company’s outside counsel, dated such date, in form and substance as is customarily given to underwriters in an underwritten public offering or, in the case of a non-underwritten offering, to the broker, placement agent or other agent of the Holders assisting in the sale of the Registrable Securities, in each case, addressed to the underwriters, if any, or, if requested, in the case of a non-underwritten offering, to the broker, placement agent or other agent of the Holders assisting in the sale of the Registrable Securities and (C) customary certificates executed by authorized officers of the Company as may be reasonably requested by any Holder or any underwriter of such Registrable Securities;
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(xxii) if the Company does not pay the filing fee covering the Registrable Securities at the time an Automatic Shelf Registration Statement is filed, pay such fee at such time or times as the Registrable Securities are to be sold; and
(xxiii) if a Shelf Registration Statement has been outstanding for at least three (3) years, at the end of the third year, refile a new Shelf Registration Statement covering the Registrable Securities, and, with respect to an Automatic Shelf Registration Statement, if at any time when the Company is required to re-evaluate its WKSI status the Company determines that it is not a WKSI, use its reasonable best efforts to refile the Shelf Registration Statement on Form S-3 and, if such form is not available, Form S-1 and keep such registration statement effective during the period during which such registration statement is required to be kept effective.
(b) Officer Obligations. Each Holder that is an officer of the Company agrees that if and for so long as he or she is employed by the Company or any Subsidiary thereof, he or she will participate fully in the sale process in a manner customary for persons in like positions and consistent with his or her other duties with the Company, including the preparation of the registration statement and the preparation and presentation of any road shows.
(c) Automatic Shelf Registration Statements. If the Company files any Automatic Shelf Registration Statement for the benefit of the holders of any of its securities other than the Holders, and the Investors do not request that their Registrable Securities be included in such Shelf Registration Statement, the Company agrees that, at the request of any Investor, it will include in such Automatic Shelf Registration Statement such disclosures as may be required by Rule 430B in order to ensure that the Investors may be added to such Shelf Registration Statement at a later time through the filing of a prospectus supplement rather than a post-effective amendment. If the Company has filed any Automatic Shelf Registration Statement for the benefit of the holders of any of its securities other than the Holders, the Company shall, at the request of any Investor, file any post-effective amendments necessary to include therein all disclosure and language necessary to ensure that the holders of Registrable Securities may be added to such Shelf Registration Statement.
(d) Additional Information. The Company may require each seller of Registrable Securities as to which any registration is being effected to furnish the Company such information regarding such seller and the distribution of such securities as the Company may from time to time reasonably request in writing, as a condition to such seller’s participation in such registration.
(e) In-Kind Distributions. If any Investor (and/or any of their Affiliates) seeks to effectuate an in-kind distribution of all or part of their Registrable Securities to their respective direct or indirect equityholders, the Company will, subject to any applicable lock-ups, work with the foregoing Persons to facilitate such in-kind distribution in the manner reasonably requested and consistent with the Company’s obligations under the Securities Act.
(f) Suspended Distributions. Each Person participating in a registration hereunder agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 4(a)(vi), such Person will immediately discontinue the disposition of its Registrable Securities pursuant to the registration statement until such Person’s receipt of the
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copies of a supplemented or amended prospectus as contemplated by Section 4(a)(vi), subject to the Company’s compliance with its obligations under Section 4(a)(vi).
(g) Other. To the extent that any of the Participating Investors is or may be deemed to be an “underwriter” of Registrable Securities pursuant to any SEC comments or policies, the Company agrees that (i) the indemnification and contribution provisions contained in Section 6 shall be applicable to the benefit of such Participating Investor in their role as an underwriter or deemed underwriter in addition to their capacity as a holder and (ii) such Participating Investor shall be entitled to conduct the due diligence which they would normally conduct in connection with an offering of securities registered under the Securities Act, including without limitation receipt of customary opinions and comfort letters addressed to such Participating Investor.
Section 5 Registration Expenses. Except as expressly provided herein, all out-of-pocket expenses incurred by the Company in connection with the performance of or compliance with this Agreement and/or in connection with any Demand Registration, Piggyback Registration or Shelf Offering, whether or not the same shall become effective, shall be paid by the Company, including, without limitation: (i) all registration and filing fees, and any other fees and expenses associated with filings required to be made with the SEC or FINRA, (ii) all fees and expenses in connection with compliance with any securities or “blue sky” laws, (iii) all printing, duplicating, word processing, messenger, telephone, facsimile and delivery expenses (including expenses of printing certificates for the Registrable Securities in a form eligible for deposit with The Depository Trust Company or other depositary and of printing prospectuses and Company Free Writing Prospectuses), (iv) all fees and disbursements of counsel for the Company and of all independent certified public accountants of the Company (including the expenses of any special audit and cold comfort letters required by or incident to such performance), (v) Securities Act liability insurance or similar insurance if the Company so desires or the underwriters so require in accordance with then-customary underwriting practice, (vi) all fees and expenses incurred in connection with the listing of the Registrable Securities on any securities exchange on which similar securities of the Company are then listed (or on which exchange the Registrable Securities are proposed to be listed in the case of the Company’s initial Public Offering), (vii) all applicable rating agency fees with respect to the Registrable Securities, (viii) all reasonable and documented fees and disbursements of one legal counsel for each of General Atlantic and Summit, in each case selected by General Atlantic or Summit, as applicable, together with any one necessary local counsel as may be required by the Investors or the managing underwriters, (ix) any other fees or expenses incurred by the Investors in connection with the exercise of their rights under this agreement, provided that the Company shall only be required to pay such fees and expenses in an amount that does not exceed $20,000 in the aggregate, (x) any fees and disbursements of underwriters customarily paid by issuers or sellers of securities, (xi) all fees and expenses of any special experts or other Persons retained by the Company or the Investors in connection with any Registration, (xii) all of the Company’s internal expenses (including all salaries and expenses of its officers and employees performing legal or accounting duties) and (xiii) all expenses related to the “road-show” for any underwritten offering, including all travel, meals and lodging. All such expenses are referred to herein as “Registration Expenses.” The Company shall not be required to pay, and each Person that sells securities pursuant to a Demand Registration, Shelf Offering or Piggyback Registration hereunder will bear and pay, all underwriting discounts and commissions
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applicable to the Registrable Securities sold for such Person’s account and all transfer taxes (if any) attributable to the sale of Registrable Securities.
Section 6 Indemnification and Contribution.
(a) By the Company. The Company will indemnify and hold harmless, to the fullest extent permitted by law and without limitation as to time, each Holder, such Holder’s officers, directors, employees, agents, fiduciaries, stockholders, managers, partners, members, affiliates, direct and indirect equityholders, consultants and representatives, and any successors and assigns thereof, and each Person who controls such Holder (within the meaning of the Securities Act) (the “Indemnified Parties”) against all losses, claims, actions, damages, liabilities and expenses (including with respect to actions or proceedings, whether commenced or threatened, and including reasonable attorney fees and expenses) (collectively, “Losses”) caused by, resulting from, arising out of, based upon or related to any of the following (each, a “Violation”) by the Company: (i) any untrue or alleged untrue statement of material fact contained in (A) any registration statement, prospectus, preliminary prospectus or Free Writing Prospectus, or any amendment thereof or supplement thereto or (B) any application or other document or communication (in this Section 6, collectively called an “application”) executed by or on behalf of the Company or based upon written information furnished by or on behalf of the Company filed in any jurisdiction in order to qualify any securities covered by such registration under the “blue sky” or securities laws thereof, (ii) any omission or alleged omission of 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 Company of the Securities Act or any other similar federal or state securities laws or any rule or regulation promulgated thereunder applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, qualification or compliance. In addition, the Company will reimburse such Indemnified Party for any legal or any other expenses reasonably incurred by them in connection with investigating or defending any such Losses. Notwithstanding the foregoing, the Company will not be liable in any such case to the extent that any such Losses result from, arise out of, are based upon, or relate to an untrue statement, or omission, made in such registration statement, any such prospectus, preliminary prospectus or Free Writing Prospectus or any amendment or supplement thereto, or in any application, in reliance upon, and in conformity with, written information prepared and furnished in writing to the Company by such Indemnified Party expressly for use therein or by such Indemnified Party’s failure to deliver a copy of the registration statement or prospectus or any amendments or supplements thereto after the Company has furnished such Indemnified Party with a sufficient number of copies of the same. In connection with an underwritten offering, the Company will indemnify such underwriters, their officers and directors, and each Person who controls such underwriters (within the meaning of the Securities Act) to the same extent as provided above with respect to the indemnification of the Indemnified Parties or as otherwise agreed to in the underwriting agreement executed in connection with such underwritten offering. Such indemnity and reimbursement of expenses shall remain in full force and effect regardless of any investigation made by or on behalf of such Indemnified Party and shall survive the transfer of such securities by such seller.
(b) By Holders. In connection with any registration statement in which a Holder is participating, each such Holder will furnish to the Company in writing such information regarding
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such Holder as the Company reasonably requests for use in connection with any such registration statement or prospectus and, to the extent permitted by law, will indemnify the Company, its officers, directors, employees, agents and representatives, and each Person who controls the Company (within the meaning of the Securities Act) against any Losses resulting from (as determined by a final and appealable judgment, order or decree of a court of competent jurisdiction) any untrue or alleged untrue statement of material fact contained in the registration statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, but only to the extent that such untrue statement or omission is contained in any information so furnished in writing by such Holder expressly for use therein; provided that the obligation to indemnify will be individual, not joint and several, for each Holder and each Holder’s liability pursuant to the indemnification and contribution provisions herein will be limited to the net amount of proceeds received by such Holder from the sale of Registrable Securities pursuant to such registration statement.
(c) Claim Procedure. Any Person entitled to indemnification hereunder will (i) give prompt written notice to the indemnifying party of any claim with respect to which it seeks indemnification (provided that the failure to give prompt notice will impair any Person’s right to indemnification hereunder only to the extent such failure has prejudiced the indemnifying party) and (ii) unless in such indemnified party’s reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist with respect to such claim, permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party. If such defense is assumed, the indemnifying party will not be subject to any liability for any settlement made by the indemnified party without its consent (but such consent will not be unreasonably withheld, conditioned or delayed). An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim will not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim. In such instance, the conflicted indemnified parties will have a right to retain one separate counsel, chosen by the majority of the conflicted indemnified parties involved in the indemnification and approved by the Majority Investors, at the expense of the indemnifying party, which approval shall not be unreasonably withheld, conditioned or delayed.
