As filed with the U.S. Securities and Exchange Commission on May 5, 2021.
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FIGS, Inc.
(Exact name of Registrant as specified in its charter)
Delaware | 2300 | 46-2005653 | ||
(State or other jurisdiction of incorporation or organization) |
(Primary Standard Industrial Classification Code Number) |
(I.R.S. Employer Identification Number) |
2834 Colorado Avenue, Suite 100
Santa Monica, California 90404
(424) 300-8330
(Address, including zip code, and telephone number, including area code, of Registrants principal executive offices)
Heather Hasson
Trina Spear
Co-Chief Executive Officers
FIGS, Inc.
2834 Colorado Avenue, Suite 100
Santa Monica, California 90404
(424) 500-8209
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
Marc D. Jaffe Ian D. Schuman Alison A. Haggerty Latham & Watkins LLP 885 Third Avenue New York, New York 10022 (212) 906-1200 |
Jeffrey D. Lawrence Chief Financial Officer FIGS, Inc. 2834 Colorado Avenue, Suite 100 Santa Monica, California 90404 (424) 500-8209 |
Dave Peinsipp Charles S. Kim Kristin VanderPas Dave Young Cooley LLP 101 California Street, 5th Floor San Francisco, California 94111 (415) 693-2000 |
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, or Securities Act, check the following box. ☐
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Securities Exchange Act of 1934, as amended.
Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
Non-accelerated filer | ☒ | Smaller reporting company | ☐ | |||
Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
CALCULATION OF REGISTRATION FEE
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Title of Each Class of Securities to be Registered |
Proposed Maximum Aggregate Offering Price(1)(2) |
Amount of Registration Fee |
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Class A common stock, par value $0.0001 per share |
$100,000,000.00 | $10,910.00 | ||
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(1) |
Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) under the Securities Act. |
(2) |
Includes the aggregate offering price of additional shares that the underwriters have the option to purchase. |
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
The information in this preliminary prospectus is not complete and may be changed. Neither we nor the selling stockholders may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities, and neither we nor the selling stockholders are soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.
Subject to Completion. Dated May 5, 2021
CLASS A COMMON STOCK | SHARES |
This is the initial public offering of shares of Class A common stock of FIGS, Inc.
We are offering shares of our Class A common stock. The selling stockholders identified in this prospectus are offering an additional shares of our Class A common stock. We will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders.
Prior to this offering, there has been no public market for our Class A common stock. It is currently estimated that the initial public offering price per share will be between $ and $ . We have applied to list our Class A common stock on the New York Stock Exchange under the symbol FIGS.
Upon the completion of this offering, we will have three classes of authorized common stock: Class A common stock, Class B common stock and Class C common stock. The rights of the holders of each class of our common stock are identical, except with respect to voting and conversion rights. Each share of Class A common stock is entitled to one vote per share. Each share of Class B common stock is entitled to 20 votes per share and is convertible into one share of Class A common stock. Each share of Class C common stock is entitled to three votes per share and is convertible into one share of Class A common stock. See the section titled Description of Capital Stock for more information. Immediately following the completion of this offering, all outstanding shares of our Class B common stock will be held by our co-founders and co-Chief Executive Officers, Heather Hasson and Trina Spear, and all outstanding shares of our Class C common stock will be held by Tulco, LLC, our majority stockholder. Immediately following the completion of this offering, the outstanding shares of our Class B common stock and Class C common stock will represent approximately % and %, respectively, of the voting power of our outstanding capital stock, assuming no exercise of the underwriters option to purchase additional shares.
Upon the completion of this offering, we will be a controlled company within the meaning of the corporate governance rules of the New York Stock Exchange.
We are an emerging growth company as that term is used in the Jumpstart Our Business Startups Act of 2012 and, as such, may elect to comply with certain reduced public company reporting requirements in future reports after the completion of this offering.
See Risk Factors beginning on page 18 to read about factors you should consider before buying shares of our Class A common stock.
Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
Per Share | Total | |||||||
Initial Public Offering Price |
$ | $ | ||||||
Underwriting discount and commissions (1) |
$ | $ | ||||||
Proceeds, before expenses, to FIGS |
$ | $ | ||||||
Proceeds, before expenses, to the selling stockholders |
$ | $ |
(1) See Underwriting beginning on page 163 for additional information regarding underwriter compensation.
At our request, the underwriters have reserved for sale at the initial public offering price per share up to % of the shares of Class A common stock offered by this prospectus for sale at the initial public offering price through a directed share program to certain individuals identified by management. See the section titled UnderwritingDirected Share Program.
To the extent that the underwriters sell more than shares of Class A common stock, the underwriters have the option to purchase up to an additional shares from the selling stockholders at the initial public offering price, less the underwriting discount and commissions.
The underwriters expect to deliver the shares against payment in New York, New York on , 2021.
GOLDMAN SACHS & CO. LLC | MORGAN STANLEY |
BARCLAYS | CREDIT SUISSE | BofA SECURITIES |
Prospectus dated , 2021
Our mission is to celebrate, empower, and serve those who serve others.
We have built the largest DTC platform in healthcare apparel, leading the industry in the shift to digital. +1.3 Million Active Customers1 Net revenue of $263.1M2 Net revenue growth of 138%3 Gross margins of 72.3%4 Adjusted EBITDA margin of 26.3%5 NPS of +8156 1 as of December 31, 2020 2 as of December 31, 2020 3 growth from December 31, 2019 to December 31, 2020 4 as of December 31, 2020 5 as of December 31, 2020 6 as of March 1, 2021 from January 1, 2021 to March 31, 2020
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F-1 |
Through and including , 2021 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealers obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.
Neither we, the selling stockholders, nor any of the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. Neither we, the selling stockholders, nor any of the underwriters take responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our Class A common stock.
For investors outside of the United States: Neither we, the selling stockholders, nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside of the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of our Class A common stock and the distribution of this prospectus outside of the United States.
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This summary highlights selected information presented in more detail elsewhere in this prospectus. This summary does not contain all the information you should consider before investing in our Class A common stock. You should carefully read this prospectus in its entirety before investing in our Class A common stock, including the sections titled Risk Factors, Managements Discussion and Analysis of Financial Condition and Results of Operations, and Special Note Regarding Forward-Looking Statements, and our financial statements and the accompanying notes included elsewhere in this prospectus. Unless otherwise indicated, the terms FIGS, Wear FIGS, we, us and our refer to FIGS, Inc.
Our Mission
Our mission is to celebrate, empower and serve those who serve others.
Who We Are
We are a founder-led, direct-to-consumer healthcare apparel and lifestyle brand that seeks to celebrate, empower and serve current and future generations of healthcare professionals. We are committed to helping this growing, global community of professionals, whom we refer to as Awesome Humans, look, feel and perform at their best24/7, 365 days a year. We create technically advanced apparel and products that feature an unmatched combination of comfort, durability, function and style, all at an affordable price. In doing so, we have redefined what scrubs aregiving rise to our tag-line: why wear scrubs, when you can #wearFIGS?
We have revolutionized the large and fragmented healthcare apparel market. We branded a previously unbranded industry and de-commoditized a previously commoditized productelevating scrubs and creating premium products for healthcare professionals. Most importantly, we built a community and lifestyle around a profession. As a result, we have become the industrys category-defining healthcare apparel and lifestyle brand.
We market and sell 98% of our products through our digital platform, consisting of our website and mobile app, to a rapidly growing community of loyal customers. From 2017 to 2020, we grew net revenues from $17.6 million to $263.1 million, representing a compound annual growth rate, or CAGR, of 146%. In addition, in 2020, we delivered operating income and Adjusted EBITDA of $57.9 million and $69.1 million, respectively.
We Are Obsessed with Our Community of Awesome Humans.
We are dedicated to empowering and celebrating every healthcare professional across all disciplines and levels of experience. The healthcare community informs and inspires us, and we place these Awesome Humans at the center of everything we do. We purposefully design products to serve their particular needs and we sell those products through a convenient direct-to-consumer, or DTC, model tailored to their around-the-clock lifestyle. We use our digital platform to celebrate Awesome Humans in aspirational, creative and unexpected ways. We leverage social media platforms to listen to, engage with, understand and better serve our community of healthcare professionals at scale. Our Ambassador Program, which consists of over 250 healthcare professionals from around the world, further drives engagement with our community. Our Ambassadors are an extension of our team and are evangelists for our brand. Our differentiated community-based approach has allowed us to build a growing base of approximately 1.5 million active customers who are passionate and loyal to our brand.
Innovation Drives Our Product Development.
We create technically advanced apparel and products for the modern healthcare professional. Our design philosophy is rooted in Technical Comfortthe conviction that design, comfort and function are
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non-negotiable. While multi-billion-dollar companies were focused on athletes, we believed that nobody was sufficiently focused on healthcare professionalsextraordinary people who care for patients, cure diseases and save lives, and who deserve to look, feel and perform at their best. As a result, we developed cutting-edge fabric technology and product designs to specifically address their needs. Our proprietary fabric technology, called FIONx, offers four-way stretch, anti-odor, anti-wrinkle and moisture-wicking properties. Our scrubs feature easy-to-access zippered pockets for professional and personal items such as stethoscopes, scissors, smartphones and ID badges. Our lifestyle apparel and other non-scrub offerings allow medical professionals to be outfittedon and off shift. By enabling all healthcare professionals to have access to these products, we make the healthcare community more inclusive and aim to elevate the entire healthcare ecosystem.
We Are a Digitally Native Direct-to-Consumer Brand.
We are a digitally native DTC brand that utilizes technology to deliver a differentiated customer experience. We disrupted the industrys historical distribution model, which required healthcare professionals to physically travel to brick-and-mortar stores to purchase their uniforms. We have built the largest DTC platform in healthcare apparel, leading the industry in the shift to digital. By selling directly through our digital platform, we control all aspects of the customer experience. Further, we are able to engage with our community of healthcare professionals before, during and after purchase, through our digital platform and numerous other channels. This direct engagement enables us to establish personal relationships at scale and provides us with valuable customer data and feedback that we leverage across our organization to better serve our community.
We Leverage Data Science to Connect with and Serve Our Community.
We leverage our rich customer data set, bolstered by the inherent benefits of our DTC model, to serve our community more effectively and efficiently. We develop proprietary and customized data solutions designed to optimize our product innovation, inventory analytics, marketing efforts and operational efficiency. We maintain centralized Data Science and Data Engineering teams and de-centralized Data Analysts working directly within each key functional area of the company. This approach enables us to gather and manage extensive data, and rapidly and directly apply that data to deliver customer insights and improve our core operating activities and decision-making processes. Our vast and growing data set plays a critical role in driving new customer acquisition as well as in our community engagement and retention strategy.
We Give Back to the Community We Serve.
In line with our purpose-driven mission, giving back is ingrained in everything we do at FIGS and has been from the beginning. When we started FIGS, we created an initiative called Threads for Threads to donate scrubs to healthcare professionals who work in resource-poor countries and lack the proper uniforms to do their jobs safely. By providing clean scrubs to these individuals, we aim to empower them and improve the quality of care they provide. Our efforts have been supported by over 60 organizations who understand the needs of local healthcare professionals and work with us to ensure that we provide what is needed. To date, we have donated hundreds of thousands of FIGS scrubs and other products to medical professionals in need. In response to the COVID-19 pandemic, in 2020, we focused our giving efforts locally in the United States, donating personal protective equipment, scrubs, funds and other essential products to frontline workers affected by the pandemic. Through all of these efforts, our approach is simple: we give back to the healthcare community that gives so much of itself to serving others.
Our Recent Financial Performance
We have demonstrated rapid growth, strong profitability and positive cash flow generation. In 2020, we achieved the following results compared to 2019:
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Expanded our community of active customers by 118% from 0.6 million to approximately 1.3 million; |
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Increased net revenues from $110.5 million to $263.1 million, representing 138% year-over-year growth; |
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Increased gross margin by 50 basis points from 71.8% to 72.3%; |
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Improved net operating (loss) income from $(0.3) million to $57.9 million; |
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Increased Adjusted EBITDA from $1.7 million to $69.1 million, representing an Adjusted EBITDA margin of 26.3% in 2020; |
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Increased cash flow from operations from $6.5 million to $21.7 million; and |
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Increased free cash flow from $1.8 million to $19.5 million. |
Active Customers (in millions) |
Net Revenues ($ in millions) |
Net Operating (Loss) Income ($ in millions) |
Adjusted EBITDA ($ in millions) |
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NM = Not Meaningful |
We define an active customer as a unique customer account that has made at least one purchase in the preceding 12-month period. See the section titled Selected Financial DataNon-GAAP Financial Measures for information regarding Adjusted EBITDA, Adjusted EBITDA margin and free cash flow, including a reconciliation to the most directly comparable financial measures prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP.
Our Market Opportunity
Healthcare Apparel Is a Large, Growing and Non-Discretionary Industry.
According to the Bureau of Labor Statistics, the healthcare sector is the largest and fastest growing job segment in the United States, employing over 20 million professionals in 2020. Total U.S. employment between 2019 and 2029 is expected to grow by 15% for all healthcare professionals versus just 4% for all occupations. Within this growing market, healthcare apparel is a large, fundamentally attractive industry underpinned by its scale, recurring nature and compelling growth outlook. In 2020, the total addressable market of the healthcare apparel industry was an estimated $12.0 billion in the United States and $79.0 billion globally, according to an April 2021 Frost & Sullivan study that we commissioned. Unlike most other categories in the apparel sector, the healthcare apparel industry is largely non-discretionary, recession resistant and much less susceptible to fashion or fad risk. Hospitals, medical offices, clinics and laboratories routinely require healthcare professionals to wear scrubs, lab coats and other medical apparel during every shift. Over time, healthcare apparel purchasing has shifted from institutions to the individual, with approximately 85% of all medical professionals now purchasing their own uniforms. Due to frequent wear, healthcare apparel continuously needs to be replenished, resulting in highly predictable, recurring demand for such products.
The Industry Has Historically Lacked Innovation.
Prior to FIGS, the healthcare apparel industry had operated for over 100 years with little change or innovation. Despite attractive market fundamentals, the industry had been held back, and its consumers underserved, by legacy participants with outdated business models.
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We believe that key limitations of industry incumbents include:
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Commoditized Products. Legacy manufacturers typically sell commoditized product offerings that are notoriously ill-fitting, uncomfortable, baggy, boxy and lacking in design and functionality, with minimal focus on fabric technology or performance. |
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Brand Obscurity. Traditional scrubs manufacturers sell under third-party licenses, and therefore do not retain control over the product and have limited ability to promote brand loyalty. |
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Antiquated Distribution. An outdated distribution strategy causes incumbent manufacturers to rely on a highly fragmented network of discount brick-and-mortar medical supply stores, often in inconvenient locations, and unappealing aggregated online sites operated by third-party retailers. |
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Channel Conflict. Due to legacy wholesale relationships, many incumbent manufacturers do not sell DTC despite consumers growing desire to engage directly with brands. |
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Customer Separation. Incumbent manufacturers generally do not have a direct connection with the end customerthe healthcare professional. As a result, they lack valuable feedback regarding customers needs and preferences. |
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Challenged Margins. Structurally challenged margin profiles, stemming from third-party brand licensing and wholesale distribution economics, likely impacts incumbent manufacturers ability to invest in product innovation, marketing and customer experience. |
The Industry is Fundamentally Changing.
We believe the healthcare apparel sector is positioned for continued strong growth driven by the following key industry dynamics:
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Resilient Industry with Favorable Long-Term Trends. The healthcare apparel industry is growing and has demonstrated resilience across economic cycles, driven by the non-discretionary, replenishment nature of its products and the secular growth of the healthcare sector. |
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Increased Demand for Healthcare Professionals. Healthcare is the fastest growing job sector in the United States, having grown by 22% from January 2011 to January 2020. |
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Acceleration of eCommerce. The shift to eCommerce is rapidly accelerating as consumers continue to embrace the convenience of online and mobile shopping. For healthcare professionals who work long shifts and all hours of the day and night, the convenience of eCommerce is even more necessary. |
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Attraction to Purpose-Driven Brands. Consumers are increasingly attracted to, and interested in engaging with, purpose-driven brands using social media channels. |
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Magnified Importance of Technically Advanced Healthcare Apparel. The COVID-19 pandemic has magnified the indispensability of healthcare professionals. Due to the pandemic, more healthcare professionals are choosing to wear medical apparel, and a greater number of hospitals, medical offices and clinics are requiring staff to wear scrubs and other medical apparel. While we demonstrated consistent and significant growth prior to 2020, we believe the pandemic has accelerated awareness of the FIGS brand and a shift in purchasing decisions that will continue to drive future growth. |
Supported by these key trends, the healthcare apparel industry is expected to demonstrate strong and consistent growth, with the total addressable market in the United States expected to grow by a 6.1% CAGR over the next five years, from approximately $12.0 billion in 2020 to approximately $16.0 billion in 2025, according to the Frost & Sullivan study.
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What Sets Us Apart
We believe that the following competitive strengths have been key drivers of our success to date and strategically position us for continued success.
Deeply Passionate, Loyal Community
We have been building a large, growing community of deeply loyal customers who share an authentic emotional connection with FIGS. During 2020, our community more than doubled to approximately 1.3 million active customers, about 60% of whom were repeat customers. Our brand awareness is driven largely by word of mouth among healthcare professionals who are passionate about FIGS, and whose passion quickly spreads through hospitals and healthcare institutions, where thousands of healthcare professionals often work in close proximity to one another. In addition, through our digital platform and social media presence, we showcase the daily wins and challenges that healthcare professionals experience, and allow our community to engage with each other on common ground, bridging gaps that previously existed across disciplines and experience levels within the healthcare profession. Our strong customer loyalty is demonstrated by our compelling revenue retention metrics. In 2020, we retained 75% of the 2019 and prior cohorts net revenues, including 100% of the 2019 net revenues generated by 2018 and prior cohorts.
Authentic, Category-Defining Brand
FIGS is the first digitally native lifestyle brand outfitting healthcare professionals. Our brand represents premium products combined with a seamless digital customer experience that healthcare professionals have never experienced before. Many of our customers form a deep emotional connection with our brand because we are the first brand in the industry to seek relentlessly to understand and fulfill their unique needs. Through our Ambassador Program, we have formed meaningful relationships with over 250 Awesome Humans who help us reach millions of healthcare professionals around the world in an intimate, authentic and personalized way. Our strong brand affinity is demonstrated by our high Net Promoter Score of +81. See the section titled Industry and Market Data for additional information regarding Net Promoter Score.
Industry-Leading Product Innovation
We strive to create the most innovative, functional, comfortable and stylish healthcare apparel in the industry. Our design philosophy stems from an unwavering focus on what healthcare professionals need from their apparel in order to look, feel and perform at their best. Our innovative products are designed, sourced and manufactured from the fiber level. Our proprietary FIONx fabric technology is made from what we believe to be the best combination of materials and is core-spun for maximum durability to withstand the demands of a healthcare professionals work without sacrificing comfort. We design products that offer technical features such as four-way stretch, anti-odor, anti-wrinkle, and moisture-wicking properties. Our approach and products are distinct from those of legacy manufacturers, who offer poorly fitting scrubs and other commoditized healthcare apparel offerings. By elevating healthcare apparel, we seek to create products that healthcare professionals never even knew they needed or wanted, and that not only meet but exceed their expectations. We dream about inventing the future so that design is aesthetically pleasing, while also solving real problems for our community. This combination of form and function results in a range of products that deliver maximum comfort, function and style.
Digitally Native Direct-to-Consumer Strategy
Our business is powered by a digitally native DTC strategy, which offers significant competitive advantages. Unlike most incumbent scrubs manufacturers, who sell through legacy distribution channels and do
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not have direct touchpoints with the end customer, we directly engage with and serve medical professionals through our digital platform. By owning all aspects of the customer experience, including website and app design, marketing content, storytelling and post-purchase customer engagement, we deliver an elevated, personalized and seamless experience. Our DTC strategy also gives us access to valuable real-time customer data that allows us to better acquire and retain customers and reliably predict buying patterns. This leads to operational efficiencies throughout our supply chain, inventory management and new product development.
Highly Effective Merchandising and Product Launch Model
We have developed a highly effective merchandising strategy, anchored by our recurring, functional offering of 13 core scrubwear styles, which represented approximately 82% of our net revenues in 2020. The remaining 18% of net revenues in 2020 was generated by limited edition scrubwear styles as well as our lifestyle apparel and other non-scrub offerings, which include lab coats, underscrubs, outerwear, activewear, loungewear, compression socks, footwear, masks, face shields and other products. We launch limited edition colors or styles approximately weekly, driving recurring traffic to our digital platform where customers often purchase limited edition products along with our core offerings. These launches not only drive interest in the limited edition products themselves, they also drive our core business, as, on average, 90% of sales on launch days are core styles. This innovative, lower-risk merchandising strategy drives recurring demand while maintaining inventory efficiency.
Attractive Financial Profile Driving Robust Growth, Profitability and Cash Flow Generation
Our business model supports our attractive financial profile characterized by robust growth, profitability and cash flow generation. We have built an industry-leading business with only approximately $60.0 million of outside equity capital raised between 2013 and 2020, reflecting our focus on scalability and capital efficiency. As a successful DTC brand with a highly effective merchandising model, we benefit from structurally advantaged product margins and have experienced rapid growth and strong profitability. In 2020, we delivered net revenue growth of 138%, gross margins of 72.3%, operating income margins of 22.0% and Adjusted EBITDA margins of 26.3%. Due to our modest capital expenditure requirements, we enjoy significant cash flow generation.
Mission-Driven, Founder-Led Culture and Execution
Our company culture, strategic vision and operational execution are driven by our visionary co-founders and co-Chief Executive Officers, Heather Hasson and Trina Spear. Ms. Hasson and Ms. Spear are successful entrepreneurs who offer highly complementary skillsets that have helped to scale FIGS from selling out of the back of a car to generating net revenues of $263.1 million in 2020.
Our company culture mirrors our founders mission to celebrate, empower and serve those who serve others. We understand that authentically serving humans starts from within, and we are passionate about supporting our community and ensuring that our company reflects the world we want to live in.
Our Growth Strategies
In 2020, the total addressable market of the U.S. healthcare apparel industry was approximately $12.0 billion, according to the Frost & Sullivan study. We estimate that, notwithstanding our rapid growth to date, our share of the U.S. healthcare apparel industry is currently approximately 2.1%, presenting substantial opportunity for further growth. We believe we are well-positioned to significantly expand our market share and drive sustainable growth and profitability by executing on the following strategies:
Continue to Increase Customer Loyalty
We have the opportunity to create customers for lifecustomers who return to FIGS repeatedly throughout their medical careers. Healthcare apparel continuously needs to be replenished, resulting in highly predictable,
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recurring demand. As a result, customer loyalty and retention will continue to be a key driver of our growth. We encourage repeat purchases by introducing innovative limited edition styles, products and color drops. We inspire customer loyalty by building authentic relationships with our community and by creating thoughtful brand and performance marketing focused on retention. For example, through our #FIGSLOVE program, we send special gifts, such as embroidered lab coats, to members of our community when they graduate from school, open a new practice or reach other career milestones. We aim to be part of their journey, building deep, lasting relationships along the way.
For customers that were acquired between 2017 and 2019, approximately 50% returned for a second purchase, demonstrating our high customer retention and engagement. After a second purchase, 63% of those customers in that cohort purchased again. After a third purchase, 70% of those customers in that cohort purchased yet again. By leveraging data analytics and developing new personalization capabilities, we plan to continue to deepen our existing customer relationships to further improve our strong customer retention and engagement.
Grow Brand Awareness and Attract New Customers
As of March 31, 2021, we served a community of approximately 1.5 million active customers, which compares to a broader total addressable market of over 20 million healthcare professionals in the United States. In addition, while men on average represented approximately 25% of the U.S. healthcare workforce in 2019, our mens business represented only 17% of our net revenues in 2020, presenting significant opportunity to expand our customer base.
We have a significant opportunity to grow brand awareness and attract new customers to FIGS through word of mouth, brand marketing and performance marketing. Among U.S. healthcare professionals and medical students, we have aided and unaided brand awareness of 55% and 22%, respectively, according to a survey performed by Frost & Sullivan. See Industry and Market Data for additional information. Hospitals and other healthcare institutions, which often employ thousands of healthcare professionals working in close physical proximity on a daily basis, serve as ideal environments for growing awareness of our brand through word of mouth. Brand marketing and performance marketing also work together to drive millions of visits to our digital platform. Brand marketing includes differentiated content, our network of 250 Ambassadors, and social media, all of which result in outsized engagement with our community. Our digital-centric performance marketing efforts are designed to drive customers from awareness to consideration to conversion. These efforts include retargeting, paid search and product listing advertisements, paid social media advertisements, search engine optimization, personalized email and mobile push notifications through our app. Our highly productive, diversified strategy generates a significant return on new customer acquisition investments resulting from high average order value, strong product margins and attractive repeat purchase behavior.
Broaden Our Lifestyle Offerings
We intend to continue to leverage healthcare professionals trust in our technical function, fit, comfort and style, as well as our rapid product development capabilities to broaden and deepen our product offerings. We have strategically expanded our addressable market over time by creating new innovative products and entering or creating new categories that are complementary to our core offerings. Our category expansion strategy is focused on outfitting the medical professionalon and off shiftto work, at work and from work. Our customers often begin their FIGS journey with our core scrubs and expand their purchases to limited edition scrubs and lifestyle and other products, such as lab coats, underscrubs, outerwear, activewear, loungewear, compression socks, footwear, masks and face shields. As we continue to expand our offerings to fully outfit the medical professional, we believe we have a significant opportunity to continue to expand our share of both the uniform and lifestyle wardrobe of our customers.
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Utilize Data Science to Expand Our Community, Elevate Customer Experience and Drive Intelligent Replenishment
We expect to drive continued growth from our use of proprietary data science. Through hundreds of data attributes associated with millions of customers, we have a unique ability to welcome new healthcare professionals to our community and drive repeat business from them. As just one illustration of this, we are able to identify geographic regions where FIGS is under-represented, use our knowledge of existing community members to build machine learning-derived customer segments to identify who is most likely to purchase from us, and drive our customers to a digital experience that is pre-populated with the products most likely to appeal to them.
Similarly, we believe that traditional fixed-time subscription models are disconnected from a healthcare professionals actual needs. Instead, we use an intelligent replenishment model that is tied to individualized buying preferences. To us, it is fundamental that we cater to the unique preferences of each healthcare professionalhow often they want to buy certain products, which products they are most likely to buy, and through which channel they are most likely to transact. By leveraging data science, we are able to answer these questions for each member of our large and growing community in increasingly accurate ways, and to create replenishment opportunities that are tied to those customized needs.
Pursue International Expansion
While we expect the majority of our near-term growth to continue to come from the United States, we believe there is a tremendous opportunity over the long term to serve healthcare professionals throughout the rest of the world. According to the Frost & Sullivan study, the number of healthcare professionals and medical students internationally is expected to grow from approximately 118 million in 2020 to an estimated 124 million in 2025, and the total addressable market for international healthcare apparel is expected to grow from an estimated $67.0 billion in 2020 to an estimated $86.0 billion in 2025. In 2020, we successfully piloted international expansion by selling into Australia, Canada and the United Kingdom. Over time, we plan to enter other new markets as we seek to enhance our ability to serve our international customers and further establish FIGS as a global brand. In order to offer a more localized experience to customers internationally, we plan to launch products that are specific to local markets and digital experiences that are tied to local culture. We also intend to offer market-specific languages, currency and content, as well as strategic international shipping and distribution hubs. We plan to leverage our social media strategy and expand our network of Ambassadors to grow our brand awareness globally.
Enter New Professional Markets
Outside of the healthcare apparel industry, we believe we have a compelling long-term opportunity to enter into other uniform-wearing professional markets. In the United States, there are 40 million people outside of healthcare in service-based industries that traditionally wear uniforms every day, such as food service, hospitality, construction and transportation. The occupational nature of these professions is generally hands-on, labor-intensive and often requires apparel with technical specifications. Furthermore, we believe the incumbent apparel manufacturers in these markets suffer from limitations similar to those faced by the legacy healthcare apparel manufacturers. In our view, these marketssimilar to the healthcare apparel markethave long been underserved by incumbent apparel manufacturers and are ripe for disruption. We believe we are strategically positioned to leverage our core competencies to expand into these new markets in the future.
Risk Factors Summary
Our business is subject to numerous risks and uncertainties, including those highlighted in the section titled Risk Factors immediately following this Prospectus Summary. Some of these risks include:
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Our recent rapid growth may not be sustainable or indicative of future growth, and we expect our growth rate to ultimately slow over time. |
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If we fail to manage our growth effectively, our business, financial condition and results of operations may be adversely affected. |
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We have only recently achieved profitability and may not maintain profitability in the future. |
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Our success depends on our ability to maintain the value and reputation of our brand. |
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If we fail to attract new customers, retain existing customers, or fail to maintain or increase sales to those customers, our business, financial condition, results of operations and growth prospects will be harmed. |
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If our marketing efforts are not successful, our business, financial condition and results of operations could be harmed. |
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Our business depends on our ability to maintain a strong community of engaged customers and Ambassadors, including through the use of social media. We may not be able to maintain and enhance our brand if we experience negative publicity related to our marketing efforts or use of social media, fail to maintain and grow our network of Ambassadors or otherwise fail to meet our customers expectations. |
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If we do not continue to successfully develop and introduce new, innovative and updated products, we may not be able to maintain or increase our sales and profitability. |
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The market for healthcare apparel is highly competitive. |
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Our future success depends on the continuing efforts of our key employees and our ability to attract and retain highly skilled personnel and senior management. |
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We plan to expand into additional international markets, which will expose us to new risks. |
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Shipping is a critical part of our business and any changes in, or disruptions to, our shipping arrangements, distribution system or inventory management could adversely affect our business, financial condition and results of operations. |
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If we are unable to accurately forecast customer demand, manage our inventory and plan for future expenses, our results of operations could be adversely affected. |
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Our reliance on a limited number of third-party suppliers to provide materials for and produce our products could cause problems in our supply chain and subject us to additional risks. |
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The multi-class structure of our common stock and voting agreement among us and the Class B and Class C stockholders will have the effect of concentrating control with our co-founders and Tulco, LLC. |
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We will be a controlled company within the meaning of the rules of the New York Stock Exchange and, as a result, will qualify for, and may rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements. |
Our Multi-Class Capital Structure
Upon the completion of this offering, we will have three classes of authorized common stock: Class A common stock, Class B common stock and Class C common stock. The rights of the holders of each class of our common stock are identical, except with respect to voting and conversion rights. Each share of Class A common stock is entitled to one vote per share. Each share of Class B common stock is entitled to 20 votes per share and is convertible into one share of Class A common stock. Each share of Class C common stock is entitled to three votes per share and is convertible into one share of Class A common stock. Immediately following the completion of this offering, all outstanding shares of our Class B common stock will be held by our co-founders and co-Chief Executive Officers, Heather Hasson and Trina Spear, and all outstanding shares of our Class C common stock will be held by Tulco, LLC, our majority stockholder. Immediately following the completion of
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this offering, the outstanding shares of our Class B common stock and Class C common stock will represent approximately % and %, respectively, of the voting power of our outstanding capital stock, assuming no exercise of the underwriters option to purchase additional shares.
Holders of shares of our Class A common stock, Class B common stock and Class C common stock will generally vote together as a single class on all matters (including the election of directors) submitted to a vote of stockholders, unless otherwise required by Delaware law or our amended and restated certificate of incorporation. Our amended and restated certificate of incorporation does not provide for cumulative voting for the election of directors.
Each outstanding share of Class B common stock and Class C common stock is convertible at any time at the option of the holder into one share of Class A common stock. In addition, each share of Class B common stock and Class C common stock will convert automatically into one share of Class A common stock upon any transfer, whether or not for value, which occurs after the completion of this offering, except for certain permitted transfers described in our amended and restated certificate of incorporation, including transfers for estate planning purposes or charitable transfers where voting control is retained by the transferring holder or transfers to affiliates or certain other related entities of the transferring holder. Once converted or transferred and converted into Class A common stock, the Class B common stock and Class C common stock may not be reissued.
All outstanding shares of our Class B common stock will convert automatically into shares of our Class A common stock upon the earlier of (1) the date fixed by our board of directors that is not less than 120 days or more than 180 days following the death or disability of both Ms. Hasson and Ms. Spear and (2) the 10-year anniversary of the date of the closing of this offering, each of which we refer to as a Class B final conversion event. Following such conversion, each share of Class A common stock will have one vote per share and the rights of the holders of all outstanding common stock will be identical. Once converted into Class A common stock, the Class B common stock may not be reissued.
All outstanding shares of our Class C common stock will convert automatically into shares of our Class A common stock upon the earlier of (1) the date fixed by our board of directors that is not less than 120 days or more than 180 days following the date that the number of shares of Class C common stock outstanding is less than 20% of the aggregate number of shares of all classes of common stock then outstanding (calculated on a diluted basis to include any issued and outstanding stock options, restricted stock units or other equity awards, whether vested or unvested) and (2) a Class B final conversion event. Following such conversion, each share of Class A common stock will have one vote per share. Once converted into Class A common stock, the Class C common stock may not be reissued.
Upon the conversion of all shares of Class B common stock and Class C common stock into shares of Class A common stock, the rights of the holders of all outstanding shares of common stock will be identical.
See the section titled Description of Capital Stock for more information.
Corporate Information
We were formed in 2013 as FIGS, Inc., a Delaware corporation. Our principal executive offices are located at 2834 Colorado Avenue, Suite 100 Santa Monica, California 90404 and our telephone number is (424) 300-8330. Our website address is www.wearfigs.com. The information contained on, or that can be accessed through, our website is not incorporated by reference into, and is not a part of, this prospectus. Investors should not rely on any such information in deciding whether to purchase our Class A common stock.
Following the completion of this offering, we intend to announce material information to the public through filings with the Securities and Exchange Commission, or the SEC, the investor relations page on our website, press releases, public conference calls, and public webcasts. Any updates to the list of disclosure channels through which we will announce information will be posted on the investor relations page on our website.
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Trademarks
FIGS, the CROSS & SHIELD logo, Threads for Threads, FIONtechnology, FIONx, Technical Comfort, Awesome Humans and other registered or common law trade names, trademarks, or service marks of FIGS appearing in this prospectus are the property of FIGS. This prospectus may contain additional trade names, trademarks, and service marks of other companies that are the property of their respective owners. We do not intend our use or display of other companies trade names, trademarks, or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies. Solely for convenience, our trademarks and tradenames referred to in this prospectus may appear without the ® and symbols, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights, or the right of the applicable licensor, to these trademarks and tradenames.
Implications of Being an Emerging Growth Company
We qualify as an emerging growth company as defined in Section 2(a) of the Securities Act of 1933, as amended, or the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable, in general, to public companies that are not emerging growth companies. These provisions include:
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the option to present only two years of audited financial statements and only two years of related Managements Discussion and Analysis of Financial Condition and Results of Operations in this prospectus; |
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not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002; |
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reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements; and |
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exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. |
We will remain an emerging growth company until the earliest to occur of: (1) the last day of the fiscal year in which we have more than $1.07 billion in annual revenue; (2) the date we qualify as a large accelerated filer, with at least $700 million of equity securities held by non-affiliates; (3) the date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities; and (4) the last day of the fiscal year ending after the fifth anniversary of the completion of this offering.
We have elected to take advantage of certain of the reduced disclosure obligations in the registration statement of which this prospectus is a part and may elect to take advantage of other reduced reporting requirements in future filings. As a result, the information that we provide may be different than the information you receive from other public companies in which you hold stock.
Emerging growth companies can also take advantage of the extended transition period provided in Section 13(a) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of this extended transition period and, as a result, our operating results and financial statements may not be comparable to the operating results and financial statements of companies who have adopted the new or revised accounting standards.
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THE OFFERING
Class A common stock offered by us |
shares |
Class A common stock offered by the selling stockholders |
shares |
Total shares of Class A common stock offered |
shares |
Option to purchase additional shares of Class A common stock offered by the selling stockholders |
The selling stockholders have granted the underwriters a 30-day option to purchase up to additional shares of our Class A common stock at the public offering price, less the underwriting discounts and commissions. |
Class A common stock to be outstanding after this offering |
shares (or shares if the underwriters exercise their option to purchase additional shares in full). |
Class B common stock to be outstanding after this offering |
shares |
Class C common stock to be outstanding after this offering |
shares |
Total common stock to be outstanding after this offering |
shares (or shares if the underwriters exercise their option to purchase additional shares in full). |
Use of Proceeds |
We estimate that the net proceeds from the sale of shares of our Class A common stock in this offering will be approximately $ million, or approximately $ million if the underwriters exercise their option to purchase additional shares in full, based upon an assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares of Class A common stock by the selling stockholders. |
The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our Class A common stock, increase our brand awareness and facilitate access to the public equity markets for us and our stockholders. We primarily intend to use the net proceeds that we receive from this offering for working capital and other general corporate purposes, which may include research and development and marketing activities, general and administrative matters and capital |
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expenditures. We may also use a portion of the proceeds for the acquisition of, or investment in, technologies, solutions or businesses that complement our business. However, we do not have binding agreements or commitments for any acquisitions or investments outside the ordinary course of business at this time. Our management will have broad discretion over the use of the net proceeds from this offering. See the section titled Use of Proceeds for additional information. |
Voting Rights |
Shares of our Class A common stock are entitled to one vote per share. Shares of our Class B common stock are entitled to 20 votes per share. Shares of our Class C common stock are entitled to three votes per share. |
Holders of our Class A common stock, Class B common stock and Class C common stock will generally vote together as a single class, unless otherwise required by law or our amended and restated certificate of incorporation. Following the completion of this offering, each share of our Class B common stock and Class C common stock will be convertible into one share of our Class A common stock at any time and will convert automatically upon certain transfers and in certain other circumstances as described in our amended and restated certificate of incorporation. See Our Multi-Class Capital Structure above. Immediately following the completion of this offering, all outstanding shares of our Class B common stock will be held by our co-founders and co-Chief Executive Officers, Heather Hasson and Trina Spear, and all outstanding shares of our Class C common stock will be held by Tulco, LLC, our majority stockholder. Immediately following the completion of this offering, the outstanding shares of our Class B common stock and Class C common stock will represent approximately % and % , respectively, of the voting power of our outstanding capital stock, assuming no exercise of the underwriters option to purchase additional shares. These Class B and Class C stockholders will have the ability to control the outcome of matters submitted to our stockholders for approval, including the election of our directors and the approval of any change of control transaction. In addition, we and the Class B and Class C stockholders intend to enter into a voting agreement, effective immediately prior to the completion of this offering, with respect to the election of directors. See the sections titled Principal and Selling Stockholders and Description of Capital Stock for additional information. |
Controlled Company |
Upon the completion of this offering, we will be a controlled company within the meaning of the corporate governance rules of the New York Stock Exchange, or NYSE. |
Directed Share Program |
At our request, the underwriters have reserved up to % of the shares of Class A common stock offered by this prospectus for sale at the initial public offering price through a directed share program to |
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certain individuals identified by management. Any shares sold under the directed share program will not be subject to the terms of any lock-up agreement, except in the case of shares purchased by our officers or directors. The number of shares of Class A common stock available for sale to the general public will be reduced by the number of reserved shares sold to these individuals. Any reserved shares not purchased by these individuals will be offered by the underwriters to the general public on the same basis as the other shares of Class A common stock offered under this prospectus. See the section titled UnderwritingDirected Share Program. |
Risk Factors |
See the section titled Risk Factors and other information included in this prospectus for a discussion of some of the factors you should consider before deciding to purchase shares of our Class A common stock. |
Proposed NYSE Symbol |
FIGS |
The number of shares of our common stock to be outstanding after this offering is based upon 6,525,064 shares of our Class A common stock, shares of our Class B common stock and 10,008,395 shares of our Class C common stock outstanding, in each case, as of March 31, 2021, after giving effect to the Common Stock Reclassification and the RSU Net Settlement (each as defined below), as if each had occurred as of March 31, 2021, and does not include:
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764,999 shares of our Class A common stock and 3,709,680 shares of our Class B common stock issuable upon the exercise of outstanding stock options under our Amended 2016 Equity Incentive Plan, or the 2016 Plan, as of March 31, 2021, at a weighted-average exercise price of $40.26 per share and $31.35 per share, respectively; |
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413,298 shares of our Class B common stock issuable upon the vesting and settlement of outstanding restricted stock units, or RSUs, under our 2016 Plan as of March 31, 2021; |
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shares of our Class A common stock reserved for future issuance under our 2021 Equity Incentive Plan, or the 2021 Plan, which will become effective in connection with the completion of this offering (which number includes the equity awards to be granted pursuant to the 2021 Plan that will become effective in connection with this offering); and |
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shares of our Class A common stock reserved for issuance under our 2021 Employee Stock Purchase Plan, or the ESPP, which will become effective in connection with this offering. |
On the date immediately prior to the date of this prospectus, any remaining shares of common stock available for issuance under our 2016 Plan will be added to the shares of our Class A common stock reserved for issuance under our 2021 Plan, and we will cease granting awards under the 2016 Plan. Our 2021 Plan and ESPP also provide for automatic annual increases in the number of shares reserved thereunder, which are not reflected in the numbers above. See the section titled Executive CompensationExecutive Compensation Arrangements for additional information.
Except as otherwise indicated, all information in this prospectus reflects and assumes:
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a -for- stock split of our common stock effected on , 2021; |
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the filing and effectiveness of our amended and restated certificate of incorporation and the effectiveness of our amended and restated bylaws, each of which will occur immediately prior to the completion of this offering; |
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the net issuance of shares of our Class B common stock upon the vesting and settlement of RSUs, for which the service-based vesting condition was satisfied as of March 31, 2021 and for which we expect the liquidity-based vesting condition to be satisfied or settlement to occur in connection with this offering, after withholding an aggregate of shares to satisfy associated estimated income tax obligations (based upon an assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover of this prospectus and an assumed % tax withholding rate), or the RSU Net Settlement; |
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the reclassification of outstanding shares of common stock into 6,525,064 shares of Class A common stock, shares of Class B common stock and 10,008,395 shares of Class C common stock, which will occur immediately prior to the completion of this offering, of the Common Stock Reclassification; |
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the reclassification of all shares of common stock underlying outstanding options under our 2016 Plan, other than those held by Ms. Hasson and Ms. Spear, into shares of Class A common stock, which will occur immediately prior to the completion of this offering; |
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the amendment of all outstanding RSUs and stock options held by Ms. Hasson and Ms. Spear, providing for the awards to settle in or be exercisable for shares of Class B common stock instead of Class A common stock, which amendment will occur immediately following the completion of this offering; |
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no exercise of outstanding stock options or vesting and settlement of outstanding RSUs referred to above after March 31, 2021; and |
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no exercise by the underwriters of their option to purchase up to an additional shares of our Class A common stock from the selling stockholders in this offering. |
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SUMMARY FINANCIAL DATA
The following tables summarize our financial data for the periods and as of the dates indicated. We derived our summary statements of operations data for the years ended December 31, 2019 and 2020 from our audited financial statements included elsewhere in this prospectus. We derived our summary statements of operations data for the three months ended March 31, 2020 and 2021 and the summary balance sheet data as of March 31, 2021 from our unaudited financial statements included elsewhere in this prospectus. In our opinion, the unaudited interim financial statements have been prepared on a basis consistent with our audited financial statements and contain all adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation of such interim financial statements. Our historical results are not necessarily indicative of the results to be expected in the future and our interim results are not necessarily indicative of the results that may be expected for the full fiscal year or any other future period. You should read the following summary financial data in conjunction with the sections titled Selected Financial and Other Data and Managements Discussion and Analysis of Financial Condition and Results of Operations and our financial statements, the accompanying notes and other financial information included elsewhere in this prospectus.
Years Ended December 31, | Three Months Ended March 31, | |||||||||||||||
2019 | 2020 | 2020 | 2021 | |||||||||||||
(in thousands, except share and per share data) | ||||||||||||||||
Statements of Operations Data: |
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Net revenues |
$ | 110,494 | $ | 263,112 | $ | 31,967 | $ | 87,079 | ||||||||
Cost of goods sold |
31,158 | 72,888 | 7,655 | 24,719 | ||||||||||||
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Gross profit |
79,336 | 190,224 | 24,312 | 62,360 | ||||||||||||
Operating expenses: |
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Selling |
24,840 | 51,896 | 6,739 | 17,114 | ||||||||||||
Marketing |
33,193 | 38,852 | 7,337 | 10,840 | ||||||||||||
General and administrative(1) |
21,650 | 41,536 | 6,200 | 18,346 | ||||||||||||
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Total operating expenses |
79,683 | 132,284 | 20,276 | 46,300 | ||||||||||||
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Net (loss) income from operations |
(347 | ) | 57,940 | 4,036 | 16,060 | |||||||||||
Other income (loss), net |
459 | 136 | 98 | (38 | ) | |||||||||||
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Net income before income tax provision |
112 | 58,076 | 4,134 | 16,022 | ||||||||||||
Provision for income taxes |
| 8,318 | | 4,582 | ||||||||||||
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Net income |
$ | 112 | $ | 49,758 | $ | 4,134 | $ | 11,440 | ||||||||
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Basic earnings per share(2) |
$ | 0.01 | $ | 2.91 | $ | 0.24 | $ | 0.67 | ||||||||
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Diluted earnings per share(2) |
$ | 0.01 | $ | 2.73 | $ | 0.24 | $ | 0.61 | ||||||||
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Weighted-average shares outstanding - basic(2) |
17,005,887 | 17,127,640 | 17,005,887 | 17,166,851 | ||||||||||||
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Weighted-average shares outstanding - diluted(2) |
17,069,335 | 18,232,921 | 17,072,797 | 18,668,041 | ||||||||||||
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(1) |
Includes stock-based compensation expense of $0.2 million and $8.7 million for the years ended December 31, 2019 and 2020, respectively, and $0.1 million and $5.0 million for the three months ended March 31, 2020 and 2021, respectively. |
(2) |
See Note 13 to our financial statements included elsewhere in this prospectus for an explanation of the calculations of our basic and diluted earnings per share and the weighted-average number of shares used in the computation of the per share amounts. |
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As of March 31, 2021 | ||||||||||||
Actual | Pro Forma(1) |
Pro Forma
As Adjusted(2) |
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(in thousands) | ||||||||||||
Balance Sheet Data: |
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Cash and cash equivalents |
$ | 73,837 | $ | $ | ||||||||
Total assets |
161,240 | |||||||||||
Total liabilities |
46,985 | |||||||||||
Total stockholders equity |
114,255 |
(1) |
The pro forma column reflects (1) the RSU Net Settlement and the related increase in accrued expenses and other current liabilities and a corresponding decrease in additional paid-in capital for the associated tax liabilities, (2) stock-based compensation expenses of approximately $ million related to RSUs for which the service-based vesting condition had been satisfied and for which the liquidity-based vesting condition will be satisfied in connection with this offering, (3) the filing and effectiveness of our amended and restated certificate of incorporation and the effectiveness of our amended and restated bylaws, and (4) the Common Stock Reclassification. |
(2) |
The pro forma as adjusted column reflects the items described in footnote (1), and the sale by us of shares of our Class A common stock in this offering at an assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing. Each $1.00 increase or decrease in the assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover of this prospectus, would increase or decrease, as applicable, each of the amount of cash and cash equivalents, total assets and total stockholders equity by $ million, assuming that the number of shares offered, as set forth on the cover of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase or decrease of 1,000,000 shares in the number of shares offered by us would increase or decrease, as applicable, each of the amount of cash and cash equivalents, total assets and total stockholders equity by approximately $ million, assuming the assumed initial public offering price, which is the midpoint of the price range set forth on the cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. |
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Investing in our Class A common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this prospectus, including the section titled Managements Discussion and Analysis of Financial Condition and Results of Operations and our financial statements and the accompanying notes included elsewhere in this prospectus before deciding whether to invest in shares of our Class A common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of or that we deem immaterial may also become important factors that adversely affect our business. If any of the following risks occur, our business, financial condition, results of operations and future prospects could be adversely affected. In that event, the market price of our Class A common stock could decline, and you could lose part or all of your investment.
Risks Related to Our Business
Our recent rapid growth may not be sustainable or indicative of future growth, and we expect our growth rate to ultimately slow over time.
We have experienced significant and rapid growth. Net revenues increased from $110.5 million in 2019 to $263.1 million in 2020. For the three months ended March 31, 2020 and 2021, we had net revenues of $32.0 million and $87.1 million, respectively. Our historical rate of growth may not be sustainable or indicative of our future rate of growth, and in future periods, our net revenues could grow more slowly than we expect or decline. We believe that continued growth in net revenues, as well as our ability to improve or maintain margins and profitability, will depend upon, among other factors, our ability to address the challenges, risks and difficulties described elsewhere in this Risk Factors section. We cannot provide assurance that we will be able to successfully manage any such challenges or risks to our future growth. Any of these factors could cause our net revenue growth to slow or decline and may adversely affect our margins and profitability. Even if our net revenues continue to increase, we expect that our growth rate may slow for a number of other reasons, including if there is a slowdown in the growth of demand for our products, increased competition, a decrease in the growth or reduction in the size of our overall market or if we cannot capitalize on growth opportunities. Failure to continue to grow our net revenues or improve or maintain margins would adversely affect our business, financial condition and results of operations. You should not rely on our historical rate of growth as an indication of our future performance.
If we fail to manage our growth effectively, our business, financial condition and results of operations may be adversely affected.
We have expanded our operations rapidly since our founding in 2013. To manage our growth effectively, we must continue to implement our operational plans and strategies, improve and expand our infrastructure of people and information systems and expand, train and manage our employee base. We have rapidly increased employee headcount since our inception to support the growth in our business. To support our continued growth, we must effectively integrate, develop and motivate a large number of new employees. We face significant competition for personnel, including in Southern California, where our headquarters is located. To attract top talent, we may need to increase our employee compensation levels to remain competitive in attracting and retaining talented employees. In addition, we could be required to continue to expand our sales and marketing, product development and distribution functions, to upgrade our management information systems and other processes and technology and to obtain more space for our expanding workforce. Additionally, the growth of our business places significant demands on our existing management and other employees. Failure to manage our employee base and hiring needs effectively, including successfully integrating our new hires, may adversely affect our business, financial condition and results of operations.
In addition, we are required to manage relationships with a growing number of customers, suppliers, manufacturers, distributors and other third parties. If we are unable to expand supply, manufacturing and
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distribution capabilities when required, or our information technology systems and our other processes are inadequate to support the future growth of these relationships, we could experience delays in customer service and order response and shipping times, which would adversely impact our reputation and brand. If we are unable to manage the growth of our organization effectively, our business, financial condition and results of operations may be adversely affected.
We have only recently achieved profitability and may not maintain profitability in the future.
We have a history of operating losses and have only recently achieved profitability. We expect our operating expenses to increase in the future as we increase our sales and marketing efforts, continue to invest in developing new products, hire additional personnel, expand our operating infrastructure and expand into new geographies. Further, as a public company, we will incur additional legal, accounting and other expenses that we did not incur as a private company. These efforts and additional expenses may be more costly than we expect, and we cannot guarantee that we will be able to increase our net revenues to offset our increased operating expenses. Our net revenues growth may slow for a number of other reasons, including if we experience reduced demand for our products, increased competition, a decrease in the growth or reduction in the size of our overall market or if we cannot capitalize on growth opportunities. If our net revenues do not grow at a greater rate than our operating expenses, we will not be able to maintain our current level of profitability.
Our success depends on our ability to maintain the value and reputation of our brand.
The FIGS brand is integral to our business strategy and our ability to attract and engage customers. Maintaining, promoting and positioning our brand will depend largely on the success of our marketing and branding efforts and our ability to provide a consistent, high quality product and customer experience. Our brand may suffer if we fail to achieve these objectives or if our public image were to be tarnished by negative publicity about us, including our products, technology, customer service, personnel, marketing efforts, Ambassadors or suppliers. Even isolated incidents involving our company, suppliers, agents or third-party service providers, or the products we sell, could erode the trust and confidence of our customers and damage the strength of our brand, especially if such incidents result in adverse publicity, governmental investigations, product recalls or litigation.
In addition, the importance of our brand may increase to the extent we experience increased competition, which could require additional expenditures on our brand promotion activities. Maintaining and enhancing our brand image also may require us to make additional investments in areas such as merchandising, marketing and online operations. These investments may be substantial and may not ultimately be successful. Moreover, if we are unsuccessful in protecting our intellectual property rights in our brand, the value of our brand may be harmed. Any harm to our brand and reputation could adversely affect our ability to attract and engage customers and negatively impact our business, financial condition and results of operations.
If we fail to attract new customers, retain existing customers, or fail to maintain or increase sales to those customers, our business, financial condition, results of operations and growth prospects will be harmed.
Our success depends in large part upon widespread adoption of our products by healthcare professionals. In order to attract new customers and continue to expand our customer base, we must appeal to and attract healthcare professionals who identify with our products. If the number of healthcare professionals who are willing to purchase our products does not continue to increase, if we fail to deliver a high quality shopping experience or if our current or potential future customers are not convinced that our products are superior to alternatives, then our ability to retain existing customers, acquire new customers and grow our business may be harmed. We have made significant investments in enhancing our brand and attracting new customers, and we expect to continue to make significant investments to promote our products. Such campaigns can be expensive and may not result in new customers or increased sales of our products. Further, as our brand becomes more widely known, we may not attract new customers or increase our net revenues at the same rates as we have in the past. If we are unable to acquire new customers who purchase products in numbers sufficient to grow our
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business, we may not be able to generate the scale necessary to drive beneficial network effects with our suppliers, our net revenues may decrease, and our business, financial condition and operating results may be materially adversely affected.
In addition, our future success depends in part on our ability to increase sales to our existing customers over time, as a significant portion of our net revenues are generated from sales to existing customers, particularly those existing customers who are highly engaged and make frequent and/or large purchases of the products we offer. If existing customers no longer find our products appealing, are not satisfied with our customer service, including shipping times, or if we are unable to timely update our products to meet current trends and customer demands, our existing customers may not make purchases, or if they do, they may make fewer or smaller purchases in the future.
If we are unable to continue to attract new customers or our existing customers decrease their spending on the products we offer or fail to make repeat purchases of our products, our business, financial condition, results of operations and growth prospects will be harmed.
If our marketing efforts are not successful, our business, financial condition and results of operations could be harmed.
We create differentiated brand marketing content and utilize performance marketing to drive customers from awareness to consideration to conversion, and promoting awareness of our brand and products is important to our ability to grow our business, drive customer engagement and attract new customers. Our marketing strategy includes brand marketing campaigns across platforms, including email, digital, display, site, direct-mail, commercials, social media and Ambassadors, as well as performance marketing efforts, including retargeting, paid search and product listing advertisements, paid social media advertisements, search engine optimization, personalized email and mobile push notifications through our app.
We have historically benefited from social media, customer referrals and word of mouth to advertise our brand. Social networks are important as a source of new customers and as a means by which to connect with existing customers, and such importance may be increasing. In addition, we have implemented grassroots marketing efforts such as engaging with local doctors, nurses and other healthcare professionals, some of whom we refer to as our Ambassadors, to assist us by introducing our brand and culture to their communities. Our social media and grassroots efforts must be tailored to each particular market. This requires substantial efforts as we enter new markets, as well as ongoing attention and resources. We also seek to engage with our customers and build awareness of our brands through sponsoring unique events and experiences. If our marketing efforts and messaging are not appropriately tailored to and accepted by the healthcare community, we may fail to attract customers and our brand and reputation may be harmed. In addition, our marketing initiatives may become increasingly expensive as competition increases, and generating a meaningful return on those initiatives may be difficult. Our future growth and profitability and the success of our brand will depend in part upon the effectiveness and efficiency of these marketing efforts.
We receive a significant amount of visits to our digital platform via social media or other channels used by our existing and prospective customers. As eCommerce and social media continue to rapidly evolve, we must continue to establish relationships with these channels and may be unable to develop or maintain these relationships on acceptable terms. In addition, we currently receive a significant number of visits to our website and mobile app via search engine results. Search engines frequently change the algorithms that determine the ranking and display of results of a users search, which could reduce the number of visits to our website, in turn reducing new customer acquisition and adversely affecting our results of operations. If we are unable to cost-effectively drive traffic to our digital platform, our ability to acquire new customers and our financial condition would suffer. Email marketing efforts are also important to our marketing efforts. If we are unable to successfully deliver emails to our customers or if customers do not engage with our emails, whether out of choice, because those emails are marked as low priority or spam or for other reasons, our business could be adversely affected. Our marketing initiatives may become increasingly expensive and generating a meaningful return on those initiatives may be difficult or unpredictable. Even if we successfully increase net revenues as a result of our marketing efforts, it may not offset the additional marketing expenses we incur.
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If our marketing efforts are not successful in promoting awareness of our products, driving customer engagement or attracting new customers, or if we are not able to cost-effectively manage our marketing expenses, our results of operations could be adversely affected.
Our business depends on our ability to maintain a strong community of engaged customers and Ambassadors, including through the use of social media. We may not be able to maintain and enhance our brand if we experience negative publicity related to our marketing efforts or use of social media, fail to maintain and grow our network of Ambassadors or otherwise fail to meet our customers expectations.
We currently partner with over 250 Ambassadors who help raise awareness of our brand and engage with our community. Our ability to maintain relationships with our existing Ambassadors and to identify new Ambassadors is critical to expanding and maintaining our customer base. As our market becomes increasingly competitive or as we expand internationally, recruiting and maintaining new Ambassadors may become increasingly difficult. If we are not able to develop and maintain strong relationships with our Ambassador network, our ability to promote and maintain awareness of our brand may be adversely affected. Further, if we incur excessive expenses in this effort, our business, financial condition and results of operations may be adversely affected.
We and our Ambassadors use third-party social media platforms to raise awareness of our brand and engage with our community. As existing social media platforms evolve and new platforms develop, we and our Ambassadors must continue to maintain a presence on these platforms and establish presences on emerging popular social media platforms. If we are unable to cost-effectively use social media platforms as marketing tools, our ability to acquire new customers and our financial condition may suffer. Furthermore, as laws and regulations governing the use of these platforms evolve, any failure by us, our Ambassadors, our sponsors or third parties acting at our direction to abide by applicable laws and regulations in the use of these platforms could subject us to regulatory investigations, class action lawsuits, liability, fines or other penalties and adversely affect our business, financial condition and results of operations. In addition, an increase in the use of social media for product promotion and marketing may cause an increase in the burden on us to monitor compliance of such materials, and increase the risk that such materials could contain problematic product or marketing claims in violation of applicable regulations. For example, in some cases, the Federal Trade Commission has sought enforcement action where an endorsement has failed to clearly and conspicuously disclose a financial relationship or material connection between an influencer and an advertiser.
We also do not prescribe what our Ambassadors post, and our Ambassadors could engage in behavior or use their platforms in a manner that reflects poorly on our brand or is in violation of applicable regulations or platform terms of service, and may be attributed to us. Negative commentary regarding us, our products or Ambassadors and other third parties who are affiliated with us, whether accurate or not, may be posted on social media platforms at any time and may adversely affect our reputation, brand and business. The harm may be immediate, without affording us an opportunity for redress or correction and could have an adverse effect on our business, financial condition and results of operations.
In addition, customer complaints or negative publicity related to our website, mobile app, products, product delivery times, customer data handling, marketing efforts, security practices or customer support, especially on blogs and social media websites, could diminish customer loyalty and community engagement.
If we do not continue to successfully develop and introduce new, innovative and updated products, we may not be able to maintain or increase our sales and profitability.
We are an apparel and lifestyle brand for healthcare professionals. As a result, our success depends in part on our ability to create apparel for healthcare professionals, as well as to anticipate and react to changing customer demands in a timely manner. All of our products are subject to changing customer preferences that cannot be predicted with certainty. If we do not continue to introduce new products or innovations on existing
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products in a timely manner or our new products or innovations are not accepted by our customers, or if our competitors introduce similar products in a more timely fashion, our brand or our position as a leader in medical apparel could be harmed.
Further, our new products and innovations on existing and future products may not receive the same level of customer acceptance as our products have in the past. Customer preferences could change, especially as we expand our product offerings beyond our core scrubwear, and our future success depends in part on our ability to anticipate and respond to these changes. Our failure to anticipate and respond in a timely manner to changing customer preferences could lead to, among other things, lower sales, excess inventory or inventory shortages, markdowns and write-offs and diminished brand loyalty. Even if we are successful in anticipating customer needs and preferences, our ability to adequately address those needs and preferences will in part depend upon our continued ability to develop and introduce innovative, high quality products and designs and maintain our distinctive brand identity as we expand the range of products we offer. A failure to effectively introduce new products or innovations on existing products that appeal to our customers could result in a decrease in net revenues and excess inventory levels, which could adversely affect our business, financial condition and results of operations.
The market for healthcare apparel is highly competitive.
We compete in the healthcare apparel industry, principally on the basis of product quality, innovation, style, price and brand image, as well as customer experience and service. The industry is highly competitive and includes established companies as well as new entrants. We compete against wholesalers of healthcare apparel, such as Careismatic Brands, Barco Uniforms, Landau Uniforms and Superior Group of Companies. Additionally, we compete with healthcare apparel specialty retailers, such as Scrubs & Beyond and Uniform Advantage as well as digitally native brands such as Jaanuu. In addition, we may face future competition from large, diversified apparel companies with brand recognition and well-established sales, manufacturing and distribution infrastructure that choose to expand into the production and marketing of medical apparel. Some of our competitors have longer operating histories, larger market share and greater resources than we do.
Our competitors may be able to achieve and maintain market share more quickly and effectively than we can. Similarly, if customers perceive the products offered by our competitors to be of higher quality than ours, or our competitors offer similar products at lower prices, our revenues may decline, which would adversely affect our results of operations.
Many of our potential competitors promote their brands primarily through traditional forms of advertising, such as print media, and have substantial resources to devote to such efforts. Our competitors may also use traditional forms of advertising more quickly in new markets than we can. While we believe that our DTC business model offers us competitive advantages, our competitors may also be able to increase sales in their new and existing markets faster than we do by emphasizing different distribution channels than we do, such as wholesale and an extensive franchise network of retail stores, and many of our competitors have substantial resources to devote toward increasing sales in such ways. Competition may result in pricing pressures, reduced profit margins or lost market share or a failure to grow our market share, any of which could substantially harm our business, financial condition and results of operations.
Our future success depends on the continuing efforts of our key employees and our ability to attract and retain highly skilled personnel and senior management.
We are dependent on our ability to continue to identify, attract, develop, integrate and retain qualified and highly skilled personnel, including senior management, designers, product managers, engineers, data scientists and logistics and supply chain personnel. In particular, we are highly dependent on the services of our co-founders and co-Chief Executive Officers, Heather Hasson and Trina Spear, who are critical to the development of our business, future vision and strategic direction. We also heavily rely on the continued service
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and performance of other members of our senior management team, who provide leadership, contribute to the core areas of our business and help us to efficiently execute our business. If the senior management team, including any new hires that we make, fails to work together effectively and to execute our plans and strategies on a timely basis, our business and future growth prospects could be harmed.
Additionally, the loss of any key personnel could make it more difficult to manage our operations research, development, production and marketing activities, reduce our employee retention and net revenues and impair our ability to compete. Although we have entered into employment offer letters or agreements with certain of our key personnel, these agreements have no specific duration and constitute at-will employment. We have not obtained key man life insurance policies on any of our senior management team. As a result, we would have no way to cover the financial loss if we were to lose the services of members of our senior management team.
Competition for highly skilled personnel is often intense, especially in Southern California, where our headquarters is located. We may not be successful in attracting, integrating or retaining qualified personnel to fulfill our current or future needs. We may experience difficulty in hiring and retaining highly skilled employees with appropriate qualifications. Failure to manage our employee base and hiring needs effectively, including successfully integrating our new hires, or to retain and motivate our current personnel may adversely affect our business, financial condition and results of operations.
If we cannot maintain our culture as we grow, we could lose the innovation, teamwork and passion that we believe contribute to our success and our business may be harmed.
We believe that a critical component of our success has been our corporate culture. We have invested substantial time and resources in building our culture, which is rooted in passion, purpose and innovation. As we continue to grow, including geographically expanding our presence outside of our headquarters in Santa Monica, California, and developing the infrastructure associated with being a public company, we will need to maintain our culture among a larger number of employees, dispersed across various geographic regions. Any failure to preserve our culture could negatively affect our future success, including our ability to retain and recruit personnel and to effectively focus on and pursue our corporate objectives.
We plan to expand into additional international markets, which will expose us to new and significant risks.
Our future growth depends in part on our expansion efforts outside of the United States. Our current operations and customer base are based largely in the United States, with shipping capabilities to Australia, Canada and the United Kingdom. Therefore, we have a limited number of customers and experience operating outside of the United States. We also have limited experience with regulatory environments and market practices outside of the United States and cannot guarantee that we will be able to penetrate or successfully operate in any market outside of the United States. In connection with our expansion efforts outside of North America, we may encounter obstacles we do not face in the United States, including cultural and linguistic differences, differences in regulatory environments and market practices, difficulties in keeping abreast of market, business and technical developments and foreign customers tastes and preferences.
We may also encounter difficulty expanding into new markets because of limited brand recognition in those markets, leading to delayed acceptance of our apparel by customers there. In particular, we have no assurance that our marketing efforts will prove successful outside of the narrow geographic regions in which they have been used in the United States. The expansion into new markets may also present competitive, merchandising, forecasting and distribution challenges that are different from or more severe than those we currently face. There are also other risks and costs inherent in doing business in international markets, including:
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the need to adapt and localize products for specific countries to account for, among other things, different cultural tastes, size and fit preferences or regulatory requirements; |
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difficulty establishing and managing international operations and the increased operations, travel, infrastructure, including establishment of local delivery service and customer service operations, and legal compliance costs associated with locations in different countries or regions; |
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increased shipping times to and from international markets; |
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the need to vary pricing and margins to effectively compete in international markets; |
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increased competition from local providers of similar products; |
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the ability to protect and enforce intellectual property rights abroad; |
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the need to offer customer support in various languages; |
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difficulties in understanding and complying with local laws, regulations and customs in other jurisdictions; |
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compliance with anti-bribery laws, such as the U.S. Foreign Corrupt Practices Act, or FCPA, and the U.K. Bribery Act 2010, or U.K. Bribery Act, by us, our employees and our business partners; |
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complexity and other risks associated with current and future legal requirements in other countries, including legal requirements related to medical apparel, customer advertising protection, customer product safety and data privacy frameworks, such as the EU General Data Protection Regulation 2016/679, or GDPR; |
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varying business practices and customs related to the sale of medical apparel; |
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varying levels of internet technology adoption and infrastructure, and increased or varying network and hosting service provider costs; |
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tariffs and other non-tariff barriers, such as quotas and local content rules, as well as tax consequences; |
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fluctuations in currency exchange rates and the requirements of currency control regulations, which might restrict or prohibit conversion of other currencies into U.S. dollars; and |
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political or social unrest or economic instability in a specific country or region in which we operate, including, for example, the effects of Brexit, which could have an adverse impact on our operations in that location. |
Our failure to successfully manage these risks could harm our international operations and have an adverse effect on our business, financial condition and results of operations.