(d) Contribution. If the indemnification provided for in this Section 6 is held by a court of competent jurisdiction to be unavailable to, or is insufficient to hold harmless, an indemnified party or is otherwise unenforceable with respect to any Loss referred to herein, then such indemnifying party will contribute to the amounts paid or payable by such indemnified party as a result of such Loss, (i) in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other hand in connection with the statements or omissions which resulted in such Loss as well as any other relevant equitable considerations or (ii) if the allocation provided by clause (i) of this Section 6(d) is not permitted by applicable law, then in such proportion as is appropriate to reflect not only such relative fault but also the relative benefit of the Company on the one hand and of the sellers of Registrable Securities and any other sellers participating in the registration statement on the other in connection with the statement or omissions which resulted in such Losses, as well as any other relevant
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equitable considerations; provided that the maximum amount of liability in respect of the indemnification and contribution provisions herein will be limited, in the case of each seller of Registrable Securities, to an amount equal to the net proceeds actually received by such seller from the sale of Registrable Securities effected pursuant to such registration. The relative fault of the indemnifying party and of the indemnified party will be determined by reference to, among other things, whether the untrue (or, as applicable alleged) untrue statement of a material fact or the omission to state 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. The parties hereto agree that it would not be just or equitable if the contribution pursuant to this Section 6(d) were to be determined by pro rata allocation or by any other method of allocation that does not take into account such equitable considerations. The amount paid or payable by an indemnified party as a result of the Losses referred to herein will be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending against any action or claim which is the subject hereof. 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 is not guilty of such fraudulent misrepresentation.
(e) Indemnification Priority. The Company hereby acknowledges and agrees that any of the Persons entitled to indemnification and contribution pursuant to this Section 6 (each, a “Company Indemnitee” and collectively, the “Company Indemnitees”) may have certain rights to indemnification, advancement of expenses and/or insurance provided by other sources. The Company hereby acknowledges and agrees (i) that it is the indemnitor of first resort (i.e., its obligations to a Company Indemnitee are primary and any obligation of such other sources to advance expenses or to provide indemnification for the same expenses or liabilities incurred by such Company Indemnitee are secondary) and (ii) that it shall be required to advance the full amount of expenses incurred by a Company Indemnitee and shall be liable for the full amount of all expenses, judgments, penalties, fines and amounts paid in settlement to the extent legally permitted and as required by the terms of this Agreement without regard to any rights a Company Indemnitee may have against such other sources. The Company further agrees that no advancement or payment by such other sources on behalf of a Company Indemnitee with respect to any claim for which such Company Indemnitee has sought indemnification, advancement of expenses or insurance from the Company shall affect the foregoing, and that such other sources shall have a right of contribution and/or be subrogated to the extent of such advancement or payment to all of the rights of recovery of such Company Indemnitee against the Company.
(f) Release. No indemnifying party will, except with the consent of the indemnified party, consent to the entry of any judgment or enter into any settlement that does not include as an unconditional term thereof giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation.
(g) Non-exclusive Remedy; Survival. The indemnification and contribution provided for under this Agreement will be in addition to any other rights to indemnification or contribution that any indemnified party may have pursuant to law or contract (and the Company and its Subsidiaries shall be considered the indemnitors of first resort in all such circumstances to which this Section 6 applies) and will remain in full force and effect regardless of any investigation
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made by or on behalf of the indemnified party or any officer, director or controlling Person of such indemnified party and will survive the transfer of Registrable Securities and the termination or expiration of this Agreement.
Section 7 Cooperation with Underwritten Offerings. No Person may participate in any underwritten registration hereunder unless such Person (i) agrees to sell such Person’s securities on the basis provided in any underwriting arrangements approved by the Person or Persons entitled hereunder to approve such arrangements (including, without limitation, pursuant to the terms of any over-allotment or “green shoe” option requested by the underwriters; provided that no Holder will be required to sell more than the number of Registrable Securities such Holder has requested to include in such registration) and (ii) completes, executes and delivers all questionnaires, powers of attorney, stock powers, custody agreements, indemnities, underwriting agreements and other documents and agreements required under the terms of such underwriting arrangements or as may be reasonably requested by the Company and the lead managing underwriter(s). To the extent that any such agreement is entered into pursuant to, and consistent with, Section 3, Section 4 and/or this Section 7, the respective rights and obligations created under such agreement will supersede the respective rights and obligations of the Holders, the Company and the underwriters created thereby with respect to such registration.
Section 8 Subsidiary Public Offering. If, after an initial Public Offering of the common equity securities of one of its Subsidiaries, the Company distributes securities of such Subsidiary to its equityholders, then the rights and obligations of the Company pursuant to this Agreement will apply, mutatis mutandis, to such Subsidiary, and the Company will cause such Subsidiary to comply with such Subsidiary’s obligations under this Agreement as if it were the Company hereunder.
Section 9 Joinder. The Company may from time to time (with the prior written consent of the Majority Investors, except as provided in Section 10(e) and which consent shall not be unreasonably withheld, conditioned or delayed) permit any Person who acquires Common Equity (or rights to acquire Common Equity) to become a party to this Agreement and to be entitled to and be bound by all of the rights and obligations as a Holder by obtaining an executed Joinder to this Agreement from such Person in the form of Exhibit B attached hereto (a “Joinder”). Subject to Section 10(c), upon the execution and delivery of a Joinder by such Person, the Common Equity held by such Person shall become the category of Registrable Securities (i.e. Investor or Other Holder Registrable Securities) and such Person shall be deemed the category of Holder (i.e. Investor or Other Holder), in each case as set forth on the signature page to such Joinder.
Section 10 General Provisions.
(a) Amendments and Waivers. Except as otherwise provided herein, the provisions of this Agreement may be amended, modified or waived only with the prior written consent of the Company and each of the Majority Investors; provided that no such amendment, modification or waiver that would (i) treat a specific Holder or group of Holders of Registrable Securities (i.e., Other Holders) in a manner materially and adversely different than any other Holder or group of Holders or (ii) materially and adversely change a specific right granted to such Holder or group by name, will be effective against such Holder or group of Holders without the consent of the holders
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of a majority of the Registrable Securities that are held by the group of Holders that is materially and adversely affected thereby; provided further that the foregoing provision shall not apply to any amendments or modifications otherwise expressly permitted by this Agreement, including any required to add a party hereto. The failure or delay of any Person to enforce any of the provisions of this Agreement will in no way be construed as a waiver of such provisions and will not affect the right of such Person thereafter to enforce each and every provision of this Agreement in accordance with its terms. A waiver or consent to or of any breach or default by any Person in the performance by that Person of his, her or its obligations under this Agreement will not be deemed to be a consent or waiver to or of any other breach or default in the performance by that Person of the same or any other obligations of that Person under this Agreement.
(b) Remedies. The parties to this Agreement will be entitled to enforce their rights under this Agreement specifically (without posting a bond or other security), to recover damages caused by reason of any breach of any provision of this Agreement and to exercise all other rights existing in their favor. The parties hereto agree and acknowledge that a breach of this Agreement would cause irreparable harm and money damages would not be an adequate remedy for any such breach and that, in addition to any other rights and remedies existing hereunder, any party will be entitled to specific performance and/or other injunctive relief from any court of law or equity of competent jurisdiction (without posting any bond or other security) in order to enforce or prevent violation of the provisions of this Agreement.
(c) Severability. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited, invalid, illegal or unenforceable in any respect under any applicable law or regulation in any jurisdiction, such prohibition, invalidity, illegality or unenforceability will not affect the validity, legality or enforceability of any other provision of this Agreement in such jurisdiction or in any other jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction as if such prohibited, invalid, illegal or unenforceable provision had never been contained herein.
(d) Entire Agreement. Except as otherwise provided herein, this Agreement contains the complete agreement and understanding among the parties hereto with respect to the subject matter hereof and supersedes and preempts any prior understandings, agreements or representations by or among the parties hereto, written or oral, which may have related to the subject matter hereof in any way.
(e) Successors and Assigns. Except as otherwise provided herein, this Agreement will bind and inure to the benefit and be enforceable by the Company and its successors and permitted assigns and the Holders.
(d) Notices. Any notice, demand or other communication to be given under or by reason of the provisions of this Agreement will be in writing and will be deemed to have been given (i) when delivered personally to the recipient, (ii) when sent by confirmed electronic mail or facsimile if sent during normal business hours of the recipient; but if not, then on the next Business Day, (iii) one Business Day after it is sent to the recipient by reputable overnight courier service (charges prepaid) or (iv) three Business Days after it is mailed to the recipient by first class mail,
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return receipt requested. Such notices, demands and other communications will be sent to the Company at the address specified on the signature page hereto or any Joinder and to any holder, or at such address or to the attention of such other Person as the recipient party has specified by prior written notice to the sending party. Any party may change such party’s address for receipt of notice by giving prior written notice of the change to the sending party as provided herein. The Company’s address is:
EngageSmart, Inc.
30 Braintree Hl, Office Park, Ste 101
Braintree, MA 02184
Attention: General Counsel
Email: ckallenbach@engagesmart.com
With a copy to:
Latham & Watkins LLP
1271 Avenue of the Americas
New York, NY 10020
Attention:
Ian D. Schuman
Stelios G. Saffos
Brittany D. Ruiz
Email:
ian.schuman@lw.com
stelios.saffos@lw.com
brittany.ruiz@lw.com
or to such other address or to the attention of such other person as the recipient party has specified by prior written notice to the sending party. Any request or consent made under this Agreement must be in writing (electronic mail will suffice).
(e) Business Days. If any time period for giving notice or taking action hereunder expires on a day that is not a Business Day, the time period will automatically be extended to the Business Day immediately following such Saturday, Sunday or legal holiday.
(f) Governing Law. The corporate law of the State of Delaware will govern all issues and questions concerning the relative rights of the Company and its equityholders. All issues and questions concerning the construction, validity, interpretation and enforcement of this Agreement and the exhibits and schedules hereto will be governed by, and construed in accordance with, the laws of the State of Delaware, without giving effect to any choice of law or conflict of law rules or provisions (whether of the State of Delaware or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Delaware.
(g) MUTUAL WAIVER OF JURY TRIAL. AS A SPECIFICALLY BARGAINED FOR INDUCEMENT FOR EACH OF THE PARTIES HERETO TO ENTER INTO THIS AGREEMENT (AFTER HAVING THE OPPORTUNITY TO CONSULT WITH
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COUNSEL), EACH PARTY HERETO EXPRESSLY WAIVES THE RIGHT TO TRIAL BY JURY IN ANY LAWSUIT OR PROCEEDING RELATING TO OR ARISING IN ANY WAY FROM THIS AGREEMENT OR THE MATTERS CONTEMPLATED HEREBY.
(h) CONSENT TO JURISDICTION AND SERVICE OF PROCESS. EACH OF THE PARTIES IRREVOCABLY SUBMITS TO THE NON‑EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE, FOR THE PURPOSES OF ANY SUIT, ACTION OR OTHER PROCEEDING ARISING OUT OF THIS AGREEMENT, ANY RELATED AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY OR THEREBY. EACH OF THE PARTIES HERETO FURTHER AGREES THAT SERVICE OF ANY PROCESS, SUMMONS, NOTICE OR DOCUMENT BY U.S. REGISTERED MAIL TO SUCH PARTY’S RESPECTIVE ADDRESS SET FORTH ABOVE WILL BE EFFECTIVE SERVICE OF PROCESS FOR ANY ACTION, SUIT OR PROCEEDING WITH RESPECT TO ANY MATTERS TO WHICH IT HAS SUBMITTED TO JURISDICTION IN THIS PARAGRAPH. EACH OF THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY OBJECTION TO THE LAYING OF VENUE OF ANY ACTION, SUIT OR PROCEEDING ARISING OUT OF THIS AGREEMENT, ANY RELATED DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE, AND HEREBY AND THEREBY FURTHER IRREVOCABLY AND UNCONDITIONALLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH COURT THAT ANY SUCH ACTION, SUIT OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.
(i) No Recourse. Notwithstanding anything to the contrary in this Agreement, the Company and each Holder agrees and acknowledges that no recourse under this Agreement or any documents or instruments delivered in connection with this Agreement, will be had against any current or future director, officer, employee, general or limited partner or member of any Holder or any Affiliate or assignee thereof, whether by the enforcement of any assessment or by any legal or equitable proceeding, or by virtue of any statute, regulation or other applicable law, it being expressly agreed and acknowledged that no personal liability whatsoever will attach to, be imposed on or otherwise be incurred by any current or future officer, agent or employee of any Holder or any current or future member of any Holder or any current or future director, officer, employee, partner or member of any Holder or of any Affiliate or assignee thereof, as such for any obligation of any Holder under this Agreement or any documents or instruments delivered in connection with this Agreement for any claim based on, in respect of or by reason of such obligations or their creation.
(j) Descriptive Headings; Interpretation. The descriptive headings of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. The use of the word “including” in this Agreement will be by way of example rather than by limitation.
(k) No Strict Construction. The language used in this Agreement will be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction will be applied against any party.
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(l) Counterparts. This Agreement may be executed in multiple counterparts, any one of which need not contain the signature of more than one party, but all such counterparts taken together will constitute one and the same agreement.
(m) Electronic Delivery. This Agreement, the agreements referred to herein, and each other agreement or instrument entered into in connection herewith or therewith or contemplated hereby or thereby, and any amendments hereto or thereto, to the extent executed and delivered by means of a photographic, photostatic, facsimile or similar reproduction of such signed writing using a facsimile machine or electronic mail will be treated in all manner and respects as an original agreement or instrument and will be considered to have the same binding legal effect as if it were the original signed version thereof delivered in person. At the request of any party hereto or to any such agreement or instrument, each other party hereto or thereto will re‑execute original forms thereof and deliver them to all other parties. No party hereto or to any such agreement or instrument will raise the use of a facsimile machine or electronic mail to deliver a signature or the fact that any signature or agreement or instrument was transmitted or communicated through the use of a facsimile machine or electronic mail as a defense to the formation or enforceability of a contract and each such party forever waives any such defense.
(n) Further Assurances. In connection with this Agreement and the transactions contemplated hereby, each Holder agrees to execute and deliver any additional documents and instruments and perform any additional acts that may be necessary or appropriate to effectuate and perform the provisions of this Agreement and the transactions contemplated hereby.
(o) Dividends, Recapitalizations, Etc. If at any time or from time to time there is any change in the capital structure of the Company by way of a stock split, stock dividend, distribution, combination or reclassification, or through a merger, consolidation, reorganization or recapitalization, or by any other means, appropriate adjustment will be made in the provisions hereof so that the rights and privileges granted hereby will continue.
(p) No Third-Party Beneficiaries. No term or provision of this Agreement is intended to be, or shall be, for the benefit of any Person not a party hereto, and no such other Person shall have any right or cause of action hereunder, except as otherwise expressly provided herein.
(q) Current Public Information. At all times after the Company has filed a registration statement with the SEC pursuant to the requirements of either the Securities Act or the Exchange Act, the Company will file all reports required to be filed by it under the Securities Act and the Exchange Act and will take such further action as any Investor may reasonably request, all to the extent required to enable such Holders to sell Registrable Securities (or securities that would be Registrable Securities but for the final sentence of the definition of Registrable Securities) pursuant to Rule 144.
* * * * *
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IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above.
ENGAGESMART, INC.
By: /s/ Robert P. Bennett
Name: Robert P. Bennett
Title: Chief Executive Officer
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GENERAL ATLANTIC (IC), L.P.
By: General Atlantic (SPV) GP, LLC, its general partner
By: General Atlantic, L.P., its sole member
By:/s/ Michael Gosk
Name: Michael Gosk
Title: Managing Director
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SUMMIT PARTNERS GROWTH EQUITY
FUND VIII-A, L.P.
By: Summit Partners GE VIII, L.P.
Its: General Partner
By: Summit Partners GE VIII, LLC
Its: General Partner
By:/s/ Matthew Guy-Hamilton
Name: Matthew Guy-Hamilton
Title: Managing Director
SUMMIT PARTNERS GROWTH EQUITY
FUND VIII-B, L.P.
By: Summit Partners GE VIII, L.P.
Its: General Partner
By: Summit Partners GE VIII, LLC
Its: General Partner
By:/s/ Matthew Guy-Hamilton
Name: Matthew Guy-Hamilton
Title: Managing Director
SUMMIT PARTNERS ENTREPRENEUR
ADVISORS FUND L.P.
By: Summit Partners Entrepreneur Advisors GP, LLC
Its: General Partner
By: Summit Master Company, LLC
Its: Sole Member
By:/s/ Matthew Guy-Hamilton
Name: Matthew Guy-Hamilton
Title: Managing Director
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SUMMIT INVESTORS I, LLC
By: Summit Investors Management, LLC
Its: Manager
By: Summit Partners, L.P.
Its: Manager
By: Summit Master Company, LLC
Its: General Partner
By: /s/ Matthew Guy-Hamilton
Name: Matthew Guy-Hamilton
Title: Managing Director
SUMMIT INVESTORS I (UK), L.P.
By: Summit Investors Management, LLC
Its: General Partner
By: Summit Partners, L.P.
Its: Manager
By: Summit Master Company, LLC
Its: General Partner
By:/s/Matthew Guy-Hamilton
Name: Matthew Guy-Hamilton
Title: Managing Director
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INVESTORS:
Robert P. Bennett
By:/s/ Robert P. Bennett
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Robert P. Bennett 2019
Descendants’ Trust
By: /s/ John Burgess
Name: John Burgess
Title: Trustee
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The Bennett Family 2020 Trust
By: /s/ John Burgess
Name: John Burgess
Title: Trustee
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The Robert P. Bennett 2020 Grantor retained annuity trust
By: /s/ Robert P. Bennett
Name: Robert P. Bennett
Title: Trustee
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John Burgess
By: /s/ John Burgess
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John Morabito
By: /s/ John Morabito
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John Morabito 2019
Descendants’ trust
By: /s/ John Termini
Name: John Termini
Title: Trustee
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Maria Morabito
By: /s/ Maria Morabito
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Kelton Averyt 2019
Descendants’ trust
By:/s/ Aaron Hall
Name: Aaron Hall
Title: Trustee
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quito bella family trust
By:/s/ Kelton Averyt
Name: Kelton Averyt
Title: Trustee
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Robert Lapides
By: /s/ Robert Lapides
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Robert Lapides 2019
Descendants’ trust
By:/s/ John Callahan
Name: John Callahan
Title: Trustee
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Robert Lapides 2019 Trust
By:/s/ Robert Lapides
Name: Robert Lapides
Title: Trustee
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Howard Spector
By: /s/ Howard Spector
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Howard Spector 2021
Irrevocable trust
By:/s/ Janet White
Name: Janet White
Title: Trustee
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Janet White 2021
Irrevocable trust
By: /s/ Howard Spector
Name: Howard Spector
Title: Trustee
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C. THOMAS ALLGOOD
By: /s/ C. Thomas Allgood
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nelson Blitz
By: /s/ Nelson Blitz
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OTHER HOLDERS:
STANLEY EVRARD
By: /s/ Stanley Evrard
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MATHEW BRALEY
By: /s/ Mathew Braley
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JASON BAKER
By: /s/ Jason Baker
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KEVIN MOON
By: /s/ Kevin Moon
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RENEE CHENUE
By: /s/ Renee Chenue
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EXHIBIT A
DEFINITIONS
Capitalized terms used in this Agreement have the meanings set forth below.
“Affiliate” of any Person means any other Person controlled by, controlling or under common control with such Person. For the purposes of this definition, “control” (including, with its 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 securities, by contract or otherwise.
“Agreement” has the meaning set forth in the recitals.
“Automatic Shelf Registration Statement” has the meaning set forth in Section 1(a).
“Business Day” means a day that is not a Saturday or Sunday or a day on which banks in New York City are closed.