Shipping is a critical part of our business and any changes in, or disruptions to, our shipping arrangements could adversely affect our business, financial condition and results of operations.
We currently rely on third-party global providers to deliver the products we offer on our website and mobile app. If we are not able to negotiate acceptable pricing and other terms with these providers, or if these providers experience performance problems or other difficulties in processing our orders or delivering our products to customers, it could negatively impact our results of operations and our customers experience. For example, changes to the terms of our shipping arrangements or the imposition of surcharges or surge pricing may adversely impact our margins and profitability. In addition, our ability to receive inbound inventory efficiently and ship merchandise to customers may be negatively affected by factors beyond our and these providers control, including pandemic, weather, fire, flood, power loss, earthquakes, acts of war or terrorism or other events specifically impacting other shipping partners, such as labor disputes, financial difficulties, system failures and other disruptions to the operations of the shipping companies on which we rely. We have in the past experienced, and may in the future experience, shipping delays for reasons outside of our control. We are also subject to risks of damage or loss during delivery by our shipping vendors. If the products ordered by our customers are not delivered in a timely fashion, including to international customers, or are damaged or lost during the delivery process, our customers could become dissatisfied and cease buying products from us, which would adversely affect our business, financial condition and results of operations.
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If we experience problems with our distribution and warehouse management system, our ability to meet customer expectations, manage inventory, complete sales and achieve objectives for operating efficiencies could be harmed.
We rely on our sole fulfillment center in the City of Industry, California, which is operated by our third-party logistics provider, for all of our product distribution. Our fulfillment center includes computer-controlled and automated equipment and relies on a warehouse management system to manage supply chain fulfillment operations, which means its operations are complicated and may be subject to a number of risks related to cybersecurity, the proper operation of software and hardware, electronic or power interruptions or other system failures. In addition, because all of our products are distributed from our City of Industry fulfillment center, our operations could also be interrupted by labor difficulties, or by floods, fires or other natural disasters near our fulfillment center. We maintain business interruption insurance, but it may not adequately protect us from the adverse effects that could result from significant disruptions to our distribution system, such as the long-term loss of customers or an erosion of our brand image. Moreover, if we or our third-party logistics provider are unable to adequately staff our fulfillment center to meet demand or if the cost of such staffing is higher than historical or projected costs due to mandated wage increases, regulatory changes, hazard pay, international expansion or other factors, our results of operations could be harmed. In addition, operating a fulfillment center comes with potential risks, such as workplace safety issues and employment claims for the failure or alleged failure to comply with labor laws or laws respecting union organizing activities. Our distribution capacity is also dependent on the timely performance of services by third parties, including the shipping of our products to and from our City of Industry distribution facility. We may need to operate additional fulfillment centers in the future to keep pace with the growth of our business, and we cannot assure you that we will be able to locate suitable facilities on commercially acceptable terms in accordance with our expansion plans, nor can we assure you that we will be able to recruit qualified managerial and operational personnel to support our expansion plans. If we encounter problems with our distribution and warehouse management systems, our ability to meet customer expectations, manage inventory and fulfillment capacity, complete sales, fulfill orders in a timely manner and achieve objectives for operating efficiencies could be harmed, which could also harm our reputation and our relationship with our customers.
If we are unable to accurately forecast customer demand, manage our inventory and plan for future expenses, our results of operations could be adversely affected.
We base our current and future inventory needs and expense levels on our operating forecasts and estimates of future demand. To ensure adequate inventory supply, we must be able to forecast inventory needs and expenses and place orders sufficiently in advance with our suppliers and manufacturers, based on our estimates of future demand for particular products. Failure to accurately forecast demand may result in inefficient inventory supply or increased costs. This risk may be exacerbated by the fact that we may not carry a significant amount of inventory and may not be able to satisfy short-term demand increases. Accordingly, if we fail to accurately forecast customer demand, we may experience excess inventory levels or a shortage of products available for sale. Inventory levels in excess of customer demand may result in inventory write-downs or write-offs and the sale of excess inventory at discounted prices, which would cause our gross margins to suffer and could impair the strength and premium nature of our brand. Further, lower than forecasted demand could also result in excess manufacturing capacity or reduced manufacturing efficiencies, which could result in lower margins. Conversely, if we underestimate customer demand, our suppliers and manufacturers may not be able to deliver products to meet our requirements, and we may be subject to higher costs in order to secure the necessary production capacity or we may incur increased shipping costs. An inability to meet customer demand and delays in the delivery of our products to our customers could result in reputational harm and damaged customer relationships and have an adverse effect on our business, financial condition and results of operations.
Moreover, while we devote significant attention to forecasting efforts, the volume, timing, value and type of the orders we receive are inherently uncertain. In addition, we cannot be sure the same growth rates, trends and other key performance metrics are meaningful predictors of future growth. Our business, as well as our ability to
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forecast demand, is also affected by general economic and business conditions in the United States and the degree of customer confidence in future economic conditions, and we anticipate that our ability to forecast demand due to these types of factors will be increasingly affected by conditions in international markets. A significant portion of our expenses is fixed, and as a result, we may be unable to adjust our spending in a timely manner to compensate for any unexpected shortfall in net revenues. Any failure to accurately predict net revenues or gross margins could cause our operating results to be lower than expected, which could adversely affect our financial condition.
Merchandise returns could harm our business.
We allow our customers to return our products, subject to our return policy. We generally accept merchandise returns for full refund if returned within 30 days of the original purchase date and for exchange up to 30 days from the original purchase date. Our revenue is reported net of returns and discounts. We estimate our liability for product returns based on historical return trends and an evaluation of current economic and market conditions. We record the expected customer refund liability as a reduction to revenue, and the expected inventory right of recovery as a reduction of cost of goods sold. The introduction of new products, changes in customer confidence or shopping habits or other competitive and general economic conditions could cause actual returns to exceed our estimates. If actual return costs differ from previous estimates, the amount of the liability and corresponding revenue are adjusted in the period in which such costs occur. In addition, from time to time, our products may be damaged in transit, which can also increase return rates. Returned goods may also be damaged in transit as part of the return process which can impede our ability to resell returned goods. Competitive pressures could cause us to alter our return policies or our shipping policies, which could result in an increase in damaged products and an increase in product returns. If the rate of product returns increases significantly or if product return economics become less efficient, our business, financial condition and results of operations could be harmed.
The fluctuating cost of raw materials could increase our cost of goods sold and cause our business, financial condition and results of operations to suffer.
We have in the past experienced, and may in the future experience, fluctuations in the cost of raw materials used in our products for reasons beyond our control. For example, our core scrubs fabric includes synthetic fabric, the components of which may experience price fluctuations. Our costs for raw materials are affected by, among other things, weather, customer demand, speculation on the commodities market, the relative valuations and fluctuations of the currencies of producer versus customer countries and other factors that are generally unpredictable and beyond our control. Increases in the cost of raw materials could adversely affect our cost of goods sold, business, financial condition and results of operations.
Our reliance on a limited number of third-party suppliers to provide materials for and produce our products could cause problems in our supply chain and subject us to additional risks.
We rely on third-party suppliers to manufacture our raw materials and products. Our products are manufactured by third parties and may be available, in the short-term, from a limited number of sources. We choose not to enter into long-term contracts with any of our suppliers or manufacturers for the production and supply of our raw materials and products, and typically transact business with our suppliers on an order-by-order basis. We also compete with other companies for raw materials and production.
We currently source the vast majority of the fabrics used in our products from two third-party suppliers in China, and we source the other raw materials used in our products, including items such as content labels, elastics, buttons, clasps and drawcords, from suppliers located predominantly in the Asia Pacific region. We also work with a limited number of manufacturing partners that produce our products in facilities located in South East Asia, China and South America, with the vast majority of our products currently being produced by our two largest manufacturing suppliers in South East Asia. We are continuously working to diversify our sourcing and manufacturing capabilities.
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We may experience a disruption in the supply of fabrics or raw materials from current sources, and we may be unable to locate alternative materials suppliers of comparable quality at an acceptable price, or at all. In addition, if we experience significantly increased demand, or if we need to replace an existing supplier or manufacturer, we may be unable to locate additional supplies of fabrics or raw materials or additional manufacturing capacity on terms that are acceptable to us, or at all, or we may be unable to locate any supplier or manufacturer with sufficient capacity to meet our requirements or to fill our orders in a timely manner. Identifying a suitable supplier is an involved process that requires us to become satisfied with its quality control, responsiveness and service, financial stability and labor and other ethical practices. Even if we are able to expand existing or find new manufacturing or fabric sources, we may encounter delays in production and added costs as a result of the time it takes to train our suppliers and manufacturers in our methods, products, and quality control standards. Our supply of fabric or the manufacture of our products could be disrupted or delayed by the impact of global health pandemics, including the current COVID-19 coronavirus pandemic, and the related government and private sector responsive actions, such as border closures, restrictions on product shipments and travel restrictions. For example, certain of our manufacturers experienced delays and temporary shut-downs due to the COVID-19 pandemic. In order to manage the impact of these disruptions and meet our customers expectations, we increased our use of more expensive air freight during 2020, which increased our cost of goods sold. Any delays, interruption or increased costs in the supply of fabric or the manufacture of our products could have an adverse effect on our ability to meet customer demand for our products and result in lower net revenues, increased cost of goods sold and lower income from operations, both in the short and long term.
Moreover, we have occasionally received, and may in the future receive, shipments of products that fail to comply with our technical specifications or that fail to conform to our quality control standards. Under these circumstances, unless we are able to obtain replacement products in a timely manner, we risk the loss of net revenues resulting from the inability to sell those products and related increased administrative and shipping costs. Additionally, if the unacceptability of our products is not discovered until after such products are purchased by our customers, our customers could lose confidence in our products, and our business and brand could be harmed.
The operations of many of our suppliers are subject to additional risks that are beyond our control and that could harm our business, financial condition and results of operations.
Substantially all of our suppliers are located outside of the United States, and as a result, we are subject to risks associated with doing business abroad, including:
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the imposition of new laws and regulations, including those relating to labor conditions, quality and safety standards, imports, duties, taxes and other charges on imports, as well as trade restrictions and restrictions on currency exchange or the transfer of funds; |
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political unrest, terrorism, labor disputes and economic instability resulting in the disruption of trade from foreign countries in which our products are manufactured; |
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reduced protection for intellectual property rights, including trademark protection, in some countries, particularly in China; |
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disruptions or delays in shipments whether due to port congestion, labor disputes, product regulations and/or inspections or other factors, natural disasters or health pandemics, or other transportation disruptions; and |
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the impact of health conditions, including the ongoing COVID-19 coronavirus pandemic, and related government and private sector responsive actions, and other changes in local economic conditions in countries where our manufacturers, suppliers or customers are located. |
These and other factors beyond our control could interrupt our suppliers production in offshore facilities, influence the ability of our suppliers to export our products cost-effectively or at all and inhibit our suppliers ability to procure certain materials, any of which could harm our business, financial condition and results of operations.
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Any failure by us or our manufacturers or suppliers to comply with product safety, labor or other laws, provide safe conditions for our or their workers or use or be transparent about ethical business practices may damage our reputation and brand and harm our business.
We are committed to supporting our communities around the globe. Operating with compassion and integrity is core to our values, which makes our reputation sensitive to allegations of unethical or improper business practices, whether real or perceived. The failure of any of our suppliers or manufacturers to provide safe and humane factory conditions and oversight at their facilities could damage our reputation and brand or result in legal claims against us. We rely on our manufacturers and suppliers compliance reporting in order to comply with regulations applicable to our products. This is further complicated by the fact that expectations of ethical business practices continually evolve and may be substantially more demanding than applicable legal requirements.
We do not control our suppliers and manufacturers or their business, and they may not comply with our guidelines or applicable law. The products we sell are subject to regulation by the Federal Customer Product Safety Commission, the Federal Trade Commission and similar state and international regulatory authorities. Product safety, labeling and licensing concerns may require us to voluntarily remove selected merchandise from our inventory. Such recalls or voluntary removal of merchandise can result in, among other things, lost sales, diverted resources, potential harm to our reputation and increased customer service costs and legal expenses, which could adversely affect our results of operations. Moreover, failure of our suppliers or manufacturers to comply with applicable laws and regulations and contractual requirements could lead to litigation against us or cause us to seek other vendors, which could increase our costs and result in delayed delivery of our products, product shortages or other disruptions of our operations.
Ethical business practices are also driven in part by legal developments and by groups active in publicizing and organizing public responses to perceived ethical shortcomings. In addition to evaluating the substance of companies practices, such groups also often scrutinize companies transparency as to such practices and the policies and procedures they use to ensure compliance by their suppliers and other business partners. If we do not meet the transparency standards expected by parties active in promoting ethical business practices, we may attract negative publicity, regardless of whether the actual labor and other business practices adhered to by us and our independent manufacturers are consistent with ethical business practices. Such negative publicity could harm our brand image, business, financial condition and results of operations.
We conduct business with suppliers and manufacturers based in China, which exposes us to risks inherent in doing business there.
We source raw material for our core scrubwear from, and conduct limited manufacturing in, the Peoples Republic of China. With the rapid development of the Chinese economy, the cost of labor has increased and may continue to increase. Our results of operations will be adversely affected if the labor costs of our third-party suppliers and manufacturers increase significantly. In addition, our manufacturers and suppliers may be unable to find a sufficient number of qualified workers due to the competitive market for skilled labor in China.
Conducting business in China exposes us to political, legal and economic risks. In particular, the political, legal and economic climate in China is fluid and unpredictable. Our ability to operate in China may be adversely affected by changes in U.S. and Chinese laws and regulations, including those related to taxation, import and export tariffs, environmental regulations, land use rights, intellectual property, currency controls, network security, employee benefits, hygiene supervision and other matters. In addition, Chinese trade regulations are continuously evolving, and we may become subject to other forms of taxation, tariffs and duties. Furthermore, the third parties we rely on in China may disclose our confidential information or intellectual property to competitors or third parties, which could result in the illegal sale of counterfeit versions of our products. If any of these events occur, our business, financial condition and results of operations could be adversely affected.
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Increases in labor costs, including wages, could adversely affect our business, financial condition and results of operations.
Labor is a significant portion of our cost structure and is subject to many external factors, including unemployment levels, prevailing wage rates, minimum wage laws, potential collective bargaining arrangements, health insurance costs and other insurance costs and changes in employment and labor legislation or other workplace regulation. From time to time, legislative proposals are made to increase the federal minimum wage in the United States, as well as the minimum wage in California and a number of other states and municipalities, and to reform entitlement programs, such as health insurance and paid leave programs. As minimum wage rates increase or related laws and regulations change, we may need to increase not only the wage rates of our minimum wage employees, but also the wages paid to our other hourly or salaried employees. None of our domestic employees is currently covered by a collective bargaining agreement, but any attempt by our employees to organize a labor union could result in increased legal and other associated costs. Any increase in the cost of our labor could have an adverse effect on our business, financial condition and results of operations or if we fail to pay such higher wages we could suffer increased employee turnover. Increases in labor costs could force us to increase prices, which could adversely impact our sales. If competitive pressures or other factors prevent us from offsetting increased labor costs by increases in prices, our profitability may decline and could adversely affect our business, financial condition and results of operations. In particular, the job market in Southern California, where our principal offices and fulfillment center as well as the majority of our employees are located, is very competitive.
In addition, a significant portion of our products are produced in Asia, with some of our products produced in China. Increases in the costs of labor and other costs of doing business in these regions could increase our costs to produce our products and could have a negative impact on our operations and earnings. Factors that could negatively affect our business include a potential significant revaluation of the currencies used in these countries, which may result in an increase in the cost of producing products, labor shortage and increases in labor costs, and difficulties and additional costs in transporting products manufactured from these countries. Also, the imposition of trade sanctions or other regulations against products imported by us from, or the loss of normal trade relations status with, any country in which our products are manufactured, could significantly increase our cost of products and harm our business.
Our sales and profitability may decline if product costs increase or selling prices decrease.
Our business is subject to pressure on costs and pricing caused by many factors, including competition, constrained sourcing capacity and related inflationary pressure, pressure from customers to reduce the prices we charge for our products and changes in customer demand. These factors may cause us to experience increased costs while also causing us to reduce prices. If we were to increase prices in response to increased costs, we may experience reduced sales. Any of the forgoing could cause our operating margin to decline if we are unable to offset these factors with reductions in operating costs and could adversely affect our business, financial condition and results of operations.
If we do not successfully optimize, operate and manage the expansion of the capacity of our fulfillment center, our business, financial condition and results of operations could be harmed.
We anticipate the need to add additional fulfillment center capacity and lease new warehouse space to serve as fulfillment centers as our business continues to grow. If we continue to add fulfillment and warehouse capabilities, add products categories with different fulfillment requirements or change the mix in products that we sell, our fulfillment network will become increasingly complex and operating it will become more challenging. The expansion of our fulfillment center capacity may put pressure on our managerial, financial, operational and other resources. We cannot assure you that we will be able to locate suitable facilities on commercially acceptable terms in accordance with our expansion plans, nor can we assure you that we will be able to recruit qualified managerial and operational personnel to support our expansion plans. In addition, we
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may be required to expand our capacity sooner than we anticipate. If we are unable to secure new facilities for the expansion of our fulfillment operations, recruit qualified personnel to support any such facilities or effectively control expansion-related expenses, our order fulfillment and shipping times may be delayed and our business, financial condition and results of operations could be adversely affected.
Our credit agreement contains restrictive covenants that may limit our operating flexibility.
Although we have not drawn on our existing line of credit, our existing credit agreement contains restrictive covenants that, among other things, limit our ability to transfer or dispose of assets, merge with other companies or consummate certain changes of control, acquire other companies, incur additional indebtedness and liens and enter into new businesses. We therefore may not be able to engage in any of the foregoing transactions unless we obtain the consent of the lender or terminate the credit agreement, which may limit our operating flexibility. In addition, our credit agreement is secured by all of our assets and requires us to satisfy certain financial covenants. There is no guarantee that we will be able to generate sufficient cash flow or sales to meet these financial covenants or pay the principal and interest when due under our credit facility. Furthermore, there is no guarantee that future working capital, borrowings or equity financing will be available to repay or refinance any such debt. Any inability to comply with the terms of our credit agreement, including failing to make scheduled payments or to meet the financial covenants, would adversely affect our business. See the section titled Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources for additional information regarding the terms of our existing credit agreement.
A downturn in the economy may adversely affect our business.
We believe that due to the non-discretionary nature of healthcare apparel, our business is largely resistant to recessionary pressures. However, due to our limited operating history, we have not experienced a sustained recessionary period and can therefore not predict the effect on our sales and profitability of a downturn in the economy. It is possible that a downturn in the economy in markets in which we sell our products may harm our business, financial condition and results of operations.
We may seek to grow our business through acquisitions of, or investments in, new or complementary businesses, facilities, technologies or products, or through strategic alliances, and the failure to manage these acquisitions, investments or alliances, or to integrate them with our existing business, could adversely affect us.
From time to time, we may consider opportunities to acquire or make investments in new or complementary businesses, facilities, technologies, offerings or products, or enter into strategic alliances, that may enhance our capabilities, expand our outsourcing and supplier network, complement our current products or expand the breadth of our markets. Acquisitions, investments and other strategic alliances involve numerous risks, including:
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problems integrating the acquired business, facilities, technologies or products, including issues maintaining uniform standards, procedures, controls, policies and culture; |
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unanticipated costs associated with acquisitions, investments or strategic alliances; |
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diversion of managements attention from our existing business; |
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adverse effects on existing business relationships with suppliers, outsourced manufacturing partners and other third parties; |
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risks associated with entering new markets in which we may have limited or no experience; |
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potential loss of key employees of acquired businesses; and |
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increased legal and accounting compliance costs. |
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We may be unable to identify acquisitions or strategic relationships we deem suitable. Even if we do, we may be unable to successfully complete any such transactions on favorable terms or at all, or to successfully integrate any acquired business, facilities, technologies or products into our business or retain any key personnel, suppliers or customers. These efforts could be expensive and time-consuming and may disrupt our ongoing business and prevent management from focusing on our operations. If we are unable to identify suitable acquisitions or strategic relationships, or if we are unable to integrate any acquired businesses, facilities, technologies and products effectively, our business, financial condition and results of operations could be adversely affected.
Certain of our key operating metrics are subject to inherent challenges in measurement, and any real or perceived inaccuracies in our metrics or the underlying data may cause a loss of investor confidence in such metrics and the market price of our Class A common stock may decline.
We track certain key operating metrics using internal data analytics tools, which have certain limitations. In addition, we rely on data received from third parties, including third-party platforms, to track certain performance indicators, and we may be limited in our ability to verify such data. In addition, our methodologies for tracking metrics may change over time, which could result in changes to the metrics we report. If we undercount or overcount performance due to the internal data analytics tools we use or issues with the data received from third parties, or if our internal data analytics tools contain algorithmic or other technical errors, the data we report may not be accurate or comparable with prior periods. In addition, limitations, changes or errors with respect to how we measure data may affect our understanding of certain details of our business, which could affect our longer-term strategies. If our performance metrics are not, or are not perceived to be, accurate representations of our business, if we discover material inaccuracies in our metrics or the data on which such metrics are based, or if we can no longer calculate any of our key performance metrics with a sufficient degree of accuracy, investors could lose confidence in the accuracy and completeness of such metrics, which could cause the price of our Class A common stock to decline.
We may incur losses from fraud.
We have occasionally in the past incurred and may in the future incur losses from various types of fraud, including stolen credit card numbers, claims that a customer did not authorize a purchase and merchant fraud. As a general matter, we are liable for fraudulent credit card transactions. Although we have measures in place to detect and reduce the occurrence of fraudulent activity on our digital platform, those measures may not always be effective. In addition to the direct costs of such losses, if the fraud is related to credit card transactions and becomes excessive, it could potentially result in us paying higher fees or affecting our ability to accept credit cards for payment. Our failure to adequately prevent fraudulent transactions could damage our reputation, result in litigation or regulatory action and lead to expenses that could substantially impact our operating results.
Additionally, we have occasionally in the past been, and may in the future be, subject to fraudulent purchases by individuals purchasing our products in bulk with the intention of unlawfully reselling such products at a premium. While we have procedures in place to detect and prevent such practices, our failure to identify those activities may adversely affect our brand and reputation.
Our business is affected by seasonality.
Unlike the traditional apparel industry, the healthcare apparel industry is generally not seasonal in nature. However, due to our continued strong sequential growth as well as our decision to conduct select promotions during the holiday season, we historically have generated a higher proportion of net revenues, and incurred higher selling and marketing expenses, during the fourth quarter of the year compared to other quarters, and we expect these trends to continue.
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Risks Related to Information Technology, Intellectual Property and Data Security and Privacy
System interruptions that impair customer access to our website or other performance failures in our technology infrastructure could damage our business, reputation and brand and substantially harm our business, financial condition and results of operations.
We rely on information technology networks and systems and our website to market and sell our products and to manage a variety of business processes and activities and to comply with regulatory, legal and tax requirements. We depend on our information technology infrastructure for digital marketing activities and for electronic communications among our personnel, customers, manufacturers and suppliers around the world. Our website, portions of which are run through Shopify, and information technology systems, some of which are managed by third parties, may be susceptible to damage, disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or components, power outages, hardware failures, computer viruses, attacks by computer hackers, telecommunication failures, user errors or catastrophic events. Our website serves as an effective extension of our marketing strategies by exposing potential new customers to our brand, product offerings and enhanced content. Due to the importance of our website and internet-related operations, we are vulnerable to website downtime and other technical failures, which may be outside of our control. Further, any slow down or material disruption of our systems, or the systems of our third-party service providers, or our website could disrupt our ability to track, record and analyze the products that we sell and could negatively impact our operations, shipment of goods, ability to process financial information and transactions, and our ability to receive and process customer orders or engage in normal business activities. Our third-party technology providers may also change their policies, terms or offerings from time to time, may fail to introduce new features and offerings that meet our needs as we expand, or may cease to provide services to us on favorable terms, or at all, which could require us to adjust how we use our information technology systems, including our website, or switch to alternative third-party service providers which could be costly, cause interruptions and could ultimately adversely affect our business, financial condition, results of operations and growth prospects.
If our website or information technology systems, including those run by or those of our third-party providers, suffer damage, disruption or shutdown and we or our third-party providers do not effectively resolve the issues in a timely manner, our business, financial condition and results of operations may be adversely affected, and we could experience delays in reporting our financial results.
If our computer and communications hardware fail, or if we suffer an interruption or degradation of services, we could lose customer data and miss order fulfillment deadlines, which could harm our business. Our systems and operations are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, terrorist attacks, cyberattacks, data loss, acts of war, break-ins, earthquake and similar events. Any failure or interruption of our website, mobile app, internal business applications or our technology infrastructure could harm our ability to serve our clients, which could adversely affect our business, financial condition and results of operations.
We use complex custom-built proprietary software in our technology infrastructure. Our proprietary software may contain undetected errors or vulnerabilities, some of which may only be discovered after the software has been implemented in our production environment or released to end users. In addition, we seek to continually update and improve our software, and we may not always be successful in executing these upgrades and improvements, and the operation of our systems may be subject to failure. We may experience slowdowns or interruptions in our website when we are updating it. For example, in the past we have experienced minor slowdowns while updating our website. Moreover, new technologies or infrastructures may not be fully integrated with existing systems on a timely basis, or at all. Any errors or vulnerabilities discovered in our software after commercial implementation or release could result in damage to our reputation, loss of customers, disruption to our eCommerce channels, loss of revenue or liability for damages, any of which could adversely affect our growth prospects and our business.
Additionally, if we expand our use of third-party services, including cloud-based services, our technology infrastructure may be subject to increased risk of slowdown or interruption as a result of integration with such services and/or failures by such third parties, which are out of our control. Our net revenues depend on the
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number of visitors who shop on our website and the volume of orders we can handle. Unavailability of our website or mobile app or reduced order fulfillment performance would reduce the volume of goods sold and could also adversely affect customer perception of our brand. We may experience periodic system interruptions from time to time. In addition, continued growth in our transaction volume, as well as surges in online traffic and orders associated with promotional activities or seasonal trends in our business, place additional demands on our technology platform and could cause or exacerbate slowdowns or interruptions. If there is a substantial increase in the volume of traffic on our website or the number of orders placed by customers, we will be required to further expand, scale and upgrade our technology, transaction processing systems and network infrastructure. There can be no assurance that we will be able to accurately project the rate or timing of increases, if any, in the use of our website or mobile app or expand, scale and upgrade our technology, systems and infrastructure to accommodate such increases on a timely basis. In order to remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of our website, which is particularly challenging given the rapid rate at which new technologies, customer preferences and expectations and industry standards and practices are evolving in the eCommerce industry. Our or our third-party vendors inability to continue to update, improve and scale our website or mobile app and the underlying technology infrastructure could harm our reputation and our ability to acquire, retain and serve our customers, which could adversely affect our business, financial condition and results of operations.
Further, we endeavor to continually upgrade existing technologies and business applications, and we may be required to implement new technologies or business applications in the future. The implementation of upgrades and changes requires significant investments. Our results of operations may be affected by the timing, effectiveness and costs associated with the successful implementation of any upgrades or changes to our systems and infrastructure. In the event that it is more difficult for our customers to buy products from us on their mobile devices, or if our customers choose not to buy products from us on their mobile devices or to use mobile products that do not offer access to our websites, our customer growth could be harmed and our business, financial condition and results of operations may be adversely affected.
We must continue to expand and scale our information technology systems, and our failure to do so could adversely affect our business, financial condition and results of operations.
We will need to continue to expand and scale our information technology systems and personnel to support recent and expected future growth. As such, we will continue to invest in and implement modifications and upgrades to our information technology systems and procedures, including replacing legacy systems with successor systems, making changes to legacy systems or acquiring new systems with new functionality, hiring employees with information technology expertise and building new policies, procedures, training programs and monitoring tools. These types of activities subject us to inherent costs and risks associated with replacing and changing these systems, including impairment of our ability to fulfill customer orders, potential disruption of our internal control structure, capital expenditures, additional administration and operating expenses, acquisition and retention of sufficiently skilled personnel to implement and operate the new systems, demands on management time, the introduction of errors or vulnerabilities and other risks and costs of delays or difficulties in transitioning to or integrating new systems into our current systems. These implementations, modifications and upgrades may not result in productivity improvements at a level that outweighs the costs of implementation, or at all. Additionally, difficulties with implementing new technology systems, delays in our timeline for planned improvements, significant system failures or our inability to successfully modify our information systems to respond to changes in our business needs may cause disruptions in our business operations and adversely affect our business, financial condition and results of operations.
Some of our software and systems contain open source software, which may pose particular risks to our proprietary applications.
We use software licensed to us by third-party developers under open source licenses in connection with the development or deployment of our proprietary software and expect to continue to use open source software in the future. Some open source licenses contain express requirements, which may be triggered under certain
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circumstances, that licensees make available source code for modifications or derivative works created or prohibit such modifications or derivative works from being licensed for a fee. Although we monitor our use of open source software to avoid subjecting our platform to such requirements, the terms of many open source licenses 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 develop or use our proprietary software. We may face claims from third parties demanding the release or license of the open source software or derivative works that we developed from such software (which could include our proprietary source code) or otherwise seeking to enforce the terms of applicable open source licenses. These claims could result in litigation and could require us to publicly release portions of our proprietary source code or cease distributing or otherwise using the implicated solutions unless and until we can re-engineer them.
In addition, our use of open source software may present greater risks than use of other 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. To the extent that our platform depends upon the successful operation of open source software, any undetected errors or defects in open source software that we use could prevent the deployment or impair the functionality of our systems and injure our reputation. In addition, the public availability of such software may make it easier for others to compromise our platform. Any of these risks could be difficult to eliminate or manage and, if not addressed, could have an adverse effect on our business, financial condition and results of operations.
Our business may be adversely affected if we are unable to provide our customers a cost-effective shopping platform that is able to respond and adapt to rapid changes in technology.
The number of people who access the internet through devices other than personal computers, including smartphones and portable computers, such as laptops and tablets, has increased dramatically in the past few years. The smaller screen size, functionality and memory associated with some alternative devices may make the use of our website and purchasing our products more difficult. The versions of our website and our mobile app developed for such alternative devices may not be compelling to customers. In addition, it is time consuming and costly to keep pace with rapidly changing and continuously evolving technology.
As existing mobile devices and platforms evolve and new mobile devices and platforms are released, it is difficult to predict the problems we may encounter in adjusting and developing applications for changed and alternative devices and platforms, and we may need to devote significant resources to the redevelopment, support and maintenance of our website and mobile app. The timing, effectiveness and costs associated with the successful implementation of any upgrades or changes to our systems and infrastructure serving website or mobile device users may affect our results of operations. If we are unable to attract customers to our websites through these devices or are slow to develop versions of our website or mobile app that are more compatible with alternative devices, or if our customers choose not to buy products from us on their mobile devices or use mobile products that do not offer access to our websites, we may fail to capture a significant share of customers in the medical apparel market, which could adversely affect our business. In addition, in the event that it is more difficult for our customers to buy products from us on their mobile devices, or if our customers choose not to buy products from us on their mobile devices or to use mobile products that do not offer access to our websites, our customer growth could be harmed and our business, financial condition and results of operations may be adversely affected.
Our customer engagement on mobile devices depends upon effective operation with mobile operating systems, networks, and standards that we do not control.
An increasing number of our customers purchase our products through our mobile app. We are dependent on the interoperability of our website and mobile app with popular mobile operating systems that we do not control, such as Android and iOS, and any changes in such systems that degrade the functionality of our digital offering could adversely affect the user experience of our website and mobile app on mobile devices. Additionally, in order to deliver a consistent shopping experience to mobile devices, it is important that our
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mobile app is designed effectively and works well with a range of mobile technologies, systems, networks, and standards that we do not control. We may not be successful in developing relationships with key participants in the mobile industry or in developing products that operate effectively with these technologies, systems, networks, or standards. In the event that it is more difficult for our customers to access and use our mobile app on their mobile devices or if our customers choose not to access or use our mobile app on their mobile devices or use mobile products that do not offer access to our platform, our sales and growth prospects could be adversely impacted.
If sensitive information about our customers is disclosed, or if we or our third-party providers are subject to real or perceived cyberattacks, our customers may curtail use of our website or mobile app, we may be exposed to liability and our reputation could suffer.
Operating our business and platform involves the collection, storage and transmission of proprietary and confidential information, as well as the personal information of our employees and customers. Some of our third-party service providers, such as identity verification and payment processing providers, also regularly have access to customer data. In an effort to protect sensitive information, we rely on a variety of security measures, including encryption and authentication technology licensed from third parties. However, advances in computer capabilities, increasingly sophisticated tools and methods used by hackers and cyber terrorists, new discoveries in the field of cryptography or other developments may result in our failure or inability to adequately protect sensitive information.
Like other eCommerce companies, we are also vulnerable to hacking, malware, computer viruses, unauthorized access, phishing or social engineering attacks, ransomware attacks, credential stuffing attacks, denial-of-service attacks, exploitation of software vulnerabilities and other real or perceived cyberattacks. Additionally, as a result of the ongoing COVID-19 pandemic, certain functional areas of our workforce remain in a remote work environment, which has heightened the risk of these potential vulnerabilities. Any of these incidents could lead to interruptions or shutdowns of our platform, loss or corruption of data or unauthorized access to or disclosure of personal data or other sensitive information. Cyberattacks could also result in the theft of our intellectual property, damage to our IT systems or disruption of our ability to make financial reports and other public disclosures required of public companies. We have been subject to attempted cyber, phishing or social engineering attacks in the past and may continue to be subject to such attacks and other cybersecurity incidents in the future. If we gain greater visibility, we may face a higher risk of being targeted by cyberattacks. Advances in computer capabilities, new technological discoveries or other developments may result in cyberattacks becoming more sophisticated and more difficult to detect. We and our third-party service providers may not have the resources or technical sophistication to anticipate or prevent all such cyberattacks. Moreover, techniques used to obtain unauthorized access to systems change frequently and may not be known until launched against us or our third-party service providers. Security breaches can also occur as a result of non-technical issues, including intentional or inadvertent actions by our employees, our third-party service providers, or their personnel.
We and our third-party service providers may experience cyberattacks aimed at disrupting our and their services. If we or our third-party service providers experience, or are believed to have experienced, security breaches that result in marketplace performance or availability problems or the loss or corruption of, or unauthorized access to or disclosure of, personal data or confidential information, people may become unwilling to provide us the information necessary to make purchases on our website. Existing customers may also decrease or stop their purchases altogether. While we maintain cyber errors and omissions insurance coverage that covers certain aspects of cyber risks, these losses may not be adequately covered by insurance or other contractual rights available to us. The successful assertion of one or more large claims against us that exceed or are not covered by our insurance coverage or changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have an adverse effect on our business, financial condition and results of operations.
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Furthermore, we may be required to disclose personal data pursuant to demands from individuals, privacy advocates, regulators, government agencies and law enforcement agencies in various jurisdictions with conflicting privacy and security laws. This disclosure or refusal to disclose personal data may result in a breach of privacy and data protection policies, notices, laws, rules, court orders and regulations and could result in proceedings or actions against us in the same or other jurisdictions, damage to our reputation and brand and inability to provide our products to customers in certain jurisdictions. Additionally, changes in the laws and regulations that govern our collection, use and disclosure of customer data could impose additional requirements with respect to the retention and security of customer data, could limit our marketing activities and have an adverse effect on our business, financial condition and results of operations.
Failure to comply with federal, state or foreign laws and regulations or our contractual obligations relating to privacy, data protection and customer protection, or the expansion of current or the enactment of new laws and regulations relating to privacy, data protection and customer protection, could adversely affect our business and our financial condition.
We collect and maintain significant amounts of data relating to our customers and employees, and we face risks inherent in both handling large volumes of data and in protecting the security of such data. Our actual or perceived failure to comply with any federal, state or foreign laws and regulations, or applicable industry standards that govern or apply to our collection, use, retention, sharing and security of data, could result in enforcement actions that require us to change our business practices in a manner that may negatively impact our revenue, as well as expose ourselves to litigation, fines, civil and/or criminal penalties and adverse publicity that could cause our customers to lose trust in us, negatively impacting our reputation and business in a manner that harms our financial position. Laws and regulations in the United States and around the world restrict how information about individuals is collected, processed, stored, used and disclosed, as well as set standards for its security, implement notice requirements regarding privacy practices, and provide individuals with certain rights regarding the use, disclosure and sale of their protected personal information. These laws and regulations are still being tested in courts, and they are subject to new and differing interpretations by courts and regulatory officials. We are working to comply with the privacy and data protection laws and regulations that apply to us, and we anticipate needing to devote significant additional resources to complying with these laws and regulations. It is possible that these laws and regulations may be interpreted and applied in a manner that is inconsistent from jurisdiction to jurisdiction or inconsistent with our current policies and practices.
In the United States, both federal and various state governments have adopted, or are considering, laws, guidelines or rules for the collection, distribution, use and storage of information collected from or about consumers or their devices. For example, California enacted the California Consumer Privacy Act, or the CCPA, which went into effect on January 1, 2020. The CCPA gives California residents expanded rights to access and delete their personal information, opt out of certain personal information sharing and receive detailed information about how their personal information is used. The CCPA provides for civil penalties for violations, as well as statutory damages and a private right of action for data breaches that is expected to increase data breach litigation. Further, in November 2020, California voters passed the California Privacy Rights Act, or CPRA. The CPRA, which is expected to take effect on January 1, 2023 and to create obligations with respect to certain data relating to consumers as of January 1, 2022, significantly expands the CCPA, including by introducing additional obligations such as data minimization and storage limitations, granting additional rights to consumers, such as correction of personal information and additional opt-out rights, and creates a new entity, the California Privacy Protection Agency, to implement and enforce the law. Personal information we handle may be subject to the CPPA and CPRA, which may increase our compliance costs and potential liability. Other states have considered similar bills, which could be enacted in the future. In addition to fines and penalties that may be imposed for failure to comply with state law, some states also provide for private rights of action to customers for misuse of or unauthorized access to personal information. Our compliance with these changing and increasingly burdensome and sometimes conflicting regulations and requirements may cause us to incur substantial costs or require us to change our business practices, which may impact our financial condition. If we fail to comply with these regulations or requirements, we may be exposed to litigation expenses and possible significant liability,
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fees or fines. Further, any such claim, proceeding or action could harm our reputation, brand and business, force us to incur significant expenses in defense of such proceedings, distract our management, increase our costs of doing business, result in a loss of customers and suppliers or an inability to process credit card payments and may result in the imposition of monetary penalties. We may also be contractually required to indemnify and hold harmless third parties from the costs or consequences of non-compliance with any laws, regulations or other legal obligations relating to privacy or consumer protection or any inadvertent or unauthorized use or disclosure of data that we store or handle as part of operating our business.
In addition to risks posed by new privacy laws, we could be subject to claims alleging violations of long-established federal and state privacy and consumer protection laws. For example, the Telephone Consumer Protection Act, or TCPA, is a federal law that imposes significant restrictions on the ability to make telephone calls or send text messages to mobile telephone numbers without the prior consent of the person being contacted. The TCPA provides for substantial statutory damages for violations, which has generated extensive class-action litigation. In addition, class-action plaintiffs in the United States are employing novel legal theories to allege that federal and state eavesdropping/wiretapping laws and state constitutions prohibit the use of analytics technologies widely employed by website and mobile app operators to understand how their users interact with their services. Despite our compliance efforts, our use of text messaging communications or similar analytics technologies could expose us to costly litigation, government enforcement actions, damages and penalties, which could adversely affect our business, financial condition and results of operations.
Outside of the United States, certain foreign jurisdictions, including the European Economic Area, or EEA, and the United Kingdom, have laws and regulations which are more restrictive in certain respects than those in the United States. For example, the EEA and the United Kingdom have adopted the GDPR, which may apply to our collection, control, use, sharing, disclosure and other processing of data relating to an identified or identifiable living individual (personal data). The GDPR, and national implementing legislation in EEA member states and the United Kingdom, impose a strict data protection compliance regime including: providing detailed disclosures about how personal data is collected and processed (in a concise, intelligible and easily accessible form); granting new rights for data subjects in regard to their personal data (including the right to be forgotten and the right to data portability), as well as enhancing current rights (e.g., data subject access requests); requirements to have data processing agreements in place to govern the processing of personal data on behalf of other organizations; introducing the obligation to notify data protection regulators or supervisory authorities (and in certain cases, affected individuals) of significant data breaches; maintaining a record of data processing; and complying with the principal of accountability and the obligation to demonstrate compliance through policies, procedures, trainings and audits.
We also may be subject to European Union rules with respect to cross-border transfers of personal data out of the EEA. Recent legal developments in Europe have created complexity and uncertainty regarding transfers of personal data from the EEA to the United States. Most recently, on July 16, 2020, the Court of Justice of the European Union, or CJEU, invalidated the EU-US Privacy Shield Framework, or Privacy Shield, under which personal data could be transferred from the EEA to US entities who had self-certified under the Privacy Shield scheme. While the CJEU upheld the adequacy of the standard contractual clauses (a standard form of contract approved by the European Commission as an adequate personal data transfer mechanism, and potential alternative to the Privacy Shield), it made clear that reliance on them alone may not necessarily be sufficient in all circumstances. Use of the standard contractual clauses must now be assessed on a case-by-case basis taking into account the legal regime applicable in the destination country, in particular applicable surveillance laws and rights of individuals and additional measures and/or contractual provisions may need to be put in place, however, the nature of these additional measures is currently uncertain. The CJEU went on to state that if a competent supervisory authority believes that the standard contractual clauses cannot be complied with in the destination country and the required level of protection cannot be secured by other means, such supervisory authority is under an obligation to suspend or prohibit that transfer.
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These recent developments may require us to review and amend the legal mechanisms by which we make and/or receive personal data transfers to/ in the United States. As supervisory authorities issue further guidance on personal data export mechanisms, including circumstances where the standard contractual clauses cannot be used and/or start taking enforcement action, we could suffer additional costs, complaints and/or regulatory investigations or fines, and/or if we are otherwise unable to transfer personal data between and among countries and regions in which we operate, it could affect the manner in which we provide our services, the geographical location or segregation of our relevant systems and operations, and could adversely affect our business, financial condition and results of operations.
The withdrawal of the United Kingdom from the European Union has created uncertainty with regard to the regulation of data protection in the United Kingdom. The relationship between the United Kingdom and the European Union in relation to certain aspects of data protection law remains unclear, for example, how data transfers between EU member states and the United Kingdom will be treated.
We depend on a number of third parties in relation to the operation of our business, a number of which process personal data on our behalf. Any violation of data or security laws by our third-party processors, or their acts or omissions that cause us to violate our legal obligations, could have an adverse effect on our business and result in the fines and penalties outlined below.
Fines for certain breaches of the GDPR are up to the greater of 20 million Euros or 4 % of total global annual turnover. In addition to the foregoing, a breach of the GDPR could result in regulatory investigations, reputational damage, orders to cease/ change our processing of our data, enforcement notices, and/ or assessment notices (for a compulsory audit). We may also face civil claims including representative actions and other class action type litigation (where individuals have suffered harm), potentially amounting to significant compensation or damages liabilities, as well as associated costs, diversion of internal resources and reputational harm.
We are also subject to evolving EU privacy laws on cookies and e-marketing. In the European Union, regulators are increasingly focusing on compliance with requirements in the online behavioral advertising ecosystem, and current national laws that implement the ePrivacy Directive will be replaced by an EU regulation known as the ePrivacy Regulation which will significantly increase fines for non-compliance. In the European Union, informed consent is required for the placement of a cookie or similar technologies on a users device and for direct electronic marketing. The GDPR also imposes conditions on obtaining valid consent, such as a prohibition on pre-checked consents and a requirement to ensure separate consents are sought for each type of cookie or similar technology. While the text of the ePrivacy Regulation is still under development, a recent European court decision and regulators recent guidance are driving increased attention to cookies and tracking technologies. If regulators start to enforce the strict approach in recent guidance, this could lead to substantial costs, require significant systems changes, limit the effectiveness of our marketing activities, divert the attention of our technology personnel, adversely affect our margins, increase costs and subject us to additional liabilities. Regulation of cookies and similar technologies, and any decline of cookies or similar online tracking technologies as a means to identify and potentially target individuals, may lead to broader restrictions and impairments on our marketing and personalization activities and may negatively impact our efforts to understand users.
Furthermore, compliance with legal and contractual obligations requires us to make public statements about our privacy and data security practices, including the statements we make in our online privacy policy. Although we endeavor to comply with these statements, should they prove to be untrue or be perceived as untrue, even through circumstances beyond our reasonable control, we may face litigation, claims, investigations, inquiries or other proceedings by the U.S. Federal Trade Commission, state attorneys general and other federal, state and foreign regulators and private litigants alleging violations of privacy or consumer protection laws.
We are also subject to the Payment Card Industry, or PCI, Data Security Standard, which is a security standard designed to protect payment card data as mandated by payment card industry entities. We rely on vendors to handle PCI matters and to ensure PCI compliance. Despite our compliance efforts, we may become subject to claims that we have violated the PCI Data Security Standard, which could subject us to substantial fines and penalties.
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Any actual or perceived non-compliance with these rapidly changing laws, regulations or standards or our contractual obligations relating to privacy, data protection and consumer protection by us or the third-party companies we work with could result in litigation and proceedings against us by governmental entities, consumers or others, fines and civil or criminal penalties for us or company officials, obligations to cease offerings or to substantially modify our business in a manner that makes it less effective in certain jurisdictions, negative publicity and harm to our brand and reputation, and reduced overall demand for our products, any of which could have an adverse effect on our business, financial condition and results of operations.
Government regulation of the internet and eCommerce is evolving, and unfavorable changes or failure by us to comply with these regulations could substantially harm our business, financial condition and results of operations.
We are subject to general business regulations and laws as well as regulations and laws specifically governing the internet and eCommerce. Existing and future regulations and laws could impede the growth of the internet, eCommerce or mobile commerce, which could in turn adversely affect our growth. These regulations and laws may involve taxes, tariffs, privacy and data security, anti-spam, content protection, electronic contracts and communications, customer protection and internet neutrality. It is not clear how existing laws governing issues such as property ownership, sales and other taxes and customer privacy apply to the internet as the vast majority of these laws were adopted prior to the advent of the internet and do not contemplate or address the unique issues raised by the internet or eCommerce. It is possible that general business regulations and laws, or those specifically governing the internet or eCommerce, may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. We cannot be sure that our practices comply fully with all such laws and regulations. Any failure, or perceived failure, by us to comply with any of these laws or regulations could result in damage to our reputation, a loss in business and proceedings or actions against us by governmental entities, customers, suppliers or others. Any such proceeding or action could hurt our reputation, force us to spend significant amounts in defense of these proceedings, distract our management, increase our costs of doing business, decrease the use of our website and mobile app by customers and suppliers and may result in the imposition of monetary liabilities. We may also be contractually liable to indemnify and hold harmless third parties from the costs or consequences of our own non-compliance with any such laws or regulations. As a result, adverse developments with respect to these laws and regulations could substantially harm our business, financial condition and results of operations.
Any failure or inability to protect or enforce our intellectual property rights could diminish the value of our brand, weaken our competitive position and harm our business, financial condition and results of operations.
We currently rely on a combination of copyright, trademark, trade dress, design patent and other intellectual property laws as well as confidentiality procedures and contractual restrictions to establish and protect our intellectual property rights. However, the steps we take to protect our intellectual property rights may not be adequate to prevent infringement of these rights by others, including imitation of our products and misappropriation of our brand.
Our success depends in large part on our brand image. We believe that our trademarks and other intellectual property rights have significant value and are important to differentiating our products from those of our competitors and creating and sustaining demand for our products. We have applied for and obtained certain U.S. and foreign trademark registrations and will continue to evaluate the registration of additional trademarks as appropriate. However, we cannot guarantee that any of our pending trademark applications will be approved by the applicable governmental authorities. Moreover, even if our applications are approved, third parties may seek to oppose or otherwise challenge these registrations or other of our intellectual property rights. Third parties may also knowingly or unknowingly infringe our intellectual property rights. In any of these cases, we may be required to expend significant time and expense to defend or enforce our rights.
We also currently hold various domain names relating to our brand. We may be unable to prevent third parties from acquiring and using domain names that are confusingly similar to, or that otherwise have a negative impact on, the value of our trademarks and other proprietary rights. Any inability or failure to do so could adversely affect our brand and make it more difficult for users to find our website.
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Additionally, the expansion of our product lines and the geographic scope of our sales and marketing could pose additional intellectual property challenges. For example, certain foreign countries do not protect intellectual property rights as fully as they are protected in the United States, and accordingly, intellectual property protection may be limited, or in some circumstances unavailable, in some foreign countries where we choose to do business. Thus, it may be more difficult for us to successfully challenge the use of our intellectual property rights by other parties in these countries. If we fail to protect and maintain our intellectual property rights, the value of our brand could be diminished, and our competitive position may suffer.
Our fabrics and manufacturing technology may be imitated by our competitors.
We have applications pending for design patents in the United States and have obtained or have applications pending for corresponding industrial design registrations in other countries on certain aspects of some of our product designs. In addition, our products are made using our proprietary blends of raw materials, fabrics and fabric treatments, which results in products unique to us; however, we do not own or license the intellectual property rights for the underlying fabric technology, fabrics treatments or fabrics. Our ability to obtain intellectual property protection for our products is therefore limited. As a result, our current and future competitors may attempt to imitate our products and do so at lower prices. If our competitors are successful in doing so, our net revenues and profitability could suffer.
We may incur costs to defend against, face liability for or be vulnerable to intellectual property infringement claims brought against us by others.
Although we are not currently aware of any such claims, third parties may assert claims against us alleging that we infringe upon, misappropriate, dilute or otherwise violate their intellectual property rights, particularly as we expand our business and the number of products we offer. These risks have been amplified by the increase in third parties whose sole or primary business is to assert such claims. Our defense of any claim, regardless of its merit, could be expensive and time consuming and could divert management resources. We cannot predict the outcome of lawsuits and cannot ensure that the results of any such actions will not have an adverse effect on our business, financial condition or results of operations. Successful infringement claims against us could result in significant monetary liability or prevent us from selling some of our products. In addition, resolution of claims may require us to redesign or rebrand our products, license rights from third parties, cease using certain brand names or other intellectual property rights altogether or make substantial payments for royalty or license fees, legal fees, settlement payments or other costs or damages. Any of these events could harm our business and cause our results of operations, liquidity and financial condition to suffer.
The inability to acquire, use or maintain our marks and domain names for our websites could substantially harm our business, financial condition and results of operations.
We currently are the registrant of marks for our products in numerous jurisdictions and are the registrant of the internet domain name for the website wearfigs.com, as well as various related domain names. However, we have not registered our marks represented by our domain names in all major international jurisdictions. Domain names generally are regulated by internet regulatory bodies and may not be generally protectable as trademarks in and of themselves. As our business grows, we may incur material costs in connection with the registration, maintenance and protection of our marks. If we do not have or cannot obtain on reasonable terms the ability to use our marks in a particular country, or to use or register our domain name, we could be forced either to incur significant additional expenses to market our products within that country, including the development of a new brand and the creation of new promotional materials and packaging, or to elect not to sell products in that country. Either result could adversely affect our business, financial condition and results of operations.
Furthermore, the regulations governing domain names and laws protecting marks and similar proprietary rights could change in ways that block or interfere with our ability to use relevant domains or the FIGS brand. Also, we might not be able to prevent third parties from registering, using or retaining domain names that interfere with our customer communications or infringe or otherwise decrease the value of our marks, domain names and other proprietary rights. Regulatory bodies also may establish additional generic or country-code top-level domains or may allow modifications of the requirements for registering, holding or using domain names. As a result, we might not be able to register, use or maintain the domain names that use the name FIGS or wearFIGS in all of the countries and territories in which we currently or intend to conduct business.
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Risks Related to Other Legal, Regulatory and Tax Matters
We may face exposure to foreign currency exchange rate fluctuations.
While we have historically transacted in U.S. dollars with our customers, we may transact in foreign currencies in the future as we expand offerings and operations internationally. In addition, certain of our foreign operating expenses are denominated in the currencies of the countries and territories in which our third-party vendors are located. Accordingly, changes in the value of foreign currencies relative to the U.S. dollar can affect our net revenues and results of operations. As a result of such foreign currency exchange rate fluctuations, it could be more difficult to detect underlying trends in our business and results of operations. In addition, to the extent that fluctuations in currency exchange rates cause our results of operations to differ from our expectations or the expectations of our investors, the trading price of our Class A common stock could be lowered. We do not currently maintain a program to hedge transactional exposures in foreign currencies. However, in the future, we may use derivative instruments, such as foreign currency forward and option contracts, to hedge certain exposures to fluctuations in foreign currency exchange rates. The use of such hedging activities may not offset any or more than a portion of the adverse financial effects of unfavorable movements in foreign exchange rates over the limited time the hedges are in place and may introduce additional risks if we are unable to structure effective hedges with such instruments.
The United Kingdoms withdrawal from the European Union may have a negative effect on global economic conditions, financial markets and our business.
Following a national referendum and enactment of legislation by the government of the United Kingdom, the United Kingdom formally withdrew from the European Union and ratified a trade and cooperation agreement governing its future relationship with the European Union. The agreement, which is being applied provisionally from January 1, 2021 until it is ratified by the European Parliament and the Council of the European Union, addresses trade, economic arrangements, law enforcement, judicial cooperation and a governance framework including procedures for dispute resolution, among other things. Because the agreement merely sets forth a framework in many respects and will require complex additional bilateral negotiations between the United Kingdom and the European Union as both parties continue to work on the rules for implementation, significant political and economic uncertainty remains about how the precise terms of the relationship between the parties will differ from the terms before withdrawal.
These developments, or the perception that any related developments could occur, have had and may continue to have an adverse effect on global economic conditions and financial markets, and may significantly reduce global market liquidity, restrict the ability of key market participants to operate in certain financial markets or restrict our access to capital. Any of these factors could have an adverse effect on our business, financial condition and results of operations and reduce the price of Class A common stock.
Any failure to comply with trade, anti-corruption and other regulations could lead to investigations or actions by government regulators and negative publicity.
The labeling, distribution, importation, marketing and sale of our products are subject to extensive regulation by various federal agencies, including the Federal Trade Commission, Customer Product Safety Commission and state attorneys general in the United States, the Competition Bureau and Health Canada in Canada, as well as by various other federal, state, provincial, local and international regulatory authorities in the countries in which our products are distributed or sold. If we fail to comply with any of these regulations, we could become subject to enforcement actions or the imposition of significant penalties or claims, which could harm our results of operations or our ability to conduct our business. For example, we and our co-founders and co-Chief Executive Officers are currently defendants in two actions brought by Strategic Partners, Inc., or SPI, in which SPI alleges, among other claims, causes of action based on false advertising. See BusinessLegal Proceedings for additional information. While we believe the claims asserted by SPI in both actions are without basis or merit, and we intend to vigorously defend against such claims, these proceedings or any investigations or
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inquiries by governmental agencies related to these or any other matters, could result in significant settlement amounts, damages, fines or other penalties, divert financial and management resources and result in significant legal fees. An unfavorable outcome of any particular proceeding could have an adverse impact on our business, financial condition and results of operations. In addition, the adoption of new regulations or changes in the interpretation of existing regulations may result in significant compliance costs or discontinuation of product sales and could impair the marketing of our products, resulting in significant loss of net revenues.
We derive a significant portion of our products from third-party manufacturing and supply partners in foreign countries and territories, including countries and territories perceived to carry an increased risk of corrupt business practices. We are subject to the FCPA, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act, the U.K. Bribery Act, and possibly other anti-bribery and anti-money laundering laws in countries in which we conduct activities. These laws prohibit companies and their employees and third-party intermediaries from corruptly promising, authorizing, offering or providing, directly or indirectly, improper payments or anything of value to foreign government officials, political parties and private-sector recipients for the purpose of obtaining or retaining business, directing business to any person or securing any advantage. In addition, U.S. public companies are required to maintain records that accurately and fairly represent their transactions and have an adequate system of internal accounting controls. In many foreign countries, including countries in which we may conduct business, it may be a local custom that businesses engage in practices that are prohibited by the FCPA or other applicable laws and regulations. We face significant risks if we or any of our directors, officers, employees, agents or other partners or representatives fail to comply with these laws, and governmental authorities in the United States and elsewhere could seek to impose substantial civil and/or criminal fines and penalties, which could adversely affect our reputation, business, financial condition and results of operations.
If our employees, contractors and agents, and companies to which we outsource certain of our business operations were to take actions in violation of our policies or applicable law, there could be an adverse effect on our reputation, business, financial condition and results of operations.
Any violation of the FCPA, other applicable anti-corruption laws or anti-money laundering laws could result in whistleblower complaints, adverse media coverage, investigations, loss of export privileges, severe criminal or civil sanctions and, in the case of the FCPA, suspension or debarment from U.S. government contracts, any of which could have an adverse effect on our business, financial condition and results of operations. In addition, responding to any enforcement action may result in a significant diversion of managements attention and resources and significant defense costs and other professional fees.
Our ability to source and distribute our merchandise profitably or at all could be harmed if new trade restrictions are imposed or existing trade restrictions become more burdensome.
Substantially all of our apparel products are currently manufactured outside of the United States. The United States and the countries in which our products are produced or sold internationally have imposed and may impose additional quotas, duties, tariffs or other restrictions or regulations, or may adversely adjust prevailing quota, duty or tariff levels. Countries impose, modify and remove tariffs and other trade restrictions in response to a diverse array of factors, including global and national economic and political conditions, which make it impossible for us to predict future developments regarding tariffs and other trade restrictions. Trade restrictions, including tariffs, quotas, export controls, trade sanctions, embargoes, safeguards and customs restrictions, could increase the cost or reduce the supply of products available to us or may require us to modify our supply chain organization or other current business practices, any of which could harm our business, financial condition and results of operations.
Changes in tax laws, including as a result of the 2020 United States presidential and congressional elections, may impact our future financial position and results of operation.
New income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time, or interpreted, changed, modified or applied adversely to us, any of which could adversely affect our
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business operations and financial performance. In particular, the recent presidential and congressional elections in the United States could result in significant changes in, and uncertainty with respect to, tax legislation, regulation and government policy directly affecting our business or indirectly affecting us because of impacts on our customers, suppliers and manufacturers. For example, the U.S. government may enact significant changes to the taxation of business entities including, among others, a permanent increase in the corporate income tax rate and the imposition of minimum taxes or surtaxes on certain types of income. No specific U.S. tax legislation has been proposed at this time and the likelihood of these changes being enacted or implemented is unclear. We are currently unable to predict whether such changes will occur and, if so, the ultimate impact on our business. To the extent that such changes have a negative impact on us, our suppliers, manufacturers or our customers, including as a result of related uncertainty, these changes may adversely impact our business, financial condition, results of operations and cash flows.
We could be required to collect additional sales taxes that may increase the costs our customers would have to pay for our products and adversely affect our results of operations.
Following the U.S. Supreme Courts decision in 2018 in South Dakota v. Wayfair, Inc., a state may impose sales tax collection obligations on certain retailers, including eCommerce companies, that lack any physical presence within such state. The Supreme Courts Wayfair decision has removed a significant impediment to the enactment of laws imposing sales tax collection obligations on out-of-state eCommerce companies, and an increasing number of states have adopted such laws. Although we believe that we currently collect sales taxes in all states that require us to do so, a successful assertion by one or more states requiring us to collect sales taxes where we currently do not collect sales taxes, or to collect additional sales taxes in a state in which we currently collect sales taxes, could result in substantial tax liabilities (including penalties and interest). In addition, the imposition of additional sales tax collection obligations, whether for prior years or prospectively, could create additional administrative burdens for us, put us at a competitive disadvantage if similar obligations are not imposed on our competitors and decrease our future sales, which could have an adverse impact on our business and results of operations.
Existing and potential tariffs imposed by the U.S. government or a global trade war could increase the cost of our products, which could have an adverse effect on our business, financial condition and results of operations.
The U.S. government has in recent years imposed increased tariffs on imports from certain foreign countries, and any imposition of additional tariffs by the United States could result in the adoption of tariffs by other countries, leading to a global trade war. While the U.S. governments recent tariffs on certain imports from China only affect a small portion of our production, any such future tariffs by the United States or other countries could have a significant impact on our business. While we may attempt to renegotiate prices with suppliers or diversify our supply chain in response to tariffs, such efforts may not yield immediate results or may be ineffective. We might also consider increasing prices to the end customer; however, this could reduce the competitiveness of our products and adversely affect net revenues. If we fail to manage these dynamics successfully, gross margins and profitability could be adversely affected. As of the date of this prospectus, tariffs have not had a material impact on our business, but increased tariffs or trade restrictions implemented by the United States or other countries in connection with a global trade war could have an adverse effect on our business, financial condition and results of operations.
Our ability to use our net operating loss carryforwards may be limited.
As of December 31, 2020, we had U.S. federal and state net operating loss carryforwards of approximately $1.8 million and $16.0 million, respectively. Under legislation enacted in 2017, informally titled, the Tax Cuts and Jobs Act, or the TCJA, as modified in 2020 by the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, unused U.S. federal net operating losses generated in tax years beginning after December 31, 2017, will not expire and may be carried forward indefinitely, but the deductibility of such federal net operating
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loss carryforwards in taxable years beginning after December 31, 2020, is limited to 80% of taxable income. It is uncertain if and to what extent various states will conform to the TCJA or the CARES Act. Our ability to utilize our federal net operating carryforwards may be limited under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code. The limitations apply if we experience an ownership change, which is generally defined as a greater than 50 percentage point change (by value) in the ownership of our equity by certain stockholders over a rolling three-year period. Similar provisions of state tax law may also apply to limit the use of our state net operating loss carryforwards. We have previously experienced ownership changes, and although such prior ownership changes have not materially limited our utilization of affected net operating loss carryforwards, future changes in our stock ownership, which may be outside of our control, may trigger an ownership change that materially impacts our ability to utilize pre-change net operating loss carryforwards. In addition, there may be periods during which the use of net operating loss carryforwards is suspended or otherwise limited. For example, in 2020, California generally suspended the use of California net operating loss carryforwards to offset taxable income in tax years beginning after 2019 and before 2023. Accordingly, our ability to use our net operating loss carryforwards to offset taxable income may be subject to such limitations or special rules that apply at the state level, which could adversely affect our results of operations.
Risks Related to the Ownership of Our Class A Common Stock and this Offering
There has been no prior public market for our Class A common stock. An active market may not develop or be sustainable, and you may not be able to resell your shares at or above the initial public offering price.
There has been no public market for our Class A common stock prior to this offering. The initial public offering price for our Class A common stock was determined through negotiations among us, the selling stockholders and the underwriters, and may vary from the market price of our Class A common stock following the completion of this offering. An active or liquid market in our Class A common stock may not develop upon completion of this offering or, if it does develop, it may not be sustainable. In the absence of an active trading market for our Class A common stock, you may not be able to resell any shares you hold at or above the initial public offering price or at all. We cannot predict the prices at which our Class A common stock will trade.
Our stock price may be volatile or may decline regardless of our operating performance, resulting in substantial losses for investors purchasing shares in this offering.
The market price of our Class A common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:
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actual or anticipated fluctuations in our financial condition and results of operations; |
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the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections; |
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failure of securities analysts to initiate or maintain coverage of our company, changes in financial estimates or ratings by any securities analysts who follow our company or our failure to meet these estimates or the expectations of investors; |
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announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, joint ventures, results of operations or capital commitments; |
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changes in stock market valuations and operating performance of other healthcare and technology companies generally, or those in our industry in particular; |
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price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole; |
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changes in our board of directors or management; |
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sales of large blocks of our Class A common stock, including sales by Tulco, LLC, our co-founders and co-Chief Executive Officers or our other executive officers and directors; |
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lawsuits threatened or filed against us; |
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anticipated or actual changes in laws, regulations or government policies applicable to our business; |
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changes in our capital structure, such as future issuances of debt or equity securities; |
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short sales, hedging and other derivative transactions involving our capital stock; |
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general economic conditions in the United States; |
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other events or factors, including those resulting from war, pandemics (including COVID-19), incidents of terrorism or responses to these events; and |
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the other factors described in the sections of this prospectus titled Risk Factors and Special Note Regarding Forward-Looking Statements. |
The stock market has recently experienced extreme price and volume fluctuations. The market prices of securities of companies have experienced fluctuations that often have been unrelated or disproportionate to their results of operations. Market fluctuations could result in extreme volatility in the price of shares of our Class A common stock, which could cause a decline in the value of your investment. Price volatility may be greater if the public float and trading volume of shares of our Class A common stock is low. Furthermore, in the past, stockholders have sometimes instituted securities class action litigation against companies following periods of volatility in the market price of their securities. Any similar litigation against us could result in substantial costs, divert managements attention and resources, and harm our business, financial condition and results of operations.
The multi-class structure of our common stock may adversely affect the trading market for our Class A common stock.
We cannot predict whether our multi-class structure will result in a lower or more volatile market price of our Class A common stock or in adverse publicity or other adverse consequences. For example, certain index providers have announced restrictions on including companies with dual class or multi-class share structures in certain of their indexes. In July 2017, S&P Dow Jones and FTSE Russell announced changes to their eligibility criteria for the inclusion of shares of public companies on certain indices, including the Russell 2000, the S&P 500, the S&P MidCap 400 and the S&P SmallCap 600, to exclude companies with multiple classes of shares of common stock from being added to these indices. Beginning in 2017, MSCI, a leading stock index provider, opened public consultations on their treatment of no-vote and multi-class structures and temporarily barred new multi-class listings from certain of its indices; however, in October 2018, MSCI announced its decision to include equity securities with unequal voting structures in its indices and to launch a new index that specifically includes voting rights in its eligibility criteria. As a result, our multi-class capital structure would make us ineligible for inclusion in any of these indices, and mutual funds, exchange-traded funds and other investment vehicles that attempt to passively track these indices will not be investing in our stock. These policies are still fairly new, and it remains unclear what effect, if any, they will have on the valuations of publicly traded companies excluded from the indices in the longer term, but it is possible that they may depress these valuations compared to those of other similar companies that are included. Furthermore, we cannot assure you that other stock indices will not take a similar approach to S&P Dow Jones or FTSE Russell in the future. Exclusion from indices could make our Class A common stock less attractive to investors and, as a result, the market price of our Class A common stock could be adversely affected.