“Common Equity” means the Company’s common stock, par value $0.001 per share.
“Company” has the meaning set forth in the preamble and shall include its successor(s).
“Company Indemnitee” has the meaning set forth in Section 6.
“Demand Registrations” has the meaning set forth in Section 1(a).
“End of Suspension Notice” has the meaning set forth in Section 1(f)(ii).
“Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time, or any successor federal law then in force, together with all rules and regulations promulgated thereunder.
“Excluded Registration” means any registration (i) pursuant to a Demand Registration (which is addressed in Section 1(a)), (ii) in connection with registrations on Form S‑4 or S‑8 promulgated by the SEC (or any successor or similar forms) or (iii) 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 Registrable Securities or that does not permit the registration of Registrable Securities.
“FINRA” means the Financial Industry Regulatory Authority.
“Free Writing Prospectus” means a free-writing prospectus, as defined in Rule 405.
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“General Atlantic” has the meaning set forth in the preamble.
“Holdback Period” has the meaning set forth in Section 3(a).
“Holder” means a holder of Registrable Securities who is a party to this Agreement (including by way of Joinder).
“Indemnified Parties” has the meaning set forth in Section 6(a).
“Investor” and “Investors” has the meaning set forth in the recitals.
“Investor Registrable Securities” means (i) any Common Equity held (directly or indirectly) by an Investor or any of its Affiliates, and (ii) any equity securities of the Company or any Subsidiary issued or issuable with respect to the securities referred to in clauses (i) above by way of dividend, distribution, split or combination of securities, conversion, or any recapitalization, merger, consolidation or other reorganization.
“Joinder” has the meaning set forth in Section 9(a).
“Long-Form Registrations” has the meaning set forth in Section 1(a).
“Losses” has the meaning set forth in Section 6(c).
“Majority Investors” means the Investors that are holders of a majority of all Investor Registrable Securities, measured by reference to shares of Common Equity beneficially owned or issuable upon conversion of an Investor Registrable Security.
“Majority Participating Investors” means the Participating Investor or Participating Investors who hold a majority of the Investor Registrable Securities to be included within such Demand Registration, Shelf Offering, Piggyback Registration or Underwritten Block Trade.
“Other Holders” has the meaning set forth in the recitals.
“Other Registrable Securities” means (i) any Common Equity held (directly or indirectly) by any Other Holders or any of their Affiliates, and (ii) any equity securities of the Company or any Subsidiary issued or issuable with respect to the securities referred to in clause (i) above by way of dividend, distribution, split or combination of securities, or any recapitalization, merger, consolidation, reorganization or certain other corporate transactions.
“Other Securities” has the meaning set forth in Section 3(a).
“Participating Investor” or “Participating Investors” means any Investor(s) participating in the request for a Demand Registration, Shelf Offering, Piggyback Registration or Underwritten Block Trade.
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“Person” means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof.
“Piggyback Registrations” has the meaning set forth in Section 2(a).
“Potential Participant” has the meaning set forth in Section 1(d).
“Public Offering” means any sale or distribution by the Company, one of its Subsidiaries and/or Holders to the public of Common Equity or other securities convertible into or exchangeable for Common Equity pursuant to an offering registered under the Securities Act.
“Qualified Independent Underwriter” has the meaning set forth by FINRA in Section 5121(f)(12), or any successor provision thereto.
“Registrable Securities” means Investor Registrable Securities and Other Registrable Securities. As to any particular Registrable Securities, such securities will cease to be Registrable Securities when they have been (a) sold or distributed pursuant to a Public Offering, (b) sold in compliance with Rule 144 following the consummation of the Company’s initial Public Offering, (c) distributed to the direct or indirect partners or members of an investor except for a distribution or assignment permitted pursuant to Section 4(e) or (d) repurchased by the Company or a Subsidiary of the Company. For purposes of this Agreement, a Person will be deemed to be a holder of Registrable Securities, and the Registrable Securities will be deemed to be in existence, whenever such Person has the right to acquire, directly or indirectly, such Registrable Securities (upon conversion or exercise in connection with a transfer of securities or otherwise, but disregarding any restrictions or limitations upon the exercise of such right), whether or not such acquisition has actually been effected, and such Person will be entitled to exercise the rights of a holder of Registrable Securities hereunder (it being understood that a holder of Registrable Securities may only request that Registrable Securities in the form of Common Equity be registered pursuant to this Agreement). Notwithstanding the foregoing, following the consummation of an initial Public Offering, any Registrable Securities held by any Person (other than an Investor or its Affiliates) that may be sold under Rule 144(b)(1)(i) without limitation under any of the other requirements of Rule 144 will be deemed not to be Registrable Securities.
“Registration Expenses” has the meaning set forth in Section 5.
“Rule 144”, “Rule 158”, “Rule 405”, “Rule 415”, “Rule 403B” and “Rule 462” mean, in each case, such rule promulgated under the Securities Act (or any successor provision) by the SEC, as the same will be amended from time to time, or any successor rule then in force.
“Sale Transaction” has the meaning set forth in Section 3(a).
“SEC” means the United States Securities and Exchange Commission.
“Securities” has the meaning set forth in Section 3(a).
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“Securities Act” means the Securities Act of 1933, as amended from time to time, or any successor federal law then in force, together with all rules and regulations promulgated thereunder.
“Shelf Offering” has the meaning set forth in Section 1(d)(i).
“Shelf Offering Notice” has the meaning set forth in Section 1(d)(i).
“Shelf Registration” has the meaning set forth in Section 1(a).
“Shelf Registrable Securities” has the meaning set forth in Section 1(d)(i).
“Shelf Registration Statement” has the meaning set forth in Section 1(d).
“Short-Form Registrations” has the meaning set forth in Section 1(a).
“Subsidiary” means, with respect to the Company, any corporation, limited liability company, partnership, association or other business entity of which (i) if a corporation, a majority of the total voting power of shares of stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by the Company or one or more of the other Subsidiaries of the Company or a combination thereof, or (ii) if a limited liability company, partnership, association or other business entity, a majority of the limited liability company, partnership or other similar ownership interest thereof is at the time owned or controlled, directly or indirectly, by the Company or one or more Subsidiaries of the Company or a combination thereof. For purposes hereof, a Person or Persons will be deemed to have a majority ownership interest in a limited liability company, partnership, association or other business entity if such Person or Persons will be allocated a majority of limited liability company, partnership, association or other business entity gains or losses or will be or control the managing director or general partner of such limited liability company, partnership, association or other business entity.
“Summit” has the meaning set forth in the preamble.
“Suspension Event” has the meaning set forth in Section 1(f)(ii).
“Suspension Notice” has the meaning set forth in Section 1(f)(ii).
“Suspension Period” has the meaning set forth in Section 1(f)(i).
“Underwritten Block Trade” has the meaning set forth in Section 1(c)(ii).
“Violation” has the meaning set forth in Section 6(a).
“WKSI” means a “well-known seasoned issuer” as defined under Rule 405.
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EXHIBIT B
The undersigned is executing and delivering this Joinder pursuant to the Registration Rights Agreement dated as of ________, 2021 (as amended, modified and waived from time to time, the “Registration Agreement”), among EngageSmart, Inc., a Delaware corporation (the “Company”), and the other persons named as parties therein (including pursuant to other Joinders). Capitalized terms used herein have the meaning set forth in the Registration Agreement.
By executing and delivering this Joinder to the Company, the undersigned hereby agrees to become a party to, to be bound by, and to comply with the provisions of, the Registration Agreement as a Holder in the same manner as if the undersigned were an original signatory to the Registration Agreement, and the undersigned will be deemed for all purposes to be a Holder, an [Investor // Other Holder thereunder] and the undersigned’s ____ Common Equity will be deemed for all purposes to be [Investor // Other] Registrable Securities under the Registration Agreement.
Accordingly, the undersigned has executed and delivered this Joinder as of the ___ day of ____________, 20___.
____________________________________
Signature
____________________________________
Print Name
Address: ____________________________
____________________________________
____________________________________
Agreed and Accepted as of
________________, 20___:
EngageSmart, Inc.
________________________
Its: ________________________
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Exhibit 10.3
STOCKHOLDERS AGREEMENT
This STOCKHOLDERS AGREEMENT (this “Agreement”) is made and entered into as of September 22, 2021, by and among EngageSmart, Inc. (formerly EngageSmart, LLC), a Delaware corporation (the “Company”), General Atlantic (IC), L.P., a Delaware limited partnership (together with its affiliated investment entities, the “GA Stockholder”), Summit Partners Growth Equity Fund VIII-A, L.P., a Delaware limited partnership, Summit Partners Growth Equity Fund VIII-B, L.P., a Delaware limited partnership, Summit Partners Entrepreneur Advisors Fund I, L.P., a Delaware limited partnership, Summit Investors I, LLC, a Delaware limited liability company, and Summit Investors I (UK), L.P., a Cayman Islands exempted limited partnership (collectively, the “Summit Stockholder” and, together with the GA Stockholder, the “Lead Stockholders”) and Robert Bennett, an individual (“Bennett” and, together with the Lead Stockholders, the ‘Stockholders’ and individually, a “Stockholder”).
RECITALS
WHEREAS, as of the date hereof, the Lead Stockholders collectively hold a majority of the outstanding capital stock of the Company;
WHEREAS, in connection with, and effective upon, the date of completion of the initial public offering of the Company (the “Effective Date”), the Company and the Stockholders wish to set forth certain understandings between such parties, including with respect to certain governance matters.
NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Stockholders agree as follows:
AGREEMENT
1. Defined Terms. In addition to the terms defined elsewhere herein, the following terms have the following meaning when used herein with initial capital letters:
“Affiliate” of any Person shall mean any other Person controlled by, controlling or under common control with such first Person; where “control” (including, with its correlative meanings, “controlling,” “controlled by” and “under common control with”) means possession, directly or indirectly, of the power to direct or cause the direction of management or policies (whether through ownership of securities, by contract or otherwise).
“Beneficially Own” shall mean that a specified person has or shares the right, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, to vote shares of capital stock of the Company.
“Board” means the board of directors of the Company.
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“Common Stock” means common stock of the Company, par value $0.001 per share.
“Director” means any member of the Board.
“Indebtedness” means (a) all indebtedness of the Company and any of its Subsidiaries for borrowed money, (b) all obligations of the Company and any of its Subsidiaries evidenced by bonds, debentures, notes, loan agreements or other similar instruments, (c) the amount of all drafts drawn under any and all letters of credit issued for the account of the Company or any of its Subsidiaries (but only to the extent of any unreimbursed drawings under any letter of credit), (d) all Indebtedness of any other Person secured by any Lien on any property owned by the Company or any of its Subsidiaries, whether or not such Indebtedness has been assumed by the Company or any of its Subsidiaries, (e) all obligations of the Company and any of its Subsidiaries to pay the deferred purchase price of property or services (including any earnout obligation), except trade accounts payable arising and paid in the ordinary course of business, (f) the capitalized amount of all capital leases of the Company and any of its Subsidiaries, (g) any liability of the Company or any of its Subsidiaries under any interest rate, currency or commodity swap agreement, cap agreement or collar agreement, and any other agreement or arrangement designed to protect the Company and any of its Subsidiaries against fluctuations in interest rates, currency exchange rates or commodity prices, (h) all guarantees with respect to any Indebtedness of any other Person of the type described in clauses (a) through (g) of this definition.
“Lien” means any encumbrance, restriction, claim, mortgage, pledge, charge, assignment, hypothecation, security interest, title retention, banker’s lien, privilege or priority of any kind having the effect of security.
“Person” means any individual, corporation, limited liability company, partnership, trust, joint stock company, business trust, unincorporated association, joint venture, governmental authority or other entity or organization, including a government or any subdivision or agency thereof.
“Subsidiary” means with respect to any Person, any corporation, limited liability company, partnership, association, trust or other form of legal entity, of which (a) such first Person directly or indirectly owns or controls at least a majority of the securities or other interests having by their terms voting power to elect a majority of the board of directors or others performing similar functions, or (b) such first Person is a general partner or managing member (excluding partnerships in which such Person or any Subsidiary thereof does not have a majority of the voting interests in such partnership).
2. Board of Directors.
(a) Subject to the other provisions of this Section 2, as of the Effective Date, the number of Directors constituting the full Board shall initially be fixed at eight (8), who shall be divided into three (3) classes of Directors in accordance with the terms of the Company’s Certificate of Incorporation. As of the Effective Date, the eight (8) directors shall be divided into three (3) classes as follows:
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(i) the initial Class I Directors shall include Preston McKenzie, Ashley Glover and Deborah Dunnam;
(ii) the initial Class II Directors shall include Raph Osnoss, David Mangum and Matthew Hamilton; and
(iii) the initial Class III Directors shall include Paul Stamas and Robert Bennett.
(b) The initial term of the Class I directors shall expire immediately following the Company’s 2022 annual meeting of stockholders at which directors are elected. The initial term of the Class II directors shall expire immediately following the Company’s 2023 annual meeting of stockholders at which directors are elected. The initial term of the Class III directors shall expire immediately following the Company’s 2024 annual meeting at which directors are elected. For the avoidance of doubt, Section 2(a) is applicable solely to the initial composition of the Board, except that, subject to the Company’s Certificate of Incorporation, a Director shall remain a member of the class of Directors to which he or she was assigned in accordance with Section 2(a) and (ii) the initial terms of each class of directors shall expire as set forth in this Section 2(b).
(c) From the Effective Date, the GA Stockholder shall have the right, but not the obligation, to nominate to the Board a number of designees (such persons, the “GA Nominees”), one of whom shall be designated as the Chairman of the Board (unless the General Atlantic Stockholder, in its sole discretion, designates a Director other than a GA Nominee as the Chairman of the Board), equal to at least: (i) five (5) Directors, so long as the GA Stockholder Beneficially Owns shares of Common Stock representing over 50% of the Common Stock then outstanding, at least two (2) of which such Directors must be “independent directors” under applicable law and stock exchange listing standards, (ii) three (3) Directors, so long as the GA Stockholder Beneficially Owns shares of Common Stock representing at least 30% but less than or equal to 50% of the Common Stock then outstanding, (iii) two (2) Directors so long as the GA Stockholder Beneficially Owns shares of Common Stock representing at least 20% but less than 30% of the Common Stock then outstanding and (iv) one (1) Director so long as the GA Stockholder Beneficially Owns shares of Common Stock representing at least 10%. The initial GA Nominees shall be Paul Stamas, Raph Osnoss, Preston McKenzie, David Mangum and Ashley Glover. The initial Chairman of the Board shall be Paul Stamas. At the GA Stockholder’s request, each class of Directors shall include, to the extent practicable, at least one Nominee designated by the GA Stockholder.
(d) From the Effective Date, the Summit Stockholder shall have the right, but not the obligation, to nominate to the Board one (1) Director (such person, the “Summit Nominee”) so long as the Summit Stockholder Beneficially Owns shares of Common Stock representing at least 10% of the Common Stock then outstanding. The initial Summit Nominee shall be Matthew Hamilton.
(e) Bennett shall have the right to be nominated to the Board (in such capacity, the “Founder Nominee” and, together with the GA Nominees and the Summit Nominee, the “Nominees”) so long as Company is a “controlled company” under the securities exchange on which the Common Stock is listed (“Controlled Company Eligible”).
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(f) In the event that either the GA Stockholder or the Summit Stockholder has nominated less than the total number of designees that such Lead Stockholder shall be entitled to nominate pursuant to Section 2(c) and Section 2(d), as applicable, such Lead Stockholder shall have the right, at any time, to nominate such additional designees to which it is entitled, in which case, the Company and the Directors shall take all necessary corporation action, to the fullest extent permitted by applicable law (including with respect to fiduciary duties under Delaware law), to (x) enable such Lead Stockholder to nominate and effect the election or appointment of such additional individuals, whether by increasing the size of the Board, or otherwise and (y) to designate such additional individuals nominated by such Lead Stockholder to fill such newly created vacancies or to fill any other existing vacancies.
(g) The Company shall pay all reasonable and documented out-of-pocket expenses incurred by any Nominee in connection with the performance of his or her duties as a Director and in connection with his or her attendance at any meeting of the Board.
(h) No reduction in the number of shares of Common Stock that each Lead Stockholder Beneficially Owns shall shorten the term of any incumbent Director.
(i) In the event that any GA Nominee or Summit Nominee shall cease to serve for any reason during a term, the Lead Stockholder that nominated such Nominee shall be entitled to designate such person’s successor in accordance with this Agreement (regardless of each Lead Stockholder’s Beneficial Ownership of Common Stock at the time of such vacancy) and the Board shall promptly fill the vacancy with such successor nominee; it being understood that any such designee shall serve the remainder of the term of the Director whom such designee replaces.
(j) If a GA Nominee or Summit Nominee is not appointed or elected to the Board because of such person’s death, disability, disqualification, withdrawal as a Nominee or for another reason is unavailable or unable to serve on the Board, the applicable Lead Stockholder shall be entitled to designate promptly another Nominee and the Director position for which the original Nominee was nominated shall not be filled pending such designation.
(k) For so long as the GA Stockholder Beneficially Owns shares of Common Stock representing (i) at least 50% of the Common Stock then outstanding, the stockholders of the Company shall have the right to remove directors (other than the Summit Director and Bennett) with or without cause upon the vote of holders that Beneficially Own shares of Common Stock representing over 50% of the Common Stock then outstanding or (ii) less than 50% of the Common Stock then outstanding, stockholders of the Company shall have the right to remove directors only for cause upon the vote of holders that Beneficially Own shares of Common Stock representing over 66 2/3% of the Common Stock then outstanding. Subject to Sections 2(c) and 2(d), for so long as the GA Stockholder Beneficially Owns shares of Common Stock representing (i) at least 50% of the Common Stock then outstanding, the stockholders of the Company or the Board shall have the right to designate for election to the Board directors to fill vacancies created by reason of the permanent disability, death, removal or resignation of its designees to the Board or (ii) less than 50% of the Common Stock then outstanding, the Board shall have the right to fill such vacancies.
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(l) At such times as the Company is required by applicable law or stock exchange listing standards to have a majority of the Board comprised of “independent directors” (subject in each case to any applicable phase-in periods), the Nominees shall include a number of persons that qualify as “independent directors” under applicable law and stock exchange listing standards such that, together with any other “independent directors” then serving on the Board that are not Nominees, the Board is comprised of a majority of “independent directors”; provided, that at any time that the GA Stockholder shall have any nomination rights under this Section 2, the GA Stockholder shall be entitled to nominate at least one (1) Nominee who does not qualify as an “independent director”.
(m) At any time the Summit Stockholder shall be entitled to nomination rights under Section 2(d), the Company shall not increase or decrease the number of Directors serving on the Board without the prior written consent of the the Summit Stockholder.
3. Company and Stockholder Obligations.
(a) The Company agrees that, prior to the date that each Lead Stockholder ceases to Beneficially Own shares of Common Stock representing at least 5% of the Common Stock then outstanding, (i) each Nominee (other than Bennett if the Company ceases to be Controlled Company Eligible) is included in the Board’s slate of nominees to the stockholders (the “Board’s Slate”) for each election of Directors; and (ii) each Nominee (other than Bennett if the Company ceases to be Controlled Company Eligible) is included in the proxy statement prepared by management of the Company in connection with soliciting proxies for every meeting of the stockholders of the Company called with respect to the election of Directors (each, a “Director Election Proxy Statement”), and at every adjournment or postponement thereof, and on every action or approval by written consent of the stockholders of the Company or the Board with respect to the election of members of the Board. Each Lead Stockholder will promptly report to the Company after such Lead Stockholder ceases to Beneficially Own shares of Common Stock representing at least 5% of the Common Stock then outstanding, such that the Company is informed of when this obligation terminates; provided, that such obligation of such Lead Stockholder to notify the Company shall be deemed satisfied if such Lead Stockholder makes a filing under Section 16 of the Securities Exchange Act of 1934 reflecting such change in the Common Stock Beneficially Owned by such Lead Stockholder. The calculation of the number of Nominees that each Lead Stockholder is entitled to nominate to the Board’s Slate for any election of Directors shall be based on the percentage of the Common Stock then outstanding Beneficially Owned by each Lead Stockholder (“Lead Stockholder Voting Control”) immediately prior to the mailing to stockholders of the Director Election Proxy Statement relating to such election (or, if earlier, the filing of the definitive Director Election Proxy Statement with the U.S. Securities and Exchange Commission). Unless a Lead Stockholder notifies the Company otherwise prior to the mailing to stockholders of the Director Election Proxy Statement relating to an election of Directors, the Nominees for such election shall be presumed to be the same Nominees currently serving on the Board, and no further action shall be required of any Lead Stockholder for the Board to include such Nominees on the Board’s Slate; provided, that, in the event a Lead Stockholder is no longer entitled to nominate the full number of Nominees then serving on the Board, such Lead Stockholder shall provide advance written notice to the Company of which currently serving Nominee(s) shall be excluded from the Board Slate, and of any other changes to the list of
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Nominees. If a Lead Stockholder fails to provide such notice prior to the mailing to stockholders of the Director Election Proxy Statement relating to such election (or, if earlier, the filing of the definitive Director Election Proxy Statement with the U.S. Securities and Exchange Commission), a majority of the independent directors then serving on the Board shall determine which of the Nominees of such Lead Stockholder then serving on the Board will be included in the Board’s Slate.