Sales, directly or indirectly, of a substantial amount of our Class A common stock in the public markets by our existing security holders may cause the price of our Class A common stock to decline.
Sales of a substantial number of shares of our Class A common stock into the public market, particularly sales by our directors, executive officers and principal stockholders, or the perception that these sales might occur, could cause the market price of our Class A common stock to decline. Many of our existing security
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holders have substantial unrecognized gains on the value of the equity they hold and may take steps to sell their shares or otherwise secure or limit their risk exposure to the value of their unrecognized gains on those shares. We are unable to predict the timing or effect of such sales on the market price of our Class A common stock.
All of the shares of Class A common stock sold in this offering will be freely tradable without restrictions or further registration under the Securities Act, except that any shares held by our affiliates, as defined in Rule 144 under the Securities Act, would only be able to be sold in compliance with Rule 144 and any applicable lock-up agreements described below.
In connection with this offering, we, all of our directors and executive officers and holders of substantially all of our outstanding securities have entered into market standoff agreements with us or lock-up agreements with the underwriters that restrict our and their ability to sell or transfer shares of our capital stock for a period of 180 days from the date of this prospectus, subject to certain exceptions; provided that . In addition, we and Goldman Sachs & Co. LLC and Morgan Stanley & Co. LLC may release certain stockholders from the market standoff agreements or lock-up agreements prior to the end of the lock-up period. If not otherwise early released, when the applicable market standoff and lock-up periods expire, we and our security holders subject to a lock-up agreement or market standoff agreement will be able to sell our shares freely in the public market, except that any shares held by our affiliates, as defined in Rule 144 under the Securities Act, would only be able to be sold in compliance with Rule 144. Sales of a substantial number of such shares upon expiration of the lock-up and market standoff agreements, or the perception that such sales may occur, or early release of these agreements, could cause our market price to fall or make it more difficult for you to sell your Class A common stock at a time and price that you deem appropriate.
In addition, as of March 31, 2021, after giving effect to the Common Stock Reclassification, we had stock options outstanding that, if fully exercised, would result in the issuance of 764,999 shares of Class A common stock and 3,709,680 shares of Class B common stock. All of the shares of common stock issuable upon the exercise of stock options, and the shares of Class A common stock reserved for future issuance under our equity incentive plans, will be registered for public resale under the Securities Act. Accordingly, these shares will be able to be freely sold in the public market upon issuance subject to existing lock-up or market standoff agreements and applicable vesting requirements.
Further, based on shares outstanding as of March 31, 2021, holders of shares of our common stock will have rights after the completion of this offering, subject to certain conditions, to require us to file registration statements for the public resale of such shares or to include such shares in registration statements that we may file for us or other stockholders.
The multi-class structure of our common stock and voting agreement among us and the Class B and Class C stockholders will have the effect of concentrating voting control with our co-founders and co-Chief Executive Officers, Heather Hasson and Trina Spear, and Tulco, LLC, who will hold in the aggregate % of the voting power of our capital stock following the completion of this offering, which will limit or preclude your ability to influence corporate matters, including the election of directors and the approval of any change of control transaction.
Our Class B common stock has 20 votes per share, our Class C common stock has three votes per share and our Class A common stock, which is the stock we are offering in this offering, has one vote per share. Immediately following the completion of this offering, all outstanding shares of our Class B common stock will be held by our co-founders and co-Chief Executive Officers, Ms. Hasson and Ms. Spear, and all outstanding shares of our Class C common stock will be held by Tulco, LLC, our majority stockholder. Immediately following the completion of this offering, the outstanding shares of our Class B common stock and Class C common stock will represent approximately % and % , respectively, of the voting power of our outstanding capital stock, assuming no exercise of the underwriters option to purchase additional shares and no purchases of shares of Class A common stock in this offering by Ms. Hasson, Ms. Spear or Tulco, LLC, including pursuant to our directed share program.
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These stockholders will have the ability to control the outcome of matters submitted to our stockholders for approval, including the election of our directors and the approval of any change of control transaction. In addition, we and the Class B and Class C stockholders intend to enter into a voting agreement, effective immediately prior to the completion of this offering, with respect to the election of directors. This concentrated control will limit or preclude your ability to influence corporate matters for the foreseeable future, including the election of directors, amendments of our organizational documents, and any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transaction requiring stockholder approval. In addition, this may prevent or discourage unsolicited acquisition proposals or offers for our capital stock that you may feel are in your best interest as one of our stockholders.
Future transfers by holders of Class B common stock and Class C common stock will generally result in those shares converting to Class A common stock, subject to limited exceptions, such as certain transfers effected for estate planning purposes. The conversion of Class B common stock and Class C common stock to Class A common stock will have the effect, over time, of increasing the relative voting power of those holders of Class B common stock and Class C common stock who retain their shares in the long term. See the section titled Description of Capital StockAnti-Takeover Provisions for additional information.
We will be a controlled company within the meaning of the rules of the NYSE and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements.
Upon completion of this offering, our co-founders and co-Chief Executive Officers, Ms. Hasson and Ms. Spear, and Tulco, LLC will together control a majority of the voting power of our outstanding common stock and intend to enter into a voting agreement, effective immediately prior to the completion of this offering, with respect to the election of directors. As a result, we will be a controlled company within the meaning of the corporate governance standards of the NYSE. Under these rules, a listed company of which more than 50% of the voting power is held by an individual, group or another company is a controlled company and may elect not to comply with certain corporate governance requirements, including:
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the requirement that a majority of the board of directors consist of independent directors; |
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the requirement that our nominating and corporate governance committee be composed entirely of independent directors with a written charter addressing the committees purpose and responsibilities; |
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the requirement that our compensation committee be composed entirely of independent directors with a written charter addressing the committees purpose and responsibilities; and |
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the requirement for an annual performance evaluation of our governance and compensation committees. |
We intend to rely on these exemptions and, as a result, will not have a majority of independent directors on our board of directors or governance and compensation committees consisting entirely of independent directors upon the completion of this offering. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NYSE.
We are an emerging growth company and our compliance with the reduced reporting and disclosure requirements applicable to emerging growth companies may make our Class A common stock less attractive to investors.
We are an emerging growth company, as defined in the JOBS Act, and we have elected to take advantage of certain exemptions and relief from various reporting requirements that are applicable to other public companies that are not emerging growth companies. These provisions include, but are not limited to: being permitted to have only two years of audited financial statements and only two years of related selected financial data and managements discussion and analysis of financial condition and results of operations disclosures; being
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exempt from compliance with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act; being exempt from any rules that could be adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotations or a supplement to the auditors report on financial statements; being subject to reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and not being required to hold nonbinding advisory votes on executive compensation or on any golden parachute payments not previously approved.
In addition, while we are an emerging growth company, we will not be required to comply with any new financial accounting standard until such standard is generally applicable to private companies. As a result, our financial statements may not be comparable to companies that are not emerging growth companies or elect not to avail themselves of this provision.
We may remain an emerging growth company until as late as December 31, 2026, the fiscal year-end following the fifth anniversary of the completion of this initial public offering, though we may cease to be an emerging growth company earlier under certain circumstances, including if (1) we have more than $1.07 billion in annual net revenues in any fiscal year, (2) we become a large accelerated filer, with at least $700 million of equity securities held by non-affiliates as of the end of the second quarter of that fiscal year or (3) we issue more than $1.0 billion of non-convertible debt over a three-year period.
The exact implications of the JOBS Act are still subject to interpretations and guidance by the SEC and other regulatory agencies, and we cannot assure you that we will be able to take advantage of all of the benefits of the JOBS Act. In addition, investors may find our Class A common stock less attractive to the extent we rely on the exemptions and relief granted by the JOBS Act. If some investors find our Class A common stock less attractive as a result, there may be a less active trading market for our Class A common stock and our stock price may decline or become more volatile.
If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about our business, the price of our Class A common stock and trading volume could decline.
The trading market for our Class A common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business, our market and our competitors. We do not have any control over these analysts. If few securities analysts commence coverage of us, or if industry analysts cease coverage of us, the trading price for our Class A common stock would be negatively affected. If one or more of the analysts who cover us downgrade our Class A common stock or publish inaccurate or unfavorable research about our business, our Class A common stock price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our Class A common stock could decrease, which might cause our Class A common stock price and trading volume to decline.
Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment.
The initial public offering price of our Class A common stock of $ per share is substantially higher than the pro forma as adjusted net tangible book value per share of our outstanding Class A common stock immediately after this offering. Therefore, if you purchase our Class A common stock in this offering, you will incur immediate dilution of $ in the pro forma as adjusted net tangible book value per share from the price you paid assuming that stock price. In addition, following this offering, purchasers who bought shares from us in the offering will have contributed % of the total consideration paid to us by our stockholders to purchase shares of Class A common stock to be sold by us in this offering, in exchange for acquiring approximately % of our total outstanding shares as of March 31, 2021, after giving effect to this offering. If the underwriters exercise their option to purchase additional shares, if we issue any additional stock options or warrants or any outstanding stock options are exercised, if RSUs are settled, or if we issue any other securities or convertible debt in the future, investors will experience further dilution.
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We will have broad discretion in the use of the net proceeds we receive in this offering and may not use them in ways that prove to be effective.
We will have broad discretion in the application of the net proceeds we receive in this offering, including for any of the purposes described in the section titled Use of Proceeds, and you will not have the opportunity as part of your investment decision to assess whether the net proceeds are being used appropriately. Because of the number and variability of factors that will determine our use of the net proceeds from this offering, their ultimate use may vary substantially from their currently intended use, and it is possible that a substantial portion of the net proceeds will be invested in a way that does not yield a favorable, or any, return for us. If we do not use the net proceeds that we receive in this offering effectively, our business, financial condition and results of operations could be harmed, and the market price for our Class A common stock could decline.
We do not currently intend to pay dividends for the foreseeable future.
We currently intend to retain any future earnings to finance the operation and expansion of our business and we do not currently expect to declare or pay any dividends in the foreseeable future. Moreover, the terms of our existing credit agreement restrict our ability to pay dividends, and any additional debt we may incur in the future may include similar restrictions. In addition, Delaware law may impose requirements that may restrict our ability to pay dividends to holders of our common stock. As a result, stockholders must rely on sales of their Class A common stock after price appreciation, which may never occur as the only way to realize any future gains on their investment. As a result, investors seeking cash dividends should not purchase our Class A common stock. See Dividend Policy.
Delaware law and provisions in our amended and restated certificate of incorporation and amended and restated bylaws could make a merger, tender offer or proxy contest more difficult, limit attempts by our stockholders to replace or remove our current management and depress the market price of our Class A common stock.
Provisions in our amended and restated certificate of incorporation and our amended and restated bylaws that will become effective upon the completion of this offering may discourage, delay or prevent a merger, acquisition or other change in control of us or tender offer that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our Class A common stock, thereby depressing the market price of our Class A common stock. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management. Because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team. Among others, these provisions include that:
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provide for a multi-class common stock structure in which holders of our Class B common stock and Class C common stock may have the ability to control the outcome of matters requiring stockholder approval, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or its assets, even if they own significantly less than a majority of the outstanding shares of our common stock; |
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restrict the forum for certain litigation against us to Delaware or the federal courts, as applicable; |
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our board of directors has the exclusive right to expand the size of our board of directors and to elect directors to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors; |
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our board of directors is divided into three classes, Class I, Class II and Class III, with each class serving staggered three-year terms, which may delay the ability of stockholders to change the membership of a majority of our board of directors; |
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our stockholders may act by written consent until such time as holders of our Class B common stock beneficially own less than a majority of the voting power, at which time our stockholders will no longer be able to act by written consent and instead must take action at an annual or special meeting of our stockholders; |
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a special meeting of stockholders may be called only by the chair of the board of directors, a chief executive officer, or the board of directors, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; |
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our amended and restated certificate of incorporation prohibits cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates; |
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our board of directors may alter our amended and restated bylaws without obtaining stockholder approval; |
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the required approval of the holders of at least two-thirds of the shares entitled to vote at an election of directors to adopt, amend or repeal our amended and restated bylaws or repeal the provisions of our amended and restated certificate of incorporation regarding the election and removal of directors; |
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stockholders must provide advance notice and additional disclosures in order to nominate individuals for election to the board of directors or to propose matters that can be acted upon at a stockholders meeting, which may discourage or deter a potential acquiror from conducting a solicitation of proxies to elect the acquirors own slate of directors or otherwise attempting to obtain control of our company; and |
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our board of directors is authorized to issue shares of preferred stock and to determine the terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer. |
Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner.
Our amended and restated certificate of incorporation that will be in effect on the completion of this offering will provide that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for certain stockholder litigation matters and the federal district courts of the United States shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act, which could limit our stockholders ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or stockholders.
Our amended and restated certificate of incorporation will provide that, unless we otherwise consent in writing, (A) (1) any derivative action or proceeding brought on behalf of the Company, (2) any action asserting a claim of breach of a fiduciary duty owed by any current or former director, officer, other employee or stockholder of the Company to the Company or the Companys stockholders, (3) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, our amended and restated certificate of incorporation or our amended and restated bylaws (as either may be amended or restated) or as to which the Delaware General Corporation Law confers exclusive jurisdiction on the Court of Chancery of the State of Delaware or (4) any action asserting a claim governed by the internal affairs doctrine of the law of the State of Delaware shall, to the fullest extent permitted by law, be exclusively brought in the Court of Chancery of the State of Delaware or, if such court does not have subject matter jurisdiction thereof, the federal district court of the State of Delaware; and (B) the federal district courts of the United States shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. Notwithstanding the foregoing, the exclusive forum provision shall not apply to claims seeking to enforce any liability or duty created by the Exchange Act. The choice of forum provision may limit a stockholders ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may
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discourage such lawsuits against us and our directors, officers, and other employees, although our stockholders will not be deemed to have waived our compliance with federal securities laws and the rules and regulations thereunder. Alternatively, if a court were to find the choice of forum provision contained in our amended and restated 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 harm our business, financial condition and results of operations. Any person or entity purchasing or otherwise acquiring or holding any interest in shares of our capital stock shall be deemed to have notice of and consented to the forum provisions in our amended and restated certificate of incorporation.
General Risk Factors
Our quarterly results of operations may fluctuate, and if our operating and financial performance in any given period does not meet the guidance that we have provided to the public or the expectations of our investors and securities analysts, the trading price of our Class A common stock may decline.
Our quarterly results of operations may fluctuate for a variety of reasons, many of which are beyond our control. These reasons include those described in these risk factors as well as the following:
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fluctuations in product mix; |
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our ability to effectively launch and manage new products; |
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fluctuations in the levels or quality of inventory; |
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fluctuations in capacity as we expand our operations; |
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our success in engaging existing customers and attracting new customers; |
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the amount and timing of our operating expenses; |
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the timing and success of new products launches; |
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the impact of competitive developments and our response to those developments; |
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our ability to manage our existing business and future growth; and |
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economic and market conditions, particularly those affecting our industry. |
Fluctuations in our quarterly results of operations may cause those results to fall below the guidance that we have provided to the public or the expectations of our investors and securities analysts, which could cause the trading price of our Class A common stock to decline. Fluctuations in our results could also cause a number of other problems. For example, analysts or investors might change their models for valuing our Class A common stock, we could experience short-term liquidity issues, our ability to retain or attract key personnel may diminish and other unanticipated issues may arise.
In addition, we believe that our quarterly results of operations may vary in the future and that period-to-period comparisons of our results of operations may not be meaningful. You should not rely on the results of one quarter as an indication of future performance.
The estimates of market opportunity and forecasts of market growth included in this prospectus may prove to be inaccurate, and even if the markets in which we compete achieve the forecasted growth, our business could fail to grow at similar rates, or at all.
The estimates of market opportunity and forecasts of market growth included in this prospectus may prove to be inaccurate. Market opportunity estimates and growth forecasts are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate, including as a result of any of the risks described in this prospectus.
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The variables that go into the calculation of our market opportunity are subject to change over time, and there is no guarantee that any particular number or percentage of addressable customers covered by our market opportunity estimates will purchase our products at all or generate any particular level of net revenues for us. In addition, our ability to expand in any of our target markets depends on a number of factors, including the cost, performance and perceived value associated with our products and traditional medical apparel. Even if the markets in which we compete meet the size estimates and growth forecasted in this prospectus, our business could fail to grow at similar rates, or at all. Our growth is subject to many factors, including our success in implementing our business strategy, which is subject to many risks and uncertainties. Accordingly, the forecasts of market growth included in this prospectus should not be taken as indicative of our future growth.
Our results of operations could be adversely affected by natural disasters, public health crises, political crises or other catastrophic events.
Our principal offices and our fulfillment center are located in Southern California, an area which has a history of earthquakes, and are thus vulnerable to damage. Natural disasters, such as earthquakes, wildfires, hurricanes, tornadoes, floods and other adverse weather and climate conditions; unforeseen public health crises, such as epidemics and pandemics, including the ongoing COVID-19 pandemic; political crises, such as terrorist attacks, war and other political instability; or other catastrophic events, whether occurring in the United States or internationally, could disrupt our operations in any of our offices and fulfillment center or the operations of one or more of our third-party providers or vendors. In particular, these types of events could impact our merchandise supply chain, including the ability of third parties to manufacture and ship merchandise and our ability to ship products to customers from or to the impacted region. In addition, these types of events could negatively impact customer spending in the impacted regions. To the extent any of these events occur, our business, financial condition and results of operations could be adversely affected.
We are subject to periodic claims and litigation that could result in unexpected expenses and could ultimately be resolved against us.
From time to time, we may be involved in litigation and other proceedings, including matters related to commercial disputes, product liability, intellectual property, trade, customs laws and regulations, employment, regulatory compliance and other claims related to our business. For example, we and our co-founders and co-Chief Executive Officers are currently defendants in two actions brought by SPI in which SPI alleges, among other claims, false advertising, unfair business practices, untrue and misleading advertising, intentional interference with prospective economic relations, conversion and breach of fiduciary duty. See BusinessLegal Proceedings for additional information. While we believe the claims asserted by SPI in both actions are without basis or merit, and we intend to vigorously defend against such claims, these or any other proceeding or audit could result in significant settlement amounts, damages, fines, penalties or other relief such as an injunction, divert financial and management resources and result in significant legal fees. An unfavorable outcome of any particular proceeding could exceed the limits of our insurance policies, or our insurance carriers may decline to fund such final settlements or judgments or all or part of the legal costs associated with the proceeding, which could have an adverse impact on our business, financial condition and results of operations. In addition, any such proceeding could negatively impact our brand equity and our reputation.
Our insurance may not provide adequate coverage against claims.
Some of the merchandise we sell may expose us to product liability claims and litigation or regulatory actions relating to personal injury. We believe that we maintain insurance customary for businesses of our size and type. However, there are types of losses we may incur that cannot or may not be insured against or that we believe are not economically reasonable to insure. Moreover, any loss incurred could exceed policy limits and policy payments made to us may not be made on a timely basis. In addition, some of our agreements with our suppliers may not indemnify us from product liability for a particular suppliers merchandise or our suppliers may not have sufficient resources or insurance to satisfy their indemnity and defense obligations.
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We will incur significant additional costs as a result of being a public company, and our management will be required to devote substantial time to compliance with our public company responsibilities and corporate governance practices.
Upon completion of this offering, we expect to incur increased costs associated with corporate governance requirements that will become applicable to us as a public company, including rules and regulations of the SEC, under the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Customer Protection Act of 2010, and the Exchange Act, as well as the rules of the NYSE. These rules and regulations are expected to significantly increase our accounting, legal and financial compliance costs and make some activities more time consuming. We expect such expenses to further increase after we are no longer an emerging growth company. We also expect these rules and regulations to make it more expensive for us to maintain directors and officers liability insurance. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers. Furthermore, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. We cannot predict or estimate the amount of additional costs we will incur as a public company or the timing of such costs. In addition, our management team will need to devote substantial attention to transitioning to interacting with public company analysts and investors and complying with the increasingly complex laws pertaining to public companies, which may divert attention away from the day-to-day management of our business. Increases in costs incurred or diversion of managements attention as a result of becoming a publicly traded company may adversely affect our business, financial condition and results of operations.
If our estimates or judgments relating to our critical accounting policies are based on assumptions that change or prove to be incorrect, our results of operations could fall below the expectations of our investors and securities analysts, resulting in a decline in the trading price of our Class A common stock.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as discussed in the section titled Managements Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this prospectus, the results of which form the basis for making judgments about the carrying values of assets, liabilities, equity, net revenues and expenses that are not readily apparent from other sources. 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 our publicly announced guidance or the expectations of securities analysts and investors, resulting in a decline in the market price of our Class A common stock.
Our reported financial results may be negatively impacted by changes in U.S. GAAP.
U.S. GAAP is subject to interpretation by the Financial Accounting Standards Board, or FASB, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. FASB has in the past issued new or revised accounting standards that superseded existing guidance and significantly impacted the reporting of financial results. Any future change in U.S. GAAP principles or interpretations could also have a significant effect on our reported financial results and may even affect the reporting of transactions completed before the announcement or effectiveness of a change. It is difficult to predict the impact of future changes to accounting principles or our accounting policies, any of which could negatively affect our reported results of operations.
If we are unable to implement and maintain effective internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our reported financial information and the market price of our Class A common stock may be negatively affected.
As a public company, we will be required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. Section 404 of the Sarbanes-Oxley Act requires that we evaluate and determine the effectiveness of our internal control over financial reporting and, beginning with our
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second annual report after the completion of this offering, provide a management report on the internal control over financial reporting. If we have a material weakness in our internal control over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated. We will be implementing the process and documentation necessary to perform the evaluation needed to comply with Section 404 of the Sarbanes-Oxley Act. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion.
During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, our management will be unable to conclude that our internal control over financial reporting is effective. Moreover, when we are no longer an emerging growth company, our independent registered public accounting firm will be required to issue an attestation report on the effectiveness of our internal control over financial reporting. Even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm may conclude that there are material weaknesses with respect to our internal controls or the level at which our internal controls are documented, designed, implemented or reviewed. If we are unable to conclude that our internal control over financial reporting is effective, or, when we are no longer an emerging growth company, if our auditors were to express an adverse opinion on the effectiveness of our internal control over financial reporting because we had one or more material weaknesses, investors could lose confidence in the accuracy and completeness of our financial disclosures, which could cause the price of our Class A common stock to decline. Internal control deficiencies could also result in a restatement of our financial results in the future.
In addition, we do not currently have an internal audit function. We will need to hire additional personnel to support our internal accounting and audit functions. If we are unable to hire additional personnel, our ability to report our results of operations on a timely and accurate basis could be impaired and we could suffer adverse regulatory consequences or violate NYSE listing standards. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements, which could have an adverse effect on our business, financial condition and results of operations.
Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.
Upon the closing of this initial public offering, we will become subject to the periodic reporting requirements of the Exchange Act. We designed our disclosure controls and procedures to provide reasonable assurance that information we must disclose in reports we file or submit under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected.
We may require additional capital to support business growth, and this capital might not be available or may be available only by diluting existing stockholders.
We intend to continue making investments to support our business growth and may require additional funds to support this growth. Our future capital requirements will depend on many factors, including our rate of revenue growth, the timing and extent of international expansion efforts and other growth initiatives, the expansion of our marketing activities and overall economic conditions. To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and
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any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our Class A common stock. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities. In addition, we may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited, and our business and prospects could fail or be adversely affected.
Our business may be subject to uncertainty as a result of the COVID-19 pandemic.
The COVID-19 pandemic has magnified the indispensability of healthcare professionals and the demand for scrubs and other medical apparel. We experienced increased demand in 2020, while certain of our manufacturers experienced delays and shut-downs due to the COVID-19 pandemic. In order to manage the impact of these disruptions and meet our customers expectations, we increased our use of more expensive air freight during 2020, which increased our cost of goods sold. COVID-19 may to continue to adversely affect workforces, economies and financial markets globally, potentially leading to an economic downturn and a reduction in consumer spending or an inability for our suppliers, vendors or other parties with whom we do business to meet their contractual obligations, which could negatively impact our business and results of operations. We believe the COVID-19 pandemic has accelerated the awareness of the FIGS brand and a shift in purchasing decisions that will continue to drive future growth; however, there can be no assurance that these trends will continue and the ultimate impact of the COVID-19 pandemic on our business remains uncertain.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. All statements contained in this prospectus other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans, market growth, and our objectives for future operations, are forward-looking statements. The words believe, may, will, estimate, potential, continue, anticipate, intend, expect, could, would, project, plan, target, and similar expressions are intended to identify forward-looking statements.
Forward-looking statements contained in this prospectus include, but are not limited to, statements about:
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our future financial performance, including our expectations regarding our net revenues, cost of goods sold, gross profit, operating expenses and other operating results, as well as our ability to achieve and maintain future profitability; |
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our business plan, beliefs and objectives for future operations; |
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our ability to continue to experience and effectively manage our rapid growth; |
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our market opportunity; |
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our international expansion plans; |
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our ability to promote our brand; |
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our ability to attract new customers and to retain and drive repeat purchases from our existing customers; |
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our ability to develop new products and bring them to market in a timely manner; |
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our expectations concerning relationships with third parties; |
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our ability to maintain, protect and enhance our intellectual property; |
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the effects of increased competition in our markets and our ability to compete effectively; and |
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economic and industry trends, projected growth or trend analysis. |
We caution you that the foregoing list may not contain all of the forward-looking statements made in this prospectus.
We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy and short-term and long-term business operations and objectives. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the section titled Risk Factors. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. For example, statements that we believe and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this prospectus, 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
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potentially available relevant information. These statements are inherently uncertain, and we cannot guarantee future results, performance or achievements. We undertake no obligation to update any of these forward-looking statements for any reason after the date of this prospectus or to conform these statements to actual results or revised expectations, except as required by law.
You should read this prospectus and the documents that we reference in this prospectus and have filed with the SEC as exhibits to the registration statement of which this prospectus is a part with the understanding that our actual future results, performance and events and circumstances may be materially different from what we expect. See Where You Can Find Additional Information.
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Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations, market position, market opportunity and market size, is based on information from various sources, including our own estimates, as well as assumptions that we have made that are based on such data and other similar sources, and on our knowledge of the market for our products and services. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. While we believe the market position, market opportunity and market size information included in this prospectus is generally reliable, information of this sort is inherently imprecise. In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate is necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section titled Risk Factors and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.
Certain information in this prospectus is based on the following research study, which we commissioned: Frost & Sullivan, US and Global Total Addressable Market (TAM) Assessment for the Medical Apparel Market, April 2021. The Frost & Sullivan study included a quantitative and qualitative analysis of the industry through primary and secondary research, including a quantitative survey, encompassing 200 respondents in the United States, all of whom were either professionals or medical students over the age of 18, wear scrubs to work or at school and own or have purchased at least one set of scrubs in the past 12 months. The Frost & Sullivan study calculated the U.S. and global total addressable markets for the healthcare apparel industry by identifying the total number of individuals in the engaged population (which is defined as healthcare professionals and medical students) and multiplying that number by the estimated average spend of the engaged population on medical apparel (based on data aggregated from the survey study).
This prospectus also includes references to our Net Promoter Score, or NPS, which we use to measure our customers brand loyalty and satisfaction, and can range from -100 to +100 based on the question: How likely are you to recommend FIGS to a friend or colleague? Responses were collected from 0, Not Likely, to 10, Very Likely. Our NPS is based on approximately 11,500 customers who responded to the survey question, between January 1, 2021 and March 31, 2021, which was automatically generated via email 10 days after purchase, and randomly distributed across our markets. Our NPS was calculated by using the standard methodology of subtracting the percentage of customers who responded that they are not likely to recommend FIGS (6 or lower) from the percentage of customers who responded that they are very likely to recommend FIGS (9 or 10). The NPS gives no weight to customers who declined to answer the survey question. This method is substantially consistent with how businesses across our industry and other industries typically calculate their NPS.
Certain monetary amounts, percentages and other figures included elsewhere in this prospectus have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables or charts may not be the arithmetic aggregation of the figures that precede them, and figures expressed as percentages in the text may not total 100% or, as applicable, when aggregated may not be the arithmetic aggregation of the percentages that precede them.
58
We estimate that the net proceeds from the sale of shares of our Class A common stock in this offering at an assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, will be approximately $ million, or $ million if the underwriters option to purchase additional shares is exercised in full. We will not receive any proceeds from the sale of shares of our Class A common stock by the selling stockholders.
A $1.00 increase or decrease in the assumed initial public offering price of $ per share would increase or decrease, as applicable, the net proceeds that we receive from this offering by approximately $ million, assuming the number of shares of our Class A common stock offered by us remains the same, and after deducting the estimated underwriting discounts and commissions and offering expenses payable by us. Similarly, each increase or decrease of 1,000,000 shares in the number of shares of our Class A common stock offered by us would increase or decrease, as applicable, the net proceeds that we receive from this offering by approximately $ million, assuming that the assumed initial public offering price of $ remains the same, and after deducting the estimated underwriting discounts and commissions and offering expenses payable by us.
The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our Class A common stock, increase our brand awareness and facilitate access to the public equity markets for us and our stockholders. We primarily intend to use the net proceeds that we receive from this offering for working capital and other general corporate purposes, which may include research and development and marketing activities, general and administrative matters, and capital expenditures. We may also use a portion of the proceeds for the acquisition of, or investment in, technologies, solutions, or businesses that complement our business. However, we do not have binding agreements or commitments for any acquisitions or investments outside the ordinary course of business at this time.
As of the date of this prospectus, we cannot specify with certainty the specific allocations or all of the particular uses for the net proceeds to be received upon completion of this offering. The expected use of net proceeds from this offering represents our intentions based upon our present plans and business conditions, which could change in the future as or plans and business conditions evolve. We may find it necessary or advisable to use the net proceeds for other purposes, and we will have broad discretion in the application and specific allocations of the net proceeds of this offering. Pending the uses described above, we intend to invest the net proceeds from this offering in short- and intermediate-term, interest-bearing obligations, investment-grade instruments or other securities.
59
We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any dividends on our capital stock in the foreseeable future. Any future determination to declare dividends will be made at the discretion of our board of directors and will depend on our financial condition, operating results, capital requirements, general business conditions and other factors that our board of directors may deem relevant. In addition, our Credit Agreement contains restrictions on our ability to pay cash dividends on our capital stock. See the section titled Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources for additional information.
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The following table sets forth our cash and cash equivalents and capitalization as of March 31, 2021 on:
|
an actual basis; |
|
a pro forma basis to give effect to (1) the RSU Net Settlement and the related increase in accrued expenses and other current liabilities and a corresponding decrease in additional paid-in capital for the associated tax liabilities, (2) stock-based compensation expenses of approximately $ million related to RSUs for which the service-based vesting condition had been satisfied and for which the liquidity-based vesting condition will be satisfied in connection with this offering, (3) the filing and effectiveness of our amended and restated certificate of incorporation and the effectiveness of our amended and restated bylaws, and (4) the Common Stock Reclassification, each of which will occur immediately prior to the completion of this offering; and |
|
a pro forma as adjusted basis to give effect to (1) the pro forma adjustments described above and (2) the sale and issuance by us of shares of our Class A common stock offered in this offering at an assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. |
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The pro forma as adjusted information below is illustrative only, and our capitalization following the completion of this offering will be adjusted based on the actual initial public offering price and other terms of this offering. You should read this table together with our financial statements and related notes, and the sections titled Use of Proceeds, Selected Financial and Other Data and Managements Discussion and Analysis of Financial Condition and Results of Operations, each included elsewhere in this prospectus.
As of March 31, 2021 | ||||||||||||
Actual |
Pro
Forma |
Pro
Forma As Adjusted(1) |
||||||||||
(unaudited) | ||||||||||||
(in thousands, except share and per
share data) |
||||||||||||
Cash and cash equivalents |
$ | 73,837 | $ | $ | ||||||||
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|
|
|
|
|
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Stockholders equity: |
||||||||||||
Preferred stock, $0.0001 par value per share: zero shares authorized, issued, and outstanding, actual; shares authorized, zero shares issued and outstanding, pro forma and pro forma as adjusted |
||||||||||||
Common stock, $0.0001 par value per share: 23,000,000 shares authorized, 17,183,240 shares issued and outstanding, actual; zero shares authorized, issued and outstanding, pro forma and pro forma as adjusted |
2 | |||||||||||
Class A common stock, $0.0001 par value per share: zero shares authorized, issued, and outstanding, actual; shares authorized, zero shares issued and outstanding, pro forma; shares authorized, shares issued and outstanding, pro forma as adjusted |
||||||||||||
Class B common stock, $0.0001 par value per share: zero shares authorized, issued and outstanding, actual; shares authorized, shares issued and outstanding, pro forma; shares authorized, shares issued and outstanding, pro forma as adjusted |
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Class C common stock, $0.0001 par value per share: zero shares authorized, issued and outstanding, actual; shares authorized, shares issued and outstanding, pro forma; shares authorized, shares issued and outstanding, pro forma as adjusted |
||||||||||||
Additional paid-in capital |
75,326 | |||||||||||
Retained earnings |
38,927 | |||||||||||
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Total stockholders equity |
114,255 | |||||||||||
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|
|
|
|
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Total capitalization |
$ | 114,255 | $ | $ | ||||||||
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(1) |
A $1.00 increase or decrease in the assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover of this prospectus, would increase or decrease, as applicable, each of the amount of our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders equity and total capitalization by approximately $ million, assuming that the number of shares offered by us, as set forth on the cover of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and offering expenses payable by us. Similarly, each increase or decrease of 1,000,000 shares in the number of shares offered by us would increase or decrease, as applicable, each of the amount of our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders equity and total capitalization by approximately $ million, assuming that the assumed initial public offering price, which is the midpoint of the price range set forth on the cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions. |
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The number of shares of our common stock to be outstanding after this offering is based upon 6,525,064 shares of our Class A common stock, shares of our Class B common stock and 10,008,395 shares of our Class C common stock outstanding, in each case, as of March 31, 2021, after giving effect to the Common Stock Reclassification and the RSU Net Settlement (as defined below), as if each had occurred as of March 31, 2021, and does not include:
|
764,999 shares of our Class A common stock and 3,709,680 shares of our Class B common stock issuable upon the exercise of outstanding stock options under our 2016 Plan as of March 31, 2021, at a weighted-average exercise price of $40.26 per share and $31.35 per share, respectively; |
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413,298 shares of our Class B common stock issuable upon the vesting and settlement of outstanding RSUs under our 2016 Plan as of March 31, 2021; |
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shares of our Class A common stock reserved for future issuance under our 2021 Plan, which will become effective in connection with the completion of this offering (which number includes the equity awards to be granted pursuant to the 2021 Plan that will become effective in connection with this offering); and |
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shares of our Class A common stock reserved for issuance under our ESPP, which will become effective in connection with this offering. |
On the date immediately prior to the date of this prospectus, any remaining shares of common stock available for issuance under our 2016 Plan will be added to the shares of our Class A common stock reserved for issuance under our 2021 Plan, and we will cease granting awards under the 2016 Plan. Our 2021 Plan and ESPP also provide for automatic annual increases in the number of shares reserved thereunder, which are not reflected in the numbers above. See the section titled Executive CompensationExecutive Compensation Arrangements for additional information.
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If you invest in our Class A common stock, your interest will be diluted to the extent of the difference between the amount per share paid by purchasers of shares of Class A common stock in this initial public offering and the pro forma as adjusted net tangible book value per share of Class A common stock immediately after this offering.
As of March 31, 2021, our historical net tangible book value was $112.4 million, or $6.54 per share. Our historical net tangible book value per share represents our total tangible assets less total liabilities, divided by the number of shares of our common stock outstanding as of March 31, 2021.
As of March 31, 2021, our pro forma net tangible book value was approximately $ million, or $ per share. Our pro forma net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities and divided by the total number of shares of our common stock outstanding as of March 31, 2021 after giving effect to (1) the RSU Net Settlement and the related increase in accrued expenses and other current liabilities and a corresponding decrease in additional paid-in capital for the associated tax liabilities, (2) stock-based compensation expenses of approximately $ million related to RSUs for which the service-based vesting condition had been satisfied and for which the liquidity-based vesting condition will be satisfied in connection with this offering, (3) the filing and effectiveness of our amended and restated certificate of incorporation and the effectiveness of our amended and restated bylaws, and (4) the Common Stock Reclassification, each of which will occur immediately prior to the completion of this offering.
After giving effect to our sale in this offering of shares of our Class A common stock, at an assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of March 31, 2021 would have been approximately $ million, or $ per share. This represents an immediate increase in pro forma net tangible book value of $ per share to our existing stockholders and an immediate dilution of $ per share to investors purchasing Class A common stock in this offering at the assumed initial public offering price. We determine dilution by subtracting our pro forma as adjusted net tangible book value per share after this offering from the amount of cash that a new investor paid for a share of Class A common stock in this offering. The following table illustrates this dilution:
Assumed initial public offering price per share |
$ | |||||||
Net tangible book value per share as of March 31, 2021 |
$ | 6.54 | ||||||
Pro forma increase in net tangible book value per share |
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Pro forma net tangible book value per share as of March 31, 2021 |
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Increase in pro forma net tangible book value per share attributable to new investors participating in this offering |
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Pro forma as adjusted net tangible book value per share after this offering |
$ | |||||||
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Dilution in pro forma net tangible book value per share to new investors in this offering |
$ | |||||||
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A $1.00 increase or decrease in the assumed initial public offering price of $ per share, which is the midpoint of the price range reflected on the cover of this prospectus, would increase or decrease, as applicable, our pro forma as adjusted net tangible book value per share after this offering by $ per share and would increase or decrease, as applicable, the dilution per share to new investors in this offering by $ per share, assuming the number of shares of Class A common stock offered by us, as set forth on the cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and offering expenses payable by us. Similarly, each increase or decrease of 1,000,000 shares in the number of shares of Class A common stock offered by us would increase or decrease, as applicable, the pro forma as adjusted net tangible book value per share after this offering by $ per share and would increase or decrease, as
64
applicable, the dilution to new investors by $ per share, assuming the assumed initial public offering price, which is the midpoint of the price range set forth on the cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and offering expenses payable by us.
If the underwriters exercise their option to purchase additional shares of our Class A common stock in full, the pro forma as adjusted net tangible book value per share after giving effect to this offering would be $ per share and the dilution in pro forma net tangible book value per share to investors in this offering would be $ per share.
The following table summarizes, on a pro forma as adjusted basis as of March 31, 2021, after giving effect to the pro forma adjustments described above, the difference between existing stockholders and new investors purchasing shares of Class A common stock in this offering with respect to the number of shares purchased from us, the total consideration paid to us, and the average price per share paid by our existing stockholders or to be paid by investors purchasing shares in this offering at an assumed offering price of $ per share, which is the midpoint of the price range set forth on the cover of this prospectus, before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us:
Shares Purchased | Total Consideration |
Average Price
Per Share |
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Number | Percent | Amount | Percent | |||||||||||||||||
Existing stockholders |
% | $ | % | $ | ||||||||||||||||
New investors |
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Total |
100 | % | $ | 100 | % | |||||||||||||||
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A $1.00 increase or decrease in the assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover of this prospectus, would increase or decrease, as applicable, total consideration paid by new investors and total consideration paid by all stockholders by $ million, assuming that the number of shares offered by us, as set forth on the cover of this prospectus remains the same.
Sales of shares of our Class A common stock by the selling stockholders in this offering will reduce the number of shares of common stock held by existing stockholders to , or approximately % of the total shares of common stock outstanding after this offering, and will increase the number of shares held by new investors to , or approximately % of the total shares of common stock outstanding after this offering.
Except as otherwise indicated, the above discussion and tables assume no exercise of the underwriters option to purchase additional shares of our Class A common stock. If the underwriters exercise their option to purchase additional shares in full, our existing stockholders would own % and our new investors would own % of the total number of shares of our common stock outstanding after this offering.
The dilution information discussed above is illustrative only and may change based on the actual initial public offering price and other terms of this offering. To the extent we issue any additional stock options or any outstanding stock options or warrant are exercised, or we issue any other securities or convertible debt in the future, investors will experience further dilution.
The number of shares of our common stock to be outstanding after this offering is based upon 6,525,064 shares of our Class A common stock, shares of our Class B common stock and 10,008,395 shares of our Class C common stock outstanding, in each case, as of March 31, 2021, after giving effect to the Common Stock Reclassification and the RSU Net Settlement (as defined below), as if each had occurred as of March 31, 2021, and does not include:
|
764,999 shares of our Class A common stock and 3,709,680 shares of our Class B common stock issuable upon the exercise of outstanding stock options under our 2016 Plan as of March 31, 2021, at a weighted-average exercise price of $40.26 per share and $31.35 per share, respectively; |
65
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413,298 shares of our Class B common stock issuable upon the vesting and settlement of outstanding RSUs under our 2016 Plan as of March 31, 2021; |
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shares of our Class A common stock reserved for future issuance under our 2021 Plan, which will become effective in connection with the completion of this offering (which number includes the equity awards to be granted pursuant to the 2021 Plan that will become effective in connection with this offering); and |
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shares of our Class A common stock reserved for issuance under our ESPP, which will become effective in connection with this offering. |
On the date immediately prior to the date of this prospectus, any remaining shares of common stock available for issuance under our 2016 Plan will be added to the shares of our Class A common stock reserved for issuance under our 2021 Plan, and we will cease granting awards under the 2016 Plan. Our 2021 Plan and ESPP also provide for automatic annual increases in the number of shares reserved thereunder, which are not reflected in the numbers above. See the section titled Executive CompensationExecutive Compensation Arrangements for additional information.
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The selected statements of operations data for the years ended December 31, 2019 and 2020 and the selected balance sheet data as of December 31, 2019 and 2020 have been derived from our audited financial statements included elsewhere in this prospectus. We derived our selected statement of operations data for the three months ended March 31, 2020 and 2021 and the balance sheet data as of March 31, 2021 from our unaudited financial statements included elsewhere in this prospectus. In our opinion, the unaudited interim financial statements have been prepared on a basis consistent with our audited financial statements and contain all adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation of such interim financial statements. You should read the financial data set forth below in conjunction with our financial statements and the accompanying notes and the information in Managements Discussion and Analysis of Financial Condition and Results of Operations contained elsewhere in this prospectus. Our historical results are not necessarily indicative of the results to be expected for any other period in the future and our interim results are not necessarily indicative of the results that may be expected for the full fiscal year or any other future period.
Years Ended December 31, |
Three Months Ended
March 31, |
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2019 | 2020 | 2020 | 2021 | |||||||||||||
(in thousands, except share and per share data) | ||||||||||||||||
Statements of Operations Data: |
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Net revenues |
$ | 110,494 | $ | 263,112 | $ | 31,967 | $ | 87,079 | ||||||||
Cost of goods sold |
31,158 | 72,888 | 7,655 | 24,719 | ||||||||||||
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Gross profit |
79,336 | 190,224 | 24,312 | 62,360 | ||||||||||||
Operating expenses: |
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Selling |
24,840 | 51,896 | 6,739 | 17,114 | ||||||||||||
Marketing |
33,193 | 38,852 | 7,337 | 10,840 | ||||||||||||
General and administrative(1) |
21,650 | 41,536 | 6,200 | 18,346 | ||||||||||||
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Total operating expenses |
79,683 | 132,284 | 20,276 | 46,300 | ||||||||||||
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Net (loss) income from operations |
(347 | ) | 57,940 | 4,036 | 16,060 | |||||||||||
Other income (loss), net |
459 | 136 | 98 | (38 | ) | |||||||||||
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Net income before income tax provision |
112 | 58,076 | 4,134 | 16,022 | ||||||||||||
Provision for income taxes |
| 8,318 | | 4,582 | ||||||||||||
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Net income |
$ | 112 | $ | 49,758 | 4,134 | 11,440 | ||||||||||
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Basic earnings per share |
$ | 0.01 | $ | 2.91 | $ | 0.24 | $ | 0.67 | ||||||||
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Diluted earnings per share |
$ | 0.01 | $ | 2.73 | $ | 0.24 | $ | 0.61 | ||||||||
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Weighted-average shares outstanding-basic(2) |
17,005,887 | 17,127,640 | 17,005,887 | 17,166,851 | ||||||||||||
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Weighted-average shares outstanding-diluted(2) |
17,069,335 | 18,232,921 | 17,072,797 | 18,668,041 | ||||||||||||
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(1) |
Includes stock-based compensation expense of $0.2 million and $8.7 million for the years ended December 31, 2019 and 2020, respectively, and $0.1 million and $5.0 million for the three months ended March 31, 2020 and 2021, respectively. |
(2) |
See Note 13 to our financial statements included elsewhere in this prospectus for an explanation of the calculations of our basic and diluted earnings per share and the weighted-average number of shares used in the computation of the per share amounts. |
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As of December 31, |
As of March 31,
2021 |
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2019 | 2020 | |||||||||||
(in thousands) | ||||||||||||
Balance Sheet Data: |
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Cash and cash equivalents |
$ | 38,353 | $ | 58,133 | $ | 73,837 | ||||||
Total assets |
62,598 | 133,855 | 161,240 | |||||||||
Total liabilities |
23,784 | 36,178 | 46,985 | |||||||||
Total stockholders equity |
38,814 | 97,677 | 114,255 |
Non-GAAP Financial Measures
Years Ended
December 31, |
Three Months Ended
March 31, |
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2019 | 2020 | 2020 | 2021 | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Adjusted EBITDA |
$ | 1,728 | $ | 69,094 | $ | 4,604 | $ | 24,349 | ||||||||
Adjusted EBITDA Margin |
1.6 | % | 26.3 | % | 14.4 | % | 28.0 | % | ||||||||
Net cash (used in) provided by operating activities |
6,531 | 21,748 | (821 | ) | 16,109 | |||||||||||
Free cash flow |
1,770 | 19,486 | (1,793 | ) | 15,581 |
We report our financial results in accordance with U.S. GAAP. In addition to our U.S. GAAP financial results, we believe the non-GAAP financial measures, Adjusted EBITDA, Adjusted EBITDA margin and free cash flow, are useful in evaluating our performance. Our non-GAAP financial measures should not be considered in isolation from, or as substitutes for, financial information prepared in accordance with U.S. GAAP.
Adjusted EBITDA and Adjusted EBITDA Margin
We calculate Adjusted EBITDA as net income adjusted to exclude: other income, net; gain/loss on disposal of assets; provision for income taxes; depreciation and amortization expense; stock-based compensation expense; transaction costs; and expenses related to non-ordinary course disputes. Adjusted EBITDA Margin is calculated by dividing Adjusted EBITDA by net revenues.
Management believes that excluding certain non-cash items and items that may vary substantially in frequency and magnitude period-to-period from net income provides useful supplemental measures that assist in evaluating our ability to generate earnings, provide consistency and comparability with our past financial performance and facilitate period-to-period comparisons of our core operating results as well as the results of our peer companies.
There are several limitations related to the use of Adjusted EBITDA and Adjusted EBITDA Margin as analytical tools, including:
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other companies may calculate Adjusted EBITDA and Adjusted EBITDA Margin differently, which reduces their usefulness as a comparative measure; |
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Adjusted EBITDA and Adjusted EBITDA Margin do not reflect other income (loss), net; |
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Adjusted EBITDA and Adjusted EBITDA Margin do not reflect any gain or loss on disposal of assets; |
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Adjusted EBITDA and Adjusted EBITDA Margin do not reflect our tax provision, which reduces cash available to us; |
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Adjusted EBITDA and Adjusted EBITDA Margin do not reflect recurring, non-cash expenses of depreciation and amortization of property and equipment and, although these are non-cash expenses, the assets being depreciated and amortized may have to be replaced in the future; |
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Adjusted EBITDA and Adjusted EBITDA Margin do not reflect the impact of stock-based compensation expense; |
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Adjusted EBITDA and Adjusted EBITDA Margin do not reflect transaction costs; and |
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Adjusted EBITDA and Adjusted EBITDA Margin do not reflect expenses related to non-ordinary course disputes. |
The following table reflects a reconciliation of Adjusted EBITDA to net income, the most directly comparable financial measure prepared in accordance with U.S. GAAP:
Years Ended
December 31, |
Three Months Ended
March 31, |
|||||||||||||||
2019 | 2020 | 2020 | 2021 | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Net income |
$ | 112 | $ | 49,758 | $ | 4,134 | $ | 11,440 | ||||||||
Add (deduct): |
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Other income (loss), net |
(459 | ) | (136 | ) | (98 | ) | 38 | |||||||||
Gain/loss on disposal |
120 | 2 | | | ||||||||||||
Provision for income taxes |
| 8,318 | | 4,582 | ||||||||||||
Depreciation and amortization expense(1) |
517 | 946 | 218 | 313 | ||||||||||||
Stock-based compensation expense |
179 | 8,713 | 50 | 5,015 | ||||||||||||
Transaction costs |
| 296 | | 525 | ||||||||||||
Expenses related to non-ordinary course disputes(2) |
1,259 | 1,197 | 300 | 2,436 | ||||||||||||
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Adjusted EBITDA |
$ | 1,728 | $ | 69,094 | $ | 4,604 | $ | 24,349 | ||||||||
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Adjusted EBITDA Margin |
1.6 | % | 26.3 | % | 14.4 | % | 28.0 | % |
(1) |
Excludes amortization of debt issuance costs included in Other income (loss), net. |
(2) |
Represents legal fees incurred in connection with the litigation claims described in the section titled BusinessLegal Proceedings. |
Free Cash Flow
We calculate free cash flow as net cash (used in) provided by operating activities reduced by capital expenditures, including purchases of property and equipment and capitalized software development costs. Management believes free cash flow is a useful measure of liquidity and an additional basis for assessing our ability to generate cash. There are limitations related to the use of free cash flow as an analytical tool, including: other companies may calculate free cash flow differently, which reduces its usefulness as a comparative measure; and free cash flow does reflect our future contractual commitments and it does not represent the total residual cash flow for a given period.
The following table presents a reconciliation of free cash flow to net cash (used in) provided by operating activities, the most directly comparable financial measure prepared in accordance with U.S. GAAP:
Years Ended
December 31, |
Three Months Ended
March 31, |
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2019 | 2020 | 2020 | 2021 | |||||||||||||
(in thousands) | ||||||||||||||||
Net cash (used in) provided by operating activities |
$ | 6,531 | $ | 21,748 | $ | (821 | ) | $ | 16,109 | |||||||
Less: capital expenditures |
(4,761 | ) | (2,262 | ) | (972 | ) | (528 | ) | ||||||||
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Free cash flow |
$ | 1,770 | $ | 19,486 | $ | (1,793 | ) | $ | 15,581 | |||||||
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MANAGEMENTS 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 the section titled Selected Financial Data and the financial statements and related notes included elsewhere in this prospectus. Some of the information contained in this discussion and analysis, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the sections titled Special Note Regarding Forward-Looking Statements and Risk Factors for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
Our mission is to celebrate, empower and serve those who serve others.
We are a founder-led, direct-to-consumer healthcare apparel and lifestyle brand that seeks to celebrate, empower and serve current and future generations of healthcare professionals. We are committed to helping this growing, global community of professionals, whom we refer to as Awesome Humans, look, feel and perform at their best24/7, 365 days a year. We create technically advanced apparel and products that feature an unmatched combination of comfort, durability, function and style, all at an affordable price. In doing so, we have redefined what scrubs aregiving rise to our tag-line: why wear scrubs, when you can #wearFIGS?
We have revolutionized the large and fragmented healthcare apparel market. We branded a previously unbranded industry and de-commoditized a previously commoditized productelevating scrubs and creating premium products for healthcare professionals. Most importantly, we built a community and lifestyle around a profession. As a result, we have become the industrys category-defining healthcare apparel and lifestyle brand.
We were founded in 2013 by our co-Chief Executive Officers Heather Hasson and Trina Spear. Since our inception, our business has evolved across multiple dimensions and achieved the following significant milestones:
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We generate revenue by selling technically advanced apparel for the modern healthcare professional. Our offerings include scrubwear, as well as lifestyle apparel and other non-scrub offerings, such as lab coats, underscrubs, outerwear, activewear, loungewear, compression socks, footwear, masks and face shields. We design all of our products in-house, leverage third-party suppliers and manufacturers to produce our raw materials and finished products, and utilize shallow initial buys and data-driven repurchasing decisions to test new products. We directly and actively manage every step of our product development and production process to ensure that our extremely high quality standards are met. We have a highly efficient merchandising model. Due to the non-discretionary, replenishment nature of healthcare apparel, we maintain low inventory risk driven by a high volume of repeat purchases and a focus on our core scrubs offerings. In 2020, we generated 82% of net revenues from our 13 core scrubwear styles, 5% of net revenues from limited edition scrubwear styles, and the remaining 13% from our lifestyle apparel and other non-scrub offerings. We market and sell 98% of our products through our digital platform, consisting of our website and mobile app, to a rapidly growing community of loyal customers.
We have compelling customer economics, driven by our differentiated product offerings, community-driven brand, loyal customer following and efficient customer acquisition model. Over the last eight years, we have experienced significant customer growth, close to doubling our number of active customers every year since inception. In 2020, we served approximately 1.3 million active customers. Our customers primarily come to us through word of mouth referrals, as well as through our data-driven brand and performance marketing efforts. As our brand awareness has grown and our data analytics capabilities have evolved, our marketing efficiency has improved. Between 2018 and 2020, our customer acquisition costs decreased by 61%. Our new customers spend on average approximately $215 with us during their first 12 months, which has remained consistent over the past three years. We are profitable on a first purchase basis, and our first order contribution profit to customer acquisition cost, or CAC, has increased with each annual customer cohort since 2018, rising to 1.3x in 2020. See the sections titled Key Operational and Business Metrics for a definition of active customers and Factors Affecting Our Performance for a definition of contribution profit and CAC.
We have demonstrated rapid growth and strong profitability and cash flow generation. In 2020, we achieved the following results compared to 2019:
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Expanded our community of active customers by 118% from 0.6 million to approximately 1.3 million; |
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Increased net revenues from $110.5 million to $263.1 million, representing 138% year-over-year growth; |
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Increased gross margin by 50 basis points from 71.8% to 72.3%; |
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Improved net operating (loss) income from $(0.3) million to $57.9 million; |
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Increased Adjusted EBITDA from $1.7 million to $69.1 million, representing an Adjusted EBITDA margin of 26.3% in 2020; |
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Increased cash flow from operations from $6.5 million to $21.7 million; and |
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Increased free cash flow from $1.8 million to $19.5 million. |
See the section titled Selected Financial DataNon-GAAP Financial Measures for information regarding Adjusted EBITDA, Adjusted EBITDA margin and free cash flow, including a reconciliation to the most directly comparable financial measures prepared in accordance with U.S. GAAP.
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Key Operational and Business Metrics
In addition to the measures presented in our financial statements, we use the following key operational and business metrics to evaluate our business, measure our performance, develop financial forecasts and make strategic decisions.
Years Ended
December 31, |
Three Months Ended
March 31, |
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2019 | 2020 | 2020 | 2021 | |||||||||||||
Active customers (in thousands) |
596 | 1,300 | 676 | 1,497 | ||||||||||||
Average order value |
$ | 95 | $ | 94 | $ | 92 | $ | 100 | ||||||||
Adjusted EBITDA (in thousands)(1) |
$ | 1,728 | $ | 69,094 | $ | 4,604 | $ | 24,349 | ||||||||
Adjusted EBITDA Margin(1) |
1.6 | % | 26.3 | % | 14.4 | % | 28.0 | % | ||||||||
Free cash flow (in thousands)(1) |
$ | 1,770 | $ | 19,486 | $ | (1,793 | ) | $ | 15,581 |
(1) |
See the section titled Selected Financial DataNon-GAAP Financial Measures for information regarding Adjusted EBITDA, Adjusted EBITDA Margin and free cash flow, including a reconciliation to the most directly comparable financial measure prepared in accordance with U.S. GAAP. |
Active Customers
The number of active customers is an important indicator of our growth as it reflects the reach of our digital platform, our brand awareness and overall value proposition. We define an active customer as a unique customer account that has made at least one purchase in the preceding 12-month period. In any particular period, we determine our number of active customers by counting the total number of customers who have made at least one purchase in the preceding 12-month period, measured from the last date of such period.
Average Order Value
We define average order value as the sum of the total net revenues in a given period divided by the total orders placed in that period. Total orders are the summation of all completed individual purchase transactions in a given period. We believe our relatively high average order value demonstrates the premium nature of our product. Average order value may fluctuate as we expand into and increase our presence in additional product categories and price points as well as expand internationally.
Adjusted EBITDA and Adjusted EBITDA Margin
Adjusted EBITDA and Adjusted EBITDA Margin are key performance measures that our management uses to assess our operating performance. We calculate Adjusted EBITDA as net income adjusted to exclude: other income, net; gain/loss on disposal of assets; provision for income taxes; depreciation and amortization expense; stock-based compensation expense; transaction costs; and legal expenses related to non-ordinary course disputes. Adjusted EBITDA Margin is calculated by dividing Adjusted EBITDA by net revenues.
Free Cash Flow
Free cash flow is a key performance measure that our management uses to assess our ability to generate cash. We calculate free cash flow as cash flows (used in) provided by operating activities reduced by capital expenditures, including purchases of property and equipment and capitalized software development costs.
Factors Affecting Our Performance
Brand Awareness and Loyalty
Our ability to promote and maintain brand awareness and loyalty is critical to our success. We have a significant opportunity to continue to grow our brand awareness and loyalty through word of mouth, brand
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marketing and performance marketing. We have made significant investments to strengthen the FIGS brand through our marketing strategy, which includes brand marketing campaigns across platforms, including email, digital, display, site, direct-mail, commercials, social media and Ambassadors, as well as performance marketing efforts, including retargeting, paid search and product listing advertisements, paid social media advertisements, search engine optimization, personalized email and mobile push notifications through our app. We plan to continue to invest in our brand and performance marketing to help drive our future growth.
Net Revenues per Active Customer
We believe the growth in our net revenues per active customer demonstrates our increasing value proposition for our customer base. We calculate net revenues per active customer as the total net revenues for a specified time period divided by the number of active customers during that same time period. Our historical growth in net revenues per active customer is presented in the graph below. Through our differentiated core products, limited edition color and style releases and lifestyle apparel and other non-scrub products, we have repeatedly drawn customers back to our digital platform and increased our net revenues per active customer. As we continue to expand our products to fully outfit the medical professional, we believe we have a significant opportunity to continue to expand our share of both the uniform and lifestyle wardrobe of our customers and increase our net revenues per active customer over time. Our future growth will depend in part on our ability to continue to increase our net revenues per active customer.
Net Revenues per Active Customer
Customer Acquisition Cost
Our business performance depends in part on our continued ability to cost-effectively acquire new customers. We define customer acquisition cost, or CAC, as performance and brand marketing expense attributable to both new customer acquisition and repeat customer retention in a period divided by the customers acquired during that same period. Our strategic investments in performance marketing, such as retargeting, paid search and product listing advertisements, paid social media advertisements, search engine optimization, personalized email and mobile push notifications through our app, compounded with strong brand awareness driven largely through word of mouth, have led to significant improvements in CAC, which declined 61% from 2018 to 2020, as shown in the graph below. In addition, in 2020, we successfully increased our marketing efficiency such that we achieved 1.3x our CAC on a customers first purchase contribution profit. Contribution profit is defined as gross profit, less any shipping variable costs, fulfillment variable costs, packaging variable costs and merchant processing fees.
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Customer Acquisition Cost
Customer Retention and Engagement
Our continued success depends in part on our ability to retain, and drive repeat purchases from, our existing customers. We monitor retention across our entire customer base. Our goal is to attract and convert visitors into active customers and foster relationships that drive repeat purchases. As of December 31, 2020, we had approximately 1.3 million active customers, up from 596,000 customers as of December 31, 2019. Approximately 62% of our net revenues in 2020 came from repeat customers, which we define as customers who have made a prior purchase with us in any period. Over the last four years, we have consistently increased the percentage of net revenues from repeat customers while also continuing to increase the number of new customers acquired, as shown in the graph below. These newly acquired customers frequently make one or more repeat purchase in the same year, which is supplemented by the embedded growth from prior-year cohorts customers who continue to purchase from us.
Net Revenues from New Customers and Repeat Customers
The increasing share of our net revenues from customers who have made a previous purchase with us in a prior year reflects our customer loyalty and the net revenues retention behavior we see in our cohorts. We believe the increasing contribution from repeat customers is reflective of our ability to engage and retain our customers through our differentiated product offerings, community-driven brand and customized customer experience. Cohort net revenues retention is calculated as net revenues attributable to a given customer cohort as a percentage of total net revenues attributable to the same customer cohort during the prior year. On a weighted-average net revenues basis across the 2017, 2018 and 2019 cohorts, we retained 60% of the cohorts net revenues between the year of initial purchase to the following first full year. On a weighted-average net revenues basis
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across the 2017 and 2018 cohorts, we retained 94% of the cohorts net revenues from the first full year to the second full year. In 2020, we retained 75% of the 2019 and prior cohorts net revenues, including 100% of the 2019 net revenues generated by 2018 and prior cohorts. This cohort behavior demonstrates, as depicted in the graph below, our ability to not only retain customers, but also to increase our customers spend as they place orders more frequently.
Cohort Net Revenue Retention
Impact of COVID-19
The COVID-19 pandemic has magnified the indispensability of healthcare professionals. Due to the pandemic, more healthcare professionals are also choosing to wear medical apparel, and a greater number of hospitals, medical offices and clinics are requiring staff to wear scrubs and other medical apparel while at work. In addition, the ability to purchase through eCommerce channels has become increasingly important to consumers during the pandemic, as many businesses, including brick-and-mortar retail stores, have been ordered to close and people have been required to stay at home. We experienced increased demand in 2020, while certain of our manufacturers experienced delays and shut-downs due to the COVID-19 pandemic. In order to manage the impact of these disruptions and meet our customers expectations, we increased our use of more expensive air freight during 2020, which increased our cost of goods sold. We believe the pandemic has accelerated the awareness of the FIGS brand and a shift in purchasing decisions that will continue to drive future growth; however, there can be no assurance that these trends will continue and the ultimate impact of the COVID-19 pandemic remains uncertain.
Components of Results of Operations
Net Revenues
Net revenues consist of sales of healthcare apparel, footwear and other products primarily through our digital platform. We recognize product sales at the time control is transferred to the customer, which is when the product is shipped to the customer. Net revenues represent the sale of these items and shipping revenue, net of estimated returns and discounts. Net revenues are primarily driven by the growth in the number of active customers, the frequency with which customers purchase and the average order value.
Cost of Goods Sold
Cost of goods sold consists principally of the cost of purchased merchandise and includes import duties and other taxes, freight-in, defective merchandise returned by customers, inventory write-offs and other
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miscellaneous shrinkage. Our cost of goods sold has and may continue to fluctuate with the cost of the raw materials used in our products. As we continue to scale, we expect cost of goods sold to minimally decrease as a percentage of net revenues.
Gross Profit and Gross Margin
We define gross profit as net revenues less cost of goods sold. Gross margin is gross profit expressed as a percentage of net revenues. Our gross margin has fluctuated historically and may continue to fluctuate from period to period based on a number of factors, including the timing and mix of the product offerings we sell as well as our ability to reduce costs, in any given period.
Operating Expenses
Our operating expenses consist of selling, marketing and general and administrative expenses.
Selling
Selling expenses represent the costs incurred for fulfillment expenses and selling and distribution expenses. Fulfillment expenses consist of costs incurred in operating and staffing a third-party fulfillment center, including costs associated with inspecting and warehousing inventories and picking, packaging and preparing customer orders for shipment. Selling and distribution expenses consist primarily of shipping and other transportation costs incurred delivering merchandise to customers and from customers returning merchandise, merchant processing fees and packaging. We expect fulfillment, selling and distribution costs to increase in absolute dollars as we increase our net revenues.
Marketing
Marketing expenses consist primarily of online performance marketing costs, such as retargeting, paid search and product listing advertisements, paid social media advertisements, search engine optimization, personalized email and mobile push notifications through our app. Marketing expenses also include our spend on brand marketing channels, including billboards, podcasts, commercials, photo and video shoot development, expenses associated with our Ambassador Program and other forms of online and offline marketing. We expect our marketing expenses to increase in absolute dollars as we continue to grow our business.
General and Administrative
General and administrative expenses consist primarily of employee-related costs, including salaries, bonuses, benefits, stock-based compensation, other related costs and other general overhead, including certain third-party consulting and contractor expenses, certain facilities costs, software expenses, legal expenses and recruiting fees. We expect our general and administrative expenses to increase in absolute dollars as we continue to grow our business. We also anticipate that we will incur significant additional legal, accounting, insurance, investor relations and other expenses to support our transition to and operations as a public company, including costs associated with our compliance with the Sarbanes-Oxley Act.
Other Income, Net
Other income, net consists of interest income or expense associated with our debt financing arrangements, amortization of debt issuance costs and interest income earned on investments, as well as gain or loss on foreign currency, primarily driven by payment to vendors for amounts not denominated in U.S. dollars.
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Provision for Income Taxes
Our provision for income taxes consists of an estimate of federal and state income taxes based on enacted Federal and state tax rates, as adjusted for allowable credits, deductions and uncertain tax positions.