(b) At any time that a Stockholder shall have any nomination rights under Section 2, the Company shall not take any action, including making or recommending any amendment to Company’s Certificate of Incorporation or Bylaws (each as may be further amended, supplemented or waived in accordance with its terms) that could reasonably be expected to adversely affect a Stockholder’s rights under this Agreement, in each case without the prior written consent of the adversely affected Stockholder.
4. Committees.
(a) For so long as (i) the GA Stockholder has the right to nominate any GA Nominees to the Board pursuant to Section 2(a) hereof, the GA Stockholder shall have the right to designate one member of each committee of the Board and (ii) the Summit Stockholder has the right to nominate the Summit Nominee to the Board pursuant to Section 2(a) hereof, the Summit Stockholder shall have the right to designate one member to the compensation committee of the Board; provided, that any such designee shall be a Director and shall be eligible to serve on the applicable committee under applicable law or stock exchange listing standards, including any applicable independence requirements (subject in each case to any applicable exceptions, including those for newly public companies and any applicable phase-in periods). Any additional committee members shall be determined by the Board. The GA Nominees and Summit Nominee designated to serve on a Board committee shall have the right to remain on such committee until the next election of Directors, regardless of the level of Lead Stockholder Voting Control following such designation. Unless a Lead Stockholder notifies the Company otherwise prior to the time the Board takes action to change the composition of a Board committee, and to the extent the applicable Lead Stockholder has the requisite Lead Stockholder Voting Control for such Lead Stockholder to nominate a Board committee member at the time the Board takes action to change the composition of any such Board committee, any Nominee currently designated by the applicable Lead Stockholder to serve on a committee shall be presumed to be re-designated for such committee.
(b) From and after the Effective Date until such time as the GA Stockholder ceases to Beneficially Own Common Stock representing at least 15% of the Common Stock then outstanding, the Company shall take all necessary action to cause the chairperson of each of the nominating and governance committee, the compensation committee and the audit committee of the Board to be a person selected by the GA Stockholder from among the Directors then in office from time to time; provided, that, any such selections will be in compliance with applicable law and stock exchange listing standards. The initial chairperson of the (i) nominating and governance committee shall be Paul Stamas, (ii) compensation committee shall be Preston McKenzie and (iii) audit committee shall be David Mangum.
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5. Major Actions. In addition to any voting requirements contained in the Certificate of Incorporation or the Bylaws (or similar governing documents) of the Company or any of its Subsidiaries, the following actions shall not be taken by the Company or any of its Subsidiaries, directly or indirectly (whether by merger, consolidation, reorganization or otherwise), including any proposal by the Board to put to the vote of the stockholders of the Company with respect thereto, without the prior written consent of the GA Stockholder for so long as the GA Stockholder Beneficially Owns shares of Common Stock representing at least 25% (or as otherwise specified below) of the Common Stock then outstanding:
(a) any acquisition or disposition where aggregate consideration is greater than $150,000,000 in a single transaction or series of related transactions;
(b) any transaction in which any Person or group acquires more than 50% of the then outstanding capital stock of the Company or the power to elect a majority of the members of the Board;
(c) any incurrence or refinancing of Indebtedness of the Company and its Subsidiaries to the extent such incurrence or refinancing would result in the Company and its Subsidiaries having Indebtedness in excess of $250,000,000 in the aggregate;
(d) hiring or termination of the chief executive officer of the Company;
(e) for so long as the GA Stockholder Beneficially Owns shares of Common Stock representing at least 10% of the Common Stock then outstanding, any increase or decrease in the size of the Board;
(f) any reorganization, recapitalization, voluntary bankruptcy, liquidation, dissolution or winding-up;
(g) any redemption, repurchase or other acquisition by the Company of its equity securities or any declaration thereof, other than (i) the redemption, repurchase or other acquisition by the Company of any equity securities of any director, officer, independent contractor or employee in connection with the termination of the employment or services of such director, officer, independent contractor or employee as contemplated by the applicable equity compensation plan or award agreement with respect to such equity securities, (ii) pursuant to an offer made to all stockholders of the Company pro rata with respect to such equity securities (regardless of whether any or all of such stockholders elect to participate in such redemption, repurchase or other acquisition) or (iii) pursuant to an open market plan approved by the Board;
(h) any payment or declaration of any dividend or distribution on any equity securities of the Company or any of its non-wholly-owned Subsidiaries or entering into a recapitalization transaction the primary purpose of which is to pay a dividend or distribution;
(i) any amendment, alteration or repeal of any provision of the governing documents of the Company in a manner that adversely affects the powers, preferences or rights of the GA
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Stockholder (including, for the avoidance of doubt, the advance waiver of corporate opportunities); or
(j) any adoption, approval or issuance of any “poison pill,” stockholder or similar rights plan by the Company or its Subsidiaries or any amendment, restatement, modification or waiver of such plan after the adoption thereof has been approved by the GA Stockholder in accordance with this Section 5.
6. Information Rights. For so long as the GA Stockholder Beneficially Owns shares of Common Stock representing at least 10% of the Common Stock then outstanding, the Company shall provide the GA Stockholder or its authorized representatives with (i) (x) reasonable access to visit and inspect any of the properties of the Company or any of its Subsidiaries, including its and their books of account, monthly management reports, operating and capital expenditure budgets, periodic information packages relating to the operations and cash flows of the Company and other records and (y) the right to discuss the Company’s or its Subsidiaries’ affairs, finances and accounts with its and their officers, during normal business hours following reasonable notice, and (ii) for so long as the Company is not a public reporting company, (x) an unaudited consolidated balance sheet of the Company as of the end of each completed fiscal quarter in each year following the date hereof and (y) an audited annual consolidated balance sheet of the Company as of the end of the fiscal year in each year following the date hereof and the related audited consolidated statements of income, changes in stockholders’ equity and cash flow for the fiscal years then ended, including the notes thereto; provided, however, that the Company shall not be obligated pursuant to the foregoing clauses (i) and (ii) to provide access to any information that it reasonably and in good faith considers to be a trade secret or confidential information (unless covered by an enforceable confidentiality agreement, in a form acceptable to the Company) or the disclosure of which would adversely affect the attorney-client privilege between the Company and its counsel. For so long as the GA Stockholder Beneficially Owns shares of Common Stock representing at least 10% of the Common Stock then outstanding, the Company shall also provide the GA Stockholder or its authorized representatives with the right to reasonably request information.
7. Confidential Information. The Company recognizes that Nominees (a) will from time to time receive non-public information concerning the Company, and (b) may share such information with other individuals associated with the Lead Stockholder that designated such Nominee. The Company hereby irrevocably consents to such sharing, subject to the terms of this Section 7. Each Lead Stockholder agrees that it will keep confidential and not disclose or divulge to any third party, or use for any purpose, other than to monitor its investment in the Company and its Subsidiaries, any confidential information regarding the Company it receives from the Company or a Nominee, unless such information (x) is known or becomes known to the public in general, (y) is or has been independently developed or conceived by such Lead Stockholder without use of the Company’s confidential information or (z) is or has been made known or disclosed to such Lead Stockholder by a third party without a breach of any obligation of confidentiality such third party may have; provided, however, that a Lead Stockholder may disclose confidential information (i) to its Affiliates (other than portfolio companies), (ii) to each of its and its Affiliates’ (other than portfolio companies) attorneys, accountants, consultants, advisors and other professionals to the extent necessary to obtain their services in connection with evaluating the information, or (iii) as may be required by law or legal, judicial or regulatory process or requested by any regulatory or
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self-regulatory authority or examiner, provided that such Lead Stockholder takes reasonable steps to minimize the extent of any required disclosure described in this clause (iii); provided, further, that each Lead Stockholder shall be responsible for compliance with this Section 7 by its Affiliates and advisors described in the foregoing clauses (i) and (ii).