Results of Operations
The following table sets forth our results of operations for the periods presented:
Years Ended December 31, | Three Months Ended March 31, | |||||||||||||||
2019 | 2020 | 2020 | 2021 | |||||||||||||
(in thousands) | ||||||||||||||||
Statements of Operations Data: |
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Net revenues |
$ | 110,494 | $ | 263,112 | $ | 31,967 | $ | 87,079 | ||||||||
Cost of goods sold |
31,158 | 72,888 | 7,655 | 24,719 | ||||||||||||
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Gross profit |
79,336 | 190,224 | 24,312 | 62,360 | ||||||||||||
Operating expenses: |
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Selling |
24,840 | 51,896 | 6,739 | 17,114 | ||||||||||||
Marketing |
33,193 | 38,852 | 7,337 | 10,840 | ||||||||||||
General and administrative(1) |
21,650 | 41,536 | 6,200 | 18,346 | ||||||||||||
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Total operating expenses |
79,683 | 132,284 | 20,276 | 46,300 | ||||||||||||
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Net (loss) income from operations |
(347 | ) | 57,940 | 4,036 | 16,060 | |||||||||||
Other income (loss), net |
459 | 136 | 98 | (38 | ) | |||||||||||
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Net income before income tax provision |
112 | 58,076 | 4,134 | 16,022 | ||||||||||||
Provision for income taxes |
| 8,318 | | 4,582 | ||||||||||||
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Net income |
$ | 112 | $ | 49,758 | $ | 4,134 | $ | 11,440 | ||||||||
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(1) |
Includes stock-based compensation expense of $0.2 million and $8.7 million for the years ended December 31, 2019 and 2020, respectively, and $0.1 million and $5.0 million for the three months ended March 31, 2020 and 2021, respectively. |
The following table sets forth our results of operations as a percentage of net revenues for the periods presented:
Years Ended December 31, | Three Months Ended March 31, | |||||||||||||||
2019 | 2020 | 2020 | 2021 | |||||||||||||
Statements of Operations Data, as a percentage of net revenues: |
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Net revenues |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost of goods sold |
28.2 | 27.7 | 23.9 | 28.4 | ||||||||||||
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Gross profit |
71.8 | 72.3 | 76.1 | 71.6 | ||||||||||||
Operating expenses: |
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Selling |
22.5 | 19.7 | 21.1 | 19.7 | ||||||||||||
Marketing |
30.0 | 14.8 | 23.0 | 12.4 | ||||||||||||
General and administrative |
19.6 | 15.8 | 19.4 | 21.1 | ||||||||||||
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Total operating expenses |
72.1 | 50.3 | 63.4 | 53.2 | ||||||||||||
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Net (loss) income from operations |
(0.3 | ) | 22.0 | 12.6 | 18.4 | |||||||||||
Other income, net |
0.4 | 0.1 | 0.3 | 0.0 | ||||||||||||
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Net income before income tax provision |
0.1 | 22.1 | 12.9 | 18.4 | ||||||||||||
Provision for income taxes |
| (3.2 | ) | | (5.3 | ) | ||||||||||
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Net income |
0.1 | % | 18.9 | % | 12.9 | % | 13.1 | % | ||||||||
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Comparison of Years Ended December 31, 2019 and 2020
Net Revenues
Years Ended December 31, | ||||||||||||
2019 | 2020 | % Change | ||||||||||
(in thousands) | ||||||||||||
Net revenues |
$ | 110,494 | $ | 263,112 | 138.1 | % |
Net revenues increased by $152.6 million, or 138.1%, for 2020 compared to 2019. The increase in net revenue was primarily driven by new customer acquisition coupled with strong retention of existing customers. During 2020, we observed increased customer traffic on our digital platform and improved conversion rates resulting in increased orders, partially offset by a slight decrease in average order value from $95 in 2019 to $94 in 2020 as a result of the launch of lower priced items, such as masks.
Cost of Goods Sold, Gross Profit and Gross Margin
Years Ended December 31, | ||||||||||||
2019 | 2020 | % Change | ||||||||||
(in thousands) | ||||||||||||
Cost of goods sold |
$ | 31,158 | $ | 72,888 | 133.9 | % | ||||||
Gross profit |
79,336 | 190,224 | 139.8 | |||||||||
Gross margin |
71.8 | % | 72.3 | % | 0.5 | % |
Cost of goods sold increased by $41.7 million, or 133.9%, in 2020 compared to 2019. This increase was primarily driven by an increase in total number of orders in 2020 as compared to 2019.
Gross profit, calculated as net revenues less cost of goods sold, increased by $110.9 million, or 139.8%, in 2020 compared to 2019, primarily due to the significant increase in total number of orders in 2020 as compared to 2019.
Gross margin, expressed as a percentage and calculated as gross profit divided by net revenue, increased by 50 basis points in 2020 compared to 2019. The increase in gross margin was primarily the result of lower product costs and lower discounts. These gross margin improvements were partially offset by an increase in freight-in due to the utilization of more expensive air freight to meet increased customer demand. Air freight is more expensive on a per unit basis compared to our primary method of freight-in via ocean shipping.
Operating Expenses
Years Ended December 31, | ||||||||||||
2019 | 2020 | % Change | ||||||||||
(in thousands) | ||||||||||||
Operating expenses: |
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Selling |
$ | 24,840 | $ | 51,896 | 108.9 | % | ||||||
Marketing |
33,193 | 38,852 | 17.0 | |||||||||
General and administrative |
21,650 | 41,536 | 91.9 | |||||||||
Total operating expenses |
$ | 79,683 | $ | 132,284 | 66.0 | % |
Operating expenses increased by $52.6 million, or 66.0%, in 2020 compared to 2019 and, as a percentage of net revenues, decreased by 21.8%.
Selling expense increased by $27.1 million, or 108.9%, in 2020 compared to 2019 and, as a percentage of net revenues, decreased by 2.8%. The decrease in selling expense as a percentage of net revenues was due primarily to improvements in shipping and fulfillment expenses as revenues increased.
Marketing expense increased by $5.7 million, or 17.0%, in 2020 compared to 2019 and, as a percentage of net revenues, decreased by 15.3%. The decrease in marketing expense as a percentage of net revenues was due primarily to more effective marketing strategies, particularly in our performance marketing expenses.
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General and administrative expense increased by $19.9 million, or 91.9%, in 2020 compared to 2019 and, as a percentage of net revenues, decreased by 3.8%. The decrease in general and administrative expense as a percentage of net revenues was primarily due to revenue growing at a faster rate than our personnel expenses, including wages and benefits, as well as a decrease in other costs as a percentage of net revenues, including legal fees, professional fees and other corporate expenses.
Other Income, Net
Years Ended December 31, | ||||||||||||
2019 | 2020 | % Change | ||||||||||
(in thousands) | ||||||||||||
Other income, net |
$ | 459 | $ | 136 | (70.4 | )% |
Other income, net decreased by $0.3 million, or 70.4%, in 2020 compared to 2019, primarily due to a decrease in interest income driven by a decrease in interest rates, partially offset by an increase in our average cash balance.
Provision for Income Taxes
Years Ended December 31, | ||||||||||||
2019 | 2020 | % Change | ||||||||||
(in thousands) | ||||||||||||
Provision for income taxes |
| $ | 8,318 | |
Provision for income taxes increased by $8.3 million in 2020 compared to 2019 due to an increase in net income before income tax provision.
Comparison of Three Months Ended March 31, 2020 and 2021
Net Revenues
Three Months Ended
March 31, |
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2020 | 2021 | % Change | ||||||||||
(in thousands) | ||||||||||||
Net revenues |
$ | 31,967 | $ | 87,079 | 172.4 | % |
Net revenues increased by $55.1 million, or 172.4%, for the three months ended March 31, 2021, compared to the same period last year. The increase in net revenue was primarily driven by new customer acquisition coupled with strong retention of existing customers, which drove increased sales of our products. During 2020, we observed increased customer traffic on our digital platform, which continued in the first quarter of 2021. We also continued to see improved conversion rates resulting in increased orders and experienced an increase in average order value from $92 to $100 for the three months ended March 31, 2020 and 2021, respectively.
Cost of Goods Sold, Gross Profit and Gross Margin
Three Months Ended
March 31, |
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2020 | 2021 | % Change | ||||||||||
(in thousands) | ||||||||||||
Cost of goods sold |
$ | 7,655 | $ | 24,719 | 222.9 | % | ||||||
Gross profit |
24,312 | 62,360 | 156.5 | % | ||||||||
Gross margin |
76.1 | % | 71.6 | % | (4.5 | )% |
Cost of goods sold increased by $17.1 million, or 222.9%, for the three months ended March 31, 2021, compared to the same period last year. This increase was primarily driven by a significant increase in the total number of orders in the first quarter of 2021 as compared to the same period in 2020.
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Gross profit increased by $38.0 million, or 156.5%, for the three months ended March 31, 2021, compared to the same period last year, primarily due to the significant increase in the total number of orders.
Gross margin decreased by 4.5 percentage points for the three months ended March 31, 2021, compared to the same period last year. The decrease in gross margin was primarily related to an increase in freight-in due to the utilization of more expensive air freight to meet increased customer demand.
Operating Expenses
Three Months Ended
March 31, |
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2020 | 2021 | % Change | ||||||||||
(in thousands) | ||||||||||||
Selling |
$ | 6,739 | $ | 17,114 | 154.0 | % | ||||||
Marketing |
7,337 | 10,840 | 47.7 | |||||||||
General and administrative |
6,200 | 18,346 | 195.9 | |||||||||
Total operating expenses |
$ | 20,276 | $ | 46,300 | 128.3 | % |
Operating expenses increased by $26.0 million, or 128.3%, for the three months ended March 31, 2021, compared to the same period last year and, as a percentage of net revenues, decreased by 10.2%.
Selling expense increased by $10.4 million, or 154.0%, for the three months ended March 31, 2021, compared to the same period last year and, as a percentage of net revenues, decreased by 1.4%. The decrease in selling expense as a percentage of net revenues was primarily due to scaling in shipping and fulfillment activities due to our higher order volumes.
Marketing expense increased by $3.5 million, or 47.7%, for the three months ended March 31, 2021, compared to the same period last year and, as a percentage of net revenues, decreased by 10.6%. The decrease in marketing expense as a percentage of net revenues was primarily due to more effective marketing strategies, particularly increased efficiency of our performance marketing expenses.
General and administrative expense increased by $12.1 million, or 195.9%, for the three months ended March 31, 2021, compared to the same period last year and, as a percentage of net revenues, increased by 1.7%. The increase in general and administrative expense as a percentage of net revenues was due to an increase in stock compensation expense, partially offset by revenue growing at a faster rate than our personnel expenses, including wages and benefits.
Other Income (Loss), Net
Three Months Ended
March 31, |
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2020 | 2021 | % Change | ||||||||||
(in thousands) | ||||||||||||
Other income (loss), net |
$ | 98 | $ | (38 | ) | (138.8 | )% |
Other income (loss), net decreased by $0.1 million, or 138.8%, for the three months ended March 31, 2021, compared to the same period last year, primarily due to an increase in interest expense from our revolving credit facility commitment fee, as well as a decrease in interest income driven by a decrease in interest rates, partially offset by an increase in our average cash balance.
Provision for Income Taxes
Three Months Ended
March 31, |
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2020 | 2021 | % Change | ||||||||||
(in thousands) | ||||||||||||
Provision for income taxes |
| $ | 4,582 | |
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Provision for income taxes increased by $4.6 million for the three months ended March 31, 2021, compared to the same period last year, as our effective tax rate for the three months ended March 31, 2020 was 0% due to a full valuation allowance.
Quarterly Results of Operations and Key Metrics
Quarterly Results of Operations
The following table sets forth our unaudited quarterly consolidated statements of operations data for each of the quarters indicated. The information for each of these quarters has been prepared on a basis consistent with our audited annual consolidated financial statements appearing elsewhere in this prospectus and, in our opinion, include all normal recurring adjustments necessary for the fair statement of the financial information contained in those statements. The following unaudited consolidated quarterly financial data should be read in conjunction with our annual consolidated financial statements and the related notes included elsewhere in this prospectus. These quarterly results are not necessarily indicative of our operating results for a full year or any future period.
Three Months Ended | ||||||||||||||||||||
March 31,
2020 |
June 30,
2020 |
September 30,
2020 |
December 30,
2020 |
March 31,
2021 |
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(in thousands) | ||||||||||||||||||||
Net revenues |
$ | 31,967 | $ | 64,143 | $ | 76,809 | $ | 90,193 | $ | 87,079 | ||||||||||
Cost of goods sold |
7,655 | 18,923 | 20,176 | 26,134 | 24,719 | |||||||||||||||
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Gross profit |
24,312 | 45,220 | 56,633 | 64,059 | 62,360 | |||||||||||||||
Operating expenses: |
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Selling |
6,739 | 12,906 | 13,998 | 18,254 | 17,114 | |||||||||||||||
Marketing |
7,337 | 8,804 | 9,655 | 13,055 | 10,840 | |||||||||||||||
General and administrative |
6,200 | 6,950 | 8,407 | 19,979 | 18,346 | |||||||||||||||
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Total operating expenses |
20,276 | 28,660 | 32,060 | 51,288 | 46,300 | |||||||||||||||
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Net (loss) income from operations |
4,036 | 16,568 | 24,573 | 12,771 | 16,060 | |||||||||||||||
Other income (loss), net |
98 | 18 | 12 | 8 | (38 | ) | ||||||||||||||
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Net income before income tax provision |
4,134 | 16,579 | 24,585 | 12,779 | 16,022 | |||||||||||||||
Provision for income taxes |
| 2,403 | 5,262 | 653 | 4,582 | |||||||||||||||
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|
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Net income |
$ | 4,134 | $ | 14,175 | $ | 19,323 | $ | 12,126 | $ | 11,440 | ||||||||||
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Three Months Ended | ||||||||||||||||||||
March 31,
2020 |
June 30,
2020 |
September 30,
2020 |
December 31,
2020 |
March 31,
2021 |
||||||||||||||||
Net revenues |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||
Cost of goods sold |
23.9 | 29.5 | 26.3 | 29.0 | 28.4 | |||||||||||||||
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Gross profit |
76.1 | 70.5 | 73.7 | 71.0 | 71.6 | |||||||||||||||
Operating expenses: |
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Selling |
21.1 | 20.1 | 18.2 | 20.2 | 19.7 | |||||||||||||||
Marketing |
23.0 | 13.7 | 12.6 | 14.5 | 12.4 | |||||||||||||||
General and administrative |
19.4 | 10.8 | 10.9 | 22.2 | 21.1 | |||||||||||||||
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Total operating expenses |
63.4 | 44.7 | 41.7 | 56.9 | 53.2 | |||||||||||||||
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|
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Net (loss) income from operations |
12.6 | 25.8 | 32.0 | 14.2 | 18.4 | |||||||||||||||
Other income (loss), net |
0.3 | 0.0 | 0.0 | 0.0 | 0.0 | |||||||||||||||
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Net income before income tax provision |
12.9 | 25.8 | 32.0 | 14.2 | 18.4 | |||||||||||||||
Provision for income taxes |
| 3.7 | 6.9 | 0.7 | 5.3 | |||||||||||||||
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|
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Net income |
12.9 | % | 22.1 | % | 25.2 | % | 13.4 | % | 13.1 | % | ||||||||||
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Quarterly Trends
Quarterly Net Revenues Trends
Quarterly net revenues generally increased quarter-over-quarter during 2020 primarily due to new customer acquisition coupled with strong retention of existing customers, which drove increased sales of our products. We drove sequential quarter-over-quarter orders growth in 2020 through continued improvements in conversion and increased brand awareness. We experienced some seasonality with higher levels of net revenues in the fourth quarter of the fiscal year driven by seasonal holiday demand.
Quarterly Cost of Goods Sold and Gross Profit Trends
Quarterly cost of goods sold generally increased quarter-over-quarter during 2020 primarily due to an increase in total orders and associated product costs, inbound freight and duties.
Quarterly gross profit generally increased quarter-over-quarter during 2020 primarily due to the increase in total number of orders.
We experienced quarterly fluctuations in gross margin percentage as a result of our promotional calendar, timing of product launches and mix of ocean and air freight.
Quarterly Operating Expenses Trends
Selling expenses have generally increased quarter-over-quarter in each period presented above primarily due to an increase in shipping and fulfillment costs to support the increase in number of orders. Marketing expenses have generally increased quarter-over-quarter in the each period presented above as we have expanded our base of active customers.
Marketing expense as a percent of sales decreased following the first quarter of 2020 primarily due to more effective marketing strategies, particularly increased efficiency of our performance marketing expenses.
General and administrative expenses have generally increased quarter-over-quarter in each period presented above as a result of headcount expansion and increased investments in software, recruiting, professional fees and other corporate expenses to support our growth.
In the first quarter of 2021, we experienced a sequential decrease in operating expenses. Selling expenses declined as a result of a lower total number of orders due to typically higher volume in the last quarter of the year coupled with improvements as a percentage of net revenues due to fulfillment and packaging efficiencies. Marketing expenses declined due to more effective performance marketing strategies in the first quarter and lighter spend following a strong holiday campaign in the fourth quarter of 2020. General and administrative expenses decreased as a result of lower stock compensation expense in the first quarter of 2021 offset by increases in personnel expense and investments in other corporate expenses.
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Quarterly Adjusted EBITDA and Adjusted EBITDA Margin
The following table reflects a reconciliation of Adjusted EBITDA to net income, the most directly comparable financial measure prepared in accordance with U.S. GAAP:
Three Months Ended | ||||||||||||||||||||
March 31,
2020 |
June 30,
2020 |
September 30,
2020 |
December 31,
2020 |
March 31,
2021 |
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Net income |
$ | 4,134 | $ | 14,175 | $ | 19,323 | $ | 12,126 | $ | 11,440 | ||||||||||
Add (deduct): |
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Other income (loss), net |
(98 | ) | (18 | ) | (12 | ) | (8 | ) | 38 | |||||||||||
Gain on disposal |
| | | 2 | | |||||||||||||||
Provision for income taxes |
| 2,403 | 5,262 | 653 | 4,582 | |||||||||||||||
Depreciation and amortization expense |
218 | 181 | 256 | 291 | 313 | |||||||||||||||
Stock-based compensation expense |
50 | 237 | 693 | 7,733 | 5,015 | |||||||||||||||
Transaction costs |
| | | 296 | 525 | |||||||||||||||
Expenses related to non-ordinary course dispustes |
300 | 365 | 206 | 326 | 2,436 | |||||||||||||||
Adjusted EBITDA |
$ | 4,604 | $ | 17,343 | $ | 25,728 | $ | 21,419 | $ | 24,349 | ||||||||||
Adjusted EBITDA Margin |
14.4 | % | 27.0 | % | 33.5 | % | 23.7 | % | 28.0 | % |
We have demonstrated continued strong quarterly performance in Adjusted EBITDA and Adjusted EBITDA margin. Beginning in the second quarter of 2020, we saw an increase in our Adjusted EBITDA margin, primarily as a result of decreases in operating expenses as a percentage of net revenues. We experienced some seasonal fluctuation in the fourth quarter of 2020 with larger marketing investments to support our holiday campaign.
Quarterly Free Cash Flow
The following table presents a reconciliation of free cash flow to net cash (used in) provided by operating activities, the most directly comparable financial measure prepared in accordance with U.S. GAAP:
Three Months Ended | ||||||||||||||||||||
March 31,
2020 |
June 30,
2020 |
September 30,
2020 |
December 31,
2020 |
March 31,
2021 |
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Net cash (used in) provided by operating activities |
$ | (821 | ) | $ | 25,130 | $ | (1,233 | ) | $ | (1,328 | ) | $ | 16,109 | |||||||
Less: capital expenditures |
(972 | ) | (109 | ) | (546 | ) | (635 | ) | (528 | ) | ||||||||||
Free cash flow |
$ | (1,793 | ) | $ | 25,021 | $ | (1,779 | ) | $ | (1,963 | ) | $ | 15,581 |
Our free cash flow has fluctuated over time primarily as a result of timing of inventory purchases to support our growth. Minimal capital expenditure requirements have been consistent on a quarterly basis and have resulted in strong annual free cash flow generation.
Seasonality
Unlike the traditional apparel industry, the healthcare apparel industry is generally not seasonal in nature. However, due to our continued strong sequential growth as well as our decision to conduct select promotions during the holiday season we historically have generated a higher proportion of net revenues, and incurred higher selling and marketing expenses, during the fourth quarter of the year compared to other quarters, and we expect these trends to continue.
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Liquidity and Capital Resources
As of December 31, 2020 and March 31, 2021, we had $58.1 million and $73.8 million of cash and cash equivalents, respectively. Since inception, we have financed operations primarily through cash flow from operating activities, the sale of our capital stock and borrowings under credit facilities.
In December 2020, we entered into a credit agreement with J.P. Morgan Chase Bank, N.A., providing for a revolving credit facility in an initial amount of up to $50.0 million, or the Existing Credit Facility. The Existing Credit Facility will mature in December 2025. As of March 31, 2021, we had no borrowings under the Existing Credit Facility. See Note 8 to our financial statements as of and for the years ended December 31, 2019 and 2020 and Note 7 to our financial statements as of and for the three months ended March 31, 2020 and 2021, included elsewhere in this prospectus, for more information regarding the Existing Credit Facility.
We believe that existing cash and cash equivalents and positive cash flows from operations will be sufficient to support working capital and capital expenditure requirements for at least the next 12 months. Our future capital requirements may vary materially from those currently planned and will depend on many factors, including our rate of revenue growth, the timing and extent of international expansion efforts and other growth initiatives, the expansion of our marketing activities and overall economic conditions. 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 additional 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 when needed or on terms acceptable to us. The inability to raise capital if needed would adversely affect our ability to achieve our business objectives.
Historical Cash Flows
The following table summarizes our cash flows for the periods presented:
Years Ended
December 31, |
Three Months Ended
March 31, |
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2019 | 2020 | 2020 | 2021 | |||||||||||||
(in thousands) |
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Cash (used in) provided by operating activities |
$ | 6,531 | $ | 21,748 | $ | (821 | ) | $ | 16,109 | |||||||
Cash used in investing activities |
(4,761 | ) | (2,262 | ) | (972 | ) | (528 | ) | ||||||||
Cash provided by financing activities |
14,000 | 294 | | 123 | ||||||||||||
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Net (decrease) increase in cash and cash equivalents |
$ | 15,770 | $ | 19,780 | $ | (1,793 | ) | $ | 15,704 | |||||||
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Operating Activities
Cash (used in) provided by operating activities consist primarily of net income adjusted for certain items including depreciation and amortization, stock-based compensation expense and the effect of changes in operating assets and liabilities.
Net cash provided by operating activities increased $16.9 million for the three months ended March 31, 2021, compared to the same period last year, primarily as a result of an increase in net income of $7.3 million driven by improved financial performance. Our improved financial performance, including net income, was driven primarily by increased brand awareness and increased visits to our digital platform, which resulted in more orders during the three months ended March 31, 2021, compared to the same period last year.
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In addition to improved financial performance, net cash provided by operating activities for the three months ended March 31, 2021 included an increase in non-cash adjustments of $5.5 million primarily due to $5.0 million in higher stock-based compensation expense from equity awards granted in 2020 and 2021.
We also saw a benefit from a decrease in cash consumed as a result of a net change in operating assets and liabilities of $4.1 million. The decrease in cash consumed was primarily due to higher payable and expense accruals of $14.3 million from the timing of accruals and a cash benefit of $3.4 million due to lower prepaid expenses from the timing of payments. The decreases in cash consumed were partially offset by higher inventory purchases of $14.0 million to support our growth.
Net cash provided by operating activities increased $15.2 million in 2020 compared to 2019, primarily as a result of an increase in net income of $49.6 million driven by improved financial performance. Our improved financial performance, including net income was driven primarily by increased brand awareness and increased visits to our digital platform which resulted in more orders in 2020 compared to 2019. We also believe that our increased efficiency in attracting new customers contributed to this improved financial performance in 2020.
In addition to improved financial performance, net cash provided by operating activities in 2020 included an increase in non-cash adjustments of $2.0 million. The increase in non-cash adjustments consisted of $8.5 million in higher stock-based compensation expense from equity awards granted in 2020, partially offset by a $6.5 million increase in deferred income tax benefit.
The increase in net cash provided by operating activities in 2020 was partially offset by an increase in cash consumed by net change in operating assets and liabilities of $36.8 million, primarily due to an increase in inventory purchases to support our growth.
Investing Activities
Cash used in investing activities relate to capital expenditures and other investing activities.
Cash used in investing activities decreased by $0.4 million, to $0.5 million for the three months ended March 31, 2021 from $1.0 million compared to the same period last year.
Capital expenditures in the first quarter of 2020 were primarily related to software development and computer equipment.
Capital expenditures in the first quarter of 2021 were primarily related to software development, computer equipment and furniture and fixtures.
Cash used in investing activities decreased by $2.5 million, to $2.3 million in 2020 from $4.8 million in 2019.
Capital expenditures in 2019 were primarily related to our new office build, including $3.0 million for leasehold improvements.
Capital expenditures in 2020 were primarily comprised of $1.7 million of capitalization of software.
Financing Activities
Cash provided by financing activities consist primarily of net proceeds from the sale of our common stock, borrowings, fees associated with our existing line of credit and proceeds from the exercise of stock options.
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Cash provided by financing activities was $0.1 million for the three months ended March 31, 2021, which was attributable to proceeds from stock option exercises.
In 2020, net cash provided by financing activities was $0.3 million, which was attributable to $0.4 million in proceeds from stock option exercises, partially offset by $0.1 million of fees associated with our existing line of credit.
In 2019, net cash provided by financing activities was $14.0 million, which was attributable to a capital contribution.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations as of December 31, 2020:
Payments Due by Period | ||||||||||||||||||||
Total |
Less
than 1 Year |
1-3 Years | 3-5 Years |
More than
5 Years |
||||||||||||||||
(in thousands) | ||||||||||||||||||||
Operating lease commitments |
$19,634 | $ 1,941 | $3,986 | $4,259 | $9,448 | |||||||||||||||
Inventory purchase obligations |
$ | 33,837 | $ | 33,837 | | | | |||||||||||||
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Total |
$53,471 | $35,778 | $3,986 | $4,259 | $9,448 | |||||||||||||||
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The commitment amounts in the table above are associated with contracts that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions, and the approximate timing of the actions under the contracts. Our operating lease commitments relate primarily to our office space in Santa Monica, California. Inventory purchase obligations represent open purchase orders for the materials and merchandise at the end of the fiscal year. These purchase orders can be impacted by various factors, including the timing of issuing orders and the timing of shipment of orders. The table does not include obligations under agreements that we can cancel without a significant penalty.
Critical Accounting Policies and Estimates
We believe that the following accounting policies involve a high degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of our operations. See Note 2 to our financial statements as of and for the years ended December 31, 2019 and 2020, and Note 2 to our financial statements as of and for the three months ended March 31, 2020 and 2021, appearing elsewhere in this prospectus for a description of our other significant accounting policies. The preparation of our financial statements in conformity with U.S. GAAP requires us to make estimates and judgments that affect the amounts reported in those financial statements and accompanying notes. Although we believe that the estimates we use are reasonable, due to the inherent uncertainty involved in making those estimates, actual results reported in future periods could differ from those estimates.
Revenue Recognition
Our primary source of revenues is from sales of healthcare apparel, footwear and other products primarily through our digital platform.
We determine revenue recognition through the following steps in accordance with Topic 606, which we adopted effective January 1, 2018:
|
identification of the contract, or contracts, with a customer; |
86
|
identification of the performance obligations in the contract; |
|
determination of the transaction price; |
|
allocation of the transaction price to the performance obligations in the contract; and |
|
recognition of revenue when, or as, we satisfy a performance obligation. |
Revenue is recognized upon shipment when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Our revenue is reported net of sales returns and discounts. We estimate our liability for product returns based on historical return trends and an evaluation of current economic and market conditions. We record the expected customer refund liability as a reduction to revenue, and the expected inventory right of recovery as a reduction of cost of goods sold. If actual return costs differ from previous estimates, the amount of the liability and corresponding revenue are adjusted in the period in which such costs occur.
Stock-Based Compensation
We have granted stock-based awards consisting primarily of stock options and RSUs to employees and consultants. Stock-based compensation expense related to stock-based awards is recognized based on the fair value of the awards granted. We estimate the fair value of each option award granted using the Black-Scholes option pricing model. The Black-Scholes option pricing model requires the input of highly subjective assumptions, including the fair value of the underlying common stock, the risk-free interest rate, the expected volatility of the price of our common stock, the expected dividend yield of our common stock and the expected term of the option. The assumptions used to determine the fair value of the option awards represent managements best estimates. These estimates involve inherent uncertainties and the application of managements judgment. The related stock-based compensation expense is recognized on a straight-line basis over the requisite service period of the awards, which is generally four years. We account for forfeitures as they occur. If factors change and different assumptions are used, our stock-based compensation expense could be materially different in the future. These assumptions and estimates are as follows:
|
Fair Value of Common Stock. As our common stock is not publicly traded, the fair value was determined by our board of directors, with input from management and valuation reports prepared by third-party valuation specialists as described below under Common Stock Valuations. |
|
Risk-Free Interest Rate. The risk-free interest rate for the expected term of the options was based on the U.S. Treasury yield curve in effect at the time of the grant. |
|
Expected Volatility. As we do not have a trading history for our common stock, the expected volatility was estimated by taking the average historic price volatility for industry peers, consisting of several public companies in our industry which are either similar in size, stage of life cycle or financial leverage, over a period equivalent to the expected term of the awards. |
|
Expected Dividend Yield. We have never declared or paid any cash dividends and do not currently plan to pay cash dividends in the foreseeable future. As a result, an expected dividend yield of zero percent was used. |
|
Expected Term. We estimate the expected term by using the simplified method, which calculates the expected term as the average of the time-to-vesting and the contractual life of the options. |
We estimate the fair value of each RSU granted based on the fair value of our common stock on the date of grant. All of our RSUs vest upon the satisfaction of both a service-based vesting condition and a liquidity-based vesting condition. The service-based vesting condition for the awards is satisfied in substantially equal quarterly installments over the four-year period following December 31, 2019, subject to the individuals continued service to us. The liquidity-based vesting condition is satisfied upon the occurrence of a qualifying liquidity event, which includes the effective date of the registration statement of which this prospectus forms a part or the
87
consummation of a change of control transaction. As of December 31, 2020 and March 31, 2021, no stock-based compensation expense had been recognized for RSUs because the liquidity-based vesting condition had not been probable of being satisfied. In the period in which our liquidity-based vesting condition becomes probable, we will begin recording stock-based compensation expense for these RSUs with a liquidity-based vesting condition using the accelerated attribution method, net of forfeitures, based on the grant-date fair value of the RSUs, and we will record the remaining unrecognized stock-based compensation expense over the remainder of the requisite service period.
We will continue to use judgment in evaluating the assumptions related to our stock-based compensation on a prospective basis. As we continue to accumulate additional data related to our common stock, we may refine our estimation process, which could materially impact our future stock-based compensation expense.
Common Stock Valuations
Prior to our initial public offering, given the absence of a public trading market of our common stock, and in accordance with the American Institute of Certified Public Accountants Accounting and Valuation Guide, Valuation of Privately-Held Company Equity Securities Issued as Compensation, our board of directors exercised reasonable judgment and considered numerous and subjective factors to determine the best estimate of fair value of our common stock at each grant date, including:
|
contemporaneous independent third-party valuations of our common stock; |
|
the prices at which our common stock was sold in secondary transactions; |
|
our results of operations, financial position and capital resources; |
|
industry outlook; |
|
the lack of marketability of our common stock; |
|
the fact that the stock option grants involve illiquid securities in a private company; |
|
the likelihood of achieving a liquidity event, such as an initial public offering or a sale of our company, given prevailing market conditions; |
|
the history and nature of our business, industry trends, and competitive environment; and |
|
general economic outlook, including economic growth, inflation and unemployment, interest rate environment and global economic trends. |
In valuing our common stock, the fair value of our business, or enterprise value, was determined using a combination of the market approach and income approach. The market approach estimates value based on a comparison of the subject company to comparable public companies in a similar line of business and secondary transactions of our capital stock. From the comparable companies, a representative market value multiple is determined and then applied to the subject companys financial results to estimate the value of the subject company. The market approach also includes consideration of the transaction price of secondary sales of our capital stock. The income approach estimates value based on the expectation of future cash flows, which are then discounted to present value.
For each valuation, the enterprise value was then allocated to the common stock using a combination of methods, including the Option Pricing Model, or OPM, and the consideration of private secondary transactions. The OPM allocates a companys equity value among various capital investors, taking into account any liquidation preferences, participation rights, dividend policy and conversion rights. The use of OPM is appropriate when the range of possible future outcomes is difficult to predict and can result in a highly speculative forecast. When evaluating private secondary transactions, we considered the relative size of such transaction to our fully diluted capitalization, as well as the facts and circumstances of each transaction to determine the extent to which they represented a fair value exchange. Factors considered include transaction volume, timing, whether the transactions occurred among willing and unrelated parties and whether the transactions involved investors with access to our financial information.
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Application of these approaches involves the use of estimates, judgment and assumptions that are highly complex and subjective, such as those regarding our expected future revenues, expenses, cash flows, discount rates and market multiples, the selection of comparable companies and the probability of possible future events. Changes in any or all of these estimates and assumptions, or the relationships between those assumptions, impact our valuations as of each valuation date and may have a material impact on the valuation of our common stock.
Following this offering, it will not be necessary to estimate the fair value of our common stock, as the shares will be traded in the public market, and the fair value of our common stock will be based on the closing price as reported by NYSE.
Inventory
Inventories are stated at the lower of cost and net realizable value. Cost is determined using an average cost method. Cost of inventory includes import duties and other taxes and transport and handling costs. We write down inventory where it appears that the carrying cost of the inventory may not be recovered through subsequent sale of the inventory. We analyze the quantity of inventory on hand, the quantity sold in the past year, the anticipated sales volume, the expected sales price and the cost of making the sale when evaluating the value of our inventory. If the sales volume or sales price of specific products declines, additional write-downs may be required.
Income Taxes
We are subject to income taxes in the United States. We compute our provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using the currently enacted tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized and the charge is recorded to earnings.
Significant judgment is required in determining our uncertain tax positions. We continuously review issues raised in connection with all ongoing examinations and open tax years to evaluate the adequacy of our tax liabilities. We evaluate uncertain tax positions under a two-step approach. The first step is to evaluate the uncertain tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon examination based on its technical merits. The second step is, for those positions that meet the recognition criteria, to measure the largest amount of benefit that is more likely than not of being realized. We believe our recorded tax liabilities are adequate to cover all open tax years based on our assessment. This assessment relies on estimates and assumptions and involves significant judgments about future events. To the extent that our view as to the outcome of these matters changes, we will adjust income tax expense in the period in which such determination is made. We classify interest and penalties related to income taxes as income tax expense.
Loss Contingencies
We may be involved in legal proceedings, claims and regulatory, tax or government inquiries and investigations that arise in the ordinary course of business resulting in loss contingencies. We accrue for loss contingencies when losses become probable and are reasonably estimable. If the reasonable estimate of the loss is a range and no amount within the range is a better estimate, the minimum amount of the range is recorded as a liability. We do not accrue for contingent losses that, in our judgment, are considered to be reasonably possible, but not probable; however, we disclose the range of such reasonably possible losses. Loss contingencies considered remote are generally not disclosed.
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Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Qualitative and Quantitative Disclosures about Market Risk
We are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in interest rates and foreign exchange rates.
Interest Rate Risk
At March 31, 2021, we had cash and cash equivalents of $73.8 million. Interest-earning instruments carry a degree of interest rate risk. We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure. A hypothetical 10% change in interest rates would not result in a material impact on our financial statements.
Foreign Currency Risk
Our net revenues are primarily denominated in U.S. dollars and are not currently subject to significant foreign currency risk. Some foreign operating expenses are denominated in the currencies of the countries and territories in which our third-party vendors are located and may be subject to fluctuations due to changes in foreign currency exchange rates. Fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in our results of operations. To date, foreign currency transaction gains and losses have not been material to our financial statements, and we have not engaged in any foreign currency hedging transactions.
Recently Adopted Accounting Pronouncements
See Note 2 to our financial statements included elsewhere in this prospectus for a description of recently adopted accounting pronouncements.
Emerging Growth Company Status
In April 2012, the JOBS Act was enacted. Section 107 of the JOBS Act provides that an emerging growth company may take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Therefore, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to use the extended transition period under the JOBS Act until the earlier of the date we (1) are no longer an emerging growth company or (2) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
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Heather Hasson, Co-CEO & Co-Founder The healthcare industry is made up of the most incredible people in the world. Registered nurses, respiratory therapists, surgeons, dental hygienists, veterinarians, home health aids, physician assistants, nurse practitioners, researchers, medical students, the list goes on. From the outset, FIGS mission has been to celebrate, empower and serve each of these people who are dedicating their own lives to serving others. We call our community: Awesome Humans. A CUP OF COFFEE The journey of FIGS began over a cup of coffee almost a decade ago. I (Heather) was meeting my good friend, Allison, a nurse practitioner, who was coming off a 16-hour shift draped in what essentially was a poorly fitting burlap sack with her size displayed in bright orange for all to see. This was the official garment for medical professionals, aka scrubs. As I was staring at Allisons baggy, boxy, ill-fitting scrubs, I could not help but think about how many multi-billion-dollar apparel companies were focused at that very minute on giving athletes every possible advantage through cutting-edge materials and purpose-driven designs. I thought to myself: What about the people saving lives? Who is focused on them? Trina Spear, Co-CEO & Co-Founder A BROKEN INDUSTRY I went to a scrubs store to learn more. I quickly realized that not only were the product offerings depressing, the experience was even worse. The store was lled with racks and racks of indistinguishable scrubs, there were boxes strewn about that had crude markings to designate sizing, and right next to the scrubs were bed pans and knee braces. Worse yet, the store closed at 5pm, which made it beyond difficult for healthcare professionals, many of whom work 12-hour shifts, to even get there before closing. Leaving that store, I could not believe that medical professionals who are literally saving peoples lives had to shop like this to buy their uniforms. Right then, it was clear to me that both the design and distribution of scrubs were antiquated and ripe for disruption, and that healthcare professionals deserved innovative, functional products and an efficient distribution model built around their particular needs. YIN AND YANG After I re-designed what scrubs could be and with a clear vision for FIGS both in terms of the business opportunity and the broader impact we could make, Trina and I teamed up together in 2013. Every morning at 7am and every evening at 7pm, we parked outside of emergency rooms, waiting for healthcare professionals to change shifts. We handed them a fresh cup of coffee and sold them FIGS from the back of a car. We snuck into hospital lobbies and cafeterias for almost a year to observe how healthcare workers moved; we spent countless hours speaking with them about their unique challenges, likes, and dislikes. A UNIFORM Your uniform tells the world who you are and what you do. It is a symbol of safety, identity and unity. It should help you look good, feel good and perform at your best. And if it can elevate your performance even in small or unexpected ways imagine the profound
impact it can have. For a healthcare professional, well-designed pockets dont just hold your keys or money to run around a track; they hold the tools that may save someones life. It is with that level of intention that we design our products. Design should solve a problem. And every design at FIGS is meant to solve real problems that medical professionals face every day. BUILDING DIRECT CONNECTIONS For healthcare apparel, the distribution model is almost as important as the products themselves. While most people have come to prefer the ease of shopping online for clothes, groceries, and a range of other products online, this is a nice to have. For healthcare professionals who are regularly working 12-hour shifts and caring for their families when they are not working, the ability to shop online is not a nice to have, it is a necessity. That is why since Day 1, we have always used a seamless direct-to-consumer online platform. Our approach to DTC is to break down barriers. Building direct connections online makes the experience as easy as possible for healthcare professionals, and we are committed to doing whatever we can to make their lives easier. We serve healthcare professionals from all walks of life and across all disciplines and levels of experience, who are working hard to serve others while making a living for themselves and their families. We feel a profound responsibility to empower and celebrate the people doing this important work. THE PAST Our experiences have ranged from humbling failures to hard-fought successes. Ultimately, through the tireless efforts of the entire FIGS team, we created three things above all else: (1) innovative products that allow healthcare professionals to look, feel and perform at their best, (2) the worlds first direct-to-consumer online platform specifically designed for medical professionals, and (3) a community where Awesome Humans are celebrated, their stories are told, and the gaps that previously existed in the healthcare industry are bridged. Our business model is simple. At FIGS, we design and make our own products and sell them directly through our own digital platforms. We do it that way because we know the best businesses are simple, easily understood and start with a problem that needs to be solved. THE FUTURE There is so much work left to do. We want FIGS to help inspire the next generations of healthcare professionals to become healthcare professionals. We want a world where athletes and celebrities arent the only ones on billboards in Times Square. We want those billboards to show Ana Wilkinson, RN, Lexie Robillard, PICU Transport Nurse and Dr. Elvis Francois, so that the next generation can look up and aspire to be like them. Although the COVID-19 pandemic has brought increased attention to the importance of healthcare professionals, we have been standing alongside them for almost a decade and we will still be here as the world stops clapping at 7pm. We will continue to cheer around the clock so healthcare professionals know they are seen, heard and understood. We get them. We got them. At FIGS, we believe in something bigger than ourselves. We believe we can impact this world and inspire the future of healthcare. We believe we can and will transform the healthcare experience. Heather and Trina
Our Mission
Our mission is to celebrate, empower and serve those who serve others.
Who We Are
We are a founder-led, direct-to-consumer healthcare apparel and lifestyle brand that seeks to celebrate, empower and serve current and future generations of healthcare professionals. We are committed to helping this growing, global community of professionals, whom we refer to as Awesome Humans, look, feel and perform at their best24/7, 365 days a year. We create technically advanced apparel and products that feature an unmatched combination of comfort, durability, function and style, all at an affordable price. In doing so, we have redefined what scrubs aregiving rise to our tag-line: why wear scrubs, when you can #wearFIGS?
We have revolutionized the large and fragmented healthcare apparel market. We branded a previously unbranded industry and de-commoditized a previously commoditized productelevating scrubs and creating premium products for healthcare professionals. Most importantly, we built a community and lifestyle around a profession. As a result, we have become the industrys category-defining healthcare apparel and lifestyle brand.
We market and sell 98% of our products through our digital platform, consisting of our website and mobile app, to a rapidly growing community of loyal customers. From 2017 to 2020, we grew net revenues from $17.6 million to $263.1 million, representing a compound annual growth rate, or CAGR, of 146%. In addition, in 2020, we delivered operating income and Adjusted EBITDA of $57.9 million and $69.1 million, respectively.
We Are Obsessed with Our Community of Awesome Humans.
We are dedicated to empowering and celebrating every healthcare professional across all disciplines and levels of experience. The healthcare community informs and inspires us, and we place these Awesome Humans at the center of everything we do. We purposefully design products to serve their particular needs and we sell those products through a convenient direct-to-consumer, or DTC, model tailored to their around-the-clock lifestyle. We use our digital platform to celebrate Awesome Humans in aspirational, creative and unexpected ways. We leverage social media platforms, such as Instagram, to listen to, engage with, understand and better serve our community of healthcare professionals at scale. Our Ambassador Program gives healthcare professionals a platform where they can tell their stories. This program, which consists of over 250 Awesome Humans from around the world who represent a diverse cross-section of the healthcare industry, helps us interact with and drive engagement with our community. Our Ambassadors are an extension of our team and are evangelists for our brand. Our differentiated approach to creating authentic and meaningful relationships with our community has allowed us to build a growing base of approximately 1.5 million active customers who are passionate and loyal to our brand, as demonstrated by our strong customer retention and engagement.
Innovation Drives Our Product Development.
We create technically advanced apparel and products for the modern healthcare professional. Our design philosophy is rooted in Technical Comfortthe conviction that design, comfort and function are non-negotiable. While multi-billion-dollar companies were focused on athletes, we believed that nobody was sufficiently focused on healthcare professionalsextraordinary people who care for patients, cure diseases and save lives, and who deserve to look, feel and perform at their best. As a result, we developed cutting-edge fabric technology and product designs to specifically address their needs. Our proprietary fabric technology, called FIONx, offers four-way stretch, anti-odor, anti-wrinkle and moisture-wicking properties. Our scrubs feature easy-to-access zippered pockets for professional and personal items such as stethoscopes, scissors, smartphones
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and ID badges. Our lifestyle apparel and other non-scrub offerings, such as lab coats, underscrubs, outerwear, activewear, loungewear, compression socks, footwear, masks and face shields, are specifically designed for the needs and preferences of the medical community. By enabling all healthcare professionals to have access to these products, we make the healthcare community more inclusive and aim to elevate the entire healthcare ecosystem.
We Are a Digitally Native Direct-to-Consumer Brand.
We are a digitally native DTC brand that utilizes technology to deliver a differentiated customer experience. We disrupted the industrys historical distribution model, which required healthcare professionals to physically travel to brick-and-mortar stores to purchase their uniforms. We have built the largest DTC platform in healthcare apparel, leading the industry in the shift to digital. By selling directly through our digital platform, we control all aspects of the customer experience. Further, we are able to engage with our community of healthcare professionals before, during and after purchase, through our digital platform, email, social media, podcasts, in-person events and numerous other channels. This direct engagement enables us to establish personal relationships at scale and provides us with valuable customer data and feedback that we leverage across our organization to better serve our community.
We Leverage Data Science to Connect with and Serve Our Community.
We leverage our rich customer data set, bolstered by the inherent benefits of our DTC model, to serve our community more effectively and efficiently. We develop proprietary and customized data solutions designed to optimize our product innovation, inventory analytics, marketing efforts and operational efficiency. We maintain centralized Data Science and Data Engineering teams and de-centralized Data Analysts working directly within each key functional area of the company. This approach enables us to gather and manage extensive data, and rapidly and directly apply that data to deliver customer insights and improve our core operating activities and decision-making processes. Our vast and growing data set plays a critical role in driving new customer acquisition as well as in our community engagement and retention strategy.
We Give Back to the Community We Serve.
In line with our purpose-driven mission, giving back is ingrained in everything we do at FIGS and has been from the beginning. When we started FIGS, we created an initiative called Threads for Threads to donate scrubs to healthcare professionals who work in resource-poor countries and lack the proper uniforms to do their jobs safely. By providing clean scrubs to these individuals, we aim to empower them and improve the quality of care they provide. Our efforts have been supported by over 60 organizations who understand the needs of local healthcare professionals and work with us to ensure that we provide what is needed. To date, we have donated hundreds of thousands of FIGS scrubs and other products to medical professionals in need.
In an effort to empower and support our healthcare community, we have also given in a variety of other ways, including by:
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Working with our community of Ambassadors to provide time, expertise and care to local healthcare institutions, providers and patients through medical giving trips; |
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Granting funds through our New Icons initiative to help pay the tuition of selected Awesome Humans who represent the next generation of healthcare; |
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Promoting diversity and inclusion in the healthcare profession by donating to, and raising awareness for, organizations with our shared values, such as the National Black Nurses Association and Student National Medical Association; |
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Creating a special capsule collection, through which we donated funds to Wild Aid for each product sold within the collection, to help fight poaching and climate change and to protect endangered species; and |
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Donating funds and supplies to support rehabilitation efforts following the 2020 wildfires in Australia. |
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In response to the COVID-19 pandemic, in 2020, we focused our giving efforts locally in the United States, donating personal protective equipment, scrubs, funds and other essential products to frontline workers affected by the pandemic.
Through all of these efforts, our approach is simple: we give back to the healthcare community that gives so much of itself to serving others.
Our Recent Financial Performance
We have demonstrated rapid growth, strong profitability and positive cash flow generation. In 2020, we achieved the following results compared to 2019:
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Expanded our community of active customers by 118% from 0.6 million to approximately 1.3 million; |
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Increased net revenues from $110.5 million to $263.1 million, representing 138% year-over-year growth; |
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Increased gross margin by 50 basis points from 71.8% to 72.3%; |
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Improved net operating (loss) income from $(0.3) million to $57.9 million; |
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Increased Adjusted EBITDA from $1.7 million to $69.1 million, representing an Adjusted EBITDA margin of 26.3% in 2020; |
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Increased cash flow from operations from $6.5 million to $21.7 million; and |
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Increased free cash flow from $1.8 million to $19.5 million. |
Active Customers (in millions) |
Net Revenues ($ in millions) |
Net Operating (Loss) Income ($ in millions) |
Adjusted EBITDA ($ in millions) |
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*NM = Not Meaningful
We define an active customer as a unique customer account that has made at least one purchase in the preceding 12-month period. See the section titled Selected Financial DataNon-GAAP Financial Measures for information regarding Adjusted EBITDA, Adjusted EBITDA margin and free cash flow, including a reconciliation to the most directly comparable financial measures prepared in accordance with U.S. GAAP.
Our Market Opportunity
Healthcare Apparel Is a Large, Growing and Non-Discretionary Industry.
According to the Bureau of Labor Statistics, the healthcare sector is the largest and fastest growing job segment in the United States, employing over 20 million professionals in 2020. Total U.S. employment between 2019 and 2029 is expected to grow by 15% for all healthcare professionals versus just 4% for all occupations. Within this growing market, healthcare apparel is a large, fundamentally attractive industry underpinned by its
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scale, recurring nature and compelling growth outlook. In 2020, the total addressable market of the healthcare apparel industry was an estimated $12.0 billion in the United States and $79.0 billion globally, according to an April 2021 Frost & Sullivan study that we commissioned. Unlike most other categories in the apparel sector, the healthcare apparel industry is largely non-discretionary, recession resistant and much less susceptible to fashion or fad risk. Hospitals, medical offices, clinics and laboratories routinely require healthcare professionals such as doctors, nurses and medical technicians to wear scrubs, lab coats and other medical apparel during every shift. Over time, healthcare apparel purchasing has shifted from institutions to the individual, with approximately 85% of all medical professionals now purchasing their own uniforms. Due to frequent wear, healthcare apparel continuously needs to be replenished, resulting in highly predictable, recurring demand for such products.
The Industry Has Historically Lacked Innovation.
Prior to FIGS, the healthcare apparel industry had operated for over 100 years with little change or innovation. Despite attractive market fundamentals, the industry had been held back, and its consumers underserved, by legacy participants with outdated business models.
We believe that key limitations of industry incumbents include:
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Commoditized Products. Legacy manufacturers typically sell commoditized product offerings that are notoriously ill-fitting, uncomfortable, baggy, boxy and lacking in design and functionality, with minimal focus on fabric technology or performance. In addition, any adjacent lifestyle products offered by these manufacturers are extremely limited. |
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Brand Obscurity. Traditional scrubs manufacturers sell under third-party licenses, and therefore do not retain control over the product and have limited ability to promote brand loyalty. |
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Antiquated Distribution. An outdated distribution strategy causes incumbent manufacturers to rely on a highly fragmented network of discount brick-and-mortar medical supply stores, often in inconvenient locations, and unappealing aggregated online sites operated by third-party retailers. |
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Channel Conflict. Due to legacy wholesale relationships, many incumbent manufacturers do not sell DTC despite consumers growing desire to engage directly with brands. |
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Customer Separation. Incumbent manufacturers generally do not have a direct connection with the end customerthe healthcare professional. As a result, they lack valuable feedback regarding customers needs and preferences. |
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Challenged Margins. Structurally challenged margin profiles, stemming from third-party brand licensing and wholesale distribution economics, likely impacts incumbent manufacturers ability to invest in product innovation, marketing and customer experience. |
The Industry is Fundamentally Changing.
We believe the healthcare apparel sector is positioned for continued strong growth driven by the following key industry dynamics:
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Resilient Industry with Favorable Long-Term Trends. The healthcare apparel industry is growing and has demonstrated resilience across economic cycles, driven by the non-discretionary, replenishment nature of its products and the secular growth of the healthcare sector. |
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Increased Demand for Healthcare Professionals. Healthcare is the fastest growing job sector in the United States, having grown by 22% from January 2011 to January 2020. With an expanding aging population, proliferation of chronic illness, greater access to healthcare in the United States provided by the Affordable Care Act and an increasing focus on health and wellness, the demand for healthcare professionals continues to grow. |
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Acceleration of eCommerce. The shift to eCommerce is rapidly accelerating as consumers continue to embrace the convenience of online and mobile shopping. For healthcare professionals who work long shifts and all hours of the day and night, the convenience of eCommerce is even more necessary. |
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Attraction to Purpose-Driven Brands. Consumers are increasingly attracted to, and interested in engaging with, purpose-driven brands using social media channels. Particularly among Millennials and Generation Z, purpose-driven brands are the expectation, not a luxury. |
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Magnified Importance of Technically Advanced Healthcare Apparel. The COVID-19 pandemic has magnified the indispensability of healthcare professionals. During a time when the need for high-performance healthcare apparel has never been greater, we quickly rose to the challenge by ramping up production to meet demand and by donating PPE, scrubs, funds and other essential products to frontline workers. Due to the pandemic, more healthcare professionals are choosing to wear medical apparel, and a greater number of hospitals, medical offices and clinics are requiring staff to wear scrubs and other medical apparel. While we demonstrated consistent and significant growth prior to 2020, we believe the pandemic has accelerated awareness of the FIGS brand and a shift in purchasing decisions that will continue to drive future growth. |
Supported by these key trends, the healthcare apparel industry is expected to demonstrate strong and consistent growth, with the total addressable market in the United States expected to grow by a 6.1% CAGR over the next five years, from approximately $12.0 billion in 2020 to approximately $16.0 billion in 2025, according to the Frost & Sullivan study.
What Sets Us Apart
We believe that the following competitive strengths have been key drivers of our success to date and strategically position us for continued success.
Deeply Passionate, Loyal Community
We have been building a large, growing community of deeply loyal customers who share an authentic emotional connection with FIGS. During 2020, our community more than doubled to approximately 1.3 million active customers, about 60% of whom were repeat customers. Our brand awareness is driven largely by word of mouth among healthcare professionals who are passionate about FIGS, and whose passion quickly spreads through hospitals and healthcare institutions, where thousands of healthcare professionals often work in close proximity to one another. In addition, through our digital platform and social media presence, we provide venues for our community to engage with each other on common ground. We are proud that our products and digital platform are connecting healthcare professionals and bridging gaps that previously existed across varying disciplines and experience levels. Through our digital platform, we showcase the daily wins and challenges healthcare professionals experience and highlight their stories of courage, dedication and selflessness. Our strong customer loyalty is demonstrated by our compelling revenue retention metrics. In 2020, we retained 75% of the 2019 and prior cohorts net revenues, including 100% of the 2019 net revenues generated by 2018 and prior cohorts.
Authentic, Category-Defining Brand
FIGS is the first digitally native lifestyle brand outfitting healthcare professionals. Our brand represents high quality, functional, comfortable and stylish products combined with a seamless digital customer experience that healthcare professionals have never experienced before. Many of our customers form a deep emotional connection with our brand because we are the first brand in the industry to seek relentlessly to understand and fulfill their unique needs. We are purpose-driven with a mission to celebrate, empower and serve those who serve others, and this purpose resonates with our community. We collaborate with other highly regarded brands to further extend our brand reach and enhance our appeal with customers. Through our Ambassador Program, we have formed meaningful relationships with over 250 Awesome Humans who help us reach millions of healthcare
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professionals around the world in an intimate, authentic and personalized way. Our strong brand affinity is demonstrated by our high Net Promoter Score of +81. See the section titled Industry and Market Data for additional information regarding Net Promoter Score.
Industry-Leading Product Innovation
We strive to create the most innovative, functional, comfortable and stylish healthcare apparel in the industry. Our design philosophy stems from an unwavering focus on what healthcare professionals need from their apparel in order to look, feel and perform at their best. Our innovative products are designed, sourced and manufactured from the fiber level. Our proprietary FIONx fabric technology is made from what we believe to be the best combination of materials and is core-spun for maximum durability to withstand the demands of a healthcare professionals work without sacrificing comfort. We design products that offer technical features such as four-way stretch, anti-odor, anti-wrinkle, and moisture-wicking properties. Our approach and products are distinct from those of legacy manufacturers, who offer poorly fitting scrubs and other commoditized healthcare apparel offerings. We attribute our ability to develop superior products to a number of factors, including our talented design, product development and production teams, feedback from healthcare professionals, our data-driven design process, and our obsessive focus on quality. Through those factors, we seek to create products that healthcare professionals never even knew they needed or wanted, and that not only meet but exceed their expectations. We dream about inventing the future so that design is aesthetically pleasing, while also solving real problems for our community. This combination of form and function results in a range of products that deliver maximum comfort, function and style.
Digitally Native Direct-to-Consumer Strategy
Our business is powered by a digitally native DTC strategy, which offers significant competitive advantages. Unlike most incumbent scrubs manufacturers, who sell through legacy distribution channels and do not have direct touchpoints with the end customer, we directly engage with and serve medical professionals through our digital platform. By owning all aspects of the customer experience, including website and app design, marketing content, storytelling and post-purchase customer engagement, we deliver an elevated, personalized and seamless experience. Our DTC strategy also gives us access to valuable real-time customer data that we leverage in all aspects of our business, including apparel design and merchandising, customer acquisition and retention, demand forecasting and inventory optimization. We are able to use data to tailor the digital experience to healthcare professionals based on a number of factors, including whether that individual has purchased from us before, which products they have purchased, what size they wear, which colors they prefer and what type of healthcare professional they are. We capture demographic, geographic and psychographic data that enables us to reliably predict buying patterns, leading to operational efficiencies throughout our supply chain, inventory management and new product development.
Highly Effective Merchandising and Product Launch Model
We have developed a highly effective merchandising strategy, anchored by our recurring, functional offering of 13 core scrubwear styles, which represented approximately 82% of our net revenues in 2020. We offer these core styles in six core colors as well as limited edition colors to generate excitement around the brand and create a sense of purchase urgency. The remaining 18% of net revenues in 2020 was generated by limited edition scrubwear styles as well as our lifestyle apparel and other non-scrub offerings, which include lab coats, underscrubs, outerwear, activewear, loungewear, compression socks, footwear, masks, face shields and other products. For our limited edition colors and styles, we utilize a disciplined buying approach with shallow initial buys and data-driven repurchasing decisions to minimize inventory risk while creating scarcity. We launch limited edition colors or styles approximately weekly, driving recurring traffic to our digital platform where customers often purchase limited edition products along with our core offerings. These launches not only drive interest in the limited edition products themselves, they also drive our core business, as, on average, 90% of sales
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on launch days are core styles. This innovative, lower-risk merchandising strategy drives recurring demand while maintaining inventory efficiency. As an additional benefit, our approach has resulted in a return rate of approximately 10% in 2019 and 2020, which is far lower than the broader online apparel return rates that tend to be in the 30% to 40% range.
Attractive Financial Profile Driving Robust Growth, Profitability and Cash Flow Generation
Our business model supports our attractive financial profile characterized by robust growth, profitability and cash flow generation. We have built an industry-leading business with only approximately $60.0 million of outside equity capital raised between 2013 and 2020, reflecting our focus on scalability and capital efficiency. As a successful DTC brand with a highly effective merchandising model, we benefit from structurally advantaged product margins. Through our DTC strategy, we leverage data in our marketing initiatives to drive efficient customer acquisition and retention, which has contributed to our rapid growth and strong profitability. In 2020, we delivered net revenue growth of 138%, gross margins of 72.3%, operating income margins of 22.0% and Adjusted EBITDA margins of 26.3%. Due to our modest capital expenditure requirements, we enjoy significant cash flow generation.
Mission-Driven, Founder-Led Culture and Execution
Our company culture, strategic vision and operational execution are driven by our visionary co-founders and co-Chief Executive Officers, Heather Hasson and Trina Spear. Ms. Hasson and Ms. Spear are successful entrepreneurs who offer highly complementary skillsets that have helped to scale FIGS from selling out of the back of a car to generating net revenues of $263.1 million in 2020. Our Chief Financial Officer, Jeff Lawrence, who previously served as Chief Financial Officer of Dominos Pizza, brings over 25 years of experience from his prior roles driving technology and digital strategies, international expansion and overall financial success.
Our company culture mirrors our founders mission to celebrate, empower and serve those who serve others. We understand that authentically serving humans starts from within, and we are passionate about supporting our community and ensuring that our company reflects the world we want to live in. Through Threads for Threads, we donate medical apparel to healthcare professionals in need around the world. We are committed to operating responsibly and promoting ethical and sustainable business practices through our sourcing and manufacturing. We prioritize building a diverse, inclusive, equitable and supportive team that is driven by creativity and purposeful innovation.
Our Growth Strategies
In 2020, the total addressable market of the U.S. healthcare apparel industry was approximately $12.0 billion, according to the Frost & Sullivan study. We estimate that, notwithstanding our rapid growth to date, our share of the U.S. healthcare apparel industry is currently approximately 2.1%, presenting substantial opportunity for further growth. We believe we are well-positioned to significantly expand our market share and drive sustainable growth and profitability by executing on the following strategies:
Continue to Increase Customer Loyalty
We have the opportunity to create customers for lifecustomers who return to FIGS repeatedly throughout their medical careers. Healthcare apparel continuously needs to be replenished, resulting in highly predictable, recurring demand. As a result, customer loyalty and retention will continue to be a key driver of our growth. We encourage repeat purchases by introducing innovative limited edition styles, products and color drops. We inspire customer loyalty by building authentic relationships with our community and by creating thoughtful brand and performance marketing focused on retention. For example, through our #FIGSLOVE program, we send special gifts, such as embroidered lab coats, to members of our community when they graduate from school, open a new practice or reach other career milestones. We aim to be part of their journey, building deep, lasting relationships along the way.
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For customers that were acquired between 2017 and 2019, approximately 50% returned for a second purchase, demonstrating our high customer retention and engagement. After a second purchase, 63% of those customers in that cohort purchased again. After a third purchase, 70% of those customers in that cohort purchased yet again. For our repeat customers, the average number of days between purchases is 98 days. Customers that we retain also tend to spend more with us over time. Our 2017, 2018 and 2019 customer cohorts increased revenue per customer per cohort from year 0 to year 1 by 54%, 52% and 62%, respectively. Our repeat customers make frequent purchases, buy a variety of products and become evangelists for our brand. By leveraging data analytics and developing new personalization capabilities, we plan to continue to deepen our existing customer relationships to further improve our strong customer retention and engagement.
Grow Brand Awareness and Attract New Customers
As of March 31, 2021, we served a community of approximately 1.5 million active customers, which compares to a broader total addressable market of over 20 million healthcare professionals in the United States. In addition, while men on average represented approximately 25% of the U.S. healthcare workforce in 2019, our mens business represented only 17% of our net revenues in 2020, presenting significant opportunity to expand our customer base.
We have a significant opportunity to grow brand awareness and attract new customers to FIGS through word of mouth, brand marketing and performance marketing. Among U.S. healthcare professionals and medical students, we have aided and unaided brand awareness of 55% and 22%, respectively, according to a survey performed by Frost & Sullivan. See Industry and Market Data for additional information. Hospitals and other healthcare institutions, which often employ thousands of healthcare professionals working in close physical proximity on a daily basis, serve as ideal environments for growing awareness of our brand through word of mouth. Brand marketing and performance marketing also work together to drive millions of visits to our digital platform. We create differentiated brand marketing content to grow and retain our loyal community while highlighting the spirit of the FIGS brand. We leverage authentic relationships with healthcare professionals who serve as Ambassadors by exhibiting outsized engagement with our community through social media. We complement social media efforts with offline brand marketing strategies, such as billboards and commercials, that deliver emotional and inspiring content that drive brand awareness. Our digital-centric performance marketing efforts are designed to drive customers from awareness to consideration to conversion. These efforts include retargeting, paid search and product listing advertisements, paid social media advertisements, search engine optimization, personalized email and mobile push notifications through our app. Our highly productive, diversified strategy generates a significant return on new customer acquisition investments resulting from high average order value, strong product margins and attractive repeat purchase behavior.
Broaden Our Lifestyle Offerings
We intend to continue to leverage healthcare professionals trust in our technical function, fit, comfort and style, as well as our rapid product development capabilities to broaden and deepen our product offerings. We have strategically expanded our addressable market over time by creating new innovative products and entering or creating new categories that are complementary to our core offerings. Our category expansion strategy is focused on outfitting the medical professionalon and off shiftto work, at work and from work. Our customers often begin their FIGS journey with our core scrubs and expand their purchases to limited edition scrubs and lifestyle and other products, such as underscrubs, outerwear, activewear, loungewear, compression socks, footwear, masks and face shields. As we continue to expand our offerings to fully outfit the medical professional, we believe we have a significant opportunity to continue to expand our share of both the uniform and lifestyle wardrobe of our customers.
Utilize Data Science to Expand Our Community, Elevate Customer Experience and Drive Intelligent Replenishment
We expect to drive continued growth from our use of proprietary data science. Through hundreds of data attributes associated with millions of customers, we have a unique ability to welcome new healthcare professionals
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to our community and drive repeat business from them. As just one illustration of this, we are able to identify geographic regions where FIGS is under-represented, use our knowledge of existing community members to build machine learning-derived customer segments to identify who is most likely to purchase from us, and drive our customers to a digital experience that is pre-populated with the products most likely to appeal to them.
Similarly, we believe that traditional fixed-time subscription models do not sufficiently leverage data and thus are disconnected from a healthcare professionals actual needs. Instead, we use an intelligent replenishment model that is tied to individualized buying preferences. To us, it is fundamental that we cater to the unique preferences of each healthcare professionalhow often they want to buy certain products, which products they are most likely to buy, and through which channel they are most likely to transact. By leveraging data science, we are able to answer these questions for each member of our large and growing community in increasingly accurate ways, and to create replenishment opportunities that are tied to those customized needs. The healthcare professionals we serve are among the busiest people in the world and we respect their time. Using data science to make their buying experience as seamless and accommodating as possible is a fundamental part of the value we create for our community and we believe will drive continued growth for our business.
Pursue International Expansion
While we expect the majority of our near-term growth to continue to come from the United States, we believe there is a tremendous opportunity over the long term to serve healthcare professionals throughout the rest of the world. According to the Frost & Sullivan study, the number of healthcare professionals and medical students internationally is expected to grow from approximately 118 million in 2020 to an estimated 124 million in 2025, and the total addressable market for international healthcare apparel is expected to grow from an estimated $67.0 billion in 2020 to an estimated $86.0 billion in 2025. In 2020, we successfully piloted international expansion by selling into Australia, Canada and the United Kingdom. Customer reception to date in these markets has been strong and has proven that our brand resonates with customers outside of the United States. Over time, we plan to enter other new markets. We intend to make strategic investments in these markets as we seek to enhance our ability to serve our international customers and further establish FIGS as a global brand. In order to offer a more localized experience to customers internationally, we plan to launch products that are specific to local markets and digital experiences that are tied to local culture. We also intend to offer market-specific languages, currency and content, as well as strategic international shipping and distribution hubs. We plan to leverage our social media strategy and expand our network of Ambassadors to grow our brand awareness globally.
Enter New Professional Markets
Outside of the healthcare apparel industry, we believe we have a compelling long-term opportunity to enter into other uniform-wearing professional markets. In the United States, there are 40 million people outside of healthcare in service-based industries that traditionally wear uniforms every day, such as food service, hospitality, construction and transportation. The occupational nature of these professions is generally hands-on, labor-intensive and often requires apparel with technical specifications. Furthermore, we believe the incumbent apparel manufacturers in these markets suffer from limitations similar to those faced by the legacy healthcare apparel manufacturers. In our view, these marketssimilar to the healthcare apparel markethave long been underserved by incumbent apparel manufacturers and are ripe for disruption. We believe we are strategically positioned to leverage our core competencies to expand into these new markets in the future.
Our Products
We approach product design with the healthcare professional in mind. With an intimate understanding of how medical professionals move, work and interact with colleagues and patients, we seek to design products that solve their unique needs. We are constantly challenging ourselves to create the highest quality and most innovative fabrications, styles and product features for healthcare professionals. Our apparel is comfortable, durable, functional and stylish, all at an affordable price point. As a result of our efforts, healthcare professionals now have a destination to outfit themselves with products that allow them to look, feel and perform at their best.
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We Believe in Continuous Innovation
The needs of healthcare professionals are always changing, and we aim to understand and address their needs through direct interactions with our community. We leverage customer data, customer feedback, focus groups and practitioner testing to understand how to best serve healthcare professionals. Our Ambassadors and other healthcare professionals test our products in real world circumstances and provide valuable and practical feedback. Our tight feedback loop through our digital platform and social media channels, as well as our customer experience team, enables us to quickly incorporate ideas from our community into our product design. The healthcare community is always innovating, and our talented design and product development teams are inspired by this community to create innovative designs that solve real problems. The combinations of art and science, and form and function, create the foundation for every product we make.
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Fabric Innovation for Comfort and Performance. We believe healthcare professionals deserve to be outfitted in technical apparel that allows them to perform at their best, which is why we developed our own proprietary scrubs fabric and fabrication system. Our FIONx scrubs fabric is extremely soft and features Silvadur antimicrobial technology for odor control and fabric durability, four-way stretch to allow for greater mobility, moisture-wicking properties to assist with body temperature regulation and anti-wrinkle for extra convenience. |
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Functional Innovation. We have redefined scrubs to meet the unique needs of healthcare professionals. Our scrubs have a large number of specially designed pockets to comfortably hold professional equipment, such as stethoscopes, iPads, charts, dental loupes and flushes. They also include bungee loops for security badges and other pockets for personal belongings, such as keys, phones, wallets and rings. As an extra surprise, we include a hidden inspirational message on every FIGS product. |
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Fit Innovation. Our technical design team ensures our products are tailored to provide optimal fit, comfort and mobility. In addition, we believe in fit inclusivity and strive to outfit every healthcare professional. Accordingly, we offer seven sizes for women (XXS-2XL), six sizes for men (XS-2XL), three lengths for women (petite, regular, tall) and three lengths for men (short, regular, tall). We also offer various maternity offerings. |
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Style Innovation. We believe that healthcare professionals have the right to be stylish and look good while wearing their uniform. Our design and apparel team is comprised of experts throughout the technical fashion world, ensuring that our products have a sophisticated silhouette in addition to being comfortable, high-performing and functional. Our products are designed for a medical professionals lifestyleon and off shiftto work, at work and from work. |
Product Offerings
Mix of 2020 Net Revenues
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Our core scrubwear assortment, which consists of 13 styles available on our digital platform year-round, represented 82% of our net revenues in 2020. Our core styles consist of three womens scrub tops, four womens scrub pants, three mens scrub tops and three mens scrub pants. We offer these core styles in six core colors as well as new and exciting limited edition colors. In addition to our core scrub styles, we offer scrubs in limited edition styles, which represented 5% of our net revenues in 2020. The remaining 13% of our net revenues was generated from sales of our lifestyle apparel and other non-scrub offerings.
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Core Scrubwear Styles
From left to right: Womens Catarina One-Pocket Scrub Top ($38) & Zamora Jogger Scrub Pants ($48) | Mens Chisec Three-Pocket Scrub Top ($38) & Cairo Cargo Scrub Pants ($48)
Limited Edition Scrubwear Styles
From left to right: Mens Kale Scrub Top ($48) & Lodhi Scrub Pants ($56) | Womens Jundah Scrub Top ($48) & Mundri Scrub Pants ($58) | Womens Keji Scrub Top ($48) | Mens The 20 Pocket Scrub Pants ($56)
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Lifestyle Apparel and Other Non-Scrub Offerings
Our lifestyle apparel and other non-scrub offerings include lab coats, underscrubs, outerwear, activewear, loungewear, compression socks, footwear, masks, face shields and other products. Our lab coats are designed for both students and professionals and feature technical liquid repellent and anti-static fabric with functional pockets for stethoscopes, tablets and pens.
From left to right: Womens Bellvue Long Lab Coat ($118) | Mens Huacho Lab Coat ($128)
Our underscrubs include choices of our supersoft Pima cotton or moisture-wicking performance seamless fabrications.
From left to right: Womens Salta Performance Underscrub ($58) | Mens Makato Performance Underscrub ($58)
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We offer activewear, including sports bras and performance leggings for the active medical professional.
From left to right: 300 Performance Sports Bra ($48) | 300 Performance Legging ($68)
We also offer outwear for healthcare professionals to wear on and off shift, including fleeces and scrubs jackets.
From left to right: Mens On-Shift Fleece ($98) | Womens On-Shift Fleece Vest ($98) | Mens Cobaki Performance Scrub Jacket ($88) | Womens Sydney Performance Scrub Jacket ($88)
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Our mens and womens compression socks feature light compression to help relieve leg fatigue, and we are regularly introducing new sock designs that feature witty sayings or clever puns.
From left to right: Compression Socks Love EKG, Tropical Vibes Black, Pink Pills, Blood, Tropical Vibes Green, Blue Pills ($28)
We also sell a number of other products that are meant to outfit the modern healthcare professional from head-to-toe, including masks, face shields, scrub caps, lanyards and badge reels. We also offer tote bags, fanny packs, backpacks, baseball caps and beanies.
Clockwise from top left: FIGS High-Def Face Shield ($18) | FIONx Face Masks ($8) | FIGS | New Balance ($98)
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Our products work together as part of the FIGS Layering System, and are intentionally designed from base layer to outer layer, on shift to off shift.
Our Community of Awesome Humans
We strive to celebrate, empower and serve healthcare professionals across all levels of experience and areas of expertise. While there is considerable diversity in demographics and income levels within the healthcare sector, we attract a diverse range of healthcare professionals by having a differentiated brand and offering premium products at an affordable price point. We estimate that our active customer mix in 2020 was comprised of the following:
Healthcare Professionals |
Gender |
Age |
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Our customers included a wide range of experience levels and areas of expertise, including registered nurses, nurse practitioners, orthodontists, dental hygienists, pharmacists, physical therapists, occupational therapists, veterinarians, sales representatives, estheticians, speech pathologists, emergency medical technicians, surgeons and healthcare administrators, among others. As a testament to the affordability of our products, in 2020, approximately two-thirds of our customer base earned less than $100,000, and approximately one-third of our customer base earned less than $50,000. Due to the high proportion of our customer mix that is comprised of students and young professionals whose earnings will grow over the course of their careers, we believe we are well positioned to retain and increase engagement of these customers, expanding our share of their uniform and lifestyle wardrobe over time.
Our Marketing Strategy
We create differentiated brand marketing content and utilize performance marketing to drive customers from awareness to consideration to conversion. Our fluidity in brand and performance marketing has led to the creation of a brand characterized by stickiness and high purchase frequency.
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Brand Marketing
We attract and retain customers in large part through our unique ability to engage with our community, which we do across multiple channels, including marketing campaigns, social media and our Ambassador Program.
Marketing campaigns. Our marketing campaigns, which feature some of the Awesome Humans in our community, have established FIGS as a leader of innovative storytelling. All of our creative assets are created in-house, allowing us to launch campaigns at an accelerated pace to celebrate the products we bring to market and the people who will wear them. We launch at least two fully integrated 360-degree marketing campaigns each year that feature Awesome Humans in larger-than-life scenarios, bringing the people, their profession and our brand to life. Campaigns are launched through a holistic, multi-media strategy, where hero messaging and imagery are woven through every platform, including email, digital, display, site, direct-mail, commercials, social media and Ambassadors. We believe our campaigns and inspiring messaging contribute to high brand affinity among our community.
In July 2020, FIGS launched its New Icons Campaign, a 360-degree marketing campaign celebrating healthcare professionals serving on the frontline of the COVID-19 pandemic the way FIGS has always viewed them: as icons. By drawing on the resilience, dedication and endurance required to excel in healthcare, FIGS brought various individuals unique challenges and stories to life. Some of the Awesome Humans featured in The New Icons Campaign included:
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Adam C., M.D.; Emergency Medicine Physician. Adam, an Emergency Medicine Physician, had the unique and challenging experience of fighting the pandemic on both coasts as the surge traveled from New York to California. When COVID-19 hit New York, Adam was just a few months away from completing his Emergency Medicine Residency program. Once his program finished, Adam started his first full-time job in California to fight the second wave of the pandemic. |
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Ana W., R.N.; Emergency Medicine Nurse. As Ana watched the pandemic unfold, she knew she had to leave the comfort of her home in San Diego, California to help her fellow healthcare professionals in New York. With encouragement from her husband and two sons, Ana first joined the frontline responders in Harlem, New York treating COVID-19 patients. She then completed two additional emergency medicine tours in some of the hardest hit areas of Texas leaving her family for upwards of six weeks at a time. |
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Lexie R., R.N.; Pediatric Intensive Care Unit Transport Nurse. Lexie is a nurse and a member of the transport team for her pediatric intensive care unit. Shes on call for up to 96 hours at a time, and when her beeper goes off, she moves into action quickly. She does her job almost entirely in the air, in the confines of a helicopter, with an extremely minimal team. |
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Darien S., M.D., M.B.A.; Emergency Medicine Physician. Darien is a New York-based Emergency Medicine Physician. Darien witnessed the toll of the pandemic while treating patients in the ER. Darien is a medical contributor for ABC News and uses his platforms to educate others, inspire future healthcare professionals and stop the spread of misinformation. |
The New Icons Campaign included commercial films, out-of-home placements, a capsule scrubs collection, digital and social content and the launch of a giving initiative to support the next generation of healthcare professionalsThe New Icons Grants. Five grant winners were selected from thousands of healthcare industry applicants and each received $50,000 to help pay for tuition and student loans.
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Awesome Humans-clockwise from top left: Lexi, Darien, Adam and Ana
Social Media. We were the first healthcare apparel company to have a significant presence on social media. We use social media to foster a dialogue with our community and grow an enthusiastic, highly engaged fan base. On Instagram, our primary platform, we have on average doubled our number of followers year over year since our launch and have a four-year follower growth rate of over 2,400%. Today, we have over half a million followers on Instagram, which is almost twice the number of followers of our nearest competitor. We are proud of our robust following and above-average engagement rate, which was 1.7% in 2020 (versus the industry average of 0.8%). Social media is the primary place for our community to congregate, share stories, follow product launches and interact with our brand, and in turn, our community shares feedback that informs our product and content decisions. We strive to create content that has value and purposewhether to amplify a cause, make people laugh, or to celebrate and educate about our productand social media is where our creativity and deep connection to our community meet.
Our Ambassador Program. FIGS is the first company to have brand ambassadors in the healthcare apparel industry, providing a platform for healthcare professionals to tell their stories. Our Ambassador Program consists of over 250 Awesome Humans from around the world, representing a diverse array of specialties and levels of experience across various professions and geographies. We have formed deep and meaningful relationships with our Ambassadors and their loyalty, love and involvement with our brand fosters organic sharing, storytelling and intimate connections with the millions of healthcare professionals in our community. Our Ambassadors are inspiring, teaching and mentoring the next generation of healthcare professionals, and their impact goes beyond social mediatheyre teaching at conventions, leading organizations and associations, and innovating within their specialties, bringing FIGS with them everywhere they go. Our Ambassadors are an extension of our team, and we regularly speak with them about their lives and how we can help support them. Through annual events, such as our three-day, four-night FIGS Immersion, we bring together our community to share their experiences, heal from trauma and, most importantly, bond. Our Ambassador Program is a microcosm of our FIGS communitythey are invaluable to us, they inspire and inform everything we do, and we would not be where we are today without them.
Performance Marketing
Our performance marketing is rooted in a digital centric approach that aims to offer the right products to the right healthcare professionals at the right times. Our sophisticated performance marketing efforts include retargeting, paid search and product listing advertisements, paid social media advertisements, search engine optimization, personalized email and mobile push notifications through our app. When combined with our community-driven brand marketing, our performance marketing supports attractive customer acquisition and retention metrics. Because we can pinpoint specifically who our customers are and where they live and work, we are able to target them with greater efficiency and less expense than other companies whose customers come from a much less defined group.
Our Teams Business
We have built a differentiated B2B custom platform, known as Teams, to revolutionize, consumerize and elevate what had previously been an outdated buying process for institutional customers. Through Teams, healthcare administrators can seamlessly and efficiently solicit individual orders and then buy FIGS products for their teams with only a few clicks. Our Teams business is centered around partnering with institutional departments and medical offices that wish to standardize and professionalize their teams. Our model is entirely inbound: teams apply to enter our program through an elegant and exclusive, concierge-like experience. We have partnered with departments at renowned institutions such as Childrens Hospital of Los Angeles and the Herman Ostrow School of Dentistry of USC.
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Our Data Analytics
Data is an essential and embedded capability throughout our organization. We have centralized Data Science and Data Engineering teams and de-centralized Data Analysts working directly within each key functional area. This approach enables the harvesting and management of extensive data, the development of a suite of proprietary tools, and the direct and rapid application of data science in core operating activities and decision-making processes throughout the company.
The scale of our data is vast and growing. A rich set of hundreds of data attributes is associated with millions of customers; the customer data set is a blend of first-party, deterministic and observed behaviors along with a complementary, expanded set of enriched elements derived from data science. In addition, we have established a unique approach to capturing and tracking precise and granular data from all stages of the order journey. These extensive data sets are used to build proprietary data science solutions applied to key functions across the company, including product, supply chain, merchandising and inventory management, marketing and customer experience.
Product
Drawing upon our full breadth of data and using data science solutions to cluster, segment and visualize our customers, we are able to develop richly detailed pictures of our customers. We use these personas to shape our unique understanding of our customers and to inform our product development. Our customer and demand prediction models deliver not only direct predictions, but also provide inferences on the drivers of those predictions. Those inferences include powerful insights into the products, features, functionality and other factors that are most likely to drive conversion. We use those inferences as inputs into the product design and development process.
Supply Chain
We have built a proprietary integration for our product lifecycle from purchase order to manufacturing to shipping. This deep integration enables extensive management and oversight of the product flow and also fuels a variety of prediction models (e.g., inventory planning and analytics). By combining the product lifecycle data integration with sophisticated demand predictions, we are able to continuously assess the supply chain and improve efficiency.
Merchandising and Inventory Management
Through our customer ontology, we develop precisely defined customer segments that roll-up into a mosaic representation of our customers. This approach allows us to understand buying behaviors, preferred DTC channels (e.g., site, social, SMS), product preferences and decision drivers. It also enables us to manage purchasing and inventory effectively and efficiently. We use data-driven models to predict and anticipate demand for our products. The high concentration of core scrub sales enables our merchandising and inventory models to be highly predictive, which reliably extends to limited edition product launches through advanced data science techniques. Through our customer and demand predictions, we are able to anticipate optimal times for launch, including day of week and time of day.
Marketing
We are also able to use our customer ontology to create customized segments that can be launched efficiently across media channels. This precise segmentation supports highly tailored messaging and lower costs per impression. We employ a suite of dynamic learning tools to understand creative performance and behavior at a granular customer segment level. These tools enable us to more effectively develop and place our creative assets. Combining our micro-segments and creative optimization drives our ability to create finely tuned campaigns that allow us to reach our target audiences with creative assets that we believe have the highest probability to drive conversion.
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Customer Experience
The integration of our customer ontology and predictions into the engineering of our DTC channels enables customized customer experiences. For example, we are able to use customized email and SMS communication to deliver personalized recommendations and offers that are more likely to convert into a purchase. We continue to evolve the site experience to support tuned recommendations based on prediction models and to offer product bundles based on cluster analysis. Using our customer data, we are able to determine individual customer level predictions to make direct and tailored outreach with messaging that has a higher probability of success for each customer. This means that we can provide a better customer experience by presenting products that the healthcare professionals in our community need, exactly when they need them.
Our Technology
In addition to our use of data analytics throughout the company, we internally develop custom, proprietary technology solutions where doing so would be a true differentiator and core to the unique needs of our community, and we otherwise leverage best-of-breed, third-party components and software to help build out our platform capabilities. Consistent with this philosophy, we created our own headless digital platform, which is a fully customized front-end architecture that allows our community of healthcare professionals to experience features and functionality that are specifically tailored to their needs. We then combine that customized presentation layer with the backend engine from Shopify, which is a proven and industry-leading e-commerce solution. By pairing our own in-house technology with cloud software, we have been able to create a truly differentiated user experience that we can adjust as necessary while also leveraging engineering talent from some of the best SAAS companies in the world to scale rapidly and efficiently.
Supply Chain
We have built a supply chain that is optimized for our business and through which we control the design, development and fulfillment of our products.
Manufacturing
We have a diversified and flexible supply chain that leverages third-party suppliers and manufacturers to produce our raw materials and finished products. We directly and actively manage every step of our product development and production process. The extent to which we manage production is differentiated from the typical model of primarily relying on third-party agents to manage production. We believe our approach has enabled us to produce premium products through greater control of the end-to-end production process.
Our in-house innovation and design team works closely with our suppliers to develop the materials for our products that meet our exact specifications for comfort, stretch, durability, functionality and performance. Approximately 92% of our production utilizes our main scrubwear fabric technology FIONx, which enables us to achieve consistency and scale. Our in-house production team selects our fabric and trim suppliers, directly manages the relationships between these suppliers and our finished product manufacturers, and drives our production allocation strategy and production schedules.
We have 13 core scrubwear styles that we produce year-round, which represented 82% of our net revenues in 2020. Similar to our core FIONx fabric, the continuous production of our core scrubwear styles provides us with consistency and scale in our production. We have three manufacturing partners that produce our core scrubwear styles across nine different facilities in South East Asia. For production outside of our core scrubwear category, we have additional manufacturing partners located across Asia and South America. In total, we manage a diversified supplier network consisting of approximately 30 global production partners across 12 countries.
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As a company devoted to the needs of healthcare professionals, quality is critically important to us. We have our own in-house quality control team and also independent third-party quality controllers that each conduct detailed quality control checks on our fabric, trims and finished products to ensure that our extremely high quality standards are met. We maintain stringent Acceptable Quality Limit, or AQL, standards, which define the level of quality required to pass our inspection processes. Within our core scrubwear, we maintain an AQL of 1.5 for our finished garment production, which is significantly more rigorous than the apparel industry average of 2.5.
We purchase our finished product from our manufacturers on a purchase order basis and do not have any long-term agreements requiring us to use any supplier or manufacturer. We have long-standing relationships with our vendors, which are strengthened by the consistency and longevity of our core fabric and core style profile. Further, unlike typical apparel brands, we offer our manufacturing partners predictable and consistent growth in inventory purchases with less seasonality.
We regularly source new suppliers and manufacturers to support our ongoing innovation and growth, particularly in our non-scrub categories, and we carefully evaluate all new suppliers and manufacturers to ensure they share our standards for quality of manufacturing, ethical working conditions and social and environmental sustainability practices. In line with our values, we require all of our manufacturers to be certified through the Worldwide Responsible Accredited Production (WRAP) program, which is an independent organization dedicated to promoting safe, lawful, humane and ethical manufacturing. Furthermore, we require all suppliers and manufacturers to contractually commit to upholding these standards. Once a vendor is part of FIGS production network, our in-house production team partners with third-party inspectors to closely monitor each partners compliance with applicable laws and FIGS standards on an ongoing basis.
Warehouse and Embroidery
We ship our finished products to customers across the United States as well as internationally to Australia, Canada and the United Kingdom. We distribute our products from our fulfillment center located in City of Industry, California, where we have created an innovative warehouse-within-a-warehouse model at our third-party logistics providers site. Within this space, we also operate a technology-enabled embroidery workshop, through which we offer text and logo embroidery on scrub tops, lab coats and outerwear, enabling our healthcare professionals to tell the world who they are and what they do. Our embroidery workshop is fully staffed by FIGS embroidery team members who complete the application and quality control of our embroidery product. We regularly evaluate our distribution infrastructure and capacity to ensure that we are able to meet our anticipated needs and support our continued growth.
Our People and Human Capital
As a company whose mission is to celebrate, empower and serve those who serve others, we understand that authentically serving humans starts from within. At FIGS, we are creating the world we want to live in, and we work hard to ensure that our company reflects what we want to see in our community. We prioritize building a diverse, inclusive, equitable and supportive team that is driven by creativity and purposeful innovation and represents a mix of gender, racial and ethnic backgrounds, industries and levels of experience.
We are growing fast and recognize that the awesome individuals who work at FIGS are at the center of our success. As of March 31, 2021, we employed 202 team members in the United States across our Santa Monica, California headquarters, our City of Industry, California fulfillment center location and remote locations, with women and people of color representing 68% and 38%, respectively, of our workforce, as of March 10, 2021. None of our employees is represented by a labor union. We have not experienced any work stoppages and we consider our relations with our employees to be good.
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We believe that in order to be successful, each of our employees must feel empowered to be able to show up as their true authentic selves. As we continue to grow, we are proactive in ensuring that every single person at FIGS has a platform to be seen, heard and celebrated. To accomplish this goal, we are intensely focused on our culture, recruiting, retaining and incentivizing our employees, employee development and engagement, diversity, equity and inclusion and community outreach. In 2020, we launched a Culture Committee to foster an empowering and supportive experience for all FIGS employees and help ensure that all FIGS voices are represented and heard. In addition, in light of COVID-19, we introduced new well-being perks, like food delivery stipends and virtual gym memberships, and team-building initiatives to nurture a sense of togetherness during a time when we could not be together physically.
Competition
Competition in the healthcare apparel industry is principally on the basis of product quality, innovation, style, price, brand image, distribution model, as well as customer experience and service. We believe we have competitive advantages from our technical product innovation, our focus on empowering the community of healthcare professionals, and our high quality brand image. In addition, we believe our digitally native DTC distribution strategy differentiates us from the industry incumbents and allows us to establish personal customer relationships and more effectively support healthcare professionals. We are also differentiated by our commitment to community-based marketing that increases brand awareness and strengthens customer loyalty.
The healthcare apparel industry includes established companies as well as new entrants. We compete against wholesalers of healthcare apparel, such as Careismatic Brands, Barco Uniforms, Landau Uniforms and Superior Group of Companies. Additionally, we compete with healthcare apparel aggregated retailers, such as Scrubs & Beyond and Uniform Advantage, as well as DTC brands such as Jaanuu.
Government Regulation
In the United States and the other jurisdictions in which we operate, we are subject to labor and employment laws, laws governing advertising, safety regulations and other laws, including consumer protection regulations that apply to the promotion and sale of merchandise and the operation of fulfillment centers and privacy, data security and data protection laws and regulations, such as the California Consumer Privacy Act (CCPA), the General Data Protection Regulation 2016/679 (GDPR), the ePrivacy Directive and national implementing and supplementing laws in the European Economic Area. Our products sold outside of the United States may be subject to tariffs, treaties and various trade agreements, as well as laws affecting the importation of consumer goods. We monitor changes in these laws and believe that we are in material compliance with applicable laws.
Our Intellectual Property
To establish and protect our proprietary rights, we rely on a combination of trademark, patent, copyright and trade secret laws, as well as contractual restrictions in license agreements, confidentiality and non-disclosure agreements and other contracts. Our intellectual property is an important component of our business, and we believe that our know-how and continuing innovation are important to developing and maintaining our competitive position. We also believe having distinctive marks that are readily identifiable on our products is an important factor in continuing to build our brand and distinguish our products. We consider the FIGS name and CROSS & SHIELD logo trademarks to be among our most valuable intellectual property assets. In addition, we have applied to register or have registered the trademarks for several of our fabrics and product names, and have also sought and/or obtained trademark registrations for several of our tag lines.
As of March 31, 2021, we owned five U.S. trademark registrations, had six pending U.S. trademark applications, owned 53 foreign trademark registrations and had 27 pending foreign trademark applications.
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As of March 31, 2021, we had 14 pending U.S. design patent applications and 39 foreign design registrations. Each of these designs relates to our core scrubs. The term of protection for design patents and design registrations is limited in duration and depends on the jurisdiction in which they are granted. Although our U.S. design patent applications have not yet issued, the term for any resulting issued design patents in the U.S. generally extends 15 years from the date of patent grant. If the foreign design registrations issued to us are maintained until the end of their terms, they are expected to expire in 2025, at which point we intend to renew them, to the extent they are renewable. We intend to pursue additional intellectual property protection to the extent we believe it would be beneficial and cost-effective.
While there is no active litigation involving any of our patents or other intellectual property rights, and we have not received any notices of patent or other intellectual property infringement, we may be required to enforce or defend our intellectual property rights against third parties in the future. See Risk FactorsRisks Related to Information Technology, Intellectual Property and Data Security and Privacy for additional information regarding these and other risks related to our intellectual property portfolio and their potential effect on us.
Our Facilities
We are headquartered in Santa Monica, California, where we lease approximately 27,000 square feet of office space under a lease agreement that expires in January 2030. We designed, built and use this location for product innovation and design, content creation, technology, customer experience, as well as our other teams. We also maintain a dedicated photo studio space at this location.
We also operate a 6,000 square foot embroidery workshop within our approximately 166,700 square feet of dedicated warehouse space at our third-party logistics providers location in City of Industry, California, which we lease pursuant to a services agreement.
We believe that these facilities are sufficient to meet our current and anticipated future needs and that suitable additional space will be available as needed to accommodate expansion of our operations.
Legal Proceedings
On February 22, 2019, Strategic Partners, Inc., or SPI, filed an action against us (later naming our co-founders and co-Chief Executive Officers) in the Superior Court for the County of Los Angeles, in which SPI alleges, among other things, false advertising, unfair business practices, untrue and misleading advertising, intentional interference with prospective economic relations, conversion and breach of fiduciary duty. The case was removed to the U.S. District Court for the Central District of California in March 2019 and is ongoing. On September 3, 2019, SPI filed an additional action against our co-founders and co-Chief Executive Officers (later naming us) in Los Angeles Superior Court covering the same subject matter as the previously filed federal action; this later state court action has been stayed until the conclusion of the federal court action. SPI has not quantified any of the alleged damages with particularity. We believe the claims asserted by SPI in both actions are without basis or merit, and we intend to vigorously defend against such claims.
In addition to the matter described above, from time to time, we have been and may become subject to arbitration, litigation or claims arising in the ordinary course of business. The results of any current or future claims or proceedings cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and litigation costs, diversion of management resources and other factors.
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The following table provides information regarding our executive officers, directors and director nominees as of the date of this prospectus.
Name |
Age |
Position(s) |
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Executive Officers: |
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Heather Hasson |
39 |
Co-Founder, Co-Chief Executive Officer and Director |
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Trina Spear |
37 |
Co-Founder, Co-Chief Executive Officer and Director |
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Jeffrey D. Lawrence |
47 |
Chief Financial Officer |
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Non-Employee Directors and Director Nominees: |
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J. Martin Willhite |
50 |
Director |
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Director Nominee |
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Director Nominee |
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Director Nominee |
(1) |
Member of the Nominating and Corporate Governance Committee. |
(2) |
Member of the Audit Committee. |
(3) |
Member of the Compensation Committee. |
(4) |
Will join our board of directors immediately upon the effectiveness of the registration statement of which this prospectus is a part. |
Executive Officers
Heather Hasson co-founded our company and serves as our co-Chief Executive Officer and as a member of our board of directors. Prior to co-founding FIGS, Ms. Hasson was an entrepreneur, having served as founder and CEO of Heather Hasson bags, a high-end bag line, and FIGS Ties, a tie and scarf company. Since January 2021, Ms. Hasson also has served as a member of the board of directors of G Squared Ascend I Inc. and G Squared Ascend II Inc., two blank check companies, and as a member of the board of directors of RxArt, a non-profit whose mission is to help children heal through the extraordinary power of visual art. Ms. Hasson holds a B.A. in Political Science from the University of Wisconsin-Madison. We believe that Ms. Hasson is qualified to serve as a member of our board of directors based on her experience in the apparel industry and the knowledge of our company she brings as our co-founder and co-Chief Executive Officer.
Trina Spear co-founded our company and serves as our co-Chief Executive Officer and as a member of our board of directors. Prior to co-founding FIGS, Ms. Spear served as an Associate at the Blackstone Group Inc. Ms. Spear began her career at Citigroup Global Markets Inc. Since August 2020, Ms. Spear also has served as a member of the board of directors of one, a blank check company. Ms. Spear holds a B.A. in Economics from Tufts University and an M.B.A. from Harvard Business School. We believe that Ms. Spear is qualified to serve as a member of our board of directors based on the perspective and experience she brings as our co-founder and co-Chief Executive Officer.
Jeffrey D. Lawrence has served as our Chief Financial Officer since December 2020. Prior to joining our company, Mr. Lawrence served as Executive Vice President and Chief Financial Officer of Dominos Pizza, Inc., a global, publicly traded restaurant chain, where he had worked since May 2000. Prior to joining Dominos, Mr. Lawrence was a Manager of Audit and Business Advisory Services at Arthur Andersen LLP, an accounting firm, from July 1995 to May 2000. Mr. Lawrence holds a B.B.A. in Accounting from Wayne State University and an M.B.A. from the Stephen M. Ross School of Business at the University of Michigan.
Non-Employee Directors and Director Nominees
J. Martin Willhite has served as a member of our board of directors since February 2019. Since June 2017, Mr. Willhite has served as Vice Chairman at Tulco, LLC, an investment firm. Before that, from October 2011 to June 2017, Mr. Willhite served as General Counsel at Legendary Entertainment, a film and television production company, where he also served as Chief Operating Officer from April 2013 to June 2017. Before that,
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Mr. Willhite was a Partner at Munger, Tolles & Olson, LLP, a law firm. Mr. Willhite holds a B.A. in Philosophy from Brigham Young University and a J.D. from Loyola Law School. We believe that Mr. Willhite is qualified to serve as a member of our board of directors based on his broad leadership, operational, legal and transactional experience.
Family Relationships
There are no family relationships among any of our director nominees, directors or executive officers.
Board of Directors Composition
Our business and affairs are managed under the direction of our board of directors. Our board of directors currently consists of members with no vacancies.
Pursuant to our amended and restated certificate of incorporation as currently in effect and the amended and restated stockholders agreement, Heather Hasson, Trina Spear and J. Martin Willhite have been designated to serve as members of our board of directors. Pursuant to our amended and restated stockholders agreement, the stockholders who are party to the agreement have agreed to vote their respective shares to elect (1) Ms. Hasson, for so long as she remains employed by the company and desires to serve on the board of directors, (2) Ms. Spear, for so long as she remains employed by the company and desires to serve on the board of directors, and (3) one director designated by Tulco, LLC, currently J. Martin Willhite. The provisions of the amended and restated stockholders agreement by which these directors are currently elected will terminate in connection with this offering.
We, our co-founders and co-Chief Executive Officers, Ms. Hasson and Ms. Spear, sole holders of our Class B common stock, and Tulco, LLC, sole holder of our Class C common stock, will enter into a voting agreement, effective immediately prior to the completion of this offering, under which each of Ms. Hasson, Ms. Spear and Tulco, LLC will agree, following the offering and upon the terms set forth in the voting agreement, to vote their shares for the election of each of Ms. Hasson, Ms. Spear and for so long as Tulco, LLC and its permitted transferees hold, in the aggregate, at least 10% of the total number of outstanding shares of all classes of our common stock (calculated on a diluted basis to include any issued and outstanding options, RSUs or other equity awards, whether vested or unvested), an individual designated by Tulco, LLC, who shall initially be Mr. Willhite, to our board of directors, and to vote against their removal. The voting agreement will be in effect until: (1) with respect to each co-founder, upon such founders death or disability, (2) the time at which none of the co-founders or their permitted transferees hold shares of Class B common stock or all outstanding shares of Class B common stock automatically convert to Class A common stock and (3) with respect to Tulco, LLC, the time at which Tulco, LLC and its permitted transferees cease to hold, in the aggregate, at least 10% of the total number of outstanding shares of all classes of our common stock (calculated on a diluted basis to include any issued and outstanding options, restricted stock units or other equity awards, whether vested or unvested). The conversion of our Class B common stock and Class C common stock to Class A common stock is provided for in our amended and restated certificate of incorporation, see section titled Description of Capital StockCommon StockConversion.
After this offering, the number of directors will be fixed by our board of directors, subject to the terms of our amended and restated certificate of incorporation and amended and restated bylaws, each of which will become effective immediately prior to the completion of this offering. Each of our current directors will continue to serve until the election and qualification of his or her successor, or his or her earlier death, resignation or removal.
Classified Board of Directors
Our amended and restated certificate of incorporation that will be in effect upon the completion of this offering provides that, upon the completion of this offering, our board of directors will be divided into three classes with staggered three-year terms. Upon expiration of the term of a class of directors, directors for that class will be elected for three-year terms at the annual meeting of stockholders in the year in which that term expires. As a result, only one class of directors will be elected at each annual meeting of our stockholders, with the other classes continuing for the remainder of their respective three-year terms. Each directors term will continue until
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the election and qualification of his or her successor, or his or her earlier death, resignation or removal. Our directors will be divided among the three classes as follows:
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Class I directors, whose initial term will expire at our first annual meeting of stockholders following this offering, will consist of and ; |
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Class II directors, whose initial term will expire at our second annual meeting of stockholders following this offering, will consist of , and ; and |
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Class III directors, whose initial term will expire at our third annual meeting of stockholders following this offering, will consist of , and . |
Our amended and restated certificate of incorporation and amended and restated bylaws that will be in effect upon the completion of this offering provide that only our board of directors may fill vacancies on our board. We expect that any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the total number of directors.
The classification of our board of directors may have the effect of delaying or preventing changes in our control or management. See the section titled Description of Capital StockAnti-Takeover ProvisionsAmended and Restated Certificate of Incorporation and Amended and Restated Bylaws Provisions for additional information.
Director Independence
We have applied to have our common stock listed on the NYSE. Upon completion of this offering, our co-founders and co-Chief Executive Officers, Heather Hasson and Trina Spear, and Tulco, LLC will together control a majority of the voting power of our outstanding common stock and intend to enter into a voting agreement with respect to the election of directors. As a result, we will be a controlled company within the meaning of the corporate governance standards of the NYSE. Under these rules, a listed company of which more than 50% of the voting power is held by an individual, group or another company is a controlled company and may elect not to comply with certain corporate governance requirements.
Under the rules of the NYSE, a director will only qualify as an independent director if, in the opinion of that companys board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. As a controlled company we have elected not to comply with the requirement that independent directors must comprise a majority of our board of directors and that our compensation and nominating and corporate governance committees be independent.
Audit committee members must still satisfy the independence criteria set forth in Rule 10A-3 under the Exchange Act. In order to be considered independent for purposes of Rule 10A-3, a member of an audit committee of a listed company may not, other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee: (1) accept, directly or indirectly, any consulting, advisory or other compensatory fee from the listed company or any of its subsidiaries; or (2) be an affiliated person of the listed company or any of its subsidiaries. We intend to satisfy the audit committee independence requirements of Rule 10A-3 as of the completion of this offering. In connection with this offering, our board of directors has undertaken a review of the independence of each director and considered whether each director has a material relationship with us that could compromise his or her ability to exercise independent judgment in carrying out his or her responsibilities. As a result of this review, our board of directors determined that , , and are independent directors as defined under the applicable rules and regulations of the SEC and the listing requirements and rules of the NYSE. In making these determinations, our board of directors reviewed and discussed information provided by the directors and us with regard to each directors business and personal activities and current and prior relationships as they may relate to us and our management, including the beneficial ownership of our capital stock by each non-employee director and the transactions involving them described in the section titled Certain Relationships and Related Party Transactions.
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Lead Independent Director
Our board of directors will adopt, effective prior to the completion of this offering, corporate governance guidelines that provide that one of our independent directors will serve as our lead independent director. Our board of directors has appointed to serve as our lead independent director. As lead independent director, will preside over periodic meetings of our independent directors, serve as a liaison between the chairperson of our board of directors and the independent directors, and perform such additional duties as our board of directors may otherwise determine and delegate.
Committees of Our Board of Directors
Our board of directors has established an audit committee, a compensation committee and a nominating and corporate governance committee, each of which will have the composition and responsibilities described below as of the completion of this offering. Members serve on these committees until their resignation or until otherwise determined by our board of directors. Each committee will operate under a written charter approved by our board of directors that satisfies the applicable rules of the SEC and the listing standards of the NYSE. Following this offering, copies of each committees charter will be posted on the Investor Relations section of our website. The reference to our website in this prospectus does not include or incorporate by reference the information on our website into this prospectus.
Audit Committee
Our audit committee oversees our corporate accounting and financial reporting process and assists our board of directors in monitoring our financial systems. Our audit committee will be responsible for, among other things:
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appointing, compensating, retaining, evaluating, terminating and overseeing our independent registered public accounting firm; |
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discussing with our independent registered public accounting firm their independence from management; |
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reviewing with our independent registered public accounting firm the scope and results of their audit; |
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approving all audit and permissible non-audit services to be performed by our independent registered public accounting firm; |
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overseeing the financial reporting process and discussing with management and our independent registered public accounting firm the interim and annual financial statements that we file with the SEC; |
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reviewing and monitoring our accounting principles, accounting policies, financial and accounting controls and compliance with legal and regulatory requirements; and |
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establishing procedures for the confidential anonymous submission of concerns regarding questionable accounting, internal controls or auditing matters. |
Effective immediately prior to the effectiveness of the registration statement of which this prospectus forms a part, our audit committee will consist of , and , with serving as chair. Our board of directors has affirmatively determined that , and meet the requirements for independence under the current NYSE rules and the additional independence standards applicable to audit committee members established pursuant to Rule 10A-3 under the Exchange Act. In addition, our board of directors has determined that is an audit committee financial expert as defined in Item 407(d) of Regulation S-K promulgated under the Securities Act. Each member of our audit committee is financially literate.
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Compensation Committee
Our compensation committee oversees our compensation policies, plans and benefits programs. Our compensation committee will be responsible for, among other things:
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reviewing and approving corporate goals and objectives relevant to the compensation of our co-Chief Executive Officers, evaluating our co-Chief Executive Officers performance in light of these goals and objectives and setting compensation; |
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reviewing and setting or making recommendations to our board of directors regarding the compensation of our other executive officers; |
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reviewing and approving or making recommendations to our board of directors regarding our incentive compensation and equity-based plans and arrangements; and |
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appointing and overseeing any compensation consultants. |
Effective immediately prior to the effectiveness of the registration statement of which this prospectus forms a part, our compensation committee will consist of , and , with serving as chair. The composition of our compensation committee meets the requirements for independence under the current NYSE listing standards and SEC rules and regulations. Each of , and is a non-employee director, as defined in Section 16b-3 of the Exchange Act.
Nominating and Corporate Governance Committee
Our nominating and corporate governance committee oversees and assists our board of directors in reviewing and recommending nominees for election as directors. Our nominating and corporate governance committee will be responsible for, among other things:
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identifying individuals qualified to become members of our board of directors, consistent with criteria approved by our board of directors; |
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recommending to our board of directors the nominees for election to our board of directors at annual meetings of our stockholders; |
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evaluating the overall effectiveness of our board of directors; and |
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developing and recommending to our board of directors a set of corporate governance guidelines and principles. |
Effective immediately prior to the effectiveness of the registration statement of which this prospectus forms a part, our nominating and corporate governance committee will consist of , and , with serving as chair. The composition of our nominating and corporate governance committee meets the requirements for independence under the current NYSE listing standards and SEC rules and regulations.
Board Diversity
Each year, our nominating and corporate governance committee will review, with the board of directors, the appropriate characteristics, skills and experience required for the board of directors as a whole and its individual members. In evaluating the suitability of individual candidates, our nominating and corporate governance committee will consider factors including, without limitation, an individuals character, integrity, judgment, potential conflicts of interest, other commitments and diversity. While we have no formal policy regarding board diversity for our board of directors as a whole nor for each individual member, the nominating and corporate governance committee does consider such factors as gender, race, ethnicity, experience and area of expertise, as well as other individual attributes that contribute to the total diversity of viewpoints and experience represented on the board of directors.
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Role of the Board in Risk Oversight
Our board of directors has an active role, as a whole and also at the committee level, in overseeing the management of our risks. Our board of directors is responsible for general oversight of risks and regular review of information regarding our risks, including credit risks, liquidity risks and operational risks. The compensation committee is responsible for overseeing the management of risks relating to our executive compensation plans and arrangements. The audit committee is responsible for overseeing the management of risks relating to accounting matters and financial reporting. The nominating and corporate governance committee is responsible for overseeing the management of risks associated with the independence of our board of directors and potential conflicts of interest. Although each committee is responsible for evaluating certain risks and overseeing the management of such risks, the entire board of directors is regularly informed through discussions from committee members about such risks. Our board of directors believes its administration of its risk oversight function has not negatively affected our board of directors leadership structure.
Compensation Committee Interlocks and Insider Participation
None of the members of our compensation committee is or has been an officer or employee of our company. None of our executive officers has served as a member of the board of directors, or as a member of the compensation or similar committee, of any entity that has one or more executive officers who served on our board of directors or compensation committee.
Code of Business Conduct and Ethics
We will adopt a written code of business conduct and ethics that applies to our directors, officers and employees, including our principal executive officers, principal financial officer, principal accounting officer or controller or persons performing similar functions prior to the completion of this offering. Following this offering, a current copy of the code will be posted on the Investor Relations section of our website.
Non-Employee Director Compensation
During the year ended December 31, 2020, J. Martin Willhite was our only non-employee director, and as reflected in the table below, we did not provide him with any cash, equity or other compensation. Our co-founders and co-Chief Executive Officers, Heather Hasson and Trina Spear, are also members of our board of directors but did not receive any additional compensation for service as a director. See the section titled Executive Compensation for more information.
Name |
Fees Earned
or Paid in Cash |
Option
Awards ($) |
Total ($) | |||||||||
J. Martin Willhite |
$ | | $ | | $ | |
We have reimbursed, and will continue to reimburse, any non-employee director for his or her reasonable out-of-pocket expenses incurred in attending board of directors and committee meetings.
Before this offering, we did not have a formal policy to provide any cash or equity compensation to our non-employee directors for their service on our board of directors or committees of our board of directors. In connection with this offering, our board of directors expects to approve a non-employee director compensation policy, which will take effect following the completion of this offering.
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Executive Compensation
This section discusses the material components of the executive compensation program for our executive officers who are named in the 2020 Summary Compensation Table below. In 2020, our named executive officers were as follows:
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Heather Hasson, Co-Chief Executive Officer; |
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Trina Spear, Co-Chief Executive Officer; and |
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Jeffrey D. Lawrence, Chief Financial Officer. |
This discussion may contain forward-looking statements that are based on our current plans, considerations, expectations and determinations regarding future compensation programs. Actual compensation programs that we adopt following the completion of this offering may differ materially from the currently planned programs summarized in this discussion.
2020 Summary Compensation Table
The following table sets forth information concerning the compensation of our named executive officers for 2020:
Name and Principal Position |
Year | Salary ($) | Bonus ($) |
Stock
Awards ($)(1) |
Option
Awards ($)(1) |
All Other
Compensation(3) ($) |
Total ($) | |||||||||||||||||||||
Heather Hasson |
2020 | 456,154 | 1,000,000 | | 38,125,365 | 47,329 | 39,628,848 | |||||||||||||||||||||
Co-Chief Executive Officer |
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Trina Spear |
2020 | 456,154 | 1,000,000 | | 38,125,365 | 64,212 | 39,645,731 | |||||||||||||||||||||
Co-Chief Executive Officer |
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Jeffrey D. Lawrence(2) |
2020 | 1,923 | | | 5,402,086 | | 5,404,009 | |||||||||||||||||||||
Chief Financial Officer |
(1) |
Amounts reflect the full grant-date fair value of stock awards and stock options granted during 2020, rather than the amounts paid to or realized by the named individual. In 2020, Mses. Hasson and Spear were granted RSUs that are subject to both service-based and liquidity-based vesting conditions. As required pursuant to SEC disclosure rules, the grant-date fair values of these awards included in the table above were computed based on the probable outcomes of the performance conditions as of the applicable grant date; achievement of the performance conditions for these RSUs was not deemed probable on the grant date and, accordingly, no value is included in the table for these awards. Assuming achievement of the performance conditions, the values of these RSUs to each of Mses. Hasson and Spear, as of the grant date, are $12,206,554. We provide information regarding the assumptions used to calculate the value of all stock awards and option awards made to named executive officers in Note 12 to the financial statements included in this prospectus. |
(2) |
Mr. Lawrences employment with us commenced on December 31, 2020; therefore, certain amounts for Mr. Lawrence, such as base salary, reflect a partial year of service. |
(3) |
Amounts include Company reimbursement of legal fees. |
Narrative to Summary Compensation Table
2020 Salaries
The named executive officers receive a base salary to compensate them for services rendered to us. The base salary payable to each named executive officer is intended to provide a fixed component of compensation reflecting the executives skill set, experience, role and responsibilities.
In 2020, Mses. Hasson and Spear were each entitled to receive an annual base salary of $375,000, which was increased to $650,000 in September 2020. Mr. Lawrences annual base salary is $500,000. The 2020 Summary Compensation Table above shows the actual base salaries paid to each named executive officer in 2020.
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2020 Bonuses
In 2020, each of Mses. Hasson and Spear was eligible to receive an annual discretionary cash bonus in an aggregate amount no greater than $1,000,000, with such amount determined in the sole discretion of our board of directors. The actual bonuses paid to each executive in 2020 are set forth above in the Summary Compensation Table in the column entitled Bonus. Because Mr. Lawrences employment with us commenced on December 31, 2020, he did not receive a bonus for 2020.
Equity Compensation
We historically have used stock options as the primary incentive for long-term compensation to our employees (including our named executive officers) because they are able to profit from stock options only if our stock price increases relative to the stock options exercise price, which generally is set at or above the fair market value of our common stock as of the applicable grant date. Generally, the stock options we grant vest in equal monthly installments over four years, either monthly during the four-year period or monthly following a one-year cliff, subject to the employees continued service with us as of the vesting date. In 2020, we granted restricted stock units to our co-Chief Executive Officers, Heather Hasson and Trina Spear. The equity awards granted to our named executive officers in 2020 are discussed below.
2020 Stock Option Awards
On September 16, 2020, we granted nonqualified stock options covering 1,137,340 shares of our common stock to each of Mses. Hasson and Spear. The stock options have an exercise price of $45.88 per share, which is a premium exercise price to the fair market value on the grant date, and vest in equal monthly installments over the five-year period following the grant date. If the executives service is terminated (i) by our company other than for death, disability, or cause or (ii) by executive for good reason (each, as defined in the applicable executives employment agreement), and, in each case, such termination occurs (a) during the period beginning 3 months prior and ending 12 months following a change in control and (b) prior to the second anniversary of the grant date, then 100% of any then-unvested shares subject to the option shall become fully vested immediately prior to the later of the executives termination and the change in control. If a change in control occurs on or after the second anniversary of the grant date, then 100% of the then-unvested shares subject to the option will accelerate and vest in full immediately prior to the change in control, provided that executive remains in continuous service through the consummation of the change in control.
In connection with Mr. Lawrences commencement of employment with us on December 31, 2020, we granted Mr. Lawrence a stock option covering 227,648 shares of our common stock. The stock option has an exercise price of $54.20 per share and vests over a four-year period, with 25% of the shares subject to the option vesting on the first anniversary of Mr. Lawrences start date with our company and the remaining shares vesting in substantially equal monthly installments thereafter. If Mr. Lawrences service is terminated by us without cause or by him for good reason (each, as defined in his offer letter), in either case, within 12 months following a change in control of our company (as defined in his offer letter), then 100% of the then-unvested shares subject to the option will vest in full.
2020 RSU Awards
On June 26, 2020, we granted RSU awards covering 300,580 shares of our common stock to each of Mses. Hasson and Spear. The RSU awards are subject to a service-based requirement and a liquidity event requirement, and the RSUs will vest on the first date upon which both requirements are satisfied. The RSUs will satisfy the service-based requirement in equal quarterly installments over the four-year period following December 31, 2019, subject to the executives continued service. The liquidity event requirement will be satisfied as to any then-outstanding RSUs on the earlier to occur of (i) the effective date of a registration statement of our company filed under the Securities Act for the sale of our companys common stock or (ii) immediately prior to the closing of a change in control of our company, in each case, subject to the executives continued service.
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If the executives service terminates due to a termination by our company without cause prior to the satisfaction of the liquidity event requirement, then all RSUs for which the service-based requirement already has been satisfied will accelerate and vest. Further, if the executives service is terminated (i) by our company (or a successor or affiliate) other than for death, disability, or cause or (ii) by the executive for good reason (each, as defined in the applicable executives employment agreement), and, in each case, such termination occurs (a) during the period beginning 3 months prior and ending 12 months following a change in control and (b) prior to the second anniversary of the grant date, then 100% of any then-outstanding and unvested RSUs will accelerate and vest. If a change in control occurs on or after the second anniversary of the grant date, then 100% of the RSUs that are then outstanding and unvested will accelerate and vest immediately prior to the change in control, provided that the executive remains in continuous service through such time.
Equity Compensation Plans
We currently maintain the Amended 2016 Equity Incentive Plan, or the 2016 Plan, in order to help us secure and retain the services of eligible individuals, provide incentives for such individuals to exert maximum efforts for the success of our company and our affiliates and provide a means by which such individuals may benefit from increases in value of our common stock. As noted above, we generally offer stock options to certain of our employees, including our named executive officers, and consultants as the long-term incentive component of our compensation program. For additional information about the 2016 Plan, please see the section titled 2016 Equity Incentive Plan below. As mentioned below, in connection with the completion of this offering, no further awards will be granted under the 2016 Plan.
In connection with this offering, our board of directors will adopt, and our stockholders will approve, the 2021 Equity Incentive Plan, referred to below as the 2021 Plan, in order to facilitate the grant of cash and equity incentives to directors, employees (including our named executive officers) and consultants of our company and our affiliates, and to enable us to obtain and retain services of these individuals, which we believe is essential to our long-term success. For additional information about the 2021 Plan, please see the section titled 2021 Equity Incentive Plan below.
IPO-Related Equity Award Actions
Pursuant to the amended and restated employment agreements entered into with each of Mses. Hasson and Spear in connection with this offering, our board of directors expects to approve the grant of equity awards to each of Mses. Hasson and Spear under the 2021 Plan. With respect to each award, $7,500,000 is expected to be granted in the form of a nonqualified stock option and $2,500,000 is expected to be granted in the form of an RSU award, both based on the IPO price, or the IPO awards. The stock option will vest and become exercisable as to 1/48th of the shares of Class A common stock underlying the stock option on each monthly anniversary of the grant date, and the RSU award will vest as to 1/16th of the award on each quarterly anniversary of the grant date, in each case, subject to the executives continued service with us through the applicable vesting date. If the executives service terminates due to a termination by our company without cause or by the executive for good reason, or due to death or disability (each, as defined in the applicable executives amended and restated employment agreement), then each award will vest in full.
In addition, our board of directors approved the accelerated vesting of the outstanding stock options (excluding, for clarity, the IPO award) held by Ms. Hasson, to be effective as of the closing of this offering.
Other Elements of Compensation
Retirement Plans
We currently maintain a 401(k) retirement savings plan, or the 401(k) plan, for our employees, including our named executive officers, who satisfy certain eligibility requirements. Our named executive officers are eligible to participate in the 401(k) plan on the same terms as other full-time employees. The Code allows
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eligible employees to defer a portion of their compensation, within prescribed limits, on a pre-tax basis through contributions to the 401(k) plan. Currently, we match contributions made by participants in the 401(k) plan up to a specified percentage of the employee contributions, and these matching contributions are fully vested as of the date on which the contribution is made, provided that the participant has completed one year of service with us. We believe that providing a vehicle for tax-deferred retirement savings through our 401(k) plan, and making fully vested matching contributions, adds to the overall desirability of our compensation package and further incentivizes our employees, including our named executive officers, in accordance with our compensation policies.
Employee Benefits and Perquisites
All of our full-time employees, including our named executive officers, are eligible to participate in our health and welfare plans, including medical, dental and vision benefits.
We believe the perquisites described above are necessary and appropriate to provide a competitive compensation package to our named executive officers.
No Tax Gross-Ups
We have not made gross-up payments to cover our named executive officers personal income taxes that may pertain to any of the compensation paid or provided by our company.
Outstanding Equity Awards at Year-End
The following table summarizes the number of shares of common stock underlying outstanding equity incentive plan awards for each named executive officer as of December 31, 2020. Each equity award listed in the following table was granted under the 2016 Plan. Each equity award held by Mses. Hasson and Spear will be reclassified to cover shares of our Class B common stock in connection with this offering.
Grant Date | Option Awards | Stock Awards | ||||||||||||||||||||||||||||||
Name |
Number
of Securities Underlying Unexercised Options (#) Exercisable |
Number of
Securities Underlying Unexercised Options (#) Unexercisable |
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) |
Option
Exercise Price ($) |
Option
Expiration Date |
Equity
Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) |
Equity
Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) |
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Heather Hasson |
02/22/2018 | (1) | 300,833 | 79,167 | | 7.69 | 02/21/2028 | | | |||||||||||||||||||||||
06/27/2018 | (2) | 100,000 | | | 12.27 | 06/26/2028 | | | ||||||||||||||||||||||||
06/26/2020 | (3) | | | | | | 300,580 | 23,123,619 | ||||||||||||||||||||||||
09/16/2020 | (4) | 56,867 | 1,080,473 | | 45.88 | 09/15/2030 | | | ||||||||||||||||||||||||
Trina Spear |
02/22/2018 | (1) | 676,875 | 178,125 | | 7.69 | 02/21/2028 | | | |||||||||||||||||||||||
06/27/2018 | (2) | 100,000 | | | 12.27 | 06/26/2028 | | | ||||||||||||||||||||||||
06/26/2020 | (3) | | | | | | 300,580 | 23,123,619 | ||||||||||||||||||||||||
09/16/2020 | (4) | 56,867 | 1,080,473 | | 45.88 | 09/15/2030 | | | ||||||||||||||||||||||||
Jeffrey D. Lawrence |
12/31/2020 | (5) | | 227,468 | | 54.20 | 12/30/2030 | | |
(1) |
This option vests and becomes exercisable with respect to 1/48 of the total number of shares underlying the option on each monthly anniversary of the vesting commencement date. In the event of a change in control of our company (as defined in the 2016 Plan), 100% of the shares subject to the option shall vest as of immediately prior to the change in control. |
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(2) |
This option vests with respect to 1/48 of the total number of shares underlying the option on each monthly anniversary of the vesting commencement date. In the event of a change in control of our company (as defined in the 2016 Plan), 100% of the shares subject to the option shall vest as of immediately prior to the change in control. This option has an early exercise feature, such that, if early exercised, the unvested shares are subject to a right of repurchase by the Company in connection with a termination of service. |
(3) |
This RSU award vests upon the satisfaction of both a (i) service-based requirement, which is satisfied in substantially equal quarterly installments over the four-year period following December 31, 2019, and (ii) liquidity event requirement, which is satisfied upon the earlier to occur of (a) the effective date of a registration statement of our company filed under the Securities Act for the sale of our companys common stock or (b) immediately prior to the closing of a change in control of our company. Please refer to 2020 RSU Awards above for additional detail regarding the vesting of this award, including accelerated vesting. |
(4) |
This option vests and becomes exercisable with respect to 1/60 of the total number of shares underlying the option on each monthly anniversary of the grant date. Please refer to 2020 Stock Option Awards above for additional detail regarding the vesting of this award, including accelerated vesting. |
(5) |
This option vests and becomes exercisable over a four-year period, with 25% of the total number of shares underlying the option vesting on the first anniversary of Mr. Lawrences start date with us, and 1/48 of the total number of shares underlying the option vesting on each monthly anniversary thereafter. If Mr. Lawrences employment is terminated by us without cause or by him for good reason within 12 months following a change in control, then 100% of the then-unvested shares subject to the option will vest in full. |
Executive Compensation Arrangements
The following is a summary of the compensatory agreements we have entered into with our named executive officers.
Employment Agreements with Heather Hasson and Trina Spear. We are party to employment agreements with our co-Chief Executive Officers Heather Hasson and Trina Spear, each of which was originally entered into in October 2017 and amended in September 2020. We expect that each of these employment agreements will be amended and restated upon the effectiveness of the registration statement of which this prospectus forms a part (the pricing, and such agreements, the A&R agreements).
Pursuant to the employment agreements (as amended in September 2020), each of Mses. Hasson and Spear is entitled to receive a base salary of $650,000, which will be increased to $1,000,000 under the A&R agreements. In addition, each is eligible to receive an annual discretionary bonus in an aggregate amount no greater than $1,000,000 (or, under the A&R agreements, with a target amount equal to 100% of base salary, which may be earned in an amount up to 200% of base salary if maximum performance goals are achieved), as determined by the compensation committee of our board of directors in its sole discretion, and subject to the executives continued employment through the bonus payment date. In addition, each is eligible to participate in the health, welfare, retirement, vacation and other employee benefit plans, practices, policies and programs generally available to other senior executives; and, under the A&R agreements, the company will pay the filing and legal fees associated with any required filings under the Hart-Scott-Rodino Act with respect to the acquisition of our securities.
Pursuant to the terms of the applicable executives employment agreement, we granted each executive an option to purchase shares of our common stock (380,000 shares for Ms. Hasson and 855,000 shares for Ms. Spear) in February 2018 at a per share exercise price equal to $7.69. Additionally, pursuant to the A&R agreements and in connection with this offering, we expect to grant each of Mses. Hasson and Spear equity awards with an aggregate value of $10,000,000. Please see IPO-Related Equity Award Actions for additional details. Ms. Hassons employment agreement has an eight-year term, and Ms. Spears employment agreement has a ten-year term, following which each executive will continue as an at-will employee. Under the A&R agreements, each of Mses. Hasson and Spears agreements will have a five-year term following the completion of this offering.
Pursuant to the employment agreements, if Ms. Hassons or Ms. Spears employment is terminated by us without cause or by the executive for good reason during the period beginning three months prior to and ending 12 months following a change in control (each, as defined in the applicable executives employment agreement), the executive will receive the following severance payments and benefits: (i) continued payments of
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base salary for 18 (or, under the A&R agreements, 24) months following the date of termination; (ii) 100% accelerated vesting and exercisability of the option granted in February 2018 and, under the A&R agreements, all equity awards granted to the executive prior to or in connection with this offering; (iii) under the A&R agreements, a lump-sum amount equal to 200% of the cost of 18 months of COBRA premiums; and (iv) under the A&R agreements, a pro-rated target bonus for the year in which the termination occurs and an amount equal to 200% of the executives target bonus for the year in which the termination occurs. If Ms. Hassons or Ms. Spears employment is terminated by us without cause or by the executive for good reason not within the change in control period described above, the executive will receive the severance payments and benefits set forth in items (i) through (iii) above. The severance payments and benefits described above are subject to the executives timely execution and non-revocation of a release of claims in our favor. Additionally, under the A&R agreements, if Ms. Hassons or Ms. Spears employment is terminated due to death or disability, the executive will receive 100% accelerated vesting (and exercisability, if applicable) of all equity awards granted to the executive prior to or in connection with this offering. Further, under the A&R agreements, if a change in control of the company occurs, Mses. Hasson and Spear will each receive 100% accelerated vesting (and exercisability, if applicable) of all outstanding equity awards granted prior to this offering (excluding, for clarity, the IPO awards).
Mses. Hasson and Spear are also subject to the terms and conditions of an employee confidential information and invention assignment agreement, a one-year post-termination non-solicitation covenant, and an indefinite mutual non-disparagement covenant.
Offer Letter with Jeffrey D. Lawrence. We entered into an offer letter with Mr. Lawrence on December 24, 2020, pursuant to which Mr. Lawrence commenced employment with us as our Chief Financial Officer on December 31, 2020. Pursuant to the offer letter, Mr. Lawrence is eligible to receive a base salary of $500,000 and an annual discretionary bonus equal to $500,000 as determined by our board of directors, subject to his continued employment through the bonus payment date. In addition, Mr. Lawrence is eligible to participate in our standard benefit programs.
In connection with the commencement of his employment with us, and pursuant to the offer letter, we granted Mr. Lawrence a stock option to purchase 227,468 shares of our common stock on December 31, 2020 at a per share exercise price equal to $54.20. Mr. Lawrences employment with us is at-will.
Pursuant to the offer letter, if Mr. Lawrences employment is terminated by us without cause or by him for good reason (and other than due to death or disability) during the 12-month period following a change in control (each, as defined in the offer letter), Mr. Lawrence will receive the following severance payments and benefits: (i) continued payment of base salary for 12 months following the date of termination, (ii) up to 12 months of company-paid COBRA continuation, (iii) a pro-rated target bonus for the year of termination, paid in a lump-sum, and (iv) 100% accelerated vesting and exercisability of the option granted in December 2020 under the offer letter. If Mr. Lawrences employment is terminated by us without cause or by him for good reason (and other than due to death or disability) not within the change in control period described above, Mr. Lawrence will receive the following severance payments and benefits: (i) continued payments of base salary for 12 months following the date of termination and (ii) up to 12 months of COBRA continuation.
The severance payments and benefits described above are subject to Mr. Lawrences timely execution and non-revocation of a release of claims in our favor. Mr. Lawrence entered into our standard employee confidential information and invention assignment agreement as a condition of his employment.
Cash Sale Bonus Letters. On February 22, 2018, we entered into cash sale bonus letter agreements with each of Mses. Hasson and Spear. Pursuant to the letter agreements, upon the occurrence of a sale of our company in which the implied equity valuation of our company is equal to or greater than $400 million and either (i) the cash consideration actually received by our stockholders is equal to or greater than $400 million or (ii) the cash consideration actually received by our stockholders is equal to or greater than $300 million and the sum of such
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cash consideration plus any publicly traded equity securities actually received by our stockholders is equal to or greater than $400 million, and, in either case, provided that such sale qualifies as a change in control event under Section 409A of the Code (a Qualifying Cash Sale), each executive will be eligible to earn a transaction bonus equal to $1,500,000 for Ms. Hasson and $3,750,000 for Ms. Spear, paid in a single lump sum within ten days following the Qualifying Cash Sale. Mses. Hasson and Spear need not be employed or engaged by our company on the date of the Qualifying Cash Sale in order to receive the bonus.
2016 Equity Incentive Plan
We maintain the Amended 2016 Equity Incentive Plan, or the 2016 Plan. A total of 5,746,326 shares of our common stock are reserved for issuance under the 2016 Plan as of March 31, 2021. The 2016 Plan will terminate on April 28, 2026 unless earlier terminated by our board of directors. Following the effectiveness of the 2021 Plan, the 2016 Plan will terminate, and we will not make any further awards under the 2016 Plan. However, any outstanding awards granted under the 2016 Plan will remain outstanding, subject to the terms of the 2016 Plan and applicable award agreements. Shares of our common stock subject to awards granted under the 2016 Plan that expire unexercised or are cancelled, terminated or forfeited in any manner without issuance of shares thereunder following the effective date of the 2021 Plan, will become available for issuance under the 2021 Plan in accordance with its terms.
Eligibility and Administration. Employees, consultants, and directors employed or engaged by us or our affiliates are eligible to receive awards under the 2016 Plan. The 2016 Plan is administered by our board of directors, which may delegate its duties and responsibilities as it deems appropriate The board of directors has the authority to determine who will be granted awards, what type of awards will be granted and in what amount, when and how awards will be granted, the provisions of each award, and the fair market value applicable to an award; to construe and interpret the 2016 Plan and establish, amend, and revoke rules and regulations relating to the 2016 Plan; to settle all controversies regarding the 2016 Plan; to accelerate the vesting or exercisability of any award; to amend, suspend or terminate the 2016 Plan at any time; to submit amendments to the 2016 Plan for stockholder approval; to approve forms of award agreement for use under the 2016 Plan; to adopt any procedures or subplans necessary to permit non-U.S. participation in the 2016 Plan; to reprice outstanding awards; and to make all other determinations and take all other actions it deems necessary or expedient to promote the best interests of our company and that are not in conflict with the terms of the 2016 Plan.
Awards. The 2016 Plan provides for the grant of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock awards, restricted stock units, and other stock awards. Each award under the 2016 Plan is evidenced by a separate agreement between our company and the participant, which details all terms and conditions of the awards, including any applicable vesting and payment terms and post-termination exercise limitations. The following types of awards have been granted under the 2016 Plan:
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Nonqualified Stock Options. Nonqualified stock options provide for the purchase of shares of our common stock in the future at an exercise price set on the grant date. The exercise price of a stock option is fixed by the board of directors and may not be less than 100% of the fair market value of the underlying share on the date of grant. The term of a stock option is determined by our board of directors, but may not exceed ten years. Vesting conditions determined by our board of directors may apply to stock options and may include the occurrence of certain events, the passage of a specified period of time, achievement by us of certain performance goals, and/or other fulfillment of certain conditions. |
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Incentive Stock Options. Incentive stock options are designed to comply with the provisions of the Code and are subject to specified restrictions contained in the Code applicable to incentive stock options. Among such restrictions, incentive stock options must have an exercise price of not less than the fair market value of a share of common stock on the date of grant, may only be granted to employees, must expire within a specified period of time following the participants termination of employment, and must be exercised within ten years after the date of grant. In the case of an incentive |
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stock option granted to an individual who owns (or is deemed to own) more than 10% of the total combined voting power of all classes of our capital stock on the date of grant, the exercise price must be at least 110% of the fair market value of a share of common stock on the date of grant and the incentive stock option must expire on the fifth anniversary of the date of its grant. |
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Restricted Stock Units. Restricted stock units, or RSUs, are contractual promises to deliver shares of our common stock (or the cash equivalent thereof) in the future, which may also remain forfeitable unless and until specified conditions are met, and may be accompanied by the right to receive the equivalent value of dividends paid on shares of our common stock prior to the delivery of the underlying shares. Settlement of RSUs may be deferred under the terms of the award or at the election of the participant, if the our board of directors permits such a deferral. Vesting conditions determined by the board of directors may be applicable to RSUs and may include the occurrence of certain events, the passage of a specified period of time, achievement by us of certain performance goals, and/or other fulfillment of certain conditions. |
Certain Transactions. In the event of certain transactions and events affecting our common stock, such as stock dividends, stock splits, or a combination or other change in shares of our common stock, our board of directors shall make appropriate and proportionate adjustments to the number and type of shares subject to the 2016 Plan, the number and type of shares that may be issued pursuant to incentive stock options, and the number, type and price per share of stock subject to outstanding awards granted under the 2016 Plan. In the event of a dissolution or liquidation, all outstanding awards will terminate, provided that the board of directors may provide for accelerated vesting before such dissolution or liquidation and contingent on its completion. In the event of a corporate transaction, the board of directors may take one or more of the following actions, contingent upon the closing of such corporate transaction: (i) arrange for the assumption, continuation, or substitution of the awards by the surviving corporation; (ii) arrange for the assignment of any reacquisition or repurchase rights to the surviving corporation; (iii) accelerate the vesting and exercisability of any award; (iv) arrange for the lapse of any reacquisition or repurchase rights; (v) cancel any award to the extent not vested or exercised prior to the corporate transaction in exchange for cash consideration; and (vi) make a payment equal to the excess of the value that a participant would have received upon exercise immediately prior to the corporate transaction over any exercise price payable upon exercise. In the event of a change in control, no acceleration of vesting or exercisability will occur unless provided in an award agreement or other written agreement.