8. Indemnification.
(a) The Company agrees to indemnify and hold harmless each Stockholder, its respective directors, officers, partners, members, managers, Affiliates and controlling persons (each, an “Stockholder Indemnitee”) from and against any and all liability, including, without limitation, all obligations, costs, fines, claims, actions, injuries, demands, suits, judgments, proceedings, investigations, arbitrations (including stockholder claims, actions, injuries, demands, suits, judgments, proceedings, investigations or arbitrations) and reasonable and documented expenses, including reasonable accountant’s and reasonable attorney’s fees and expenses (together the “Losses”), incurred by such Stockholder Indemnitee before or after the date of this Agreement to the extent arising out of, resulting from, or relating to (i) such Stockholder Indemnitee’s purchase and/or ownership of any Common Stock or (ii) any litigation to which any Stockholder Indemnitee is made a party in its capacity as a stockholder or owner of securities (or as a director, officer, partner, member, manager, Affiliate or controlling person of any Lead Stockholder) of the Company (including any predecessor thereof); provided, that the foregoing indemnification rights in this Section 8(a) shall not be available to the extent that (a) any such Losses are incurred as a result of such Stockholder Indemnitee’s willful misconduct or gross negligence; (b) any such Losses are incurred as a result of non-compliance by such Stockholder Indemnitee with any laws or regulations applicable to it; or (c) subject to the rights of contribution provided for below, to the extent indemnification for any Losses would violate any applicable law or public policy. For purposes of this Section 8(a), none of the circumstances described in the limitations contained in the proviso in the immediately preceding sentence shall be deemed to apply absent a final non-appealable judgment of a court of competent jurisdiction to such effect, in which case to the extent any such limitation is so determined to apply to any Stockholder Indemnitee as to any previously advanced indemnity payments made by the Company under this Section 8(a), then such payments shall be promptly repaid by such Stockholder Indemnitee to the Company. No reduction in the number of shares of Common Stock that each Lead Stockholder Beneficially Owns shall affect the coverage provided herein. The rights of any Stockholder Indemnitee to indemnification hereunder will be in addition to any other rights any such party may have under any other agreement or instrument to which such Stockholder Indemnitee is or becomes a party or is or otherwise becomes a beneficiary or under law or regulation. In the event of any payment of indemnification pursuant to this Section 8(a), to the extent that any Stockholder Indemnitee is indemnified for Losses, except as set forth in Section 7(d), the Company will be subrogated to the extent of such payment to all of the related rights of recovery of the Stockholder Indemnitee to which such payment is made against all other Persons. Such Stockholder Indemnitee shall execute all papers reasonably required to evidence such rights. The Company will be entitled at its election to participate in the defense of any third party claim upon which indemnification is due pursuant to this Section 8(a) or to assume the defense thereof, with counsel reasonably satisfactory to such Stockholder Indemnitee unless, in the reasonable judgment of the Stockholder Indemnitee, a conflict of interest between the Company and such Stockholder Indemnitee may exist, in which case such Stockholder Indemnitee shall have the right to assume its own defense and the Company shall be liable for all
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reasonable expenses therefor. Except as set forth above, should the Company assume such defense all further defense costs of the Stockholder Indemnitee in respect of such third party claim shall be for the sole account of such party and not subject to indemnification hereunder. The Company will not without the prior written consent of the Stockholder Indemnitee (which consent shall not be unreasonably withheld) effect any settlement of any threatened or pending third party claim in which such Stockholder Indemnitee is or could have been a party and be entitled to indemnification hereunder unless such settlement solely involves the payment of money by the Company and includes an unconditional release of such Stockholder Indemnitee from all liability and claims that are the subject matter of such claim. If the indemnification provided for above is unavailable in respect of any Losses, then the Company, in lieu of indemnifying an Stockholder Indemnitee, shall, if and to the extent permitted by law, contribute to the amount paid or payable by such Stockholder Indemnitee in such proportion as is appropriate to reflect the relative fault of the Company and such Stockholder Indemnitee in connection with the actions which resulted in such Losses, as well as any other equitable considerations.
(b) The Company agrees to pay or reimburse (i) the Lead Stockholders for all reasonable and documented costs and expenses (including reasonable and documented attorneys’ fees, charges, disbursement and expenses) incurred in connection with any amendment, supplement, modification or waiver of, or to, any of the terms or provisions of this Agreement or any related agreements and (ii) each Lead Stockholder for all reasonable and documented costs and expenses of such Lead Stockholder (including reasonable and documented attorneys’ fees, charges, disbursement and expenses) incurred in connection with (1) the consent to any departure by the Company or any of its Subsidiaries from the terms of any provision of this Agreement or any related agreements and (2) the enforcement or exercise by such Lead Stockholder of any right granted to it or provided for hereunder.
(c) The Company and its Subsidiaries shall obtain customary director and officer indemnity insurance on commercially reasonable terms which insurance shall cover each member of the Board and the members of each board of directors of each of the Company’s Subsidiaries. The Company and its Subsidiaries shall enter into director indemnification agreements substantially in the form attached as Exhibit A hereto, with each of the Nominees.
(d) The Company hereby acknowledges that the Stockholder Indemnitee may have certain rights to advancement and/or indemnification by certain Affiliates of the GA Stockholder or certain Affiliates of the Summit Stockholder (collectively, the “Fund Indemnitors”). In all events, (i) the Company hereby agrees that it is the indemnitor of first resort (i.e., its obligation to a Stockholder Indemnitee to provide advancement and/or indemnification to such Stockholder Indemnitee are primary and any obligation of the Fund Indemnitors (including any Affiliate thereof other than the Company) to provide advancement or indemnification hereunder or under any other indemnification agreement (whether pursuant to contract, by-laws or charter), or any obligation of any insurer of the Fund Indemnitors to provide insurance coverage, for the same expenses, liabilities, judgments, penalties, fines and amounts paid in settlement (including all interest, assessments and other charges paid or payable in connection with or in respect of such expenses, liabilities, judgments, penalties, fines and amounts paid in settlement) incurred by such Stockholder Indemnitee are secondary and it irrevocably waives any claims against the Fund Indemnitors for contribution, subrogation, reimbursement or any other recovery of any kind for
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which the Company is entitled pursuant to this Agreement and the Company’s by-laws or charter and (ii) if any Fund Indemnitor (or any Affiliate thereof, other than the Company) pays or causes to be paid, for any reason, any amounts otherwise indemnifiable hereunder or under any other indemnification agreement (whether pursuant to contract, by-laws or charter) with such Stockholder Indemnitee, then (x) such Fund Indemnitor (or such Affiliate, as the case may be) shall be fully subrogated to all rights of such Stockholder Indemnitee with respect to such payment and (y) the Company shall fully indemnify, reimburse and hold harmless such Fund Indemnitor (or such other Affiliate, as the case may be) for all such payments actually made by such Fund Indemnitor (or such other Affiliate, as the case may be).
9. Amendment and Waiver. Any provision of this Agreement may be amended or waived if, but only if, such amendment or waiver is in writing and is signed, in the case of an amendment, by the Company and each Lead Stockholder that Beneficially Owns at least 5% of the Common Stock then outstanding, or in the case of a waiver, by the party against whom the waiver is to be effective; provided, that any amendments or waivers that adversely affect Bennett in a manner disproportionate to the Lead Stockholders shall require the written consent of Bennett. No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. The Lead Stockholders shall not be obligated to nominate all (or any) of the Nominees they are entitled to nominate pursuant to this Agreement for any election of Directors but the failure to do so shall not constitute a waiver of rights hereunder with respect to future elections. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law.
10. Benefit of Parties. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective permitted successors and assigns. Notwithstanding the foregoing, the Company may not assign any of its rights or obligations hereunder without the prior written consent of each Lead Stockholder that Beneficially Own shares of Common Stock representing at least 5% of the Common Stock then outstanding. Except as otherwise expressly provided in Section 11, nothing herein contained shall confer or is intended to confer on any third party or entity that is not a party to this Agreement any rights under this Agreement.
11. Assignment. Upon written notice to the Company, each Lead Stockholder may assign to any Affiliate (other than a portfolio company) all of its rights hereunder and, following such assignment, such assignee shall be deemed to be a “Lead Stockholder” for all purposes hereunder.
12. Headings. Headings are for ease of reference only and shall not form a part of this Agreement.
13. Governing Law. This Agreement shall be construed in accordance with and governed by the law of the State of Delaware without giving effect to the principles of conflicts of laws thereof.
14. Jurisdiction. Any suit, action or proceeding seeking to enforce any provision of, or based on any matter arising out of or in connection with, this Agreement may be brought against any of the parties in any federal court located in the State of Delaware or any Delaware state court, and each of the parties hereby consents to the exclusive jurisdiction of such court (and of the appropriate
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appellate courts) in any such suit, action or proceeding and waives any objection to venue laid therein. Process in any such suit, action or proceeding may be served on any party anywhere in the world, whether within or without the jurisdiction of any such court. Without limiting the foregoing, each of the parties agrees that service of process upon such party at the address referred to in Section 21, together with written notice of such service to such party, shall be deemed effective service of process upon such party.
15. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT.
16. Entire Agreement. This Agreement constitutes the entire agreement among the parties with respect to the subject matter hereof and supersedes all prior agreements, understandings and negotiations, both written and oral among the parties with respect to the subject matter hereof.
17. Termination. This Agreement shall terminate upon the earliest to occur of any one of the following events: (a) (i) with respect to the GA Stockholder only, at such time as the GA Stockholder no longer Beneficially Owns shares of Common Stock representing at least 10% of the Common Stock then outstanding and (ii) with respect to the Summit Stockholder only, at such time as the Summit Stockholder no longer Beneficially Owns shares of Common Stock representing at least 10% of the Common Stock then outstanding and (b) the unanimous written consent of the parties hereto. Notwithstanding the foregoing, Sections 8 through 25 shall survive any termination of this Agreement.
18. Severability. If any provision of this Agreement or the application thereof to any person or circumstance shall be invalid or unenforceable to any extent, the remainder of this Agreement and the application of such provisions to other persons or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by law.
19. Further Assurances. Each of the parties hereto shall execute and deliver such further instruments and do such further acts and things as may be required to carry out the intent and purpose of this Agreement.
20. Specific Performance. Each of the parties hereto agree that irreparable damage would occur if any provision of this Agreement were not performed in accordance with the terms hereof and that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement or to enforce specifically the performance of the terms and provisions hereof in any federal or state court located in the State of Delaware, in addition to any other remedy to which they are entitled at law or in equity.
21. Notices. All notices, requests and other communications to any party shall be in writing (including email or similar writing) and shall be given:
If to the Company:
EngageSmart, Inc.
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c/o Charles Kallenbach
30 Braintree Hill, Office Park, Ste 101
Braintree, MA 02184
Attention: Charles Kallenbach
Email: ckallenbach@engagesmart.com
With a copy to (which shall not constitute notice):
Latham & Watkins LLP
1271 Avenue of the Americas
New York, NY 10020
Attention: Ian D. Schuman, Stelios G. Saffos, Jonathan Solomon and Brittany Ruiz
Email: Ian.Schuman@lw.com; Stelios.Saffos@lw.com; Jonathan.Solomon@lw.com and Brittany.Ruiz@lw.com
If to the GA Stockholder or any of its Nominees:
c/o General Atlantic Service Company, L.P.