Plan Amendment and Termination. Our board of directors may suspend or terminate the 2016 Plan or any portion thereof at any time and may amend it from time to time in such respects as our board of directors may deem necessary or advisable, provided that no such amendment shall be made without stockholder approval to the extent such approval is required by applicable law. Further, no such amendment, suspension or termination shall impair the rights of participants under outstanding awards without the consent of the affected participants. As described above, the 2016 Plan will terminate as of the effective date of the 2021 Plan.
2021 Equity Incentive Plan
In connection with this offering, our board of directors expects to adopt, subject to approval by our stockholders, the 2021 Equity Incentive Plan, or the 2021 Plan, under which we may grant cash and equity incentive awards to eligible service providers in order to attract, motivate and retain the talent for which we compete. The material terms of the 2021 Plan, currently contemplated, are summarized below.
Eligibility and Administration. Our employees, consultants and directors, and employees, consultants and directors of our subsidiaries, will be eligible to receive awards under the 2021 Plan. Following this offering, the 2021 Plan will be administered by our board of directors with respect to awards to non-employee directors and by our compensation committee with respect to other participants, each of which may delegate its duties and responsibilities to committees of our directors and/or officers (referred to collectively as the plan administrator below), subject to certain limitations that may be imposed under Section 16 of the Securities Exchange Act of
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1934, as amended, or the Exchange Act, and/or stock exchange rules, as applicable. The plan administrator will have the authority to make all determinations and interpretations under, prescribe all forms for use with, and adopt rules for the administration of, the 2021 Plan, subject to its express terms and conditions. The plan administrator will also set the terms and conditions of all awards under the 2021 Plan, including any vesting and vesting acceleration conditions.
Limitation on Awards and Shares Available. The initial share reserve under the 2021 Plan will equal 5% of the shares of our outstanding Class A, Class B and Class C common stock upon the completion of this offering, on a fully diluted basis (i.e., including shares underlying equity awards), other than any options granted in connection with this offering. Shares issued under the 2021 Plan may be authorized but unissued shares, treasury shares or shares purchased in the open market. Notwithstanding anything to the contrary in the 2021 Plan, no more than 20,000,000 shares of our common stock may be issued pursuant to the exercise of incentive stock options under the 2021 Plan.
The number of shares available for issuance will be increased by (i) the number of shares available under the 2016 Plan as of the effective date of the 2021 Plan or represented by awards outstanding under our 2016 Plan that expire, lapse or are terminated, exchanged for or settled in cash, surrendered, repurchased, cancelled without having been fully experienced or forfeited following the effective date of the 2021 Plan, with the maximum number of shares to be added to the 2021 Plan equal to shares, and (ii) an annual increase on the first day of each calendar year beginning January 1, 2022 and ending on and including January 1, 2031, equal to the lesser of (A) 5% of the aggregate number of shares of our Class A, Class B, and Class C common stock outstanding on the final day of the immediately preceding calendar year and (B) such smaller number of shares as is determined by our board of directors.
If an award under the 2021 Plan or 2016 Plan expires, lapses or is terminated, exchanged for or settled for cash, surrendered, repurchased, cancelled without having been fully exercised or forfeited, any shares subject to such award may, to the extent of such forfeiture, expiration or cash settlement, be used again for new grants under the 2021 Plan. Further, shares delivered to us to satisfy the applicable exercise or purchase price of an award under the 2021 Plan or the 2016 Plan and/or to satisfy any applicable tax withholding obligations (including shares retained by us from the award under the 2021 Plan or the 2016 Plan being exercised or purchased and/or creating the tax obligation) will become or again be available for award grants under the 2021 Plan. The payment of dividend equivalents in cash in conjunction with any awards under the 2021 Plan will not reduce the shares available for grant under the 2021 Plan. However, the following shares may not be used again for grant under the 2021 Plan: (i) shares subject to stock appreciation rights, or SARs, that are not issued in connection with the stock settlement of the SAR on exercise, and (ii) shares purchased on the open market with the cash proceeds from the exercise of options.
Awards granted under the 2021 Plan upon the assumption of, or in substitution for, awards authorized or outstanding under a qualifying equity plan maintained by an entity with which we enter into a merger or similar corporate transaction will not reduce the shares available for grant under the 2021 Plan. The 2021 Plan provides that, commencing with the calendar year following the calendar year in which the effective date of the 2021 Plan occurs, the sum of any cash compensation and the aggregate grant date fair value (determined as of the date of the grant under ASC Topic 718, or any successor thereto) of all awards granted to a non-employee director as compensation for services as a non-employee director during any calendar year may not exceed the amount equal to $700,000.
Awards. The 2021 Plan provides for the grant of stock options, including incentive stock options, or ISOs, and nonqualified stock options, or NSOs, restricted stock, dividend equivalents, RSUs, stock appreciation rights, or SARs, and other stock or cash awards. Certain awards under the 2021 Plan may constitute or provide for a deferral of compensation, subject to Section 409A of the Code, which may impose additional requirements on the terms and conditions of such awards. All awards under the 2021 Plan will be set forth in award agreements, which will detail all terms and conditions of the awards, including any applicable vesting and payment terms and
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post-termination exercise limitations. Awards other than cash awards generally will be settled in shares of our common stock, but the plan administrator may provide for cash settlement of any award. A brief description of each award type follows.
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Stock Options. Stock options provide for the purchase of shares of our common stock in the future at an exercise price set on the grant date. ISOs, by contrast to NSOs, may provide tax deferral beyond exercise and favorable capital gains tax treatment to their holders if certain holding period and other requirements of the Code are satisfied. The exercise price of a stock option may not be less than 100% of the fair market value of the underlying share on the date of grant (or 110% in the case of ISOs granted to certain significant stockholders), except with respect to certain substitute options granted in connection with a corporate transaction. The term of a stock option may not be longer than ten years (or five years in the case of ISOs granted to certain significant stockholders). Vesting conditions determined by the plan administrator may apply to stock options and may include continued service, performance and/or other conditions. |
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SARs. SARs entitle their holder, upon exercise, to receive from us an amount equal to the appreciation of the shares subject to the award between the grant date and the exercise date. The exercise price of a SAR may not be less than 100% of the fair market value of the underlying share on the date of grant (except with respect to certain substitute SARs granted in connection with a corporate transaction) and the term of a SAR may not be longer than ten years. Vesting conditions determined by the plan administrator may apply to SARs and may include continued service, performance and/or other conditions. |
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Restricted Stock and RSUs. Restricted stock is an award of nontransferable shares of our common stock that remain forfeitable unless and until specified conditions are met, and which may be subject to a purchase price. RSUs are contractual promises to deliver shares of our common stock in the future, which may also remain forfeitable unless and until specified conditions are met, and may be accompanied by the right to receive the equivalent value of dividends paid on shares of our common stock prior to the delivery of the underlying shares. Settlement of RSUs may be deferred under the terms of the award or at the election of the participant, if the plan administrator permits such a deferral. Conditions applicable to restricted stock and RSUs may be based on continuing service, the attainment of performance goals and/or such other conditions as the plan administrator may determine. |
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Other Stock or Cash Based Awards. Other stock or cash based awards of cash, fully vested shares of our common stock and other awards valued wholly or partially by referring to, or otherwise based on, shares of our common stock may be granted under the 2021 Plan. Other stock or cash based awards may be granted to participants and may also be available as a payment form in the settlement of other awards, as standalone payments and as payment in lieu of base salary, bonus, fees or other cash compensation otherwise payable to any individual who is eligible to receive awards. |
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Dividend Equivalents. Dividend equivalents represent the right to receive the equivalent value of dividends paid on shares of our common stock and may be granted alone or in tandem with awards other than stock options or SARs. Dividend equivalents are credited as of dividend record dates during the period between the date an award is granted and the date such award vests, is exercised, is distributed or expires, as determined by the plan administrator. |
Performance Awards. Performance awards include any of the foregoing awards that are granted subject to vesting and/or payment based on the attainment of specified performance goals or other criteria the plan administrator may determine, which may or may not be objectively determinable. Performance criteria upon which performance goals are established by the plan administrator may include but are not limited to: (1) net earnings (either before or after one or more of the following: (a) interest, (b) taxes, (c) depreciation, (d) amortization and (e) non-cash equity-based compensation expense); (2) gross or net sales or revenue; (3) net income (either before or after taxes); (4) adjusted net income; (5) operating earnings or profit; (6) cash flow (including, but not limited to, operating cash flow and free cash flow); (7) return on assets; (8) return on capital;
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(9) return on stockholders equity; (10) total stockholder return; (11) return on sales; (12) gross or net profit or operating margin; (13) costs; (14) funds from operations; (15) expenses; (16) working capital; (17) earnings per share; (18) adjusted earnings per share; (19) price per share of our common stock; (20) regulatory achievements or compliance; (21) implementation or completion of critical projects; (22) market share; (23) economic value; (24) debt levels or reduction; (25) sales-related goals; (26) comparisons with other stock market indices; (27) operating efficiency; (28) employee satisfaction; (29) financing and other capital raising transactions; (30) recruiting and maintaining personnel; (31) year-end cash; and (32) human capital management goals or environmental, social and governance goals, any of which may be measured either in absolute terms for us or any operating unit of our company or as compared to any incremental increase or decrease or as compared to results of a peer group or to market performance indicators or indices.
Certain Transactions. The plan administrator has broad discretion to take action under the 2021 Plan, as well as make adjustments to the terms and conditions of existing and future awards, to prevent the dilution or enlargement of intended benefits and facilitate necessary or desirable changes in the event of certain transactions and events affecting our common stock, such as stock dividends, stock splits, mergers, acquisitions, consolidations and other corporate transactions. In addition, in the event of certain non-reciprocal transactions with our stockholders known as equity restructurings, the plan administrator will make equitable adjustments to the 2021 Plan and outstanding awards. In the event of a change in control of our company (as defined in the 2021 Plan), to the extent that the surviving entity declines to continue, convert, assume or replace outstanding awards, then all such awards will become fully vested and exercisable in connection with the transaction. Upon or in anticipation of a change of control, the plan administrator may cause any outstanding awards to terminate at a specified time in the future and give the participant the right to exercise such awards during a period of time determined by the plan administrator in its sole discretion. Individual award agreements may provide for additional accelerated vesting and payment provisions.
Foreign Participants, Claw-Back Provisions, Transferability, and Participant Payments. The plan administrator may modify award terms, establish subplans and/or adjust other terms and conditions of awards, subject to the share limits described above, in order to facilitate grants of awards subject to the laws and/or stock exchange rules of countries outside of the United States. All awards will be subject to the provisions of any claw-back policy implemented by our company to the extent set forth in such claw-back policy and/or in the applicable award agreement. With limited exceptions for estate planning, domestic relations orders, certain beneficiary designations and the laws of descent and distribution, awards under the 2021 Plan are generally non-transferable prior to vesting, and are exercisable only by the participant. With regard to tax withholding, exercise price and purchase price obligations arising in connection with awards under the 2021 Plan, the plan administrator may, in its discretion, accept cash or check, shares of our common stock that meet specified conditions, a market sell order or such other consideration as it deems suitable.
Plan Amendment and Termination. Our board of directors may amend or terminate the 2021 Plan at any time; however, except in connection with certain changes in our capital structure, stockholder approval will be required for any amendment that increases the number of shares available under the 2021 Plan. Stockholder approval is not required for any amendment that reprices any stock option or SAR, or cancels any stock option or SAR in exchange for cash or another award when the option or SAR price per share exceeds the fair market value of the underlying shares. No award may be granted pursuant to the 2021 Plan after the tenth anniversary of the earlier of the date on which our stockholders approved the 2021 Plan or the date on which our board of directors adopted the 2021 Plan.
2021 Employee Stock Purchase Plan
In connection with this offering, our board of directors expects to adopt, subject to stockholder approval, the 2021 Employee Stock Purchase Plan, or ESPP. The material terms of the ESPP, as currently contemplated, are summarized below.
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Shares Available; Administration. The initial share reserve under the ESPP will equal 1% of the shares of our outstanding Class A, Class B and Class C common stock upon the completion of this offering. We expect a total of shares of our common stock to be initially reserved for issuance under our ESPP. In addition, we expect that the number of shares available for issuance under the 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 Class A, Class B and Class C common stock outstanding on the final day of the immediately preceding calendar year and (ii) such smaller number of shares as is determined by our board of directors. In no event will more than shares of our common stock be available for issuance under the ESPP.
Our board of directors or a committee designated by our board of directors will have authority to interpret the terms of the ESPP and determine eligibility of participants. The compensation committee will be the administrator of the ESPP.
Eligibility. The plan administrator may designate certain of our subsidiaries as participating designated subsidiaries in the ESPP and may change these designations from time to time. Employees of our company and our designated subsidiaries are eligible to participate in the ESPP if they meet the eligibility requirements under the ESPP established from time to time by the plan administrator. However, an employee may not be granted rights to purchase stock under the ESPP if such employee, immediately after the grant, would own (directly or through attribution) stock possessing 5% or more of the total combined voting power or value of all classes of our common or other class of stock.
If the grant of a purchase right under the ESPP to any eligible employee who is a citizen or resident of a foreign jurisdiction would be prohibited under the laws of such foreign jurisdiction or the grant of a purchase right to such employee in compliance with the laws of such foreign jurisdiction would cause the ESPP to violate the requirements of Section 423 of the Code, as determined by the plan administrator in its sole discretion, such employee will not be permitted to participate in the ESPP.
Eligible employees become participants in the ESPP by enrolling and authorizing payroll deductions by the deadline established by the plan administrator prior to the relevant offering date. Directors who are not employees, as well as consultants, are not eligible to participate. Employees who choose to not participate, or are not eligible to participate at the start of an offering period but who become eligible thereafter, may enroll in any subsequent offering period.
Participation in an Offering. We intend for the ESPP to qualify under Section 423 of the Code and stock will be offered under the ESPP during offering periods. The length of offering periods under the ESPP will be determined by the plan administrator and may be up to 27 months long. Employee payroll deductions will be used to purchase shares on each purchase date during an offering period. The number of purchase periods within, and purchase dates during, each offering period will be established by the plan administrator. Offering periods under the ESPP will commence when determined by the plan administrator. The plan administrator may, in its discretion, modify the terms of future offering periods.
The ESPP will permit participants to purchase our common stock through payroll deductions of up to 15% of their eligible compensation, unless otherwise determined by the plan administrator, which will include a participants gross base compensation for services to us, including overtime payments, periodic bonuses, and sales commissions, and excluding one-time bonuses, expense reimbursements, fringe benefits and other special payments. The plan administrator will establish a maximum number of shares that may be purchased by a participant during any offering period or purchase period, which, in the absence of a contrary designation, will be shares for an offering period and/or a purchase period. In addition, no employee will be permitted to accrue the right to purchase stock under the ESPP at a rate in excess of $25,000 worth of shares during any calendar year during which such a purchase right is outstanding (based on the fair market value per share of our common stock as of the first day of the offering period).
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On the first trading day of each offering period, each participant automatically will be granted an option to purchase shares of our common stock. The option will be exercised on the applicable purchase date(s) during the offering period, to the extent of the payroll deductions accumulated during the applicable purchase period. The purchase price of the shares, in the absence of a contrary determination by the plan administrator, will be 85% of the lower of the fair market value of our common stock on the first trading day of the offering period or on the applicable purchase date, which will be the final trading day of the applicable purchase period.
Participants may voluntarily end their participation in the ESPP at any time at least two weeks prior to the end of the applicable offering period (or such longer or shorter period specified by the plan administrator), and will be paid their accrued payroll deductions that have not yet been used to purchase shares of common stock. Participation ends automatically upon a participants termination of employment.
Transferability. A participant may not transfer rights granted under the ESPP other than by will, the laws of descent and distribution or as otherwise provided in the ESPP.
Certain Transactions. In the event of certain transactions or events affecting our common stock, such as any stock dividend or other distribution, change in control, reorganization, merger, consolidation or other corporate transaction, the plan administrator will make equitable adjustments to the ESPP and outstanding rights. In addition, in the event of the foregoing transactions or events or certain significant transactions, including a change in control, the plan administrator may provide for (i) either the replacement of outstanding rights with other rights or property or termination of outstanding rights in exchange for cash, (ii) the assumption or substitution of outstanding rights by the successor or survivor corporation or parent or subsidiary thereof, (iii) the adjustment in the number and type of shares of stock subject to outstanding rights, (iv) the use of participants accumulated payroll deductions to purchase stock on a new purchase date prior to the next scheduled purchase date and termination of any rights under ongoing offering periods or (v) the termination of all outstanding rights. Under the ESPP, a change in control has the same definition as given to such term in the 2021 Plan.
Plan Amendment; Termination. The plan administrator may amend, suspend or terminate the ESPP at any time. However, stockholder approval of any amendment to the ESPP must be obtained for any amendment which increases the aggregate number or changes the type of shares that may be sold pursuant to rights under the ESPP, changes the ESPP in any manner that would be considered the adoption of a new plan within the meaning of Treasury regulation Section 1.423-2(c)(4), or changes the ESPP in any manner that would cause the ESPP to no longer be an employee stock purchase plan within the meaning of Section 423(b) of the Code.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In addition to the compensation arrangements discussed in the sections titled Management and Executive Compensation, the following is a description of each transaction since January 1, 2018 and each currently proposed transaction in which:
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we have been or are to be a participant; |
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the amount involved exceeds or will exceed $120,000; and |
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any of our director nominees, directors, executive officers or holders of more than 5% of our capital stock, or any immediate family member of, or person sharing the household with, any of these individuals, had or will have a direct or indirect material interest. |
Transactions with Tulco, LLC
Promissory Note
On February 22, 2018, we issued a $2.5 million promissory note to Tulco, LLC, a holder of greater than 5% of our capital stock and our majority stockholder, which promissory note was cancelled in connection with our common stock financing with Tulco, LLC in May 2018.
Common Stock Purchase Agreement
On May 14, 2018, we entered into a common stock purchase agreement with Tulco, LLC, pursuant to which we issued and sold to Tulco, LLC an aggregate of 4,075,000 shares of our common stock for an initial aggregate purchase price of $20.0 million, comprised of $17.5 million in cash and the cancellation of the $2.5 million promissory note. Under the agreement, Tulco, LLC also agreed to pay us an aggregate of $30.0 million in additional milestone payments based on our achievement of certain net revenues targets. Following entry into this agreement, we achieved all milestones and, as a result, have received an aggregate of $50.0 million in consideration from Tulco, LLC under this agreement.
Purchase Order Agreement
On June 15, 2020, we entered into a purchase order agreement with Tulco, LLC, pursuant to which Tulco, LLC purchased from us 100,000 isolation gowns and 10,000 masks for an aggregate purchase price of $4.2 million. We then facilitated the donation of the products to Albert Einstein Medical Center in Philadelphia, Pennsylvania, East Boston Neighborhood Health Center in East Boston, Massachusetts, Grady Health System in Atlanta, Georgia and the Alaska Native Tribal Health Consortium in Anchorage, Alaska.
Professional Fees
In connection with the preparation of our 2017 and 2018 audits, Tulco, LLC paid an aggregate of $257,000 of our audit and tax preparation fees, $136,000 of which were repaid to Tulco, LLC by us.
Stockholders Agreement
On October 23, 2020, we entered into an amended and restated stockholders agreement with certain holders of our common stock, including, but not limited to, Ms. Hasson, Ms. Spear, Tulco, LLC, Viking Global Opportunities Illiquid Investments Sub-Master LP and Commonwealth of Pennsylvania, Public School Employees Retirement System, pursuant to which these holders are entitled to certain rights relating to the registration of their shares following this offering. See Description of Capital StockRegistration Rights for additional information.
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Employment and Compensation Arrangements
We have entered into, or plan on entering into, employment agreements with and have granted equity awards to our executive officers. In addition, we have entered into a cash sale bonus agreement with each of our co-founders and co-Chief Executive Officers, Ms. Spear and Ms. Hasson. See the section titled Executive CompensationExecutive Compensation Arrangements for additional information.
Indemnification Agreements
We have entered into, and plan on entering into, indemnification agreements with each of our directors and executive officers. See the section titled Description of Capital StockLimitations on Liability and Indemnification Matters.
Directed Share Program
At our request, the underwriters have reserved for sale at the initial public offering price per share up to % of the shares of Class A common stock offered by this prospectus for sale at the initial public offering price through a directed share program to certain individuals identified by management. See the section titled UnderwritingDirected Share Program.
Policies and Procedures for Transactions with Related Persons
Our board of directors has adopted a written related person transaction policy, to be effective upon the completion of this offering, setting forth the policies and procedures for the review and approval or ratification of related person transactions. This policy will cover, with certain exceptions set forth in Item 404 of Regulation S-K under the Securities Act, any transaction, arrangement or relationship, or any series of similar transactions, arrangements or relationships, in which we were or are to be a participant, where the amount involved exceeds $120,000 in any fiscal year and a related person had, has or will have a direct or indirect material interest, including without limitation, purchases of goods or services by or from the related person or entities in which the related person has a material interest, indebtedness, guarantees of indebtedness and employment by us of a related person. In reviewing and approving any such transactions, our audit committee is tasked to consider all relevant facts and circumstances, including, but not limited to, whether the transaction is on terms comparable to those that could be obtained in an arms length transaction and the extent of the related persons interest in the transaction. All of the transactions described in this section occurred prior to the adoption of this policy.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table presents certain information with respect to the beneficial ownership of our common stock as of March 31, 2021, and as adjusted to reflect the sale of Class A common stock offered by us and the selling stockholders in this offering, assuming no exercise of the underwriters option to purchase additional shares of our Class A common stock, by:
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each of our directors and director nominees; |
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each of our named executive officers; |
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all of our directors and executive officers as a group; |
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each stockholder known by us to be the beneficial owner of more than 5% of our outstanding shares of Class A common stock, Class B common stock or Class C common stock; and |
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each selling stockholder. |
We have determined beneficial ownership in accordance with the rules of the SEC. Unless otherwise indicated below, to our knowledge, based on information furnished to us, the persons and entities named in the table have sole voting and investment power with respect to all shares that they beneficially own, subject to applicable community property laws. Shares of our Class A common stock subject to stock options that are currently exercisable or exercisable within 60 days of March 31, 2021 are deemed to be outstanding and to be beneficially owned by the person holding the options for the purpose of computing the percentage ownership of that person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
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We have based our calculation of the percentage ownership of our common stock before this offering on 17,183,240 shares of our common stock outstanding on March 31, 2021, and giving effect to (1) the filing and effectiveness of our amended and restated certificate of incorporation and the effectiveness of our amended and restated bylaws, (2) the reclassification of 17,183,240 outstanding shares of common stock into 6,525,064 shares of Class A common stock, 649,781 shares of Class B common stock and 10,008,395 shares of Class C common stock, and (3) the reclassification of all shares of common stock underlying outstanding options under our 2016 Plan, other than those held by Ms. Hasson and Ms. Spear, into shares of Class A common stock, and (4) the amendment of all outstanding RSUs and stock options held by Ms. Hasson and Ms. Spear, providing for the awards to settle in or be exercisable for shares of Class B common stock instead of Class A common stock, as if each had occurred as of March 31, 2021. Percentage ownership of our common stock after this offering also assumes the sale by us and the selling stockholders of shares of our Class A common stock in this offering. The table below excludes any purchases that may be made through our directed share program or otherwise in this offering. See UnderwritingDirected Share Program. Unless otherwise indicated, the address of each beneficial owner in the table below is c/o FIGS, Inc., 2834 Colorado Avenue, Suite 100, Santa Monica, California 90404.
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Represents beneficial ownership of less than 1% of our outstanding shares of common stock. |
(1) |
Percentage of total voting power represents voting power with respect to all shares of our Class A common stock, Class B common stock and Class C common stock, as a single class. The holders of our Class B common stock are entitled to 20 votes per share, holders of our Class C common stock are entitled to three votes per share and holders of our Class A common stock are entitled to one vote per share. See the section titled Description of Capital StockCommon Stock for more information about the voting rights of our Class A common stock, Class B common stock and Class C common stock. |
(2) |
Consists of (a) 10,008,395 shares of Class C common stock held by Tulco, LLC. J. Martin Willhite, a member of our board of directors, is Vice Chairman of Tulco, LLC and a member of its board of directors. In addition, Thomas J. Tull, founder, Chairman and Chief Executive Officer of Tulco, LLC and a member of its board of directors, may control Tulco, LLC. Mr. Tull may be deemed to have or share beneficial ownership of the Class C common stock held directly by Tulco, LLC. The mailing address of Tulco, LLC and Messrs. Willhite and Tull is 61 E. Colorado Blvd., Unit 200, Pasadena, CA 91105. |
(3) |
Viking Global Opportunities Illiquid Investments Sub-Master LP (the Opportunities Fund) has the authority to dispose of and vote the Class A common stock directly owned by it, which power may be exercised by its general partner, Viking Global Opportunities Portfolio GP LLC (Opportunities GP), and by Viking Global Investors LP (VGI), which provides managerial services to Opportunities Fund. O. Andreas Halvorsen, David C. Ott and Rose Shabet, as Executive Committee members of Viking Global Partners LLC (the general |
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partner of VGI) and Opportunities GP, have shared authority to direct the voting and disposition of investments beneficially owned by VGI, Opportunities GP and the Opportunities Fund. The address of each of the entities is c/o Viking Global Investors LP, 55 Railroad Avenue, Greenwich, Connecticut 06830. |
(4) |
James H. Grossman, Jr., the Authorized Person for the Commonwealth of Pennsylvania, Public School Employees Retirement System, holds voting and investment power over the shares of Class A common stock held by the Commonwealth of Pennsylvania, Public School Employees Retirement System. The address of Commonwealth of Pennsylvania, Public School Employees Retirement System is 5 North Fifth Street, Harrisburg, Pennsylvania 17101. |
(5) |
Consists of (a) 104,717 shares of Class B common stock held by the Maple Tree Irrevocable Trust, (b) 93,931 shares of Class B common stock issuable upon the vesting and settlement of RSUs within 60 days of March 31, 2021, (c) 567,061 shares of Class B common stock issuable upon the exercise of stock options exercisable within 60 days of March 31, 2021 and (d) 25,000 shares of Class B common stock issuable pursuant to options that are early exercisable, but subject to repurchase right until vested, within 60 days of March 31, 2021. |
(6) |
Consists of (a) 255,564 shares of Class B common stock held by the Catherine Spear Revocable Trust, (b) 144,750 shares of Class B common stock held by the Wingaersheek Irrevocable Trust I, (c) 144,750 shares of Class B common stock held by the Wingaersheek Irrevocable Trust II, (d) 93,931 shares of Class B common stock issuable upon the vesting and settlement of RSUs within 60 days of March 31, 2021, (e) 992,582 shares of Class B common stock issuable upon the exercise of stock options exercisable within 60 days of March 31, 2021 and (f) 25,000 shares of Class B common stock issuable pursuant to options that are early exercisable, but subject to repurchase right until vested, within 60 days of March 31, 2021. |
(7) |
Consists of (a) 649,781 shares of Class B common stock, (b) 187,862 shares of Class B common stock issuable upon the vesting and settlement of RSUs within 60 days of March 31, 2021, (c) 1,559,643 shares of Class B common stock issuable upon the exercise of stock options exercisable within 60 days of March 31, 2021 and (d) 50,000 shares of Class B common stock issuable pursuant to options that are early exercisable, but subject to repurchase right until vested, within 60 days of March 31, 2021. |
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The following description summarizes the most important terms of our capital stock, as they will be in effect following this offering. Because it is only a summary, it does not contain all the information that may be important to you. We expect to adopt an amended and restated certificate of incorporation and amended and restated bylaws, each of which will become effective immediately prior to completion of this offering, and this description summarizes provisions that are expected to be included in these documents. For a complete description of the information contained in this section, you should refer to our amended and restated certificate of incorporation, amended and restated bylaws and amended and restated stockholders agreement, each of which are included as exhibits to the registration statement of which this prospectus forms a part, and to the applicable provisions of Delaware law.
General
Upon the completion of this offering, our authorized capital stock will consist of shares of our Class A common stock, shares of our Class B common stock, and shares of our Class C common stock, in each case, $0.0001 par value per share, and shares of undesignated preferred stock, $0.0001 par value per share.
As of March 31, 2021, assuming (1) the RSU Net Settlement, (2) the filing and effectiveness of our amended and restated certificate of incorporation and the effectiveness of our amended and restated bylaws, each of which will occur immediately prior to the completion of this offering, and (3) the Common Stock Reclassification, which will occur immediately prior to the completion of this offering, there were outstanding:
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6,525,064 shares of our Class A common stock, held by approximately 55 stockholders of record; |
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shares of our Class B common stock, held by four stockholders of record; and |
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10,008,395 shares of our Class C common stock, held by one stockholder of record. |
Common Stock
Upon the completion of this offering, we will have three classes of authorized common stock: Class A common stock, Class B common stock and Class C common stock. The rights of the holders of each class of our common stock are identical, except with respect to voting and conversion rights.
Dividend Rights
Subject to preferences that may apply to any shares of preferred stock outstanding at the time, the holders of our common stock are entitled to receive dividends out of funds legally available if our board of directors, in its discretion, determines to issue dividends and then only at the times and in the amounts that our board of directors may determine. See the section titled Dividend Policy for additional information.
Voting Rights
Holders of our Class A common stock are entitled to one vote for each share of Class A common stock held on all matters submitted to a vote of stockholders. Holders of our Class B common stock are entitled to 20 votes for each share of Class B common stock held on all matters submitted to a vote of stockholders. Holders of our Class C common stock are entitled to three votes for each share of Class C common stock held on all matters submitted to a vote of stockholders.
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Immediately following the completion of this offering, all outstanding shares of our Class B common stock will be held by our co-founders and co-Chief Executive Officers, Heather Hasson and Trina Spear, and all outstanding shares of our Class C common stock will be held by Tulco, LLC, our majority stockholder. Immediately following the completion of this offering, the outstanding shares of Class B common stock and Class C common stock will represent approximately % and %, respectively, of the voting power of our outstanding capital stock, assuming no exercise of the underwriters option to purchase additional shares.
Holders of shares of our Class A common stock, Class B common stock and Class C common stock vote together as a single class on all matters (including the election of directors) submitted to a vote of stockholders, unless otherwise required by Delaware law or our amended and restated certificate of incorporation. Delaware law could require either holders of our Class A common stock, Class B common stock or Class C common stock to vote separately as a single class in the following circumstances:
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if we were to seek to amend our amended and restated certificate of incorporation to increase or decrease the par value of a class of our capital stock, then that class would be required to vote separately to approve the proposed amendment; and |
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if we were to seek to amend our amended and restated certificate of incorporation in a manner that alters or changes the powers, preferences or special rights of a class of our capital stock in a manner that affected its holders adversely, then that class would be required to vote separately to approve the proposed amendment. |
Our amended and restated certificate of incorporation does not provide for cumulative voting for the election of directors. As a result, the holders of a majority of our voting shares can elect all of the directors then standing for election. Our amended and restated certificate of incorporation establishes a classified board of directors, to be divided into three classes with staggered three-year terms. Only one class of directors will be elected at each annual meeting of our stockholders, with the other classes continuing for the remainder of their respective three-year terms.
No Preemptive or Similar Rights
None of our common stock is entitled to preemptive rights or subject to redemption or sinking fund provisions.
Right to Receive Liquidation Distributions
Upon our liquidation, dissolution or winding up, the assets legally available for distribution to our stockholders would be distributable ratably among the holders of our common stock and any participating preferred stock outstanding at that time, subject to the prior satisfaction of all outstanding debt and liabilities and the preferential rights of and the payment of liquidation preferences, if any, on any shares of preferred stock outstanding at that time.
Change of Control Transactions
In the case of any distribution or payment in respect of the shares of our Class A common stock, Class B common stock or Class C common stock upon a merger or consolidation with or into any other entity, or other substantially similar transaction, the holders of our Class A common stock, Class B common stock and Class C common stock will be treated equally and identically with respect to shares of Class A common stock, Class B common stock or Class C common stock owned by them, unless the only difference in the per share distribution to the holders of the Class A common stock, Class B common stock and Class C common stock is that any securities distributed to the holder of a share of Class B common stock have 20 times the voting power of any securities distributed to the holder of a share of Class A common stock and any securities distributed to the
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holder of a share of Class C common stock have three times the voting power of any securities distributed to the holder of a share of Class A common stock, or such merger, consolidation or other transaction is approved by the affirmative vote of the holders of a majority of the outstanding shares of Class A common stock, Class B common stock and Class C common stock, each voting as a separate class.
Subdivisions and Combinations
If we subdivide or combine in any manner outstanding shares of Class A common stock, Class B common stock or Class C common stock, the outstanding shares of the other class will be subdivided or combined in the same manner, unless different treatment of the shares of each class is approved by the affirmative vote of the holders of a majority of the outstanding shares of Class A common stock, Class B common stock and Class C common stock, each voting as a separate class.
Conversion
Each outstanding share of Class B common stock and Class C common stock is convertible at any time at the option of the holder into one share of Class A common stock. In addition, each share of Class B common stock and Class C common stock will convert automatically into one share of Class A common stock upon any transfer, whether or not for value, which occurs after the completion of this offering, except for certain permitted transfers described in our amended and restated certificate of incorporation, including transfers for estate planning purposes or charitable transfers where voting control is retained by the transferring holder or transfers to affiliates or certain other related entities of the transferring holder. Once converted or transferred and converted into Class A common stock, the Class B common stock and Class C common stock may not be reissued.
All outstanding shares of our Class B common stock will convert automatically into shares of our Class A common stock upon the earlier of (1) the date fixed by our board of directors that is not less than 120 days or more than 180 days following the death or disability of both Ms. Hasson and Ms. Spear and (2) the 10-year anniversary of the date of the closing of this offering, each of which we refer to as a Class B final conversion event. Following such conversion, each share of Class A common stock will have one vote per share and the rights of the holders of all outstanding common stock will be identical. Once converted into Class A common stock, the Class B common stock may not be reissued.
All outstanding shares of our Class C common stock will convert automatically into shares of our Class A common stock upon the earlier of (1) the date fixed by our board of directors that is not less than 120 days or more than 180 days following the date that the number of shares of Class C common stock outstanding is less than 20% of the aggregate number of shares of all classes of common stock then outstanding (calculated on a diluted basis to include any issued and outstanding stock options, restricted stock units or other equity awards, whether vested or unvested) and (2) a Class B final conversion event of our outstanding common stock. Following such conversion, each share of Class A common stock will have one vote per share. Once converted into Class A common stock, the Class C common stock may not be reissued.
Upon the conversion of all shares of Class B common stock and Class C common stock into shares of Class A common stock, the rights of the holders of all outstanding common stock will be identical.
Preferred Stock
Following the completion of this offering, and pursuant to the provisions of our amended and restated certificate of incorporation that will be in effect thereafter, our board of directors will be authorized, subject to limitations prescribed by Delaware law, to issue preferred stock in one or more series, to establish from time to time the number of shares to be included in each series and to fix the designation, powers, preferences and rights of the shares of each series and any of its qualifications, limitations or restrictions, in each case without further vote or action by our stockholders. Our board of directors can also increase or decrease the number of shares of
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any series of preferred stock, but not below the number of shares of that series then outstanding, without any further vote or action by our stockholders. Our board of directors may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of our common stock. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, have the effect of delaying, deferring or preventing a change in control of our company and might adversely affect the market price of our Class A common stock and the voting and other rights of the holders of our Class A common stock, Class B common stock and Class C common stock. We have no current plans to issue any shares of preferred stock.
Stock Options
As of March 31, 2021, we had outstanding options to purchase an aggregate of 764,999 shares of our Class A common stock and 3,709,680 shares of our Class B common stock under our 2016 Plan, with a weighted-average exercise price of $40.26 per share and $31.35 per share, respectively, assuming (1) the reclassification of all shares of common stock underlying outstanding options under our 2016 Plan, other than those held by Ms. Hasson and Ms. Spear, into shares of Class A common stock, and (2) the amendment of all outstanding stock options held by Ms. Hasson and Ms. Spear, providing for the awards to be exercisable for shares of Class B common stock instead of Class A common stock, which amendment will occur immediately following the completion of this offering.
RSUs
As of March 31, 2021, 601,160 shares of our Class B common stock were subject to RSUs under our 2016 Plan, assuming the amendment of all outstanding RSUs held by Ms. Spear and Ms. Hasson, providing for the awards to settle in Class B common stock instead of Class A common stock, which amendment will occur immediately following the completion of this offering.
Voting Agreement
We, our co-founders and co-Chief Executive Officers, Ms. Hasson and Ms. Spear, sole holders of Class B common stock, and Tulco, LLC, sole holder of Class C common stock, will enter into a voting agreement, effective immediately prior to the completion of this offering, under which each of Ms. Hasson, Ms. Spear and Tulco, LLC will agree, following the offering and upon the terms set forth in the voting agreement, to vote their shares for the election of each of Ms. Hasson, Ms. Spear and for so long as Tulco, LLC and its permitted transferees hold, in the aggregate, at least 10% of the total number of outstanding shares of all classes of our common stock (calculated on a diluted basis to include any issued and outstanding options, RSUs or other equity awards, whether vested or unvested), a director designated by Tulco, LLC to our board of directors, and to vote against their removal. The voting agreement will be in effect until: (1) with respect to each co-founder, upon such co-founders death or disability, (2) the time at which none of the co-founders or their permitted transferees hold shares of Class B common stock or all outstanding shares of Class B common stock automatically convert to Class A common stock and (3) with respect to the individual designated by Tulco, LLC, the time at which Tulco, LLC and its permitted transferees cease to hold, in the aggregate, at least 10% of the total number of outstanding shares of all classes of our common stock (calculated on a diluted basis to include any issued and outstanding options, restricted stock units or other equity awards, whether vested or unvested). The conversion of our Class B common stock and Class C common stock to Class A common stock is provided for in our amended and restated certificate of incorporation, see section titled Common StockConversion.
Registration Rights
Following the completion of this offering, subject to the lock-up agreements entered into in connection with this offering, the holders of outstanding shares of our common stock, will be entitled to rights with respect to the registration of these shares under the Securities Act. These rights are provided under the terms of our amended and restated stockholders agreement between us and the holders of these shares, which was entered into in October 2020, and include demand registration rights, Form S-3 registration rights and piggyback registration
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rights. The registration of shares of our common stock by the exercise of registration rights described below would enable the holders to sell these shares without restriction under the Securities Act when the applicable registration statement is declared effective. Our amended and restated stockholders agreement does not provide for any maximum cash penalties or any penalties connected with delays in registering our common stock.
In any registration made pursuant to such amended and restated stockholders agreement, all fees, costs, and expenses of underwritten registrations, including reasonable fees and disbursements not to exceed $50,000 of one special counsel to the selling stockholders, will be borne by us and all selling expenses, including the estimated underwriting discounts and commissions, will be borne by the holders of the shares being registered. However, we will not be required to bear the expenses in connection with the exercise of the requested and Form S-3 registration rights of a registration if the request is subsequently withdrawn at the request of the selling stockholders holding a majority of registrable securities to be registered, unless such holders agree to forfeit their right to either one demand registration or one Form S-3 registration.
Generally, in an underwritten offering, the managing underwriter, if any, has the right, subject to specified conditions, to limit the number of shares such holders may include. The registration rights terminate upon the earliest of: (1) three years following the completion of this offering, (2) as to any given holder of registration rights, at such time following this offering when such holder of registration rights can sell all of such holders registrable securities in compliance with Rule 144(b)(1)(i) and all registrable securities held by such holder can be sold in any three-month period without registration pursuant to Rule 144 under the Securities Act and (3) a transaction or series of related transactions (whether by merger, consolidation, share transfer, new issuance of voting securities, as defined in the amended and restated stockholders agreement, or otherwise) in which a person as defined in the amended and restated stockholders agreement, acquires, directly or indirectly, (i) a majority of the voting power of our company (or the surviving or acquiring entity) or (ii) all or substantially all of the assets of our company and its direct and indirect subsidiaries (on a consolidated basis).
Demand Registration Rights
The holders of an aggregate of shares of our common stock following this offering, or their permitted transferees, are entitled to demand registration rights. Under the terms of the amended and restated stockholders agreement, at any time after 180 days following the effective date of this prospectus, holders of at least 35% of the voting securities (as defined in the amended and restated stockholders agreement) then-outstanding can request that we register the offer and sale of their shares on a registration statement on Form S-1 under the Securities Act with an anticipated aggregate offering price, net of selling expenses, of at least $25.0 million. We are required to effect only one registration pursuant to this provision of the amended and restated stockholders agreement. We may postpone the filing of a registration statement no more than once during any 12-month period for up to 90 days if our board of directors determines that the filing would be detrimental to us and our stockholders. We are not required to effect a requested registration under certain additional circumstances specified in the amended and restated stockholders agreement.
Form S-3 Registration Rights
The holders of an aggregate of shares of our common stock following this offering or their permitted transferees are also entitled to Form S-3 registration rights. If we are eligible and qualified to file a registration statement on Form S-3, holders can request that we register the offer and sale of all or part of their shares on a registration statement on Form S-3 with an anticipated aggregate offering price, net of selling expenses, of at least $10.0 million. We are required to effect at most two registration statements on Form S-3 in any 12-month period. We may postpone the filing of a registration statement on Form S-3 no more than once during any 12-month period for up to 90 days if our board of directors determines that the filing would be detrimental to us and our stockholders. We are not required to effect a registration on Form S-3 under certain additional circumstances specified in the amended and restated stockholders agreement.
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Piggyback Registration Rights
If we register any of our common stock for public sale, the holders of an aggregate of shares of our common stock following this offering or their permitted transferees are entitled to piggyback registration rights. However, this right does not apply to (1) a registration relating to the sale or grant of securities to our employees pursuant to a stock option, stock purchase, equity incentive or similar plan; (2) a registration relating to an SEC Rule 145 transaction; (3) a registration on any form that does not include substantially the same information as would be required to be included in a registration statement covering the sale of the voting securities, as defined in the amended and restated stockholders agreement; or (4) a registration in which the only common stock being registered is common stock issuable upon conversion of debt securities that are also being registered. The underwriters of any underwritten offering will have the right, in their sole discretion, to limit, because of marketing reasons, the number of shares registered by these holders, in which case the number of shares to be registered will be apportioned, first, to us, and second, pro rata among these holders, according to the total amount of securities entitled to be included by each holder, subject to additional circumstances specified in the amended and restated stockholders agreement.
Anti-Takeover Provisions
The provisions of Delaware law, our amended and restated certificate of incorporation and our amended and restated bylaws, as we expect they will be in effect upon the completion of this offering, could have the effect of delaying, deferring, or discouraging another person from acquiring control of our company. These provisions, which are summarized below, may have the effect of discouraging takeover bids. They are also designed, in part, to encourage persons seeking to acquire control of us to negotiate first with our board of directors. We believe that the benefits of increased protection of our potential ability to negotiate with an unfriendly or unsolicited acquirer outweigh the disadvantages of discouraging a proposal to acquire us because negotiation of these proposals could result in an improvement of their terms.
Delaware Law
We are subject to the provisions of Section 203 of the Delaware General Corporation Law, or DGCL, regulating corporate takeovers. In general, DGCL Section 203 prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder for a period of three years following the date on which the person became an interested stockholder unless:
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prior to the date of the transaction, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; |
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the interested stockholder owned at least 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 the interested stockholder, (1) shares owned by persons who are directors and also officers and (2) shares owned by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or |
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at or subsequent to the date of the transaction, the business combination is approved by the board of directors of the corporation and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least two-thirds of the outstanding voting stock that is not owned by the interested stockholder. |
Generally, a business combination includes a merger, asset or stock sale, or other transaction or series of transactions together resulting in a financial benefit to the interested stockholder. An interested stockholder is a person who, together with affiliates and associates, owns or, within three years prior to the determination of interested stockholder status, did own 15% or more of a corporations outstanding voting stock. We expect the existence of this provision to have an anti-takeover effect with respect to transactions our board of directors does not approve in advance. We also anticipate that DGCL Section 203 may also discourage attempts that might result in a premium over the market price for the shares of common stock held by stockholders.
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Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws Provisions
Our amended and restated certificate of incorporation and our amended and restated bylaws will include a number of provisions that could deter hostile takeovers or delay or prevent changes in control of our management team, including the following:
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Multi-Class Common Stock. As described above in the section titled Common StockVoting Rights, our amended and restated certificate of incorporation will provide for a multi-class common stock structure pursuant to which holders of our Class B common stock and Class C common stock will have the ability to control the outcome of matters requiring stockholder approval, even if they own significantly less than a majority of all outstanding shares of our common stock, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or its assets. Current investors, executives and employees will have the ability to exercise significant influence over those matters. |
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Board of Directors Vacancies. Our amended and restated certificate of incorporation and amended and restated bylaws will authorize only our board of directors to fill vacant directorships, including newly created seats. In addition, the number of directors constituting our board of directors is permitted to be set only by a resolution adopted by a majority vote of our entire board of directors. These provisions would prevent a stockholder from increasing the size of our board of directors and then gaining control of our board of directors by filling the resulting vacancies with its own nominees. This makes it more difficult to change the composition of our board of directors but promotes continuity of management. |
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Classified Board. Our amended and restated certificate of incorporation and amended and restated bylaws will provide that our board of directors will be classified into three classes of directors. The existence of a classified board of directors could discourage a third party from making a tender offer or otherwise attempting to obtain control of us as it is more difficult and time consuming for stockholders to replace a majority of the directors on a classified board of directors. See the section titled ManagementBoard of Directors Composition for additional information. |
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Directors Removed Only for Cause. Our amended and restated certificate of incorporation will provide that stockholders may remove directors only for cause. |
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Supermajority Requirements for Amendments of Our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws. Our amended and restated certificate of incorporation will further provide that the affirmative vote of holders of at least two-thirds of the voting power of all of the then outstanding shares of voting stock will be required to amend certain provisions of our amended and restated certificate of incorporation, including provisions relating to the classified board, the size of the board, removal of directors, special meetings, actions by written consent, and designation of our preferred stock. In addition, the affirmative vote of holders of 66 2/3% of the voting power of each of our Class A common stock, Class B common stock and Class C common stock, voting separately by class, will be required to amend the provisions of our amended and restated certificate of incorporation relating to the terms of our Class B common stock or Class C common stock. The affirmative vote of holders of at least 66 2/3% of the voting power of all of the then outstanding shares of voting stock will be required to amend or repeal our amended and restated bylaws, although our amended and restated bylaws may be amended by a simple majority vote of our board of directors. |
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Stockholder Action; Special Meeting of Stockholders. Our amended and restated certificate of incorporation provides that special meetings of our stockholders may be called only by our board of directors, the chairman of our board of directors, or either of our co-Chief Executive Officers. Our amended and restated certificate of incorporation will provide that our stockholders may act by written consent until such time as holders of our Class B common stock beneficially own less than a majority of the voting power, at which time our stockholders will no longer be able to act by written consent and instead must take action at an annual or special meeting of our stockholders. As a result, holders of our capital stock would not be able to amend our amended and restated bylaws or remove directors without holding a meeting of our stockholders called in accordance with our amended and restated bylaws. |
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Further, our amended and restated bylaws will provide that special meetings of our stockholders may be called only by our board of directors, the chairman of our board of directors, or our co-Chief Executive Officers, thus prohibiting a stockholder from calling a special meeting. These provisions might delay the ability of our stockholders to force consideration of a proposal or for stockholders to take any action, including the removal of directors. |
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Advance Notice Requirements for Stockholder Proposals and Director Nominations. Our amended and restated bylaws provide advance notice procedures for stockholders seeking to bring business before our annual meeting of stockholders or to nominate candidates for election as directors at our annual meeting of stockholders. Our amended and restated bylaws also specify certain requirements regarding the form and content of a stockholders notice. These provisions might preclude our stockholders from bringing matters before our annual meeting of stockholders or from making nominations for directors at our annual meeting of stockholders if the proper procedures are not followed. We expect that these provisions might also discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirers own slate of directors or otherwise attempting to obtain control of our company. |
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No Cumulative Voting. The DGCL provides that stockholders are not entitled to the right to cumulate votes in the election of directors unless a corporations certificate of incorporation provides otherwise. Our amended and restated certificate of incorporation and amended and restated bylaws will not provide for cumulative voting. |
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Issuance of Undesignated Preferred Stock. After the filing of our amended and restated certificate of incorporation, our board of directors will have the authority, without further action by the stockholders, to issue up to shares of undesignated preferred stock with rights and preferences, including voting rights, designated from time to time by our board of directors. The existence of authorized but unissued shares of preferred stock enables our board of directors to render more difficult or to discourage an attempt to obtain control of us by means of a merger, tender offer, proxy contest or other means. |
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Choice of Forum. Our amended and restated certificate of incorporation will provide that, unless we consent in writing to the selection of an alternative forum, (A)(i) any derivative action or proceeding brought on behalf of us, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our current or former directors, officers, other employees or stockholders to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the DGCL, our amended and restated certificate of incorporation or amended and restated bylaws (as either may be amended or restated) or as to which the DGCL confers exclusive jurisdiction on the Court of Chancery of the State of Delaware, or (iv) any action asserting a claim governed by the internal affairs doctrine of the law of the State of Delaware shall, to the fullest extent permitted by law, be exclusively brought in the Court of Chancery of the State of Delaware or, if such court does not have subject matter jurisdiction thereof, the federal district court of the State of Delaware, and (B) the federal district courts of the United States shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. Notwithstanding the foregoing, the exclusive forum provision shall not apply to claims seeking to enforce any liability or duty created by the Exchange Act. Our amended and restated certificate of incorporation will also provide that, to the fullest extent permitted by law, any person or entity purchasing or otherwise acquiring or holding any interest in shares of our capital stock shall be deemed to have notice of and consented to the foregoing. By agreeing to this provision, however, stockholders will not be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder. |
Limitations on Liability and Indemnification Matters
Our amended and restated certificate of incorporation, which will become effective immediately prior to the completion of this offering, will provide that we will indemnify each of our directors and executive officers to the fullest extent permitted by the DGCL. We have entered or will enter into indemnification agreements with each of our directors and executive officers that may, in some cases, be broader than the specific indemnification
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provisions contained under Delaware law. Further, pursuant to our indemnification agreements and directors and officers liability insurance, our directors and executive officers are indemnified and insured against the cost of defense, settlement or payment of a judgment under certain circumstances. In addition, as permitted by Delaware law, our amended and restated certificate of incorporation will include provisions that eliminate the personal liability of our directors for monetary damages resulting from breaches of certain fiduciary duties as a director. The effect of this provision is to restrict our rights and the rights of our stockholders in derivative suits to recover monetary damages against a director for breach of fiduciary duties as a director.
These provisions may be held not to be enforceable for violations of the federal securities laws of the United States.
Listing
We have applied to list our Class A common stock on the NYSE under the symbol FIGS.
Transfer Agent and Registrar
The transfer agent and registrar for our Class A common stock is Computershare Trust Company, N.A.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for shares of our Class A common stock, and we cannot predict the effect, if any, that market sales of shares of our Class A common stock or the availability of shares of our Class A common stock for sale will have on the market price of our Class A common stock prevailing from time to time. Nevertheless, sales of substantial amounts of our Class A common stock, including shares issued upon exercise of outstanding stock options in the public market following this offering could adversely affect market prices prevailing from time to time and could impair our ability to raise capital through the sale of our equity securities.
Following the completion of this offering, based on the number of shares of our capital stock outstanding as of March 31, 2021, we will have a total of shares of our Class A common stock, shares of our Class B common stock and shares of our Class C common stock outstanding. This includes shares of Class A common stock that we and the selling stockholders are selling in this offering, which shares may be resold in the public market immediately following this offering, and assumes no additional exercise of outstanding options. Shares of our Class B common stock and Class C common stock are convertible into an equivalent number of shares of our Class A common stock and generally convert into shares of our Class A common stock upon transfer.
The remaining outstanding shares of our Class A common stock, Class B common stock and Class C common stock will be deemed restricted securities as defined in Rule 144 under the Securities Act. Restricted securities may be sold in the public market only if they are registered under the Securities Act or if they qualify for an exemption from registration under Rule 144 or Rule 701 under the Securities Act, which rules are summarized below. As a result of the lock-up agreements and market standoff provisions described below and subject to the provisions of Rule 144 or Rule 701, shares will be available for sale in the public market as follows:
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beginning on the date of this prospectus, all of the shares of Class A common stock sold in this offering, which includes shares of Class A common stock to be sold in this offering by the selling stockholders, will be immediately available for sale in the public market; |
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beginning on the date of this prospectus, shares of Class A common stock, assuming no exercise of outstanding options, will be immediately available for sale in the public market; |
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beginning days after the date of this prospectus, additional shares of Class A common stock will become eligible for sale in the public market, of which shares will be held by affiliates and subject to the volume and other restrictions of Rule 144, as described below; provided that , such additional shares shall become eligible for sale in the public market; and |
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the remainder of the shares of Class A common stock will be eligible for sale in the public market from time to time thereafter upon subject to vesting and, in some cases, to the volume and other restrictions of Rule 144, as described below. |
Lock-Up Agreements and Market Standoff Provisions
All of our directors, executive officers, and holders of substantially all of our outstanding equity securities are subject to lock-up agreements or market standoff provisions that, subject to exceptions described under the section titled Underwriting below, prohibit them from offering for sale, selling, contracting to sell, granting any option for the sale of, transferring or otherwise disposing of any shares of our common stock, stock options or any security or instrument related to this common stock, or stock option for a period of at least 180 days following the date of this prospectus, without the prior written consent of Goldman Sachs & Co. LLC and Morgan Stanley & Co. LLC; provided that . These agreements are subject to certain customary exceptions. See the section titled Underwriting for additional information.
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Rule 144
In general, under Rule 144, as currently in effect, once we have been subject to the public company reporting requirements of Section 13 or Section 15(d) of the Exchange Act for at least 90 days, a person who is not deemed to have been one of our affiliates for purposes of the Securities Act at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least six months, including the holding period of any prior owner other than our affiliates, is entitled to sell those shares without complying with the manner of sale, volume limitation or notice provisions of Rule 144, subject to compliance with the public information requirements of Rule 144 and the requirements of the lock-up and market standoff agreements, as described above. If such a person has beneficially owned the shares proposed to be sold for at least one year, including the holding period of any prior owner other than our affiliates, then that person would be entitled to sell those shares (subject to the requirements of the lock-up and market standoff agreements, as described above) without complying with any of the requirements of Rule 144.
In general, under Rule 144, as currently in effect, our affiliates or persons selling shares on behalf of our affiliates are entitled to sell upon expiration of the lock-up and market standoff provisions described above, within any three-month period, a number of shares that does not exceed the greater of:
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1% of the number of shares of our Class A common stock then outstanding, which will equal approximately shares immediately after this offering; or |
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the average weekly trading volume of our Class A common stock during the four calendar weeks preceding the filing of a notice on Form 144 with respect to that sale. |
Sales under Rule 144 by our affiliates or persons selling shares on behalf of our affiliates are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about us.
Rule 701
Rule 701 generally allows a stockholder who purchased shares of our capital stock pursuant to a written compensatory plan or contract and who is not deemed to have been an affiliate of our company during the immediately preceding 90 days to sell these shares in reliance upon Rule 144, but without being required to comply with the public information, holding period, volume limitation, or notice provisions of Rule 144. Rule 701 also permits affiliates of our company to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. All holders of Rule 701 shares, however, are required by that rule to wait until 90 days after the date of this prospectus before selling those shares pursuant to Rule 701. Moreover, all Rule 701 shares are subject to lock-up agreements and or market standoff agreements as described above and under the section titled Underwriting and will not become eligible for sale until the expiration of those agreements.
Registration Statements
In connection with this offering, we intend to file one or more registration statements on Form S-8 under the Securities Act covering all of the shares of our Class A common stock subject to outstanding stock options and the shares of our Class A common stock reserved for issuance under our equity incentive plans. We expect to file this registration statement as soon as permitted under the Securities Act. However, the shares registered on Form S-8 may be subject to the volume limitations and the manner of sale, notice and public information requirements of Rule 144 and will not be eligible for resale until expiration of the lock-up and market standoff agreements to which they are subject.
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Registration Rights
We have granted demand, Form S-3, and piggyback registration rights to certain of our stockholders to sell approximately shares of our common stock. Registration of the sale of these shares under the Securities Act would result in these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration, except for shares purchased by affiliates. See the section titled Description of Capital StockRegistration Rights for additional information.
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MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS OF OUR CLASS A COMMON STOCK
The following discussion is a summary of the material U.S. federal income tax consequences to Non-U.S. Holders (as defined below) of the purchase, ownership and disposition of our Class A common stock issued pursuant to this offering, but does not purport to be a complete analysis of all potential tax effects. The effects of other U.S. federal tax laws, such as estate and gift tax laws, and any applicable state, local or non-U.S. tax laws are not discussed. This discussion is based on the U.S. Internal Revenue Code of 1986, as amended, or the Code, Treasury Regulations promulgated thereunder, judicial decisions, and published rulings and administrative pronouncements of the U.S. Internal Revenue Service, or the IRS, in each case in effect as of the date hereof. These authorities may change or be subject to differing interpretations. Any such change or differing interpretation may be applied retroactively in a manner that could adversely affect a Non-U.S. Holder. We have not sought and will not seek any rulings from the IRS regarding the matters discussed below. There can be no assurance the IRS or a court will not take a contrary position to that discussed below regarding the tax consequences of the purchase, ownership and disposition of our Class A common stock.
This discussion is limited to Non-U.S. Holders that hold our Class A common stock as a capital asset within the meaning of Section 1221 of the Code (generally, property held for investment). This discussion does not address all U.S. federal income tax consequences relevant to a Non-U.S. Holders particular circumstances, including the impact of the Medicare contribution tax on net investment income, the alternative minimum tax provisions of the Code, and the special tax accounting rules under Section 451(b) of the Code. In addition, it does not address consequences relevant to Non-U.S. Holders subject to special rules, including, without limitation:
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U.S. expatriates and former citizens or long-term residents of the United States; |
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persons holding our Class A common stock as part of a hedge, straddle, synthetic security or other risk reduction strategy or as part of a conversion transaction or other integrated investment; |
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banks, insurance companies, and other financial institutions; |
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brokers, dealers or traders in securities; |
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controlled foreign corporations, passive foreign investment companies, and corporations that accumulate earnings to avoid U.S. federal income tax; |
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partnerships or other entities or arrangements treated as partnerships for U.S. federal income tax purposes (and investors therein); |
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tax-exempt organizations or governmental organizations; |
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persons deemed to sell our Class A common stock under the constructive sale provisions of the Code; |
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persons who hold or receive our Class A common stock pursuant to the exercise of any employee stock option or otherwise as compensation; |
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persons that own, or are deemed to own, during the applicable testing period, more than 5% of our outstanding capital stock (except to the extent specifically set forth below); |
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tax-qualified retirement plans; and |
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qualified foreign pension funds as defined in Section 897(l)(2) of the Code and entities all of the interests of which are held by qualified foreign pension funds. |
If an entity treated as a partnership for U.S. federal income tax purposes holds our Class A common stock, the tax treatment of a partner in the partnership will depend on the status of the partner, the activities of the partnership and certain determinations made at the partner level. Accordingly, partnerships holding our Class A common stock and the partners in such partnerships should consult their tax advisors regarding the U.S. federal income tax consequences to them.
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THIS DISCUSSION IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT TAX ADVICE. INVESTORS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF OUR CLASS A COMMON STOCK ARISING UNDER U.S. FEDERAL NON-INCOME TAX LAWS, INCLUDING ESTATE OR GIFT TAX LAWS OR UNDER THE LAWS OF ANY STATE, LOCAL OR NON-U.S. TAXING JURISDICTION OR UNDER ANY APPLICABLE INCOME TAX TREATY.
Definition of a Non-U.S. Holder
For purposes of this discussion, a Non-U.S. Holder is any beneficial owner of our Class A common stock that is neither a U.S. person nor an entity treated as a partnership for U.S. federal income tax purposes. A U.S. person is any person that, for U.S. federal income tax purposes, is or is treated as any of the following:
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an individual who is a citizen or resident of the United States; |
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a corporation created or organized under the laws of the United States, any state thereof, or the District of Columbia; |
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an estate, the income of which is subject to U.S. federal income tax regardless of its source; or |
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a trust that (1) is subject to the primary supervision of a U.S. court and the control of one or more United States persons (within the meaning of Section 7701(a)(30) of the Code), or (2) has a valid election in effect to be treated as a United States person for U.S. federal income tax purposes. |
Distributions
As described in the section entitled Dividend Policy, we do not anticipate declaring or paying dividends to holders of our Class A common stock in the foreseeable future. However, if we do make distributions of cash or property on our Class A common stock, such distributions will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Amounts not treated as dividends for U.S. federal income tax purposes will constitute a return of capital and first be applied against and reduce a Non-U.S. Holders adjusted tax basis in its Class A common stock, but not below zero. Any excess will be treated as capital gain and will be treated as described below under Sale or Other Taxable Disposition.
Subject to the discussion below on effectively connected income, dividends paid to a Non-U.S. Holder of our Class A common stock will be subject to U.S. federal withholding tax at a rate of 30% of the gross amount of the dividends (or such lower rate specified by an applicable income tax treaty, provided the Non-U.S. Holder furnishes a valid IRS Form W-8BEN or W-8BEN-E (or other applicable documentation) certifying qualification for the lower treaty rate). A Non-U.S. Holder that does not timely furnish the required documentation, but that qualifies for a reduced treaty rate, may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with the IRS. Non-U.S. Holders should consult their tax advisors regarding their entitlement to benefits under any applicable income tax treaty.
If dividends paid to a Non-U.S. Holder are effectively connected with the Non-U.S. Holders conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, the Non-U.S. Holder maintains a permanent establishment in the United States to which such dividends are attributable), the Non-U.S. Holder will be exempt from the U.S. federal withholding tax described above. To claim the exemption, the Non-U.S. Holder must furnish to the applicable withholding agent a valid IRS Form W-8ECI, certifying that the dividends are effectively connected with the Non-U.S. Holders conduct of a trade or business within the United States.
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Any such effectively connected dividends will be subject to U.S. federal income tax on a net income basis at the regular rates applicable to United States persons. A Non-U.S. Holder that is a corporation also may be subject to a branch profits tax at a rate of 30% (or such lower rate specified by an applicable income tax treaty) on such effectively connected dividends, as adjusted for certain items. Non-U.S. Holders should consult their tax advisors regarding any applicable tax treaties that may provide for different rules.
Sale or Other Taxable Disposition
Subject to the discussion below regarding backup withholding, a Non-U.S. Holder will not be subject to U.S. federal income tax on any gain realized upon the sale or other taxable disposition of our Class A common stock unless:
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the gain is effectively connected with the Non-U.S. Holders conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, the Non-U.S. Holder maintains a permanent establishment in the United States to which such gain is attributable); |
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the Non-U.S. Holder is a nonresident alien individual present in the United States for 183 days or more during the taxable year of the disposition and certain other requirements are met; or |
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our Class A common stock constitutes a U.S. real property interest, or USRPI, by reason of our status as a U.S. real property holding corporation, or USRPHC at any time during the five-year period preceding such disposition (or the Non-U.S. Holders holding period, if shorter), for U.S. federal income tax purposes. |
Gain described in the first bullet point above generally will be subject to U.S. federal income tax on a net income basis at the regular graduated rates applicable to United States persons. A Non-U.S. Holder that is a corporation also may be subject to a branch profits tax at a rate of 30% (or such lower rate specified by an applicable income tax treaty) on such effectively connected gain, as adjusted for certain items.
A Non-U.S. Holder described in the second bullet point above will be subject to U.S. federal income tax at a rate of 30% (or such lower rate specified by an applicable income tax treaty) on gain realized upon the sale or other taxable disposition of our Class A common stock, which may be offset by U.S. source capital losses of the Non-U.S. Holder (even though the individual is not considered a resident of the United States), provided the Non-U.S. Holder has timely filed U.S. federal income tax returns with respect to such losses.
With respect to the third bullet point above, we believe we currently are not, and do not anticipate becoming, a USRPHC. Because the determination of whether we are a USRPHC depends, however, on the fair market value of our USRPIs relative to the fair market value of our non-U.S. real property interests and our other business assets, there can be no assurance we currently are not a USRPHC or will not become one in the future. Even if we are or were to become a USRPHC, gain arising from the sale or other taxable disposition of our Class A common stock by a Non-U.S. Holder will not be subject to U.S. federal income tax if our Class A common stock is regularly traded, as defined by applicable Treasury Regulations, on an established securities market, and such Non-U.S. Holder owned, actually and constructively, 5% or less of our Class A common stock throughout the shorter of the five-year period ending on the date of the sale or other taxable disposition or the Non-U.S. Holders holding period.
Non-U.S. Holders should consult their tax advisors regarding potentially applicable income tax treaties that may provide for different rules.
Information Reporting and Backup Withholding
Payments of dividends on our Class A common stock will not be subject to backup withholding, provided the applicable withholding agent does not have actual knowledge or reason to know the holder is a United States
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person and the holder either certifies its non-U.S. status, such as by furnishing a valid IRS Form W-8BEN, W-8BEN-E or W-8ECI, or otherwise establishes an exemption. However, information returns are required to be filed with the IRS in connection with any distributions on our Class A common stock paid to the Non-U.S. Holder, regardless of whether such distributions constitute dividends or whether any tax was actually withheld. In addition, proceeds of the sale or other taxable disposition of our Class A common stock within the United States or conducted through certain U.S.-related brokers generally will not be subject to backup withholding or information reporting if the applicable withholding agent receives the certification described above and does not have actual knowledge or reason to know that such holder is a United States person or the holder otherwise establishes an exemption. Proceeds of a disposition of our Class A common stock conducted through a non-U.S. office of a non-U.S. broker generally will not be subject to backup withholding or information reporting.
Copies of information returns that are filed with the IRS may also be made available under the provisions of an applicable treaty or agreement to the tax authorities of the country in which the Non-U.S. Holder resides or is established.
Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against a Non-U.S. Holders U.S. federal income tax liability, provided the required information is timely furnished to the IRS.
Additional Withholding Tax on Payments Made to Foreign Accounts
Withholding taxes may be imposed under Sections 1471 to 1474 of the Code (such Sections commonly referred to as the Foreign Account Tax Compliance Act, or FATCA) on certain types of payments made to non-U.S. financial institutions and certain other non-U.S. entities. Specifically, a 30% withholding tax may be imposed on dividends on, or (subject to the proposed Treasury Regulations discussed below) gross proceeds from the sale or other disposition of, our Class A common stock paid to a foreign financial institution or a non-financial foreign entity (each as defined in the Code), unless (1) the foreign financial institution undertakes certain diligence and reporting obligations, (2) the non-financial foreign entity either certifies it does not have any substantial United States owners (as defined in the Code) or furnishes identifying information regarding each substantial United States owner, or (3) the foreign financial institution or non-financial foreign entity otherwise qualifies for an exemption from these rules. If the payee is a foreign financial institution and is subject to the diligence and reporting requirements in (1) above, it must enter into an agreement with the U.S. Department of the Treasury requiring, among other things, that it undertake to identify accounts held by certain specified United States persons or United States owned foreign entities (each as defined in the Code), annually report certain information about such accounts, and withhold 30% on certain payments to non-compliant foreign financial institutions and certain other account holders. Foreign financial institutions located in jurisdictions that have an intergovernmental agreement with the United States governing FATCA may be subject to different rules.
Under the applicable Treasury Regulations and administrative guidance, withholding under FATCA generally applies to payments of dividends on our Class A common stock. While withholding under FATCA would have applied also to payments of gross proceeds from the sale or other disposition of stock, proposed Treasury Regulations eliminate FATCA withholding on payments of gross proceeds entirely. Taxpayers generally may rely on these proposed Treasury Regulations until final Treasury Regulations are issued.
Prospective investors should consult their tax advisors regarding the potential application of withholding under FATCA to their investment in our Class A common stock.
EACH PROSPECTIVE INVESTOR SHOULD CONSULT ITS OWN TAX ADVISOR REGARDING THE TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF OUR CLASS A COMMON STOCK ARISING UNDER U.S. FEDERAL NON-INCOME TAX LAWS, INCLUDING ESTATE OR GIFT TAX LAWS, OR UNDER THE LAWS OF ANY STATE, LOCAL OR NON-U.S. TAXING JURISDICTION OR UNDER ANY APPLICABLE INCOME TAX TREATY.
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The company, the selling stockholders and the underwriters named below have entered into an underwriting agreement with respect to the shares of Class A common stock being offered. Subject to certain conditions, each underwriter has severally agreed to purchase the number of shares of Class A common stock indicated in the following table. Goldman Sachs & Co. LLC and Morgan Stanley & Co. LLC are the representatives of the underwriters.
Underwriters |
Number of
Shares |
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Goldman Sachs & Co. LLC |
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Morgan Stanley & Co. LLC |
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Barclays Capital Inc. |
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Credit Suisse Securities (USA) LLC |
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BofA Securities, Inc. |
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Total |
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The underwriters are committed to take and pay for all of the shares of Class A common stock being offered, if any are taken, other than the shares of Class A common stock covered by the option described below unless and until this option is exercised.
The underwriters have an option to buy up to an additional shares of Class A common stock from the company and selling stockholders to cover sales by the underwriters of a greater number of shares of Class A common stock than the total number set forth in the table above. They may exercise that option for 30 days. If any shares of Class A common stock are purchased pursuant to this option, the underwriters will severally purchase shares of Class A common stock in approximately the same proportion as set forth in the table above.
The following tables show the per share and total underwriting discounts and commissions to be paid to the underwriters by the company and the selling stockholders. Such amounts are shown assuming both no exercise and full exercise of the underwriters option to purchase additional shares of Class A common stock.
Paid by the Company
No Exercise | Full Exercise | |||||||
Per Share |
$ | $ | ||||||
Total |
$ | $ |
Paid by the Selling Stockholders
No Exercise | Full Exercise | |||||||
Per Share |
$ | $ | ||||||
Total |
$ | $ |
Shares of Class A common stock sold by the underwriters to the public will initially be offered at the initial public offering price set forth on the cover of this prospectus. Any shares of Class A common stock sold by the underwriters to securities dealers may be sold at a discount of up to $ per share from the initial public offering price. After the initial offering of the shares of Class A common stock, the representatives may change the offering price and the other selling terms. The offering of the shares of Class A common stock by the underwriters is subject to receipt and acceptance and subject to the underwriters right to reject any order in whole or in part.
The company and its officers, directors and holders of substantially all of the companys common stock, including the selling stockholders, have agreed with the underwriters, subject to certain exceptions, not to dispose of or hedge any of their common stock or securities convertible into or exchangeable for shares of Class A common
173
stock during the period from the date of this prospectus continuing through the date after the date of this prospectus, except with the prior written consent of Goldman Sachs & Co. LLC and Morgan Stanley & Co. LLC; provided that . These agreements are subject to certain other customary exceptions and do not apply to any existing employee benefit plans. See Shares Eligible for Future Sale for a discussion of certain transfer restrictions.
Prior to the offering, there has been no public market for the shares of Class A common stock. The initial public offering price has been negotiated among the company and the representatives. Among the factors to be considered in determining the initial public offering price of the shares of Class A common stock, in addition to prevailing market conditions, will be the companys historical performance, estimates of the business potential and earnings prospects of the company, an assessment of the companys management and the consideration of the above factors in relation to market valuation of companies in related businesses.
We have applied to list the Class A common stock on the NYSE under the symbol FIGS. In order to meet one of the requirements for listing the Class A common stock on the NYSE, the underwriters have undertaken to sell lots of 100 or more shares to a minimum of 400 beneficial holders.
In connection with the offering, the underwriters may purchase and sell shares of common stock in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering, and a short position represents the amount of such sales that have not been covered by subsequent purchases. A covered short position is a short position that is not greater than the amount of additional shares for which the underwriters option described above may be exercised. The underwriters may cover any covered short position by either exercising their option to purchase additional shares or purchasing shares in the open market. In determining the source of shares to cover the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase additional shares pursuant to the option described above. Naked short sales are any short sales that create a short position greater than the amount of additional shares for which the option described above may be exercised. The underwriters must cover any such naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the Class A common stock in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of various bids for or purchases of Class A common stock made by the underwriters in the open market prior to the completion of the offering.
The underwriters may also impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of such underwriter in stabilizing or short covering transactions.
Purchases to cover a short position and stabilizing transactions, as well as other purchases by the underwriters for their own accounts, may have the effect of preventing or retarding a decline in the market price of the companys Class A stock, and together with the imposition of the penalty bid, may stabilize, maintain or otherwise affect the market price of the Class A common stock. As a result, the price of the Class A common stock may be higher than the price that otherwise might exist in the open market. The underwriters are not required to engage in these activities and may end any of these activities at any time. These transactions may be effected on the NYSE, in the over-the-counter market or otherwise.
The company and the selling stockholders estimate that their share of the total expenses of the offering, excluding underwriting discounts and commissions, will be approximately $ . We have agreed to reimburse the underwriters for certain of their expenses in an amount up to $ . The underwriters have agreed to reimburse us for certain expenses incurred by us in connection with this offering upon closing of this offering.
174
The company and the selling stockholders have agreed to indemnify the several underwriters against certain liabilities, including liabilities under the Securities Act of 1933.
The underwriters and their respective affiliates are full service financial institutions engaged in various activities, which may include sales and trading, commercial and investment banking, advisory, investment management, investment research, principal investment, hedging, market making, brokerage and other financial and non-financial activities and services. Certain of the underwriters and their respective affiliates have provided, and may in the future provide, a variety of these services to the issuer and to persons and entities with relationships with the issuer, for which they received or will receive customary fees and expenses. Goldman Sachs & Co. LLC beneficially owns a less than 1% interest in Tulco, LLC, our majority stockholder and one of the selling stockholders, which was acquired in 2018.
In the ordinary course of their various business activities, the underwriters and their respective affiliates, officers, directors and employees may purchase, sell or hold a broad array of investments and actively trade securities, derivatives, loans, commodities, currencies, credit default swaps and other financial instruments for their own account and for the accounts of their customers, and such investment and trading activities may involve or relate to assets, securities and/or instruments of the issuer (directly, as collateral securing other obligations or otherwise) and/or persons and entities with relationships with the issuer. The underwriters and their respective affiliates may also communicate independent investment recommendations, market color or trading ideas and/or publish or express independent research views in respect of such assets, securities or instruments and may at any time hold, or recommend to clients that they should acquire, long and/or short positions in such assets, securities and instruments.
Directed Share Program
At our request, the underwriters have reserved up to % of the shares of Class A common stock offered by this prospectus for sale at the initial public offering price through a directed share program to certain individuals identified by management. Any shares sold under the directed share program will not be subject to the terms of any lock-up agreement, except in the case of shares purchased by any of our officers or directors. The number of shares of Class A common stock available for sale to the general public will be reduced by the number of reserved shares sold to these individuals. Any reserved shares not purchased by these individuals will be offered by the underwriters to the general public on the same basis as the other shares of Class A common stock offered under this prospectus. We will agree to indemnify the underwriters against certain liabilities and expenses, including liabilities under the Securities Act of 1933, in connection with sales of the shares reserved for the directed share program. The directed share program will be arranged through Morgan Stanley & Co. LLC.
Selling Restrictions
European Economic Area
In relation to each Member State of the European Economic Area (each a Relevant State), no shares have been offered or will be offered pursuant to the offering to the public in that Relevant State prior to the publication of a prospectus in relation to the shares which has been approved by the competent authority in that Relevant State or, where appropriate, approved in another Relevant State and notified to the competent authority in that Relevant State, all in accordance with the Prospectus Regulation, except that the shares may be offered to the public in that Relevant State at any time:
(a) |
to any legal entity which is a qualified investor as defined under Article 2 of the Prospectus Regulation; |
(b) |
to fewer than 150 natural or legal persons (other than qualified investors as defined under Article 2 of the Prospectus Regulation), subject to obtaining the prior consent of the representatives for any such offer; or |
(c) |
in any other circumstances falling within Article 1(4) of the Prospectus Regulation, |
175
provided that no such offer of the shares shall require the company or any of the underwriters to publish a prospectus pursuant to Article 3 of the Prospectus Regulation or supplement a prospectus pursuant to Article 23 of the Prospectus Regulation.
For the purposes of this provision, the expression an offer to the public in relation to the shares in any Relevant State means the communication in any form and by any means of sufficient information on the terms of the offer and any shares to be offered so as to enable an investor to decide to purchase or subscribe for any shares, and the expression Prospectus Regulation means Regulation (EU) 2017/1129.
United Kingdom
No shares have been offered or will be offered pursuant to the offering to the public in the United Kingdom prior to the publication of a prospectus in relation to the shares which has been approved by the Financial Conduct Authority, except that the shares may be offered to the public in the United Kingdom at any time:
(a) |
to any legal entity which is a qualified investor as defined under Article 2 of the UK Prospectus Regulation; |
(b) |
to fewer than 150 natural or legal persons (other than qualified investors as defined under Article 2 of the UK Prospectus Regulation), subject to obtaining the prior consent of the representatives for any such offer; or |
(c) |
in any other circumstances falling within Section 86 of the FSMA. |
provided that no such offer of the shares shall require the company or any underwriter to publish a prospectus pursuant to Section 85 of the FSMA or supplement a prospectus pursuant to Article 23 of the UK Prospectus Regulation.
For the purposes of this provision, the expression an offer to the public in relation to the shares in the United Kingdom means the communication in any form and by any means of sufficient information on the terms of the offer and any shares to be offered so as to enable an investor to decide to purchase or subscribe for any shares and the expression UK Prospectus Regulation means Regulation (EU) 2017/1129 as it forms part of domestic law by virtue of the European Union (Withdrawal) Act 2018.
Canada
The securities may be sold in Canada only to purchasers purchasing, or deemed to be purchasing, as principal that are accredited investors, as defined in National Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), and are permitted clients, as defined in National Instrument 31-103 Registration Requirements, Exemptions, and Ongoing Registrant Obligations. Any resale of the securities must be made in accordance with an exemption form, or in a transaction not subject to, the prospectus requirements of applicable securities laws.
Securities legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this prospectus (including any amendment thereto) contains a misrepresentation, provided that the remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchasers province or territory. The purchaser should refer to any applicable provisions of the securities legislation of the purchasers province or territory of these rights or consult with a legal advisor.
Pursuant to section 3A.3 of National Instrument 33-105 Underwriting Conflicts (NI 33-105), the underwriters are not required to comply with the disclosure requirements of NI 33-105 regarding underwriter conflicts of interest in connection with this offering.
176
Hong Kong
The shares may not be offered or sold in Hong Kong by means of any document other than (i) in circumstances which do not constitute an offer to the public within the meaning of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32 of the Laws of Hong Kong) (Companies (Winding Up and Miscellaneous Provisions) Ordinance) or which do not constitute an invitation to the public within the meaning of the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) (Securities and Futures Ordinance), or (ii) to professional investors as defined in the Securities and Futures Ordinance and any rules made thereunder, or (iii) in other circumstances which do not result in the document being a prospectus as defined in the Companies (Winding Up and Miscellaneous Provisions) Ordinance, and no advertisement, invitation or document relating to the shares may be issued or may be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere), which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to shares which are or are intended to be disposed of only to persons outside Hong Kong or only to professional investors in Hong Kong as defined in the Securities and Futures Ordinance and any rules made thereunder.
Singapore
This prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this prospectus and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the shares may not be circulated or distributed, nor may the shares be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor (as defined under Section 4A of the Securities and Futures Act, Chapter 289 of Singapore (the SFA)) under Section 274 of the SFA, (ii) to a relevant person (as defined in Section 275(2) of the SFA) pursuant to Section 275(1) of the SFA, or any person pursuant to Section 275(1A) of the SFA, and in accordance with the conditions specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA, in each case subject to conditions set forth in the SFA.
Where the shares are subscribed or purchased under Section 275 of the SFA by a relevant person which is a corporation (which is not an accredited investor (as defined in Section 4A of the SFA)) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor, the securities (as defined in Section 239(1) of the SFA) of that corporation shall not be transferable for 6 months after that corporation has acquired the shares under Section 275 of the SFA except: (1) to an institutional investor under Section 274 of the SFA or to a relevant person (as defined in Section 275(2) of the SFA), (2) where such transfer arises from an offer in that corporations securities pursuant to Section 275(1A) of the SFA, (3) where no consideration is or will be given for the transfer, (4) where the transfer is by operation of law, (5) as specified in Section 276(7) of the SFA, or (6) as specified in Regulation 32 of the Securities and Futures (Offers of Investments) (Shares and Debentures) Regulations 2005 of Singapore (Regulation 32)
Where the shares are subscribed or purchased under Section 275 of the SFA by a relevant person which is a trust (where the trustee is not an accredited investor (as defined in Section 4A of the SFA)) whose sole purpose is to hold investments and each beneficiary of the trust is an accredited investor, the beneficiaries rights and interest (howsoever described) in that trust shall not be transferable for 6 months after that trust has acquired the shares under Section 275 of the SFA except: (1) to an institutional investor under Section 274 of the SFA or to a relevant person (as defined in Section 275(2) of the SFA), (2) where such transfer arises from an offer that is made on terms that such rights or interest are acquired at a consideration of not less than S$200,000 (or its equivalent in a foreign currency) for each transaction (whether such amount is to be paid for in cash or by exchange of securities or other assets), (3) where no consideration is or will be given for the transfer, (4) where the transfer is by operation of law, (5) as specified in Section 276(7) of the SFA, or (6) as specified in Regulation 32.
177
Japan
The securities have not been and will not be registered under the Financial Instruments and Exchange Act of Japan (Act No. 25 of 1948, as amended), or the FIEA. The securities may not be offered or sold, directly or indirectly, in Japan or to or for the benefit of any resident of Japan (including any person resident in Japan or any corporation or other entity organized under the laws of Japan) or to others for reoffering or resale, directly or indirectly, in Japan or to or for the benefit of any resident of Japan, except pursuant to an exemption from the registration requirements of the FIEA and otherwise in compliance with any relevant laws and regulations of Japan.
178
The validity of the shares of our Class A common stock offered hereby will be passed upon for us by Latham & Watkins LLP. Certain legal matters will be passed upon for the underwriters by Cooley LLP.
The financial statements audited by Ernst & Young LLP as of and for each of the years ended December 31, 2019 and 2020 have been included in this prospectus in reliance on their report given on their authority as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the shares of our Class A common stock offered hereby. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement or the exhibits and schedules filed therewith. For further information about us and the Class A common stock offered hereby, reference is made to the registration statement and the exhibits filed therewith. Statements contained in this prospectus regarding the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and in each instance, we refer you to the copy of such contract or other document filed as an exhibit to the registration statement. The SEC maintains a website that contains reports, proxy, and information statements and other information regarding registrants that file electronically with the SEC. The address of the website is www.sec.gov.
As a result of this offering, we will become subject to the information and periodic reporting requirements of the Exchange Act and, in accordance with this law, will file periodic reports, proxy statements and other information with the SEC. These periodic reports, proxy statements and other information will be available for inspection and copying at the SECs public reference facilities and the website of the SEC referred to above. We also maintain a website at www.wearfigs.com. Upon the completion of this offering, you may access these materials free of charge as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. The inclusion of our website address in this prospectus is an inactive textual reference only. The information contained in or accessible through our website is not part of this prospectus or the registration statement of which this prospectus forms a part, and investors should not rely on such information in making a decision to purchase our Class A common stock in this offering.
179
F-1
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of FIGS, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of FIGS, Inc. (the Company) as of December 31, 2019 and 2020, the related statements of income and comprehensive income, stockholders equity and cash flows for the years then ended and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on the Companys financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young
We have served as the Companys auditor since 2017.
Los Angeles, California
March 17, 2021
F-2
FIGS, INC.
(In thousands, except share and per share data)
As of December 31, | ||||||||
Assets | 2019 | 2020 | ||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 38,353 | $ | 58,133 | ||||
Accounts receivable |
1,758 | 5,780 | ||||||
Inventory, net |
14,300 | 49,735 | ||||||
Prepaid expenses and other current assets |
1,992 | 6,665 | ||||||
|
|
|
|
|||||
Total current assets |
56,403 | 120,313 | ||||||
Non-current assets |
||||||||
Property and equipment, net |
5,749 | 6,529 | ||||||
Deferred tax assets |
| 6,507 | ||||||
Other assets |
446 | 506 | ||||||
|
|
|
|
|||||
Total non-current assets |
6,195 | 13,542 | ||||||
|
|
|
|
|||||
Total assets |
$ | 62,598 | $ | 133,855 | ||||
|
|
|
|
|||||
Liabilities and stockholders equity |
||||||||
Current liabilities |
||||||||
Accounts payable |
$ | 10,522 | $ | 11,965 | ||||
Accrued expenses |
3,186 | 6,682 | ||||||
Accrued compensation and benefits |
1,848 | 4,214 | ||||||
Sales tax payable |
2,548 | 3,076 | ||||||
Gift card liability |
991 | 3,019 | ||||||
Deferred revenue |
988 | 1,781 | ||||||
Returns reserve |
776 | 1,677 | ||||||
Income tax payable |
| 105 | ||||||
|
|
|
|
|||||
Total current liabilities |
20,859 | 32,519 | ||||||
Non-current liabilities |
||||||||
Deferred rent and lease incentive |
2,925 | 3,659 | ||||||
|
|
|
|
|||||
Total liabilities |
23,784 | 36,178 | ||||||
|
|
|
|
|||||
Commitments and contingencies |
||||||||
Stockholders equity |
||||||||
Common stockpar value $0.0001 per share, 19,000,000 and 23,000,000 shares authorized as of December 31, 2019 and 2020, respectively; 17,005,887 and 17,160,539 shares issued and outstanding as of December 31, 2019 and 2020, respectively. |
2 | 2 | ||||||
Additional paid-in capital |
61,083 | 70,188 | ||||||
(Accumulated deficit) retained earnings |
(22,271 | ) | 27,487 | |||||
|
|
|
|
|||||
Total stockholders equity |
38,814 | 97,677 | ||||||
|
|
|
|
|||||
Total liabilities and stockholders equity |
$ | 62,598 | $ | 133,855 | ||||
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-3
FIGS, INC.
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except share and per share data)
Years ended December 31, | ||||||||
2019 | 2020 | |||||||
Net revenues |
$ | 110,494 | $ | 263,112 | ||||
Cost of goods sold |
31,158 | 72,888 | ||||||
|
|
|
|
|||||
Gross profit |
79,336 | 190,224 | ||||||
Operating expenses |
||||||||
Selling |
24,840 | 51,896 | ||||||
Marketing |
33,193 | 38,852 | ||||||
General and administrative |
21,650 | 41,536 | ||||||
|
|
|
|
|||||
Total operating expenses |
79,683 | 132,284 | ||||||
|
|
|
|
|||||
Net (loss) income from operations |
(347 | ) | 57,940 | |||||
Other income, net |
||||||||
Interest income |
460 | 136 | ||||||
Other expense |
(1 | ) | | |||||
|
|
|
|
|||||
Total other income, net |
459 | 136 | ||||||
|
|
|
|
|||||
Net income before provision for income taxes |
112 | 58,076 | ||||||
Provision for income taxes |
| 8,318 | ||||||
Net income and comprehensive income |
$ | 112 | $ | 49,758 | ||||
|
|
|
|
|||||
Basic earnings per share |
$ | 0.01 | $ | 2.91 | ||||
|
|
|
|
|||||
Diluted earnings per share |
$ | 0.01 | $ | 2.73 | ||||
|
|
|
|
|||||
Weighted-average shares outstandingbasic |
17,005,887 | 17,127,640 | ||||||
|
|
|
|
|||||
Weighted-average shares outstandingdiluted |
17,069,335 | 18,232,921 | ||||||
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-4
FIGS, INC.
STATEMENTS OF STOCKHOLDERS EQUITY
(In thousands, except share data)
Common Stock | ||||||||||||||||||||||||
Shares | Amount |
Contribution
Receivable |
Additional
Paid-in Capital |
(Accumulated
Deficit) Retained Earnings |
Total
Stockholders Equity |
|||||||||||||||||||
December 31, 2018 |
17,005,887 | $ | 2 | $ | (14,000 | ) | $ | 60,904 | $ | (22,383 | ) | $ | 24,523 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Stock-based compensation |
| | | 179 | | 179 | ||||||||||||||||||
Contributed capital |
| | 14,000 | | | 14,000 | ||||||||||||||||||
Net income |
| | | | 112 | 112 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
December 31, 2019 |
17,005,887 | $ | 2 | $ | | $ | 61,083 | $ | (22,271 | ) | $ | 38,814 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Stock-based compensation |
| | | 8,713 | | 8,713 | ||||||||||||||||||
Stock option exercises |
154,652 | | | 392 | | 392 | ||||||||||||||||||
Net income |
| | | | 49,758 | 49,758 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
December 31, 2020 |
17,160,539 | $ | 2 | $ | | $ | 70,188 | $ | 27,487 | $ | 97,677 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-5
FIGS, INC.
(In thousands)
Years Ended
December 31, |
||||||||
Cash flows from operating activities: | 2019 | 2020 | ||||||
Net income |
$ | 112 | $ | 49,758 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization expense |
517 | 946 | ||||||
Benefit for deferred income taxes |
| (6,507 | ) | |||||
Loss on disposal of property and equipment |
120 | 2 | ||||||
Stock-based compensation |
179 | 8,713 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(1,266 | ) | (4,023 | ) | ||||
Inventory |
(763 | ) | (35,435 | ) | ||||
Prepaid expenses and other current assets |
254 | (4,672 | ) | |||||
Other assets |
(342 | ) | 38 | |||||
Accounts payable |
2,715 | 1,207 | ||||||
Accrued expenses |
464 | 4,266 | ||||||
Deferred revenue |
(712 | ) | 794 | |||||
Accrued compensation and benefits |
713 | 2,366 | ||||||
Returns reserve |
267 | 901 | ||||||
Sales tax payable |
636 | 527 | ||||||
Income tax payable |
| 105 | ||||||
Gift card liability |
722 | 2,028 | ||||||
Deferred rent and lease incentive |
2,915 | 734 | ||||||
|
|
|
|
|||||
Net cash provided by operating activities |
6,531 | 21,748 | ||||||
Cash flows from investing activities: |
||||||||
Purchases of property and equipment |
(4,761 | ) | (2,262 | ) | ||||
|
|
|
|
|||||
Net cash used in investing activities |
(4,761 | ) | (2,262 | ) | ||||
Cash flows from financing activities: |
||||||||
Payment of financing costs |
| (98 | ) | |||||
Proceeds from contributed capital |
14,000 | | ||||||
Proceeds from stock option exercises |
| 392 | ||||||
|
|
|
|
|||||
Net cash provided by financing activities |
14,000 | 294 | ||||||
|
|
|
|
|||||
Net increase in cash and cash equivalents |
15,770 | 19,780 | ||||||
Cash and cash equivalents, beginning of year |
22,583 | 38,353 | ||||||
|
|
|
|
|||||
Cash and cash equivalents, end of year |
$ | 38,353 | $ | 58,133 | ||||
|
|
|
|
|||||
Supplemental disclosures: |
||||||||
Income taxes paid |
$ | | $ | 18,162 | ||||
Property and equipment in accounts payable and accrued expenses |
$ | 770 | $ | 236 |
The accompanying notes are an integral part of these financial statements.
F-6
FIGS, INC.
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2020
1. DESCRIPTION OF BUSINESS
FIGS, Inc. (the Company), a Delaware Corporation, was founded in 2013 and is a founder-led, direct-to-consumer healthcare apparel and lifestyle brand company. The Company designs and sells healthcare apparel and other non-scrub offerings, such as lab coats, underscrubs, outerwear, activewear, loungewear, compression socks footwear, masks and face shields. The Company markets and sells its products primarily in the United States. Sales are primarily generated through the Companys digital platforms.
Impact of COVID-19
In December 2019, a novel strain of coronavirus, which causes the disease known as COVID-19, was reported to have surfaced in Wuhan, China. Since then, COVID-19 coronavirus has spread globally. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The ongoing COVID-19 global and national health emergency has caused significant disruption in the international and United States economies and financial markets. The spread of COVID-19 has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction in business activity and financial transactions, labor shortages, supply chain interruptions and overall economic and financial market instability.
In response to public health directives and orders and to help minimize the risk of the virus to employees, the Company has taken precautionary measures, including implementing work from home policies for certain employees. The COVID-19 pandemic has the potential to significantly impact the Companys manufacturing supply chain, distribution, logistics and other services. Certain of the Companys suppliers experienced delays and shut-downs due to the COVID-19 pandemic. In order to manage the impact of these disruptions and meet its customers expectations, the Company increased the use of more costly air freight during 2020, which increased cost of goods sold. The Company has not experienced the pandemics adverse impacts in any additional material respect.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company has prepared the accompanying financial statements in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP).
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods presented. Significant estimates include, but are not limited to, the valuation of the net realizable value of inventory, reserves for sales returns, allowances for doubtful accounts, stock-based compensation, contingent sales tax liability, and the useful lives and recoverability of long-lived assets. Actual results could differ from those estimates.
Loss Contingencies
The Company may be involved in legal proceedings, claims and regulatory, tax or government inquiries and investigations that arise in the ordinary course of business resulting in loss contingencies. Loss contingencies are accrued for when losses become probable and are reasonably estimable. If the reasonable estimate of the loss is a range and no amount within the range is a better estimate, the minimum amount of the range is recorded as a liability. The Company does not accrue for contingent losses that, in its judgment, are considered to be reasonably possible, but not probable; however, the range of such reasonably possible losses would be disclosed. Loss contingencies considered remote are generally not disclosed.
F-7
Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company uses valuation techniques that are based upon observable and unobservable inputs. Observable inputs are developed using market data such as publicly available information and reflect the assumptions market participants would use, while unobservable inputs are developed using the best information available about the assumptions market participants would use. Assets and liabilities are classified in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement:
Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2: Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies, and similar techniques that use significant unobservable inputs.
To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instruments level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The Company has no assets or liabilities classified as Level 3 on its balance sheets as of December 31, 2019 and 2020.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents.
The Companys cash and cash equivalents are held with creditworthy financial institutions. Although the Companys deposits held with banks may exceed the amount of federal insurance provided on such deposits, the Company has not experienced any losses in such accounts. The Company invests its excess cash in money market accounts.
The Company is exposed to credit risk in the event of a default by the financial institutions holding its cash and cash equivalents for the amounts reflected on the balance sheets.
Comprehensive Income
Comprehensive income includes net income as well as other changes in stockholders equity that result from transactions and economic events other than those with stockholders. For the years ended December 31, 2019 and 2020, there was no difference between net income and comprehensive income.
Cash and Cash Equivalents
The Company considers highly liquid investments with original maturities of three months or less to be cash equivalents. The Companys cash equivalents, which are funds held in a money market account, are measured at fair value on a recurring basis. The carrying amount of cash equivalents was $27.6 million and $50.2 million as of December 31, 2019 and 2020, respectively, which approximates fair value and was determined based upon Level 1 inputs. The money market account is valued using quoted market prices with no valuation adjustments applied and is categorized as Level 1.
F-8
Accounts Receivable
Accounts receivable consists of trade accounts receivables relating primarily to the credit card receivables arising from the sale of products to customers through the Companys digital platforms. Trade accounts receivable is reported net of an allowance for doubtful accounts. The Company had no allowance for doubtful accounts as of December 31, 2019 and 2020. Other receivables generally relate to amounts due to the Company that result from activities that are not related to the direct sale of the Companys products.
Inventory, Net
Inventory consists of finished goods and is accounted for using an average cost method. Inventory is valued at the lower of cost or net realizable value. The Company records a provision for excess and obsolete inventory to adjust the carrying value of inventory based on assumptions regarding future demand for the Companys products.
Lower of cost or net realizable value is evaluated by considering obsolescence, excessive levels of inventory, deterioration, and other factors. Adjustments to reduce the cost of inventory to its net realizable value, if required, are made for estimated excess, obsolescence, or impaired inventory. Excess and obsolete inventory is charged to cost of goods sold.
The Company recorded an allowance to write down inventory of $0.8 million as of December 31, 2020, to reduce inventory to the lower of cost or to its net realizable value. There was no allowance to write down inventory as of December 31, 2019.
Property and Equipment, Net
Property and equipment are recorded at cost, net of accumulated depreciation and amortization. The Company depreciates property and equipment using the straight-line method over the estimated useful lives of the assets, which range from three to ten years.
Estimated useful life (years) | ||
Furniture and fixtures |
7 | |
Office equipment |
5 | |
Machinery and equipment |
10 | |
Computer equipment |
3 | |
Software and website development |
5 | |
Leasehold improvements |
Shorter of the lease term or
the estimated life of the asset |
Upon the sale or disposal of property and equipment, the cost and related accumulated depreciation and amortization are removed from the balance sheet and the resulting gain or loss is reflected in general and administrative expense in the statements of income and comprehensive income. Maintenance and repairs are charged to the general and administrative expenses in the statements of income and comprehensive income as incurred, while expenditures for major renewals and betterments that extend the useful life of an asset or provide additional utility are capitalized.
The Company has incurred costs related to the development of the Companys websites. The Company capitalizes these website development costs, as applicable, in accordance with ASC Subtopic 350-50, IntangiblesGoodwill and OtherWebsite Development Costs (ASC 350-50). ASC 350-50 requires that costs incurred during the website development stage be capitalized. Capitalized website costs include salary and benefit costs for Company employees and contractors that develop the website. When the development phase is substantially complete and the website is ready for its intended purpose, capitalized costs are amortized using the straight-line method over the five-year useful life.
F-9
Cloud Computing Costs
The Company also capitalizes software license fees and implementation costs associated with cloud hosting arrangements that are service contracts. These amounts are included in other assets in the accompanying balance sheets. Amortization of the software license fees is calculated using the straight-line method over the term of the service contract. Amortization of the implementation costs is calculated using the straight-line method based on the term of the service contract or based on the expected utilization of the asset and commences once the module or component is ready for its intended use.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset or group of assets to the future undiscounted cash flows expected to be generated by the asset or asset group. If the evaluation of the forecasted cash flows indicates that the carrying value of the assets is not recoverable, the assets are written down to their fair value. No such impairments have been identified for the years ended December 31, 2019 and 2020.
Deferred Rent and Lease Incentive
The Company leases certain facilities under non-cancelable operating leases. The Companys leases generally contain escalating payments over the lease term or rent holiday periods. Rent expense is recognized on a straight-line basis over the term of the lease, beginning when the Company takes possession of the leased space. The difference between the rent expense and cash paid to landlords is recorded as a deferred rent liability in the accompanying balance sheets.
In certain cases, the Company receives allowances for construction and leasehold improvements from its landlords which are recorded as a deferred lease credit in the accompanying balance sheets and amortizes the deferred lease credit as a reduction of rent expense in the accompanying statements of income and comprehensive income over the term of the lease.
Sales Tax
Based on the 2018 Supreme Court decision in South Dakota v. Wayfair Inc., an increasing number of states have considered or adopted laws or administrative practices, with or without notice, that impose new taxes on remote sellers to collect transaction taxes such as sales, consumption, or similar taxes. The Company follows the guidelines of ASC 450, Contingencies, and its financial statements reflect the current impact of such legislation.
Revenue Recognition
The Company recognizes revenues in accordance with Financial Accounting Standards Board (FASB) ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (ASC 606). Revenue is recognized in an amount that reflects the consideration expected to be received in exchange for products. To determine revenue recognition for contracts with customers within the scope of ASC 606, the Company recognizes revenue from the commercial sales of products and contracts by applying the following five steps (i) identify the contract(s) with a customer; (ii) identify the performance obligations of the contract(s); (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract(s); and (v) recognize revenue when (or as) we satisfy the performance obligations.
The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the good or services it transfers to the customer. The Company recognizes revenue at a point in time when it satisfies a performance obligation and transfers control of the products to the respective customers, which occurs when the goods are transferred to a common carrier.
F-10
Shipping and handling costs associated with outbound freight incurred to transfer a product to a customer are treated as a fulfillment activity, and as a result, any fees received from customers are included in the transaction price for the performance obligation of providing goods to the customer.
The Company generally provides refunds for goods returned within 30 days from the original purchase date. A returns reserve is recorded by the Company based on the historical refund pattern. The returns reserve in the balance sheets was $0.8 million and $1.7 million as of December 31, 2019 and 2020, respectively.
Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue. The Company records deferred revenue when it receives payments in advance of the transfer of the goods to a common carrier. The amounts recorded are expected to be recognized as revenue within the 12 months following the balance sheet and, therefore, are classified as current liabilities in the balance sheets.
The Company does not have significant contract balances other than deferred revenue, the allowance for sales returns and liabilities related to its gift cards. The Company does not have significant contract acquisition costs.
The following table presents the disaggregation of the Companys net revenues for the years ended December 31, 2019 and 2020 (in thousands):
Years ended December 31, | ||||||||
2019 | 2020 | |||||||
By geography: |
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United States |
$ | 109,932 | $ | 253,723 | ||||
Rest of the world |
562 | 9,389 | ||||||
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$ | 110,494 | $ | 263,112 | |||||
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By product: |
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Scrubs |
$ | 97,629 | $ | 227,988 | ||||
Non-scrubs |
12,865 | 35,124 | ||||||
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$ | 110,494 | $ | 263,112 | |||||
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Cost of Goods Sold
Cost of goods sold consists primarily of the cost of purchased merchandise and includes import duties and other taxes, freight-in, defective merchandise returned by customers, inventory write-offs and other miscellaneous shrinkage as well as compensation and benefits related to embroidery personnel.
Selling Expenses
Selling expenses primarily include the cost of shipping and handling, fulfillment and credit card sales processing. Shipping and handling costs are associated with outbound freight after control over a product has transferred to a customer and, as such, are included in selling expenses.
Marketing Expenses
Marketing expenses primarily consist of digital and brand advertising. The Companys marketing costs are primarily comprised of digital advertising through search engines and social media and are expensed as incurred.
F-11
General and Administrative Expenses
General and administrative expenses consist primarily of employee-related costs, including salaries, bonuses, benefits and stock-based compensation, charitable contributions, including the cost of product donations, other related costs, including certain third-party consulting and contractor expenses, certain facilities costs, software expenses, legal expenses and recruiting fees, and overhead.
Stock-Based Compensation
The Company measures and recognizes stock-based compensation expense for all stock option awards granted to employees and non-employees based on their estimated fair values as of the grant date using the Black-Scholes option-pricing model. The Companys use of the Black-Scholes option-pricing model to estimate the fair value of stock options granted requires the input of various assumptions which are as follows:
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Risk-free interest ratedetermined 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. |
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Expected volatilityas there is no public market for its common stock, the Company determines the volatility for awards granted based on an analysis of reported data for a group of peer companies that issued options with substantially similar terms. The expected volatility has been determined using a weighted-average of the historical volatility measures of this group of guideline companies. The Company expects to continue to do so until such time as it has adequate historical data regarding the volatility of its own traded stock price. |
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Expected dividend yieldthe Company has not paid, and does not currently anticipate paying, cash dividends on its common stock; therefore, the expected dividend yield is assumed to be zero. |
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Expected termthe expected term of the Companys stock options granted to employees has been determined utilizing the simplified method for awards that qualify as plain-vanilla options, which calculates the expected term as the average of the time-to-vesting and the contractual life of options. |
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Fair value of common stockthe fair value of the Companys common stock has been determined on input from management and approved by the Board, utilizing the valuation of the Companys enterprise value determined utilizing various methods, including the guideline public company method or a weighting of the guideline public company method and discounted cash flow method. The total enterprise value is then allocated to the various outstanding equity instruments, including the underlying common stock, utilizing the option-pricing model or private secondary transactions or a weighting of them. |
For employee and non-employee options, the Company recognizes compensation expense based on the grant date fair value of the award over the requisite service period, which is generally the vesting period of the respective award based on the grant date fair value of the award. The Company accounts for forfeitures as they occur.
The Company measures the fair value of the restricted stock units (RSUs) granted to employees based on the fair market value of its common stock on the grant date. The Companys RSU grants vest upon the satisfaction of both a service condition and a performance condition. The service condition for these awards is satisfied ratably over four years. The performance condition is satisfied upon the occurrence of a qualifying event, defined as a change of control transaction or an initial public offering (IPO) and is not deemed probable to occur until it occurs. As of December 31, 2019 and 2020, the performance condition was not probable to occur and, therefore, no stock-based compensation expense has been recognized for the Companys RSU awards. If and when the performance condition is deemed probable to occur, the Company will record cumulative stock-based compensation expense using the accelerated attribution method for those RSUs for which the service condition has been satisfied prior to the qualifying event, and the Company will record the remaining unrecognized stock-based compensation expense over the remainder of the requisite service period.
F-12
The Company classifies stock-based compensation expense in its statements of income and comprehensive income in the same manner in which the award recipients cash compensation costs are classified. For the years ended December 31, 2019 and 2020, the Company recorded stock-based compensation of $0.2 million and $8.7 million, respectively, which are all recorded in general and administrative expense on the statements of income and comprehensive income.
Income Taxes
The Company accounts for income taxes under the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences attributed to temporary differences between the financial reporting basis and the respective tax basis of these assets and liabilities. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which the differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rates is recognized in income in the period that includes the enactment date.
A valuation allowance is recorded for carryforwards and other deferred tax assets when it is more likely than not that some or all of the deferred tax assets will not be realized. Based on its facts, the Company considered all available evidence, both positive and negative, including historical levels of taxable income, expectations, and risks associated with estimates of future taxable income, and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. As of December 31, 2019, the Company recorded a valuation allowance against its deferred tax assets as it was more likely than not that the Company would not be able to realize its deferred tax assets. The Company has released its valuation allowance in 2020 and is not recording a valuation allowance against any of its deferred tax assets as of December 31, 2020.
The Company uses a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals and litigation processes, if any. The second step is to measure the largest amount of tax benefit as the largest amount that is more likely than not to be realized upon settlement.
Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. As of December 31, 2019 and 2020, there are no known uncertain tax positions.
Earnings per Share
The Company presents both basic and diluted earnings per share amounts. Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding during the year. Diluted earnings per share is based upon the weighted average number of common and common equivalent shares outstanding during the year. Common equivalent shares are excluded from the computation of diluted earnings per share in periods for which they have an anti-dilutive effect. Stock options for which the exercise price exceeds the average market price over the period are anti-dilutive and, accordingly, excluded from the calculation.
Segment Information
Operating segments are defined as components of an entity for which separate financial information is available and that is regularly reviewed by the chief operating decision maker (CODM), in deciding how to allocate resources to an individual segment and in assessing performance. The Companys CODM are its co-chief executive officers. The Company manages its operations as a single segment for the purposes of assessing performance and making operating decisions. Therefore, the Company has concluded that it has one reportable segment.
F-13
Recently Adopted Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure FrameworkChanges to the Disclosure Requirements for Fair Value Measurement, (ASU 2018-13). This update removed the following disclosure requirements: (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (2) the policy for timing of transfers between levels; and (3) the valuation processes for Level 3 fair value measurements. Additionally, this update added the following disclosure requirements: (1) the changes in unrealized gains and losses for the period included in other comprehensive income and loss for recurring Level 3 fair value measurements held at the end of the reporting period; (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 was effective for fiscal years beginning after December 15, 2019 with early adoption permitted. The Company has adopted this update as of January 1, 2020 and noted no effect on the financial statements and related disclosures.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU 2016- 02, Leases (Topic 842), as subsequently amended, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors), and replaces the existing guidance in ASC 840, Leases. The new standard also requires lessees to recognize operating and finance lease liabilities and corresponding right-of-use assets on the balance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements. The Company is required to adopt the standard on January 1, 2022 and is currently evaluating the impact that ASU 2016-02 will have on the financial statements and related disclosures.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326) (ASU 2016-13). ASU 2016-13 requires measurement and recognition of expected credit losses for financial assets. In April 2019, the FASB issued clarification to ASU 2016-13 within ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. This update is effective for entities other than public business entities, including emerging growth companies that elected to defer compliance with new or revised financial accounting standards until a company that is not an issuer is required to comply with such standards, for annual reporting periods beginning after December 15, 2021. The Company is currently evaluating the impact that ASU 2016-13 will have on the financial statements and related disclosures.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (ASU 2019-12). ASU 2019-12 eliminates certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of the accounting for income taxes. This update is effective for entities other than public business entities, including emerging growth companies that elected to defer compliance with new or revised financial accounting standards until a company that is not an issuer is required to comply with such standards, for annual reporting periods beginning after December 15, 2021, and interim periods within annual periods beginning after December 15, 2022. The Company is currently evaluating the impact that ASU 2019-12 will have on the financial statements and related disclosures.
F-14
3. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
As of December 31, 2019 and 2020, the Companys cash equivalents consisted of money market funds, classified as Level 1 financial assets, as these assets are valued using quoted market prices in active markets without any valuation adjustment (in thousands).
Fair Value Measurement as of
December 31, 2019 |
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Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets |
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Money market funds |
$ | 27,593 | $ | | $ | | $ | 27,593 | ||||||||
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$ | 27,593 | $ | | $ | | $ | 27,593 | |||||||||
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Fair Value Measurement as of
December 31, 2020 |
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Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets |
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Money market funds |
$ | 50,219 | $ | | $ | | $ | 50,219 | ||||||||
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$ | 50,219 | $ | | $ | | $ | 50,219 | |||||||||
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There have been no transfers between fair value levels during the years ended December 31, 2019 and 2020. The carrying values of other current assets, accounts payable and accrued expenses approximate their fair values due to the short-term nature of these assets and liabilities.
4. ACCOUNTS RECEIVABLE
The accounts receivable consisted of the following (in thousands):
December 31, | ||||||||
2019 | 2020 | |||||||
Trade |
$ | 1,381 | $ | 1,704 | ||||
Other |
377 | 4,076 | ||||||
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$ | 1,758 | $ | 5,780 | |||||
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The other accounts receivable as of December 31, 2019 and 2020 is primarily comprised of receivables related to vendor refunds and amounts due to the Company that result from activities that are not related to the direct sale of the Companys products.
5. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following (in thousands):
December 31, | ||||||||
2019 | 2020 | |||||||
Inventory deposits |
$ | 363 | $ | 963 | ||||
Prepaid expenses |
786 | 1,406 | ||||||
Prepaid taxes |
| 3,493 | ||||||
Sample kits |
391 | 33 | ||||||
Other prepaid expenses and current assets |
452 | 770 | ||||||
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$ | 1,992 | $ | 6,665 | |||||
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F-15
6. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of the following (in thousands):
December 31, | ||||||||
2019 | 2020 | |||||||
Furniture and fixtures |
$ | 769 | $ | 808 | ||||
Office equipment |
546 | 765 | ||||||
Machinery and equipment |
424 | 752 | ||||||
Computer equipment |
378 | 610 | ||||||
Software and website design |
19 | 1,704 | ||||||
Vehicles |
19 | | ||||||
Leasehold improvements |
3,017 | 3,017 | ||||||
Capital projects in progress |
1,041 | 312 | ||||||
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Total property and equipment |
6,213 | 7,968 | ||||||
Less: accumulated depreciation and amortization |
(464 | ) | (1,439 | ) | ||||
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Property and equipment, net |
$ | 5,749 | $ | 6,529 | ||||
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Depreciation and amortization expense for the years ended December 31, 2019 and 2020 on property and equipment was $0.5 million and $0.9 million, respectively.
7. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
December 31, | ||||||||
2019 | 2020 | |||||||
Accrued inventory |
$ | | $ | 3,151 | ||||
Accrued shipping |
877 | 656 | ||||||
Other accrued expenses |
2,309 | 2,875 | ||||||
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$ | 3,186 | $ | 6,682 | |||||
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8. FINANCING ARRANGEMENTS
On September 5, 2017, the Company, as borrower, entered into a credit agreement with First Choice Bank, as lender, administrative agent and promissory note issuer for a $5.0 million revolving credit facility (the Prior Credit Facility). On October 5, 2018, the principal amount of the Prior Credit Facility was increased to $10.0 million. On January 7, 2019, the Company amended the Prior Credit Facility to extend the maturity date to January 12, 2022 and carved out of the Prior Credit Facility two standby letters of credit. The Company had letters of credit aggregating to $2.3 million as of December 31, 2019. Availability under the Credit Facility was $7.7 million as of December 31, 2019. On January 10, 2020, the Company amended and extended a letter of credit, increasing the aggregate of letters of credit to $2.4 million. In December 2020, the Prior Credit Facility was terminated.
On December 2, 2020, the Company, as borrower, entered into a credit agreement with JPMorgan Chase Bank, N.A for an initial $50.0 million revolving credit facility (including capacity to issue letters of credit (the Existing Credit Facility). The Existing Credit Facility has a maturity date of December 2, 2025 (Maturity Date). Subject to certain conditions, the Existing Credit Facility also provides for an additional $25.0 million of capacity. The Company had letters of credit aggregating to $3.2 million outstanding under the Existing Credit Facility as of December 31, 2020. As of December 31, 2020, the Company has not made any borrowings under the Existing Credit Facility. Borrowings under the Existing Credit Facility are payable on the Maturity Date. Borrowings bear interest at LIBOR (with a 0.5% floor) plus 1.75%. The interest rate for undrawn amounts is 0.25%.
F-16
9. RELATED PARTY TRANSACTIONS
Tulco, LLC (Tulco) is the majority stockholder of the Company. Tulco paid for certain of the Companys professional fees which were expensed as incurred in the year ended December 31, 2019 and amounted to $0.1 million. These were reimbursed by the Company in 2020 and are recorded within accrued expenses on the accompanying balance sheet as of December 31, 2019.
On May 14, 2018, the Company entered into a common stock purchase agreement with Tulco pursuant to which the Company issued and sold 4,075,000 shares of common stock for a total purchase price of $50.0 million. As consideration, May 14, 2019, Tulco paid $17.5 million in cash and cancelled the $2.5 million owed by the Company to Tulco pursuant to a promissory note dated as of February 22, 2018. The remaining $30.0 million of capital contributions were payable upon the Companys achievement of certain milestones at defined dates in the years ended December 31, 2018 and December 31, 2019. During the year ended December 31, 2018, $16.0 million of contributions were made. The remaining $14.0 million contribution was made in the year ended December 31, 2019.
In 2020, the Company sold $4.2 million of masks and other products to Tulco, the amounts of which are included in net revenues for the year ended December 31, 2020.
10. COMMITMENTS AND CONTINGENCIES
Taxes on Remote Sellers
As discussed in Note 2, the Company is subject to state laws or administrative practices with respect to the taxes on remote sellers. In accordance with ASC 450, Contingencies, the Company recorded $1.6 million and $1.9 million within sales tax payable on the Companys balance sheets as of December 31, 2019 and 2020, respectively, as an estimate of contingent sales tax payable.
Operating Leases
The Company leases its office facilities and certain office equipment under non-cancelable operating leases that expire on various dates through December 2029. During the years ended December 31, 2019 and 2020, the Company recorded rent expense of $1.9 million and $1.8 million, respectively.
Future minimum lease payments under non-cancelable operating leases for the years succeeding December 31, 2020 are as follows (in thousands):
2021 |
$ | 1,941 | ||
2022 |
1,963 | |||
2023 |
2,023 | |||
2024 |
2,093 | |||
2025 |
2,166 | |||
Thereafter |
9,448 | |||
|
|
|||
$ | 19,634 |
Inventory Purchase Obligations
Inventory purchase obligations as of December 31, 2020 were approximately $33.8 million. These inventory purchase obligations can be impacted by various factors, including the timing of issuing orders and the timing of the shipment of orders.
F-17
Legal Contingencies
Legal claims may arise from time to time in the normal course of business, the results of which may have a material effect on the Companys accompanying financial statements. The Company currently has legal actions against it with respect to its litigation with Strategic Partners, Inc., but without quantification of the alleged damages. The Company believes the claims are without basis or merit, and intends to vigorously defend against such claims.
11. INCOME TAXES
The current and deferred income tax provision as of December 31, 2019 was $0. The provision for income taxes for the year ended December 31, 2020 is as follows (in thousands):
Year Ended December 31, |
||||
2020 | ||||
Current income tax provision |
||||
Federal |
$ | 9,087 | ||
State |
5,738 | |||
|
|
|||
Total current provision |
14,825 | |||
|
|
|||
Deferred income tax benefit |
||||
Federal |
(3,504 | ) | ||
State |
(3,003 | ) | ||
|
|
|||
Total deferred benefit |
(6,507 | ) | ||
|
|
|||
Provision for income taxes |
$ | 8,318 | ||
|
|
On March 18, 2020, the Families First Coronavirus Response Act (FFCR Act), and on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) were each enacted in response to the COVID-19 pandemic. The FFCR Act and the CARES Act contain numerous income tax provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The FFCR Act and CARES Act did not have a material impact on the Companys financial statements as of December 31, 2020; however, the Company continues to examine the impacts the FFCR Act and CARES Act may have on its business, results of operations, financial condition, liquidity and related disclosures.
On June 29, 2020, Assembly Bill 85 (A.B. 85) was signed into California law. A.B. 85 provides for a three-year suspension of the use of net operating losses for medium and large businesses and a three-year cap on the use of business incentive tax credits to offset no more than $5.0 million of tax per year. A.B. 85 suspends the use of net operating losses for taxable years 2020, 2021 and 2022 for certain taxpayers with taxable income of $1.0 million or more. The carryover period for any net operating losses that are suspended under this provision will be extended. A.B. 85 also requires that business incentive tax credits including carryovers may not reduce the applicable tax by more than $5.0 million for taxable years 2020, 2021 and 2022. In connection with A.B. 85, the Company was not able to offset its California taxable income with its net operating losses for the year ended December 31, 2020.
F-18
A reconciliation from the income tax expense using the US statutory federal income tax rate to the provision for income taxes is as follows (in thousands):
December 31, | ||||||||
2019 | 2020 | |||||||
Tax at U.S. statutory rate |
$ | 23 | $ | 12,196 | ||||
State taxes, net of federal benefit |
| 4,176 | ||||||
Non-deductible expenses |
| (2,116 | ) | |||||
Change in valuation allowance |
(75 | ) | (5,994 | ) | ||||
Other |
52 | 56 | ||||||
|
|
|
|
|||||
Provision for income taxes |
$ | | $ | 8,318 | ||||
|
|
|
|
The effective tax rate for years ending December 31, 2019 and 2020 was 0% and 14.3%, respectively. For the year ended December 31, 2019, there was no income tax provision recorded, as the Company recorded a full valuation allowance on its net deferred tax asset and utilized net operating loss carryforwards to offset current taxes payable. During 2019, the Company weighed all available positive and negative evidence and determined that it was more likely than not that the deferred tax assets were not fully realizable. The Company determined during 2020 that all the deferred tax assets were realizable due to the Company now being in a three year cumulative pretax book income position, resulting in the full release in the valuation allowance. As of December 31, 2020, the Company has recorded a valuation allowance of $0, which is a decrease of $6.0 million from December 31, 2019. The 2020 income tax provision is a result of the current earnings of the Company, offset by the stock-based compensation permanent adjustment and the tax benefit from the release in valuation allowance.
Significant components of the deferred income taxes are as follows (in thousands):
December 31, | ||||||||
2019 | 2020 | |||||||
Deferred tax assets |
||||||||
Net operating losses |
$ | 3,710 | $ | 1,490 | ||||
Uniform capitalization adjustment to inventory |
539 | 1,135 | ||||||
Stock-based compensation |
137 | 1,503 | ||||||
Accrued compensation and benefits |
475 | 1,032 | ||||||
Tenant improvement allowance |
510 | 459 | ||||||
Inventory reserve |
142 | 991 | ||||||
Deferred rent |
297 | 564 | ||||||
Returns reserve |
217 | 469 | ||||||
Sales tax accrual |
457 | 528 | ||||||
Other |
145 | 148 | ||||||
|
|
|
|
|||||
Total deferred tax assets |
6,629 | 8,319 | ||||||
Less: valuation allowance |
(5,994 | ) | | |||||
|
|
|
|
|||||
Total net deferred tax assets |
635 | 8,319 | ||||||
Deferred Tax Liabilities |
||||||||
Property and equipment |
(635 | ) | (1,812 | ) | ||||
|
|
|
|
|||||
Total deferred tax liabilities |
(635 | ) | (1,812 | ) | ||||
|
|
|
|
|||||
Net deferred tax assets |
$ | | $ | 6,507 | ||||
|
|
|
|
As of December 31, 2020, the Company had available federal net operating loss (NOL) carryforwards of approximately $1.8 million, which begin to expire in 2034. The Company also has available state NOL carryforwards of approximately $16.0 million as of December 31, 2020, which begin to expire in 2033. The
F-19
majority of the state NOL carryforwards relate to the state of California. The utilization of California NOL carryforwards has been suspended by state legislation for tax years beginning before January 1, 2023. Years ending December 31, 2014 through December 31, 2019 remain open and subject to audit.
The Company had no material unrecognized tax benefits as of December 31, 2019 and 2020. The Companys policy is to recognize interest and penalties accrued on the unrecognized tax liability as income tax expense. During the years ended December 31, 2019 and 2020, there were no such interest and penalties.
12. STOCK-BASED COMPENSATION
2016 Stock Incentive Plan
The Companys 2016 Stock Incentive Plan (the Plan) provides for the Company to issue restricted stock, RSUs, stock appreciation rights, incentive stock options, non-statutory stock options and other stock-based awards to employees, officers, members of the Board of Directors (the Board), consultants and advisors of the Company.
All options and awards typically expire ten years from the date of grant if not exercised. In the event of a termination of employment, all unvested options will be forfeited immediately. Any vested options may be exercised within three months, depending on the circumstances of termination, and except for instances of termination with cause whereby any vested options or awards are forfeited immediately.
Shares that expire, are terminated, surrendered or canceled under the 2016 Plan without having been exercised are available for future awards. In addition, shares of common stock that are tendered to the Company by a participant to exercise an award are added to the number of shares of common stock available for future awards. The 2016 Plan is administered by the Board.
During the years ended December 31, 2019 and 2020, the Company granted stock options to purchase 74,680 and 2,880,906 shares of common stock, respectively. Also, during the year ended December 31, 2020, the Company granted 601,160 RSUs, which have both time-based and performance-based vesting conditions, all of which remain unvested as of December 31, 2020.
Under the Plan, up to 5,746,326 shares of common stock of the Company may be awarded through the granting of one or more of the following types of awards: (a) nonqualified stock options, (b) qualified stock options (c) RSU awards, (d) restricted stock awards and (e) stock appreciation rights. To date, the Company has granted nonqualified and qualified stock options with vesting periods of two to five years. The Company issues new common stock upon exercise of stock options. As of December 31, 2019 and 2020, the number of shares available for issuance under the Plan were 146,554 and 558,743, respectively.
Stock Option Valuation
The assumptions that the Company used to determine the grant date fair value of stock options granted were as follows, presented on a weighted-average basis:
December 31, | ||||
2019 | 2020 | |||
Risk free interest rate |
1.81% | 0.42% | ||
Expected volatility |
57% | 44% | ||
Expected dividend yield |
0% | 0% | ||
Expected term (in years) |
6.25 | 6.45 |
F-20
A summary of the stock option activity under the Plan, is as follows:
Stock Options Outstanding | ||||||||||||
Number of
Shares |
Weighted-
Average Exercise Price (per share) |
Weighted-
Average Remaining Contractual Term (in years) |
||||||||||
Outstanding at December 31, 2018 |
1,732,950 | $ | 7.43 | 9.25 | ||||||||
Granted |
74,680 | 4.12 | ||||||||||
Exercised |
| | ||||||||||
Forfeited |
(78,600 | ) | 4.10 | |||||||||
|
|
|
|
|||||||||
Outstanding at December 31, 2019 |
1,729,030 | $ | 7.44 | 8.28 | ||||||||
|
|
|
|
|||||||||
Granted |
2,880,906 | 43.98 | ||||||||||
Exercised |
(154,652 | ) | 2.54 | |||||||||
Forfeited |
(28,929 | ) | 4.00 | |||||||||
|
|
|
|
|||||||||
Outstanding at December 31, 2020 |
4,426,355 | $ | 31.42 | 8.87 | ||||||||
|
|
|
|
|||||||||
Exercisable at December 31, 2019 |
844,187 | $ | 7.45 | 8.17 | ||||||||
|
|
|
|
|||||||||
Exercisable at December 31, 2020 |
1,269,007 | $ | 11.43 | 7.45 | ||||||||
|
|
|
|
The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair value of the Companys common stock for those stock options that had exercise prices lower than the fair value of the common stock as of the end of the period. As of December 31, 2019, the aggregate intrinsic value of stock options outstanding and stock options exercisable was $0.3 million and $0.2 million, respectively. As of December 31, 2020, the aggregate intrinsic value of stock options outstanding and stock options exercisable was $100.8 million and $54.3 million, respectively. The aggregate intrinsic value of stock options exercised during the year ended December 31, 2020 was $1.2 million. There were no exercises of stock options for the year ended December 31, 2019.
The weighted-average grant date fair values per share of the Companys stock options granted during the years ended December 31, 2019 and 2020 was $2.27 and $31.78, respectively. The fair value of stock options vested during the years ended December 31, 2019 and 2020 was $0.2 million and $4.8 million, respectively.
As of December 31, 2020, total unrecognized compensation cost related to the unvested stock option awards was $86.7 million, to be recognized over a weighted-average period of 4.5 years.
Restricted Stock Units
In 2020, the Company granted a total of 601,160 RSUs to employees which vest upon the satisfaction of both a service and a performance condition. The service condition for these awards is satisfied over four years. The performance condition is satisfied upon the occurrence of a qualifying event, defined as a change of control transaction or an IPO. As the performance condition is not considered probable of occurring, through December 31, 2020, the Company had not recognized any stock-based compensation expense related to these awards.
F-21
13. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share and a reconciliation of the weighted average number of common and common equivalent shares outstanding for the years ended December 31, 2019 and 2020 (in thousands, except share and per share amounts).
Years Ended December 31, | ||||||||
2019 | 2020 | |||||||
Numerator: |
||||||||
Net income basic and diluted |
$ | 112 | $ | 49,758 | ||||
Denominator: |
||||||||
Weighted-average sharesbasic |
17,005,887 | 17,127,640 | ||||||
Effect of dilutive stock options |
63,448 | 1,105,281 | ||||||
|
|
|
|
|||||
Weighted-average sharesdiluted |
17,069,335 | 18,232,921 | ||||||
|
|
|
|
|||||
Earnings per share: |
||||||||
Basic earnings per share |
$ | 0.01 | $ | 2.91 | ||||
Effect of dilutive stock options |
| (0.18 | ) | |||||
Diluted earnings per share |
$ | 0.01 | $ | 2.73 |
The Company excluded the following from the computation of diluted earnings per share for the years ended December 31, 2019 and 2020 because including them would have had an anti-dilutive effect:
Years Ended December 31, | ||||||||
2019 | 2020 | |||||||
Stock options to purchase common stock |
1,475,000 | 2,668,338 | ||||||
|
|
|
|
The Company also had RSUs outstanding as of December 31, 2020, which include a performance based vesting condition satisfied upon the occurrence of a qualifying event, defined as a change of control transaction or an IPO. Because the necessary conditions for the vesting of the restricted stock had not been satisfied as of December 31, 2020, the Company has excluded the RSUs from the table above as of December 31, 2020 and the calculation of diluted net income per share for the year ended December 31, 2020.
14. EMPLOYEE BENEFIT PLAN
The Company maintains a defined contribution 401(k) plan for the benefit of all employees who have met the eligibility requirements. Participants may contribute up to 100% of their eligible compensation, subject only to annual limitations set by the Internal Revenue Service. In 2019 and 2020, the Company matched 100% of the participant contributions, up to the first 6% of the participants deferrals. For the years ended December 31, 2019 and 2020, the Company recorded expense for matching contributions of $0.3 million and $0.6 million, respectively, within general and administrative expenses on the Companys statements of income and comprehensive income.
15. SUBSEQUENT EVENTS
Management has evaluated subsequent events occurring through March 17, 2021, the date that these financial statements were issued, and determined that no additional subsequent events occurred that would require recognition or disclosure in these financial statements.
F-22
FIGS, INC.
(In thousands, except share and per share data)
As of | ||||||||
December 31, | March 31, | |||||||
2020 | 2021 | |||||||
(Unaudited) | ||||||||
Assets |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 58,133 | $ | 73,837 | ||||
Accounts receivable |
5,780 | 3,549 | ||||||
Inventory, net |
49,735 | 65,170 | ||||||
Prepaid expenses and other current assets |
6,665 | 3,762 | ||||||
|
|
|
|
|||||
Total current assets |
120,313 | 146,318 | ||||||
Non-current assets |
||||||||
Property and equipment, net |
6,529 | 6,582 | ||||||
Deferred tax assets |
6,507 | 6,054 | ||||||
Other assets |
506 | 2,286 | ||||||
|
|
|
|
|||||
Total non-current assets |
13,542 | 14,922 | ||||||
|
|
|
|
|||||
Total assets |
$ | 133,855 | $ | 161,240 | ||||
|
|
|
|
|||||
Liabilities and stockholders equity |
||||||||
Current liabilities |
||||||||
Accounts payable |
$ | 11,965 | $ | 16,051 | ||||
Accrued expenses |
6,682 | 14,736 | ||||||
Accrued compensation and benefits |
4,214 | 2,086 | ||||||
Sales tax payable |
3,076 | 4,011 | ||||||
Gift card liability |
3,019 | 2,877 | ||||||
Deferred revenue |
1,781 | 278 | ||||||
Returns reserve |
1,677 | 1,973 | ||||||
Income tax payable |
105 | 1,340 | ||||||
|
|
|
|
|||||
Total current liabilities |
32,519 | 43,352 | ||||||
Non-current liabilities |
||||||||
Deferred rent and lease incentive |
3,659 | 3,633 | ||||||
|
|
|
|
|||||
Total liabilities |
36,178 | 46,985 | ||||||
|
|
|
|
|||||
Commitments and contingencies |
||||||||
Stockholders equity |
||||||||
Common stockpar value $0.0001 per share, 23,000,000 shares authorized as of December 31, 2020 and March 31, 2021 (unaudited); 17,160,539 and 17,183,240 shares issued and outstanding as of December 31, 2020 and March 31, 2021 (unaudited), respectively |
2 | 2 | ||||||
Additional paid-in capital |
70,188 | 75,326 | ||||||
Retained earnings |
27,487 | 38,927 | ||||||
|
|
|
|
|||||
Total stockholders equity |
97,677 | 114,255 | ||||||
|
|
|
|
|||||
Total liabilities and stockholders equity |
$ | 133,855 | $ | 161,240 | ||||
|
|
|
|
The accompanying notes are an integral part of these unaudited financial statements.