55 East 52nd Street, 33rd Floor
New York, NY 10055
Attention: Chris Lanning
Email: clanning@generalatlantic.com
With a copy to (which shall not constitute notice):
Paul, Weiss, Rifkind, Wharton & Garrison LLP
1285 Avenue of the Americas
New York, NY 10019-6064
Attention: Matthew Abbott; Ellen Ching
Email: mabbott@paulweiss.com; eching@paulweiss.com
If to the Summit Stockholder or any of its Nominees:
c/o Summit Partners, L.P.
222 Berkeley St., 18th Floor
Boston, MA 02116
Attention: Christopher J. Dean; Matthew G. Hamilton
Email: cdean@summitpartners.com; mhamilton@summitpartners.com
With a copy to (which shall not constitute notice):
Kirkland & Ellis LLP
300 North LaSalle St.
Chicago, IL 60654
Attention: Brian C. Van Klompenberg, P.C.; Michael P. Keeley
Email: brian.vanklompenberg@kirkland.com; michael.keeley@kirkland.com
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or to such other address or email address as such party may hereafter specify for the purpose by notice to the other parties. Each such notice, request or other communication shall be effective when delivered at the address specified in this Section 21 during regular business hours.
22. Enforcement. Each of the parties hereto covenants and agrees that the disinterested members of the Board have the right to enforce, waive or take any other action with respect to this Agreement on behalf of the Company.
23. Interpretation. Each of the parties hereto acknowledges that each party has been represented by legal counsel in connection with this Agreement. Accordingly, any rule of law or any legal decision that would require interpretation of any claimed ambiguities in this Agreement against the drafting party has no application and is expressly waived.
24. Reporting. Each of the Stockholders acknowledge and agree that nothing in this Agreement shall be deemed to create a group among such Stockholders and the parties hereto shall not take a reporting position that is inconsistent with the foregoing without the prior written consent of the other Stockholders.
25. Counterparts; Effectiveness. This Agreement may be signed in any number of counterparts, each of which shall be deemed an original. This Agreement shall become effective when each party shall have received a counterpart hereof signed by each of the other parties. An executed copy or counterpart hereof delivered by facsimile shall be deemed an original instrument.
[signature page follows]
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IN WITNESS WHEREOF, the parties hereto have executed this Stockholders Agreement as of the date first set forth above.
ENGAGESMART, INC.
By: /s/ Robert P. Bennett
Name:Robert P. Bennett
Title:Chief Executive Officer
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GENERAL ATLANTIC (IC), L.P.
By: General Atlantic (SPV) GP, LLC, its general partner
By: General Atlantic, L.P., its sole member
By: /s/ Michael Gosk
Name: Michael Gosk
Title: Managing Director
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SUMMIT PARTNERS GROWTH EQUITY
FUND VIII-A, L.P.
By: Summit Partners GE VIII, L.P.
Its: General Partner
By: Summit Partners GE VIII, LLC
Its: General Partner
By:/s/ Matthew Guy-Hamilton
Name: Matthew Guy-Hamilton
Title: Managing Director
SUMMIT PARTNERS GROWTH EQUITY
FUND VIII-B, L.P.
By: Summit Partners GE VIII, L.P.
Its: General Partner
By: Summit Partners GE VIII, LLC
Its: General Partner
By:/s/ Mattthew Guy-Hamilton
Name: Matthew Guy-Hamilton
Title: Managing Director
SUMMIT PARTNERS ENTREPRENEUR
ADVISORS FUND L.P.
By: Summit Partners Entrepreneur Advisors GP, LLC
Its: General Partner
By: Summit Master Company, LLC
Its: Sole Member
By:/s/ Matthew Guy-Hamilton
Name: Matthew Guy-Hamilton
Title: Managing Director
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SUMMIT INVESTORS I, LLC
By: Summit Investors Management, LLC
Its: Manager
By: Summit Partners, L.P.
Its: Manager
By: Summit Master Company, LLC
Its: General Partner
By:/s/ Matthew Guy-Hamilton
Name: Matthew Guy-Hamilton
Title:Managing Director
SUMMIT INVESTORS I (UK), L.P.
By: Summit Investors Management, LLC
Its: General Partner
By: Summit Partners, L.P.
Its: Manager
By: Summit Master Company, LLC
Its: General Partner
By:/s/ Matthew Guy-Hamilton
Name: Matthew Guy-Hamilton
Title: Managing Director
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Robert Bennett
By:/s/ Robert P. Bennett
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Exhibit 10.13
ENGAGESMART, INC.
AMENDMENT TO EMPLOYMENT AGREEMENT
THIS AMENDMENT TO EMPLOYMENT AGREEMENT (this “Amendment”), is made as of October 21, 2021 (the “Effective Date”), by and between EngageSmart, Inc., a Delaware corporation (the “Company”), and Thomas Griffin (“Executive”). Capitalized terms not otherwise defined herein shall have the meanings ascribed thereto in the Employment Agreement (as defined below).
RECITALS
AGREEMENT
In consideration of the covenants and undertakings contained herein, and for other good and valuable consideration, the sufficiency of which is hereby acknowledged, the Company and Executive hereby agree as follows:
(i) Base Salary. During the Employment Period, the Executive shall receive a base salary (the “Base Salary”) of $400,000 per annum. The Base Salary shall be reviewed annually by the Compensation Committee (the “Compensation Committee”) of the Board of Directors of the Company (the “Board”) and may be increased from time to time by the Compensation Committee in its sole discretion. The Base Salary shall be paid in accordance with the Company’s normal payroll practices for executive salaries generally, but no less often than monthly. The Base Salary may be increased in the Compensation Committee’s discretion, but not reduced, and the term “Base Salary” as utilized in this Agreement shall refer to the Base Salary as so increased.
3. Further Actions. Executive agrees to take any and all actions, and to execute and deliver any and all documents, that may be requested by the Company in order to accomplish the transactions contemplated by this Amendment or to effectuate the intent hereof.
4. Tax Consequences. The Company is making no warranties or representations to Executive with respect to the tax consequences of the transactions contemplated by this Amendment. Executive is hereby advised to consult with Executive’s own personal legal, accounting, tax and/or financial professional advisors with respect to the tax consequences associated with transactions contemplated by this Amendment.
6. Governing Law. This Amendment shall be construed, administered and enforced according to the laws of the State of Delaware without regard to the conflicts of law provisions thereof.
7. Counterparts. This Amendment may be executed in two or more counterparts, each of which shall be deemed to be an original and all of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the Company and Executive have caused this Amendment to be executed, effective as of the Effective Date.
ENGAGESMART, INC.
a Delaware corporation
By: /s/ Cassandra Hudson
Name: Cassandra Hudson
Title: CFO
EXECUTIVE
/s/ Thomas Griffin
Name: Thomas Griffin
|US-DOCS\127194067.1||
Exhibit 10.14
ENGAGESMART, INC.
AMENDMENT TO EMPLOYMENT AGREEMENT
THIS AMENDMENT TO EMPLOYMENT AGREEMENT (this “Amendment”), is made as of October 21, 2021 (the “Effective Date”), by and between EngageSmart, Inc., a Delaware corporation (the “Company”), and Jonathan Seltzer (“Executive”). Capitalized terms not otherwise defined herein shall have the meanings ascribed thereto in the Employment Agreement (as defined below).
RECITALS
AGREEMENT
In consideration of the covenants and undertakings contained herein, and for other good and valuable consideration, the sufficiency of which is hereby acknowledged, the Company and Executive hereby agree as follows:
(i) Base Salary. During the Employment Period, the Executive shall receive a base salary (the “Base Salary”) of $400,000 per annum. The Base Salary shall be reviewed annually by the Compensation Committee (the “Compensation Committee”) of the Board of Directors of the Company (the “Board”) and may be increased from time to time by the Compensation Committee in its sole discretion. The Base Salary shall be paid in accordance with the Company’s normal payroll practices for executive salaries generally, but no less often than monthly. The Base Salary may be increased in the Compensation Committee’s discretion, but not reduced, and the term “Base Salary” as utilized in this Agreement shall refer to the Base Salary as so increased.
3. Further Actions. Executive agrees to take any and all actions, and to execute and deliver any and all documents, that may be requested by the Company in order to accomplish the transactions contemplated by this Amendment or to effectuate the intent hereof.
4. Tax Consequences. The Company is making no warranties or representations to Executive with respect to the tax consequences of the transactions contemplated by this Amendment. Executive is hereby advised to consult with Executive’s own personal legal, accounting, tax and/or financial professional advisors with respect to the tax consequences associated with transactions contemplated by this Amendment.
6. Governing Law. This Amendment shall be construed, administered and enforced according to the laws of the State of Delaware without regard to the conflicts of law provisions thereof.
7. Counterparts. This Amendment may be executed in two or more counterparts, each of which shall be deemed to be an original and all of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the Company and Executive have caused this Amendment to be executed, effective as of the Effective Date.
ENGAGESMART, INC.
a Delaware corporation
By: /s/ Cassandra Hudson
Name: Cassandra Hudson
Title: CFO
EXECUTIVE
/s/ Jonathan Seltzer
Name: Jonathan Seltzer
|US-DOCS\127194372.1||
Exhibit 31.1
CERTIFICATION
I, Robert P. Bennett, certify that:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) [omitted];
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
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Date: November 10, 2021 |
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By: |
/s/Robert P. Bennett |
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Robert P. Bennett |
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Chief Executive Officer
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Exhibit 31.2
CERTIFICATION
I, Cassandra Hudson, certify that:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) [omitted];
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
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Date: November 10, 2021 |
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By: |
/s/ Cassandra Hudson |
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Cassandra Hudson |
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Chief Financial Officer
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Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of EngageSmart, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2021, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert P. Bennett, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
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Date: November 10, 2021 |
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By: |
/s/Robert P. Bennett |
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Robert P. Bennett |
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Chief Executive Officer
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Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of EngageSmart, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2021, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Cassandra Hudson, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
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Date: November 10, 2021 |
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By: |
/s/ Cassandra Hudson |
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Cassandra Hudson |
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Chief Financial Officer |