F-23
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except share and per share data)
(Unaudited)
Three Months Ended March 31, | ||||||||
2020 | 2021 | |||||||
Net revenues |
$ | 31,967 | $ | 87,079 | ||||
Cost of goods sold |
7,655 | 24,719 | ||||||
|
|
|
|
|||||
Gross profit |
24,312 | 62,360 | ||||||
Operating expenses |
||||||||
Selling |
6,739 | 17,114 | ||||||
Marketing |
7,337 | 10,840 | ||||||
General and administrative |
6,200 | 18,346 | ||||||
|
|
|
|
|||||
Total operating expenses |
20,276 | 46,300 | ||||||
|
|
|
|
|||||
Net income from operations |
4,036 | 16,060 | ||||||
Other income (loss), net |
||||||||
Interest income (expense) |
98 | (36 | ) | |||||
Other expense |
| (2 | ) | |||||
|
|
|
|
|||||
Total other income (loss), net |
98 | (38 | ) | |||||
|
|
|
|
|||||
Net income before provision for income taxes |
4,134 | 16,022 | ||||||
Provision for income taxes |
| 4,582 | ||||||
Net income and comprehensive income |
$ | 4,134 | $ | 11,440 | ||||
|
|
|
|
|||||
Basic earnings per share |
$ | 0.24 | $ | 0.67 | ||||
|
|
|
|
|||||
Diluted earnings per share |
$ | 0.24 | $ | 0.61 | ||||
|
|
|
|
|||||
Weighted-average shares outstandingbasic |
17,005,887 | 17,166,851 | ||||||
|
|
|
|
|||||
Weighted-average shares outstandingdiluted |
17,072,797 | 18,668,041 | ||||||
|
|
|
|
The accompanying notes are an integral part of these unaudited financial statements.
F-24
FIGS, INC.
STATEMENTS OF STOCKHOLDERS EQUITY
(In thousands, except share data)
(Unaudited)
Common Stock |
Additional
Paid-in Capital |
(Accumulated
Deficit) Retained Earnings |
Total
Stockholders Equity |
|||||||||||||||||
Shares | Amount | |||||||||||||||||||
December 31, 2019 |
17,005,887 | $ | 2 | $ | 61,083 | $ | (22,271 | ) | $ | 38,814 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Stock-based compensation |
| | 50 | | 50 | |||||||||||||||
Net income |
| | | 4,134 | 4,134 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
March 31, 2020 |
17,005,887 | $ | 2 | $ | 61,133 | $ | (18,137 | ) | $ | 42,998 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
December 31, 2020 |
17,160,539 | $ | 2 | $ | 70,188 | $ | 27,487 | $ | 97,677 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Stock-based compensation |
| | 5,015 | | 5,015 | |||||||||||||||
Stock option exercises |
22,701 | | 123 | | 123 | |||||||||||||||
Net income |
| | | 11,440 | 11,440 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
March 31, 2021 |
17,183,240 | $ | 2 | $ | 75,326 | $ | 38,927 | $ | 114,255 | |||||||||||
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited financial statements.
F-25
FIGS, INC.
(In thousands)
(Unaudited)
Three Months Ended
March 31, |
||||||||
2020 | 2021 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 4,134 | $ | 11,440 | ||||
Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
||||||||
Depreciation and amortization expense |
218 | 318 | ||||||
Provision for deferred income taxes |
| 453 | ||||||
Stock-based compensation |
50 | 5,015 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(1,122 | ) | 2,231 | |||||
Inventory |
(1,466 | ) | (15,435 | ) | ||||
Prepaid expenses and other current assets |
(494 | ) | 2,902 | |||||
Other assets |
(46 | ) | (1,785 | ) | ||||
Accounts payable |
(2,164 | ) | 4,249 | |||||
Accrued expenses |
203 | 8,054 | ||||||
Deferred revenue |
448 | (1,503 | ) | |||||
Accrued compensation and benefits |
(874 | ) | (2,128 | ) | ||||
Returns reserve |
168 | 296 | ||||||
Sales tax payable |
(53 | ) | 935 | |||||
Income tax payable |
| 1,235 | ||||||
Gift card liability |
(26 | ) | (142 | ) | ||||
Deferred rent and lease incentive |
203 | (26 | ) | |||||
|
|
|
|
|||||
Net cash (used in) provided by operating activities |
(821 | ) | 16,109 | |||||
Cash flows from investing activities: |
||||||||
Purchases of property and equipment |
(972 | ) | (528 | ) | ||||
|
|
|
|
|||||
Net cash used in investing activities |
(972 | ) | (528 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from stock option exercises |
| 123 | ||||||
|
|
|
|
|||||
Net cash provided by financing activities |
| 123 | ||||||
Net (decrease) increase in cash and cash equivalents |
(1,793 | ) | 15,704 | |||||
Cash and cash equivalents, beginning of period |
38,353 | 58,133 | ||||||
|
|
|
|
|||||
Cash and cash equivalents, end of period |
$ | 36,560 | $ | 73,837 | ||||
|
|
|
|
|||||
Supplemental disclosures: |
||||||||
Property and equipment included in accounts payable and accrued expenses |
$ | | $ | 73 | ||||
|
|
|
|
|||||
Deferred offering costs included in accounts payable and accrued expenses |
$ | | $ | 1,796 | ||||
|
|
|
|
The accompanying notes are an integral part of these unaudited financial statements.
F-26
FIGS, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS (UNAUDITED)
1. |
DESCRIPTION OF BUSINESS |
FIGS, Inc. (the Company), a Delaware Corporation, was founded in 2013 and is a founder-led, direct-to-consumer healthcare apparel and lifestyle brand company. The Company designs and sells healthcare apparel and other non-scrub offerings, such as lab coats, underscrubs, outerwear, activewear, loungewear, compression socks footwear, masks and face shields. The Company markets and sells its products primarily in the United States. Sales are primarily generated through the Companys digital platforms.
Impact of COVID-19
In December 2019, a novel strain of coronavirus, which causes the disease known as COVID-19, was reported to have surfaced in Wuhan, China. Since then, COVID-19 coronavirus has spread globally. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The ongoing COVID-19 global and national health emergency has caused significant disruption in the international and United States economies and financial markets. The spread of COVID-19 has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction in business activity and financial transactions, labor shortages, supply chain interruptions and overall economic and financial market instability.
In response to public health directives and orders, and to help minimize the risk of the virus to employees, the Company has taken precautionary measures, including implementing work from home policies for certain employees. The COVID-19 pandemic has the potential to significantly impact the Companys manufacturing supply chain, distribution, logistics and other services. Certain of the Companys suppliers experienced delays and shut-downs due to the COVID-19 pandemic. In order to manage the impact of these disruptions and meet its customers expectations, the Company increased the use of more costly air freight during 2020 and during the three months ended March 31, 2021, which increased cost of goods sold. The Company has not experienced the pandemics adverse impacts in any additional material respect.
2. |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation
The accompanying unaudited financial statements are prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information. Our fiscal year ends on December 31. Certain information and footnote disclosures normally included in the Companys annual audited financial statements and accompanying notes have been condensed or omitted in these accompanying interim financial statements and footnotes. These unaudited interim financial statements should be read in conjunction with the audited financial statements and related notes for the year ended December 31, 2020 included elsewhere in this prospectus.
In our opinion, the unaudited interim financial statements include all adjustments of a normal recurring nature necessary for the fair presentation of our financial position, results of operations, and cash flows. The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results to be expected for the year ending December 31, 2021.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods presented. Significant estimates include, but are not limited to, the valuation of the net
F-27
realizable value of inventory, reserves for sales returns, allowances for doubtful accounts, stock-based compensation, contingent sales tax liability, and the useful lives and recoverability of long-lived assets. Actual results could differ from those estimates.
Deferred Offering Costs
The Company capitalizes certain legal, professional accounting and other third-party fees that are directly associated with an in-process equity offering as deferred costs until such offering is consummated. After consummation of the equity offering, these costs will be recorded in stockholders equity as a reduction of proceeds generated as a result of the offering.
Should a planned equity offering be abandoned, the deferred offering costs would be expensed immediately as a charge to operating expenses in the statement of income and comprehensive income. The Company recorded deferred offering costs of $1.9 million as of March 31, 2021, which are included in other assets. There were no deferred offering costs capitalized as of December 31, 2020.
Inventory, Net
Inventory consists of finished goods and is accounted for using an average cost method. Inventory is valued at the lower of cost or net realizable value. The Company records a provision for excess and obsolete inventory to adjust the carrying value of inventory based on assumptions regarding future demand for the Companys products.
Lower of cost or net realizable value is evaluated by considering obsolescence, excessive levels of inventory, deterioration, and other factors. Adjustments to reduce the cost of inventory to its net realizable value, if required, are made for estimated excess, obsolescence, or impaired inventory. Excess and obsolete inventory is charged to cost of goods sold.
The Company recorded an allowance to write down inventory of $0.8 million, and $0.3 million as of December 31, 2020, and March 31, 2021, respectively, to reduce inventory to the lower of cost or to its net realizable value.
Revenue Recognition
The Company recognizes revenues in accordance with Financial Accounting Standards Board (FASB) ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (ASC 606). Revenue is recognized in an amount that reflects the consideration expected to be received in exchange for products. To determine revenue recognition for contracts with customers within the scope of ASC 606, the Company recognizes revenue from the commercial sales of products and contracts by applying the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations of the contract(s); (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract(s); and (v) recognize revenue when (or as) we satisfy the performance obligations.
The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the good or services it transfers to the customer. The Company recognizes revenue at a point in time when it satisfies a performance obligation and transfers control of the products to the respective customers, which occurs when the goods are transferred to a common carrier. Shipping and handling costs associated with outbound freight incurred to transfer a product to a customer are treated as a fulfillment activity, and as a result, any fees received from customers are included in the transaction price for the performance obligation of providing goods to the customer.
The Company generally provides refunds for goods returned within 30 days from the original purchase date. A returns reserve is recorded by the Company based on the historical refund pattern. The returns reserve in the balance sheets was $1.7 million and $2.0 million as of December 31, 2020 and March 31, 2021, respectively.
F-28
Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue. The Company records deferred revenue when it receives payments in advance of the transfer of the goods to a common carrier. The amounts recorded are expected to be recognized as revenue within the 12 months following the balance sheet and, therefore, are classified as current liabilities in the balance sheets.
The Company does not have significant contract balances other than deferred revenue, the allowance for sales returns and liabilities related to its gift cards. The Company does not have significant contract acquisition costs.
The following table presents the disaggregation of the Companys net revenues for the three months ended March 31, 2020 and 2021 (in thousands):
Three Months Ended
March 31, |
||||||||
2020 | 2021 | |||||||
By geography: |
||||||||
United States |
$ | 31,577 | $ | 81,607 | ||||
Rest of the world |
390 | 5,472 | ||||||
|
|
|
|
|||||
$ | 31,967 | $ | 87,079 | |||||
|
|
|
|
|||||
By product: |
||||||||
Scrubs |
$ | 28,552 | $ | 76,215 | ||||
Non-scrubs |
3,415 | 10,864 | ||||||
|
|
|
|
|||||
$ | 31,967 | $ | 87,079 | |||||
|
|
|
|
Recently Adopted Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure FrameworkChanges to the Disclosure Requirements for Fair Value Measurement, (ASU 2018-13). This update removed the following disclosure requirements: (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (2) the policy for timing of transfers between levels; and (3) the valuation processes for Level 3 fair value measurements. Additionally, this update added the following disclosure requirements: (1) the changes in unrealized gains and losses for the period included in other comprehensive income and loss for recurring Level 3 fair value measurements held at the end of the reporting period; (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 was effective for fiscal years beginning after December 15, 2019 with early adoption permitted. The Company has adopted this update as of January 1, 2020 and noted no effect on the financial statements and related disclosures.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU 2016- 02, Leases (Topic 842), as subsequently amended, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors), and replaces the existing guidance in ASC 840, Leases. The new standard also requires lessees to recognize operating and finance lease liabilities and corresponding right-of-use assets on the balance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements. The Company is required to adopt the standard on January 1, 2022 and is currently evaluating the impact that ASU 2016-02 will have on the financial statements and related disclosures.
F-29
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments (Topic 326) (ASU 2016-13). ASU 2016-13 requires measurement and recognition of expected credit losses for financial assets. In April 2019, the FASB issued clarification to ASU 2016-13 within ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. This update is effective for entities other than public business entities, including emerging growth companies that elected to defer compliance with new or revised financial accounting standards until a company that is not an issuer is required to comply with such standards, for annual reporting periods beginning after December 15, 2021. The Company is currently evaluating the impact that ASU 2016-13 will have on the financial statements and related disclosures.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (ASU 2019-12). ASU 2019-12 eliminates certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of the accounting for income taxes. This update is effective for entities other than public business entities, including emerging growth companies that elected to defer compliance with new or revised financial accounting standards until a company that is not an issuer is required to comply with such standards, for annual reporting periods beginning after December 15, 2021, and interim periods within annual periods beginning after December 15, 2022. The Company is currently evaluating the impact that ASU 2019-12 will have on the financial statements and related disclosures.
3. |
FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES |
As of December 31, 2020 and March 31, 2021, the Companys cash equivalents consisted of money market funds, classified as Level 1 financial assets, as these assets are valued using quoted market prices in active markets without any valuation adjustment (in thousands).
Fair Value Measurement as of
December 31, 2020 |
||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets |
||||||||||||||||
Money market funds |
$ | 50,219 | $ | | $ | | $ | 50,219 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 50,219 | $ | | $ | | $ | 50,219 | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Fair Value Measurement as of
March 31, 2021 |
||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets |
||||||||||||||||
Money market funds |
$ | 50,229 | $ | | $ | | $ | 50,229 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 50,229 | $ | | $ | | $ | 50,229 | |||||||||
|
|
|
|
|
|
|
|
There were no transfers of assets between fair value levels during the three months ended March 31, 2020 or the three months ended March 31, 2021. The carrying values of other current assets, accounts payable and accrued expenses approximate their fair values due to the short-term nature of these assets and liabilities.
F-30
4. |
PREPAID EXPENSES AND OTHER CURRENT ASSETS |
Prepaid expenses and other current assets consist of the following (in thousands):
December 31,
2020 |
March 31,
2021 |
|||||||
Inventory deposits |
$ | 963 | $ | 550 | ||||
Prepaid expenses |
1,406 | 1,811 | ||||||
Prepaid taxes |
3,493 | 599 | ||||||
Sample kits |
33 | | ||||||
Other prepaid expenses and current assets |
770 | 802 | ||||||
|
|
|
|
|||||
$ | 6,665 | $ | 3,762 | |||||
|
|
|
|
5. |
PROPERTY AND EQUIPMENT, NET |
Property and equipment, net consists of the following (in thousands):
December 31,
2020 |
March 31,
2021 |
|||||||
Furniture and fixtures |
$ | 808 | $ | 830 | ||||
Office equipment |
765 | 770 | ||||||
Machinery and equipment |
752 | 752 | ||||||
Computer equipment |
610 | 683 | ||||||
Software and website design |
1,704 | 2,227 | ||||||
Leasehold improvements |
3,017 | 3,017 | ||||||
Capital projects in progress |
312 | 55 | ||||||
|
|
|
|
|||||
Total property and equipment |
7,968 | 8,334 | ||||||
Less: accumulated depreciation and amortization |
(1,439 | ) | (1,752 | ) | ||||
|
|
|
|
|||||
Property and equipment, net |
$ | 6,529 | $ | 6,582 | ||||
|
|
|
|
Depreciation and amortization expense for the three months ended March 31, 2020 and 2021 on property and equipment was $0.2 million and $0.3 million, respectively.
6. |
ACCRUED EXPENSES |
Accrued expenses consist of the following (in thousands):
December 31,
2020 |
March 31,
2021 |
|||||||
Accrued inventory |
$ | 3,151 | $ | 7,047 | ||||
Accrued shipping |
656 | 931 | ||||||
Accrued selling expenses |
1,394 | 1,482 | ||||||
Accrued legal expenses |
986 | 2,962 | ||||||
Credit card liabilities |
276 | 495 | ||||||
Other accrued expenses |
219 | 1,819 | ||||||
|
|
|
|
|||||
$ | 6,682 | $ | 14,736 | |||||
|
|
|
|
7. |
FINANCING ARRANGEMENTS |
On September 5, 2017, the Company, as borrower, entered into a credit agreement with First Choice Bank, as lender, administrative agent and promissory note issuer for a $5.0 million revolving credit facility (the
F-31
Prior Credit Facility). On October 5, 2018, the principal amount of the Prior Credit Facility was increased to $10.0 million. On January 7, 2019, the Company amended the Prior Credit Facility to extend the maturity date to January 12, 2022 and carved out of the Prior Credit Facility two standby letters of credit. The Company had letters of credit aggregating to $2.3 million as of December 31, 2019. Availability under the Credit Facility was $7.7 million as of December 31, 2019. On January 10, 2020, the Company amended and extended a letter of credit, increasing the aggregate of letters of credit to $2.4 million. In December 2020, the Prior Credit Facility was terminated.
On December 2, 2020, the Company, as borrower, entered into a credit agreement with JPMorgan Chase Bank, N.A. for an initial $50.0 million revolving credit facility (including capacity to issue letters of credit (the Existing Credit Facility). The Existing Credit Facility has a maturity date of December 2, 2025 (Maturity Date). Subject to certain conditions, the Existing Credit Facility also provides for an additional $25.0 million of capacity. The Company had letters of credit aggregating to $3.2 million outstanding under the Existing Credit Facility as of March 31, 2021. As of March 31, 2021, the Company has not made any borrowings under the Existing Credit Facility. Borrowings under the Existing Credit Facility are payable on the Maturity Date. Borrowings bear interest at LIBOR (with a 0.5% floor) plus 1.75%. The interest rate for undrawn amounts is 0.25%.
8. |
COMMITMENTS AND CONTINGENCIES |
Taxes on Remote Sellers
The Company is subject to state laws or administrative practices with respect to the taxes on remote sellers. In accordance with ASC 450, Contingencies, the Company recorded $1.9 million and $1.8 million within sales tax payable on the Companys balance sheets as of December 31, 2020 and March 31, 2021, respectively, as an estimate of contingent sales tax payable.
Operating Leases
The Company leases its office facilities and certain office equipment under non-cancelable operating leases that expire on various dates through December 2029. During the three months ended March 31, 2020 and 2021, the Company recorded rent expense of $0.5 million and $0.4 million, respectively.
Future minimum lease payments under non-cancelable operating leases subsequent to March 31, 2021 are as follows (in thousands):
2021 |
$ | 1,431 | ||
2022 |
1,963 | |||
2023 |
2,023 | |||
2024 |
2,093 | |||
2025 |
2,166 | |||
Thereafter |
9,448 | |||
|
|
|||
$ | 19,124 |
Inventory Purchase Obligations
Inventory purchase obligations as of March 31, 2021 were approximately $18.1 million. These inventory purchase obligations can be impacted by various factors, including the timing of issuing orders and the timing of the shipment of orders.
Legal Contingencies
Legal claims may arise from time to time in the normal course of business, the results of which may have a material effect on the Companys accompanying financial statements. The Company currently has legal
F-32
actions against it with respect to its litigation with Strategic Partners, Inc., but without quantification of the alleged damages. The Company believes the claims are without basis or merit and intends to vigorously defend against such claims.
9. |
INCOME TAXES |
Our tax provision for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items arising during interim periods.
For the three months ended March 31, 2020, the Companys effective tax rate was 0% due to the full valuation allowance on its deferred tax assets. The Companys effective tax rate was 28.6% for the three months ended March 31, 2021. The Companys effective tax rate differs from the U.S. statutory tax rate primarily due to state taxes, the permanent disallowance of stock-based compensation expense for tax purposes and the impact of other discrete items, including certain transaction expenses.
The Company did not incur income tax expense for the three months ended March 31, 2020. The Company recorded income tax expense of $4.6 million for the three months ended March 31, 2021.
10. |
STOCK-BASED COMPENSATION |
During the three months ended March 31, 2020, the Company did not grant stock options to purchase shares of common stock. During the three months ended March 31, 2021, the Company granted stock options to purchase 98,014 shares of common stock.
Under the Plan, up to 5,746,326 shares of common stock of the Company may be awarded through the granting of one or more of the following types of awards: (a) nonqualified stock options, (b) qualified stock options (c) RSU awards, (d) restricted stock awards and (e) stock appreciation rights. To date, the Company has granted nonqualified and qualified stock options with vesting periods of two to five years. The Company issues new common stock upon exercise of stock options. As of December 31, 2020 and March 31, 2021, the number of shares available for issuance under the Plan were 558,743 and 490,747, respectively.
Stock Options
A summary of the stock option activity under the Plan, is as follows:
Stock Options Outstanding | ||||||||||||
Number of
Shares |
Weighted
Average Exercise Price (per share) |
Weighted
Average Remaining Contractual Term (in years) |
||||||||||
Outstanding at December 31, 2019 |
1,729,030 | $ | 7.44 | 8.28 | ||||||||
Granted |
| | ||||||||||
Exercised |
| | ||||||||||
Forfeited |
(11,500 | ) | 4.10 | |||||||||
|
|
|
|
|||||||||
Outstanding at March 31, 2020 |
1,717,530 | $ | 7.46 | 8.03 | ||||||||
Outstanding at December 31, 2020 |
4,426,355 | $ | 31.42 | 8.87 | ||||||||
|
|
|
|
|||||||||
Granted |
98,014 | 83.84 | ||||||||||
Exercised |
(22,701 | ) | 5.39 | |||||||||
Forfeited |
(30,018 | ) | 10.13 | |||||||||
|
|
|
|
|||||||||
Outstanding at March 31, 2021 |
4,471,650 | $ | 32.84 | 8.65 | ||||||||
|
|
|
|
F-33
The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair value of the Companys common stock for those stock options that had exercise prices lower than the fair value of the common stock as of the end of the period. As of March 31, 2021, the aggregate intrinsic value of stock options outstanding and stock options exercisable was $311.6 million and $136.2 million, respectively. The aggregate intrinsic value of stock options exercised during the three months ended March 31, 2021 was $1.8 million.
The weighted-average grant date fair value per share of the Companys stock options granted during the three months ended March 31, 2021 was $53.64. The fair value of stock options vested during the three months ended March 31, 2020 and 2021 was $0.1 million and $4.4 million, respectively.
As of March 31, 2021, total unrecognized compensation cost related to unvested stock option awards was $86.4 million, to be recognized over a weighted-average period of 4.3 years.
Restricted Stock Units
In 2020, the Company granted a total of 601,160 RSUs to employees which vest upon the satisfaction of both a service and a performance condition. The service condition for these awards is satisfied over four years. The performance condition is satisfied upon the occurrence of a qualifying event, defined as a change of control transaction or an IPO. As the performance condition is not considered probable of occurring, through March 31, 2021, the Company has not recognized stock-based compensation expense related to these awards. The Company did not grant any RSUs during the three months ended March 31, 2020 and 2021.
11. |
EARNINGS PER SHARE |
The following table sets forth the computation of basic and diluted earnings per share and a reconciliation of the weighted average number of common and common equivalent shares outstanding for the three months ended March 31, 2020 and 2021 (in thousands, except share and per share amounts).
Three Months Ended March 31, | ||||||||
2020 | 2021 | |||||||
Numerator: |
||||||||
Net income basic and diluted |
$ | 4,134 | $ | 11,440 | ||||
Denominator: |
||||||||
Weighted-average sharesbasic |
17,005,887 | 17,166,851 | ||||||
Effect of dilutive stock options |
66,910 | 1,501,190 | ||||||
|
|
|
|
|||||
Weighted-average sharesdiluted |
17,072,797 | 18,668,041 | ||||||
|
|
|
|
|||||
Earnings per share: |
||||||||
Basic earnings per share |
$ | 0.24 | $ | 0.67 | ||||
Effect of dilutive stock options |
| (0.06 | ) | |||||
Diluted earnings per share |
$ | 0.24 | $ | 0.61 |
The Company excluded the following from the computation of diluted earnings per share for the three months ended March 31, 2020 and 2021 because including them would have had an anti-dilutive effect:
Three Months Ended March 31, | ||||||||
2020 | 2021 | |||||||
Stock options to purchase common stock |
1,662,160 | 3,023,179 | ||||||
|
|
|
|
The Company had 601,160 RSUs outstanding as of March 31, 2021, which include a service and performance-based vesting condition satisfied upon the occurrence of a qualifying event, defined as a change of
F-34
control transaction or an IPO. Because the necessary condition for the performance vesting of the restricted stock units was not satisfied as of March 31, 2021, the Company has excluded the RSUs from the calculation of diluted earnings per share for the three months ended March 31, 2021.
12. |
EMPLOYEE BENEFIT PLAN |
The Company maintains a defined contribution 401(k) plan for the benefit of all employees who have met the eligibility requirements. Participants may contribute up to 100% of their eligible compensation, subject only to annual limitations set by the Internal Revenue Service. The Company matches 100% of participant contributions, up to the first 6% of a participants plan compensation. For the three months ended March 31, 2020 and 2021, the Company recorded expense for matching contributions of $0.1 million and $0.2 million, respectively, within general and administrative expenses on the Companys statements of income and comprehensive income.
13. |
SUBSEQUENT EVENTS |
Management has evaluated subsequent events occurring through May 5, 2021, the date that these financial statements were issued, and determined that no additional subsequent events occurred that would require recognition or disclosure in these financial statements.
F-35
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. |
Other Expenses of Issuance and Distribution. |
The following table sets forth all expenses to be paid by us, other than underwriting discounts and commissions, in connection with this offering. All amounts shown are estimates except for the Securities and Exchange Commission, or SEC, registration fee, the Financial Industry Regulatory Authority, Inc., or FINRA, filing fee and the NYSE listing fee.
Amount | ||||
Securities and Exchange Commission registration fee |
$ | * | ||
FINRA filing fee |
* | |||
NYSE initial listing fee |
* | |||
Accountants fees and expenses |
* | |||
Legal fees and expenses |
* | |||
Blue Sky fees and expenses |
* | |||
Transfer Agents fees and expenses |
* | |||
Printing and engraving expenses |
* | |||
Miscellaneous |
* | |||
|
|
|||
Total expenses |
$ | * | ||
|
|
* |
To be provided by amendment. |
Item 14. |
Indemnification of Directors and Officers. |
The Registrant is governed by the Delaware General Corporation Law, or DGCL. Section 145 of the DGCL provides that a corporation may indemnify any person, including an officer or director, who was or is, or is threatened to be made, a party to any threatened, pending or completed legal action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such corporation), by reason of the fact that such person was or is an officer, director, employee or agent of such corporation or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, provided such officer, director, employee or agent acted in good faith and in a manner such person reasonably believed to be in, or not opposed to, the corporations best interest and, for criminal proceedings, had no reasonable cause to believe that such persons conduct was unlawful. A Delaware corporation may indemnify any person, including an officer or director, who was or is, or is threatened to be made, a party to any threatened, pending or contemplated action or suit by or in the right of such corporation, under the same conditions, except that such indemnification is limited to expenses (including attorneys fees) actually and reasonably incurred by such person, and except that no indemnification is permitted without judicial approval if such person is adjudged to be liable to such corporation. Where an officer or director of a corporation is successful, on the merits or otherwise, in the defense of any action, suit or proceeding referred to above, or any claim, issue or matter therein, the corporation must indemnify that person against the expenses (including attorneys fees) which such officer or director actually and reasonably incurred in connection therewith.
The Registrants amended and restated certificate of incorporation will authorize the indemnification of its officers and directors, consistent with Section 145 of the DGCL.
Reference is made to Section 102(b)(7) of the DGCL, which enables a corporation in its original certificate of incorporation or an amendment thereto to eliminate or limit the personal liability of a director for violations of
II-1
the directors fiduciary duty, except (i) for any breach of the directors duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the DGCL, which provides for liability of directors for unlawful payments of dividends of unlawful stock purchase or redemptions or (iv) for any transaction from which a director derived an improper personal benefit.
We have entered into indemnification agreements with each of our directors and officers. These indemnification agreements may require us, among other things, to indemnify our directors and officers for some expenses, including attorneys fees, judgments, fines and settlement amounts incurred by a director or officer in any action or proceeding arising out of his or her service as one of our directors or officers, or any of our subsidiaries or any other company or enterprise to which the person provides services at our request.
We maintain a general liability insurance policy that covers certain liabilities of directors and officers of our corporation arising out of claims based on acts or omissions in their capacities as directors or officers. In any underwriting agreement we enter into in connection with the sale of common stock being registered hereby, the underwriters will agree to indemnify, under certain conditions, us, our directors, our officers and persons who control us within the meaning of the Securities Act against certain liabilities.
Item 15. |
Recent Sales of Unregistered Securities. |
We have issued and sold the following securities:
1. |
In May 2018, we issued and sold to an accredited investor an aggregate of 4,075,000 shares of our common stock for a total purchase price of $50.0 million through cash payments totaling $47.5 million and the cancellation of a promissory note of $2.5 million. The average price per share was $12.27. |
2. |
Since January 1, 2018, we have granted stock options to employees and consultants, covering an aggregate of 4,966,829 shares of our common stock under our 2016 Equity Incentive Plan, at exercise prices ranging from $0.64 to $100.51 per share, and have issued 178,718 shares of common stock upon exercise of stock options under our 2016 Equity Incentive Plan with an aggregate exercise price of $475,008. |
3. |
Since January 1, 2018, we have granted restricted stock units to employees representing an aggregate of 601,160 shares of common stock under our 2016 Equity Incentive Plan. |
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, or Rule 701 promulgated under Section 3(b) of the Securities Act as transactions by an issuer not involving any public offering or pursuant to benefit plans and contracts relating to compensation as provided under Rule 701. 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.
II-2
Item 16. |
Exhibits and Financial Statement Schedules. |
(a) |
Exhibits. |
The following documents are filed as exhibits to this registration statement.
Exhibit
|
Description of Exhibit |
|
1.1* | Form of Underwriting Agreement | |
3.1 | Amended and Restated Certificate of Incorporation, as amended to date and as currently in effect | |
3.2* | Form of Amended and Restated Certificate of Incorporation, to be effective upon the completion of this offering | |
3.3 | Amended and Restated Bylaws, as currently in effect | |
3.4 | Form of Amended and Restated Bylaws, to be effective upon the completion of this offering | |
4.1 | Form of Certificate of Common Stock | |
4.2* | Amended and Restated Stockholders Agreement by and between FIGS, Inc. and certain security holders of FIGS, Inc., dated October 23, 2020 | |
5.1* | Opinion of Latham & Watkins LLP | |
10.1 | Form of Indemnification Agreement between FIGS, Inc. and its directors and officers | |
10.2# | Amended 2016 Equity Incentive Plan | |
10.3# | Form of Stock Option Grant Notice and Agreement under 2016 Equity Incentive Plan | |
10.4# | Form of Founders Restricted Stock Unit Grant Notice and Agreement under 2016 Equity Incentive Plan | |
10.5#* | 2021 Equity Incentive Plan | |
10.6#* | Form of Stock Option Grant Notice and Agreement under 2021 Equity Incentive Plan | |
10.7#* | Form of Restricted Stock Unit Grant Notice and Agreement under 2021 Equity Incentive Plan | |
10.8#* | Employee Stock Purchase Plan | |
10.9 | Credit Agreement by and between FIGS, Inc. and JPMORGAN CHASE BANK, N.A., dated December 2, 2020 | |
10.10 | Office Lease by and between FIGS, Inc. and 2834 Colorado Avenue, LLC, dated November 26, 2018 | |
10.11#* | Employment Agreement by and between FIGS, Inc. and Heather Hasson, as amended | |
10.12#* | Employment Agreement by and between FIGS, Inc. and Catherine Spear, as amended | |
10.13# | Employment Offer Letter by and between FIGS, Inc. and Jeffrey D. Lawrence | |
10.14#* | Non-Employee Director Compensation Policy | |
10.15* | Voting Agreement by and among Heather Hasson, Catherine Spear, Tulco, LLC and FIGS, Inc., dated as of | |
23.1 | Consent of Ernst & Young, LLP | |
23.2* | Consent of Latham & Watkins LLP (included in Exhibit 5.1) | |
23.3 | Consent of Frost & Sullivan | |
24.1 | Power of Attorney (included on signature page) |
* |
To be filed by amendment. |
# |
Indicates management contract or compensatory plan. |
(b) |
Financial Statement Schedules. Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. |
II-3
Item 17. |
Undertakings. |
The undersigned registrant hereby undertakes to provide to the underwriter, at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) |
For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. |
(2) |
For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Santa Monica, State of California, on this 5th day of May 2021.
FIGS, INC. | ||
By: |
/s/ Catherine Spear |
|
Name: | Catherine Spear | |
Title: | Co-Chief Executive Officer and Director |
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Heather Hasson and Catherine Spear, and each of them singly (with full power to each of them to act alone), his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution in each of them for him or her and in their name, place and stead, and in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement (or any other registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended), and all post-effective amendments thereto, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as full to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities held on the dates indicated.
Signature |
Title |
Date |
||
/s/ Catherine Spear Catherine Spear |
Co-Chief Executive Officer and Director (Co-Principal Executive Officer) |
May 5, 2021 | ||
/s/ Heather Hasson Heather Hasson |
Co-Chief Executive Officer and Director (Co-Principal Executive Officer) |
May 5, 2021 | ||
/s/ Jeffrey D. Lawrence Jeffrey D. Lawrence |
Chief Financial Officer (Principal Financial and Accounting Officer) |
May 5, 2021 | ||
/s/ J. Martin Willhite J. Martin Willhite |
Director |
May 5, 2021 |
Exhibit 3.1
CERTIFICATE OF
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
FIGS, INC.
The undersigned, Catherine Spear, certifies that she is the President of Figs, Inc. (the Corporation), a corporation organized and existing under the laws of the State of Delaware and does hereby further certify as follows:
1. |
The name of the Corporation is Figs, Inc. The Certificate of Incorporation of the Corporation was originally filed with the Secretary of State of the State of Delaware on January 28, 2013, and was amended and restated on May 2, 2016 (The First Amended and Restated Certificate of Incorporation). |
2. |
This Second Amended and Restated Certificate of Incorporation of the Corporation has been duly adopted in accordance with the provisions of Sections 228, 242 and 245 of the General Corporation Law of the State of Delaware by the directors and stockholders of the Corporation. |
3. |
The text of the First Amended and Restated Certificate of Incorporation is hereby amended and restated in its entirety to read as follows: |
FIRST
The name of the corporation is Figs, Inc. (the Corporation).
SECOND
The address of the registered office of the Corporation in the State of Delaware is 160 Greentree Drive, Suite 101, City of Dover, County of Kent, Zip Code 19904, and the name of the registered agent of the Corporation in the State of Delaware at such address is National Registered Agents, Inc.
THIRD
The nature of the business or purposes to be conducted or prompted by 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 (the DGCL).
FOURTH
The total number of shares of stock which the Corporation is authorized to issue is 15,000,000 shares of Common Stock, with a par value of $0.0001 per share.
FIFTH
The Corporation shall have perpetual existence.
SIXTH
Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws of the Corporation may provide. The books of the Corporation may be kept outside the State of Delaware at such place or places as may be designated from time to time by the board of directors of the Corporation (the Board) or as set forth in the Bylaws of the Corporation. Election of directors need not be by written ballot unless the Bylaws of the Corporation so provide.
SEVENTH
In furtherance and not in limitation of the powers conferred by statute, the Board is expressly authorized to adopt, amend or repeal the Bylaws of the Corporation; provided that any bylaws adopted or amended by the Board, and any powers thereby conferred, may be amended, altered or repealed by the stockholders.
EIGHTH
To the fullest extent permitted by law, a director of the Corporation shall not be personally liable to the Corporation or to its stockholders for monetary damages for any breach of fiduciary duty as a director. No amendment to, modification of or repeal of this paragraph seven shall apply to or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment.
NINTH
The Corporation shall indemnify, advance expenses, and hold harmless, to the fullest extent permitted by applicable law as it presently exists or may hereafter be amended, any person (a Covered Person) who was or is made or is threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a Proceeding), by reason of the fact that he or she, or a person for whom he or she is the legal representative, is or was a director or officer of the Corporation or, while a director or officer of the Corporation, is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust, enterprise or nonprofit entity, including service with respect to employee benefit plans, against all liability and loss suffered and expenses (including attorneys fees) reasonably incurred by such Covered Person. Notwithstanding the preceding sentence, except for claims for indemnification (following the final disposition of such Proceeding) or advancement of expenses not paid in full, the Corporation shall be required to indemnify a Covered Person in connection with a Proceeding (or part thereof) commenced by such Covered Person only if the commencement of such Proceeding (or part thereof) by the Covered Person was authorized in the specific case by the Board. Any amendment, repeal or modification of this paragraph 8 shall not adversely affect any right or protection hereunder of any person in respect of any act or omission occurring prior to the time of such repeal or modification.
TENTH
Section 203 of the DGCL shall not apply to any business combination (as defined in Section 203(c)(3) of the DGCL) in which the Corporation shall engage.
ELEVENTH
In the event that any member of the Board who is not an employee of the Corporation, including any member of the Board who is also a member, partner, manager or employee of an entity that is a holder of Common Stock and that is in the business of investing and reinvesting in other entities, or an employee of an entity that manages such an entity (each, an Investment Entity), acquires knowledge of a potential transaction or other matter other than directly in connection with such individuals service as a member of the Board (including, if applicable, in such individuals capacity as a member, partner, manager or employee of an Investment Entity) that may be an opportunity of interest for both the Corporation and such individual or Investment Entity (a Corporate Opportunity), then, provided that such director has acted in good faith, the Corporation: (i) renounces any interest or expectancy that such director or Investment Entity offer an opportunity to participate in such Corporate Opportunity to the Corporation, and (ii) to the fullest extent permitted by law, waives any claim that such opportunity constituted a Corporate Opportunity that should have been presented by such director or Investment Entity to the Corporation.
TWELTH
The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation.
IN WITNESS WHEREOF, this Second Amended and Restated Certificate of Incorporation has been executed by its duly authorized officer this 27th day of October, 2017.
FIGS, INC. | ||
By: |
/s/ Catherine Spear |
|
Name: | Catherine Spear | |
Title: | President |
CERTIFICATE OF AMENDMENT
OF
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
FIGS, INC.
Figs, Inc. a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the DGCL), certifies as follows:
FIRST: The name of this corporation is Figs, Inc. (hereinafter referred to as the Company) and this corporation was originally incorporated pursuant to the DGCL on January 28, 2013.
SECOND: Pursuant to Section 242 of the DGCL, this Certificate of Amendment of Amended and Restated Certificate of Incorporation of the Company (the Certificate of Amendment) amends the Amended and Restated Certificate of Incorporation of the Company (the Certificate) as set forth below.
1. |
Article Fourth of the Certificate is amended and restated to read in its entirety as follows: |
The total number of shares of stock which the Corporation is authorized to issue is 19,000,000 shares of Common Stock, with a par value of $0.0001 per share.
THIRD: The foregoing Certificate of Amendment has been duly approved and adopted by the Board of Directors and stockholders of the Company in accordance with Sections 141, 228 and 242 of the DGCL.
FOURTH: Other than as set forth in this Certificate of Amendment, the Certificate shall remain in full force and effect, without modification, amendment or change.
[Signature page follows]
IN WITNESS WHEREOF, the Company has caused this Certificate of Amendment of Amended and Restated Certificate of Incorporation to be executed by a duly authorized officer of the Company on this 11 day of May, 2018.
FIGS, INC. | ||
By: |
/s / Catherine Spear |
|
Name: | Catherine Spear | |
Title: | President |
CERTIFICATE OF AMENDMENT
OF
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
FIGS, INC.
Figs, Inc. a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the DGCL), certifies as follows:
FIRST: The name of this corporation is Figs, Inc. (hereinafter referred to as the Company) and this corporation was originally incorporated pursuant to the DGCL on January 28, 2013.
SECOND: Pursuant to Section 242 of the DGCL, this Certificate of Amendment of Amended and Restated Certificate of Incorporation of the Company (the Certificate of Amendment) amends the Amended and Restated Certificate of Incorporation of the Company (the Certificate) as set forth below.
1. |
Article Fourth of the Certificate is amended and restated to read in its entirety as follows: |
The total number of shares of stock which the Corporation is authorized to issue is 23,000,000 shares of Common Stock, with a par value of $0.0001 per share.
THIRD: The foregoing Certificate of Amendment has been duly approved and adopted by the Board of Directors and stockholders of the Company in accordance with Sections 141, 228 and 242 of the DGCL.
FOURTH: Other than as set forth in this Certificate of Amendment, the Certificate shall remain in full force and effect, without modification, amendment or change.
[Signature page follows]
IN WITNESS WHEREOF, the Company has caused this Certificate of Amendment of Amended and Restated Certificate of Incorporation to be executed by a duly authorized officer of the Company on June 26, 2020.
FIGS, INC. | ||
By: |
/s/ Catherine Spear |
|
Name: | Catherine Spear | |
Title: | President |
Exhibit 3.3
AMENDED AND RESTATED BYLAWS
OF
FIGS, INC.
a Delaware corporation
(Adopted as of October 27, 2017)
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office of the corporation in the State of Delaware shall be located at 160 Greentree Drive, Suite 101, in the City of Dover, County of Kent, Delaware 19904. The name of the corporations registered agent at such address shall be National Registered Agents, Inc. The registered office and/or registered agent of the corporation may be changed from time to time by action of the Board of Directors.
Section 2. Other Offices. The corporation may also have offices at such other places, both within and without the State of Delaware, as the Board of Directors may from time to time determine or the business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Annual Meeting.
The annual meeting of the stockholders for the election of directors and for the transaction of such other business as may properly come before the meeting shall be held at such date, time and place, if any, as shall be determined by the Board of Directors and stated in the notice of the meeting.
Section 2. Special Meetings. Special meetings of stockholders may be called for any purpose and may be held at such time and place, within or without the State of Delaware, and/or by means of remote communication, as shall be stated in a notice of meeting or in a duly executed waiver of notice thereof. Such meetings may be called at any time by a resolution approved by the Board of Directors and shall be called by the chief executive officer or president upon the written request of holders of shares entitled to cast not less than 10 percent of the votes at the meeting. Such written request shall state the purpose or purposes of the meeting and shall be delivered to the chief executive officer or president. On such written request, the chief executive officer or president shall fix a date and time for such meeting within 30 days of the date requested for such meeting in such written request. Each stockholder of the corporation shall be entitled to receive notice of and attend such special meeting.
Section 3. Place of Meetings. The Board of Directors may designate any place, either within or without the State of Delaware, and/or by means of remote communication, as the place of meeting for any annual meeting or for any special meeting called pursuant to Article II, Section 2. If no designation is made, or if a special meeting be otherwise called, the place of meeting shall be the principal executive office of the corporation.
Section 4. Notice. Whenever stockholders are required or permitted to take any action at a meeting, written or printed notice stating the place, if any, date and hour of the meeting, the means of remote communications, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at such meeting, and, in the case of special meetings, the purpose or purposes of such meeting, shall be given to each stockholder not less than two nor more than 60 business days before the date of the meeting. All such notices shall be delivered, either personally, by mail, or by a form of electronic transmission, by or at the direction of the Board of Directors, the chief executive officer, the president or the secretary, and if mailed, such notice shall be deemed to be delivered 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 electronic transmission, such notice shall be deemed to be delivered (i) if by facsimile telecommunication, when directed to a number at which the stockholder has consented to receive notice; (ii) if by electronic mail, when directed to an electronic mail address at which the stockholder has consented to receive notice; (iii) if by a posting on an electronic network to which the stockholder has been provided access, upon such posting; and (iv) if by any other form of electronic transmission, when directed to the stockholder. Any applicable consent under clauses (i) or (ii) of this paragraph shall be revocable by the stockholder by written notice to the corporation, and shall be deemed revoked if (1) the corporation is unable to deliver by such form of electronic transmission two consecutive notices given by the corporation in accordance with such consent and (2) such inability becomes known to the secretary or an assistant secretary of the corporation or to the transfer agent.
Section 5. Stockholders List. The officer having charge of the stock ledger of the corporation shall make, at least 10 days before every meeting of the stockholders, a complete list of the stockholders entitled to vote at such meeting arranged in alphabetical order, showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, for a period of at least 10 days prior to the meeting: (i) 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, and/or (ii) during ordinary business hours, at the principal place of business of the corporation. In the event that the corporation determines to make the list available on an electronic network, the corporation may take reasonable steps to ensure that such information is available only to stockholders of the corporation. If the meeting is to be held at a place, then the list shall 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.
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Section 6. Quorum. The holders of a majority of the outstanding shares of common stock, present in person or represented by proxy, and entitled to vote at the meeting, shall constitute a quorum at all meetings of the stockholders, except as otherwise provided by statute or by the certificate of incorporation. If a quorum is not present, the holders of a majority of the shares 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.
Section 7. Adjourned Meetings. When a meeting is adjourned to another time and place, notice need not be given of the adjourned meeting if the time, place, if any, thereof, and the means of remote communications, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at such adjourned meeting 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, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting.
Section 8. Vote Required. The affirmative vote or written consent of the stockholders holding a majority of the then outstanding voting shares entitled to vote on the subject matter shall be the act of the stockholders unless the question is one upon which by express provisions of an applicable law, these Bylaws or the certificate of incorporation a different vote is required, in which case such express provision shall govern and control the decision of such question. All stockholders so entitled to vote shall vote together as a single class on all matters submitted to a vote of stockholders.
Section 9. Voting Rights. Except as otherwise provided by the General Corporation Law of the State of Delaware (DGCL), or by the certificate of incorporation of the corporation or any amendments thereto, and subject to Section 3 of Article VI hereof, every stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of common stock held by such stockholder.
Section 10. Proxies. Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent 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. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212 of the DGCL. A written proxy may be given by electronic transmission that sets forth or is submitted with information from which it can be determined that the electronic transmission was authorized by the stockholder.
Section 11. Action by Written Consent. Unless otherwise provided in the certificate of incorporation, any action required to be taken at any annual or special meeting of stockholders of the corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and
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without a vote, if a consent or consents in writing, or by electronic transmission, setting forth the action so taken and bearing the dates of signature of the stockholders who signed the consent or consents, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the corporation by delivery to its registered office in the state of Delaware, or the corporations principal place of business, or an officer or agent of the corporation having custody of the book or books in which proceedings of meetings of the stockholders are recorded. Delivery made to the corporations registered office shall be by hand or by certified or registered mail, return receipt requested. All consents properly delivered in accordance with this section shall be deemed to be recorded when so delivered. No written consent shall be effective to take the corporate action referred to therein unless, within 60 days after the earliest dated consent delivered to the corporation as required by this section, written consents signed by the holders of a sufficient number of shares to take such corporate action are so recorded. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing, or by electronic transmission. Any action taken pursuant to such written consent or consents of the stockholders shall have the same force and effect as if taken by the stockholders at a meeting thereof.
Any copy, facsimile, electronic transmission or other reliable reproduction of a consent in writing may be substituted or used in lieu of the original writing for any and all purposes for which the original writing could be used; provided that such copy, facsimile, electronic transmission or other reproduction shall be a complete reproduction of the entire original writing.
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. Number. The number of directors which shall constitute the board shall be three, as shall be established in accordance with the provisions of that certain stockholders agreement dated as of October 20, 2017, by and among the corporations stockholders and the corporation (Stockholders Agreement).
Section 3. Removal and Resignation. Subject to any limitation imposed by applicable law and subject to Section 2.3 of the Stockholders Agreement, any director or the entire Board of Directors may be removed from office at any time with or without cause by the affirmative vote of the holders of a majority of the voting power of all then-outstanding shares of capital stock of the corporation entitled to vote generally at an election of directors. Any director may resign at any time upon notice given in writing or by electronic transmission to the corporation.
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Section 4. Election; Vacancies. Subject to Section 2.3 of the Stockholders Agreement, directors shall be elected by the vote of the stockholders holding a majority of the then-outstanding shares of capital stock of the corporation. Each director shall hold office until such directors successor is elected and qualified or until such directors earlier death, resignation or removal as herein provided. Any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other causes shall be filled in accordance with the provisions of the Stockholders Agreement. Each director so chosen shall hold office until a successor is duly elected and qualified or until his or her earlier death, resignation or removal as herein provided.
Section 5. Meetings and Notice. Regular meetings of the Board of Directors may be held without notice at such time and at such place, if any, as shall from time to time be determined by resolution of the Board of Directors. Special meetings of the Board of Directors may be called by or at the request of the chief executive officer, the president or any director on at least 24 hours notice to each director, either personally by hand, by courier, by telephone, by mail, by facsimile or by electronic mail.
Section 6. Quorum, Required Vote and Adjournment. Except as otherwise provided by law or the certificate of incorporation, a majority of the authorized number of directors (as determined pursuant to Section 2 of this Article III) shall constitute a quorum for the transaction of business, except to adjourn as provided below. 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, except as may be otherwise specifically provided by law, the certificate of incorporation, these Bylaws or Section 2.4 of the Stockholders Agreement with respect to the matters requiring the affirmative approval of the Tulco Director (as defined in the Stockholders Agreement). If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present.
Section 7. Committees. Except as set forth in the Stockholders Agreement, the Board of Directors may, by resolution passed by a majority of the whole board, designate one or more committees, each committee to consist of one or more of the directors of the corporation, which to the extent provided in such resolution or these Bylaws shall have and may exercise the powers of the Board of Directors in the management and affairs of the corporation except as otherwise limited by law. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required.
Section 8. Committee Rules. Each committee of the Board of Directors may fix its own rules of procedure and shall hold its meetings as provided by such rules, except as may otherwise be provided by a resolution of the Board of Directors designating such committee. In the event that a member and that members alternate, if alternates are designated by the Board of Directors as provided in Section 7 of this Article III, of such committee is or are absent or disqualified, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in place of any such absent or disqualified member.
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Section 9. Telephonic Meetings. Members of the Board of Directors or any committee thereof may participate in and act at any meeting of such board or committee by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and participation in the meeting pursuant to this section shall constitute presence in person at the meeting.
Section 10. Waiver of Notice and Presumption of Assent. Any member of the Board of Directors or any committee thereof who is present at a meeting shall be conclusively presumed to 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. 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 11. 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 directors or members of such committee consent thereto in writing or by electronic transmission, and the writing or writings or electronic transmission or transmissions are 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 12. Director Conflicts of Interest.
Each director who has a Material Conflict of Interest (as defined in the Stockholders Agreement) in voting on any particular matter before the Board of Directors shall recuse himself or herself prior to the vote of the Board of Directors on such matter in accordance with Section 2.9 of the Stockholders Agreement.
Section 13. Stockholders Agreement and Certificate of Incorporation. The provisions in Article II and this Article III shall be subject to the terms and conditions of the Stockholders Agreement and the certificate of incorporation.
ARTICLE IV
OFFICERS
Section 1. Number. The officers of the corporation shall be elected by the Board of Directors and shall consist of a chief executive officer or president, a secretary, 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.
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Section 2. Election and Term of Office. The officers of the corporation shall be elected annually by the Board of Directors at its first meeting held after each annual meeting of stockholders (or adoption of written consent in lieu thereof) or as soon thereafter as conveniently may be. Vacancies may be filled or new offices created and filled at any meeting of the Board of Directors. 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. In addition, the election of the officers of the corporations direct and indirect subsidiaries shall be subject to the approval of the Board of Directors.
Section 3. Removal. Any officer or agent elected by the Board of Directors may be removed by the Board of Directors whenever in its judgment the best interests of the corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed.
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 for the unexpired portion of the term by the Board of Directors then in office.
Section 5. Compensation. Subject to the applicable affirmative approval rights of the Tulco Director in Section 2.4 of the Stockholders Agreement, compensation of all officers shall be fixed by the Board of Directors, 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. The President. Subject to the powers of the Board of Directors, the President shall be the chief executive officer of the corporation and shall have general charge of the business, affairs and property of the corporation, and control over its officers, agents and employees, and shall see that all orders and resolutions of the Board of Directors are carried into effect, unless some other officer has been elected chief executive officer of the corporation. The President shall 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 have such other powers and perform such other duties as may be prescribed by the Board of Directors or as may be provided in these Bylaws.
Section 7. The Treasurer and Assistant Treasurers. The treasurer shall have the custody of the corporate funds and securities, except as otherwise provided by the Board of Directors, and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the Board of Directors. The treasurer shall disburse the funds of the corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the chief executive officer, president and the directors, at the regular meetings of the Board of Directors, or whenever they may require it, an account of all his or her transactions as treasurer and of the financial condition
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of the corporation. The assistant treasurer, or if there be more than one, the assistant treasurers in the order determined by the Board of Directors, shall, in the absence or disability of the treasurer, perform the duties and exercise the powers of the treasurer and shall perform such other duties and have such other powers as the Board of Directors, the chief executive officer, president, or secretary may, from time to time, prescribe.
Section 8. The Secretary and Assistant Secretaries. The secretary shall attend all meetings of the Board of Directors, all meetings of the committees 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. Under the chief executive officers or presidents supervision, the secretary shall (i) give, or cause to be given, all notices required to be given by these Bylaws or by law, (ii) have such powers and perform such duties as the Board of Directors, the chief executive officer, president or these Bylaws may, from time to time, prescribe and (iii) 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, the assistant secretaries in the order determined by the Board of Directors, 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 chief executive officer, president, or secretary may, from time to time, prescribe.
Section 9. 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.
Section 10. Absence or Disability of Officers. In the case of the absence or disability of any officer of the corporation and of any person hereby authorized to act in such officers place during such officers absence or disability, the Board of Directors may by resolution delegate the powers and duties of such officer to any other officer or to any director, or to any other person whom it may select.
ARTICLE V
INDEMNIFICATION OF OFFICERS, DIRECTORS AND OTHERS
Section 1. Nature of Indemnity. Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a proceeding), by reason of the fact that he or she is or was a director or officer of the corporation shall be indemnified and held harmless by the corporation to the fullest extent which it is empowered to do so by the DGCL, as the same exists or may hereafter be amended against all expense, liability and loss (including attorneys fees actually and reasonably incurred by such person in connection with such proceeding); provided, that, except as provided in Section 2 hereof, the corporation shall indemnify any such person seeking indemnification in connection with a proceeding initiated by such person only if such proceeding was authorized by the Board of Directors of the corporation.
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Section 2. Procedure for Indemnification of Directors and Officers. Any indemnification of a director or officer of the corporation under Section 1 of this Article V or advance of expenses under Section 5 of this Article V shall be made promptly, and in any event within 30 days, upon the written request of the director or officer. If a determination by the corporation that the director or officer is entitled to indemnification pursuant to this Article V is required, and the corporation fails to respond within 60 days to a written request for indemnity, the corporation shall be deemed to have approved the request. If the corporation denies a written request for indemnification or advancing of expenses, in whole or in part, or if payment in full pursuant to such request is not made within 30 days, the right to indemnification or advances as granted by this Article V shall be enforceable by the director or officer in any court of competent jurisdiction. Such persons costs and expenses incurred in connection with successfully establishing his or her right to indemnification, in whole or in part, in any such action shall also be indemnified by the corporation. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any, has been tendered to the corporation) that the claimant has not met the standards of conduct which make it permissible under the DGCL for the corporation to indemnify the claimant for the amount claimed, but the burden of such defense shall be on the corporation. Neither the failure of the corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the DGCL, 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. Article Not Exclusive. The rights to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Article V shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the certificate of incorporation, by-law, agreement, vote of stockholders or disinterested directors or otherwise.
Section 4. Insurance. The corporation may purchase and maintain insurance on its own behalf and on behalf of any person who is or was a director, officer, employee, fiduciary, or agent of the corporation or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity, whether or not the corporation would have the power to indemnify such person against such liability under this Article V.
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Section 5. Expenses. Expenses incurred by any person described in Section 1 of this Article V in defending a proceeding shall be paid by the corporation in advance of such proceedings final disposition upon receipt of an undertaking by or on behalf of the director or officer to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the corporation. Such expenses incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the Board of Directors deems appropriate.
Section 6. Employees and Agents. Persons who are not covered by the foregoing provisions of this Article V and who are or were employees or agents of the corporation, or who are or were serving at the request of the corporation as employees or agents of another corporation, partnership, joint venture, trust or other enterprise, may be indemnified to the extent authorized at any time or from time to time by the Board of Directors.
Section 7. Contract Rights. The provisions of this Article V shall be deemed to be a contract right between the corporation and each director or officer who serves in any such capacity at any time while this Article V and the relevant provisions of the DGCL or other applicable law are in effect, and any repeal or modification of this Article V or any such law shall not affect any rights or obligations then existing with respect to any state of facts or proceeding then existing.
Section 8. Merger or Consolidation. For purposes of this Article V, 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, partnership, joint venture, trust or other enterprise, shall stand in the same position under this Article V 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.
ARTICLE VI
CERTIFICATES OF STOCK
Section 1. Form. The shares of the corporation shall be represented by certificates, or shall be uncertified. Certificates for the shares of stock, if any, shall be in such form as is consistent with the certificate of incorporation and applicable law. Every holder of stock in the corporation represented by certificate shall be entitled to have a certificate signed by or in the name of the corporation by the president or any vice president and by the treasurer or assistant treasurer or secretary or assistant secretary, certifying the number of shares owned by him, her or it in the corporation. Any or all of the signatures on the certificate may be facsimiles. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued with the same effect as if he were such officer, transfer agent, or registrar at the date of issue.
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Section 2. Lost Certificates. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates previously issued by the corporation alleged to have been lost, stolen, or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen, or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance 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 sufficient to indemnify the corporation against any claim that may be made against the corporation on account of the loss, theft or destruction of any such certificate or the issuance of such new certificate.
Section 3. Fixing a Record Date for Stockholder Meetings. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than 60 nor less than 10 days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be the close of business on the next day preceding the day on which notice is given, or if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. 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.
Section 4. Fixing a Record Date for Action by Written Consent. In order that the corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, 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 date shall not be more than 10 days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. If no record date has been fixed by the Board of Directors, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by statute, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the corporations registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by statute, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall 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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Section 5. Fixing a Record Date for Other Purposes. 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, 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.
Section 6. Registered Stockholders. Prior to the surrender to the corporation of the certificate or certificates for a share or shares of stock with a request to record the transfer of such share or shares, the corporation may treat the registered owner as the person entitled to receive dividends, to vote, to receive notifications, and otherwise to exercise all the rights and powers of an owner.
Section 7. Restrictions on Transfer.
(a) No holder of any of the shares of the common stock of the corporation may sell, transfer, assign, pledge, or otherwise dispose of or encumber any of the shares of common stock of the corporation or any right or interest therein, whether voluntarily or by operation of law, or by gift or otherwise (each, a Transfer) without the prior written consent of the corporation, upon duly authorized action of its Board of Directors. The corporation may withhold consent for any legitimate corporate purpose, as determined by the Board of Directors. Examples of the basis for the corporation to withhold its consent include, without limitation, (i) if such Transfer to individuals, companies or any other form of entity identified by the corporation as a potential competitor or considered by the corporation to be unfriendly; or (ii) if such Transfer increases the risk of the corporation having a class of security held of record by two thousand (2,000) or more persons, or five hundred (500) or more persons who are not accredited investors (as such term is defined by the SEC), as described in Section 12(g) of the 1934 Act and any related regulations, or otherwise requiring the corporation to register any class of securities under the 1934 Act; or (iii) if such Transfer would result in the loss of any federal or state securities law exemption relied upon by the corporation in connection with the initial issuance of such shares or the issuance of any other securities; or (iv) if such Transfer is facilitated in any manner by any public posting, message board, trading portal, internet site, or similar method of communication, including without limitation any trading portal or internet site intended to facilitate secondary transfers of securities; or (v) if such Transfer is to be effected in a brokered transaction; or (vi) if such Transfer represents a Transfer of less than all of the shares then held by the stockholder and its affiliates or is to be made to more than a single transferee.
(b) If a stockholder desires to Transfer any shares of common stock, then the stockholder shall first give written notice thereof to the corporation. The notice shall name the proposed transferee and state the number of shares of common stock to be transferred, the proposed consideration, and all other terms and conditions of the proposed transfer. Any shares of common stock proposed to be transferred to which Transfer the corporation has consented pursuant to Section 7(a) will first be subject to the corporations right of first refusal located in Section 8 hereof.
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(c) Any Transfer, or purported Transfer, of shares of common stock not made in strict compliance with this Section 7 shall be null and void, shall not be recorded on the books of the corporation and shall not be recognized by the corporation.
(d) The foregoing restriction on Transfer shall terminate upon the date securities of the corporation are first offered to the public pursuant to a registration statement filed with, and declared effective by, the United States Securities and Exchange Commission under the Securities Act of 1933, as amended.
(e) The certificates representing shares of common stock of the corporation shall bear on their face the following legend so long as the foregoing Transfer restrictions are in effect:
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A TRANSFER RESTRICTION, AS PROVIDED IN THE BYLAWS OF THE CORPORATION.
(f) Notwithstanding anything contained in this bylaw (Article VI, Section 7) to the contrary, the provisions of this bylaw (Article VI, Section 7) shall not apply to any Transfer by a stockholder who is a party to the Stockholders Agreement (each such stockholder, a Stockholders Agreement Party and, collectively, the Stockholders Agreement Parties).
Section 8. Right of First Refusal. Except for the Stockholders Agreement Parties, no stockholder shall Transfer any of the shares of common stock of the corporation, except by a Transfer which meets the requirements set forth in Section 7 and below:
(a) If the stockholder desires to Transfer any of his shares of common stock, then the stockholder shall first give the notice specified in Section 7(b) hereof and comply with the provisions therein.
(b) For thirty (30) days following receipt of such notice, the corporation shall have the option to purchase all but not less than all of the shares specified in the notice at the price and upon the terms set forth in such notice; provided, however, that, with the consent of the stockholder, the corporation shall have the option to purchase a lesser portion of the shares specified in said notice at the price and upon the terms set forth therein. In the event of a gift, property settlement or other Transfer in which the proposed transferee is not paying the full price for the shares, and that is not otherwise exempted from the provisions of this Section 8, the price shall be deemed to be the fair market value of the stock at such time as determined in good faith by the Board of Directors. In the event the corporation elects to purchase all of the shares or, with consent of the stockholder, a lesser portion of the shares, it shall give written notice to the transferring stockholder of its election and settlement for said shares shall be made as provided below in paragraph (d).
(c) The corporation may assign its rights hereunder.
(d) In the event the corporation and/or its assignee(s) elect to acquire any of the shares of the transferring stockholder as specified in said transferring stockholders notice, the Secretary of the corporation shall so notify the transferring stockholder and settlement thereof shall be made in cash within thirty (30) days after the Secretary of the corporation receives said
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transferring stockholders notice; provided that if the terms of payment set forth in said transferring stockholders notice were other than cash against delivery, the corporation and/or its assignee(s) shall pay for said shares on the same terms and conditions set forth in said transferring stockholders notice.
(e) In the event the corporation and/or its assignees(s) do not elect to acquire all of the shares specified in the transferring stockholders notice, said transferring stockholder may, subject to the corporations approval and all other restrictions on Transfer located in Section 7 hereof, within the sixty-day period following the expiration or waiver of the option rights granted to the corporation and/or its assignees(s) herein, Transfer the shares specified in said transferring stockholders notice which were not acquired by the corporation and/or its assignees(s) as specified in said transferring stockholders notice. All shares so sold by said transferring stockholder shall continue to be subject to the provisions of this bylaw in the same manner as before said Transfer.
(f) Anything to the contrary contained herein notwithstanding, the following transactions shall be exempt from the right of first refusal in Section 8(a)
(i) A stockholders Transfer of any or all shares of common stock held either during such stockholders lifetime or on death by will or intestacy to such stockholders immediate family or to any custodian or trustee for the account of such stockholder or such stockholders immediate family or to any limited partnership of which the stockholder, members of such stockholders immediate family or any trust for the account of such stockholder or such stockholders immediate family will be the general or limited partner(s) of such partnership. Immediate family as used herein shall mean spouse, lineal descendant, father, mother, brother, or sister of the stockholder making such Transfer;
(ii) A stockholders bona fide pledge or mortgage of any shares of common stock with a commercial lending institution, provided that any subsequent Transfer of said shares by said institution shall be conducted in the manner set forth in this bylaw;
(iii) A stockholders Transfer of any or all of such stockholders shares of common stock to the corporation or to any other stockholder of the corporation;
(iv) A stockholders Transfer of any or all of such stockholders shares of common stock to a person who, at the time of such Transfer, is an officer or director of the corporation;
(v) A corporate stockholders Transfer of any or all of its shares of common stock pursuant to and in accordance with the terms of any merger, consolidation, reclassification of shares or capital reorganization of the corporate stockholder, or pursuant to a sale of all or substantially all of the stock or assets of a corporate stockholder;
(vi) A corporate stockholders Transfer of any or all of its shares of common stock to any or all of its stockholders; or
(vii) A Transfer by a stockholder which is a limited or general partnership to any or all of its partners or former partners in accordance with partnership interests.
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In any such case, the transferee, assignee, or other recipient shall receive and hold such stock subject to the provisions of this Section 8 and the transfer restrictions in Section 7, and there shall be no further Transfer of such stock except in accord with this bylaw and the transfer restrictions in Section 7.
(g) The provisions of this bylaw may be waived with respect to any Transfer either by the corporation, upon duly authorized action of its Board of Directors, or by the stockholders, upon the express written consent of the owners of a majority of the voting power of the corporation (excluding the votes represented by those shares to be transferred by the transferring stockholder). This bylaw may be amended or repealed either by a duly authorized action of the Board of Directors or by the stockholders, upon the express written consent of the owners of a majority of the voting power of the corporation.
(h) Any Transfer, or purported Transfer, of securities of the corporation shall be null and void unless the terms, conditions, and provisions of this bylaw are strictly observed and followed.
(i) The foregoing right of first refusal shall terminate upon the date securities of the corporation are first offered to the public pursuant to a registration statement filed with, and declared effective by, the United States Securities and Exchange Commission under the Securities Act of 1933, as amended.
(j) The certificates representing shares of common stock of the corporation shall bear on their face the following legend so long as the foregoing right of first refusal remains in effect:
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A RIGHT OF FIRST REFUSAL OPTION IN FAVOR OF THE CORPORATION AND/OR ITS ASSIGNEE(S), AS PROVIDED IN THE BYLAWS OF THE CORPORATION.
(k) For the avoidance of doubt, notwithstanding anything contained in this bylaw (Article VI, Section 8) to the contrary, the provisions of this bylaw (Article VI, Section 8) shall not apply to any Transfer by a Stockholders Agreement Party.
ARTICLE VII
GENERAL PROVISIONS
Section 1. Dividends. Dividends upon the common stock of the corporation, subject to the provisions of the certificate of incorporation and the affirmative approval rights of the Tulco Director under Section 2.4 of the Stockholders Agreement, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the common stock, subject to the provisions of the certificate of incorporation. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for any other purpose and the directors may modify or abolish any such reserve in the manner in which it was created.
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Section 2. Checks, Drafts or Orders. All checks, drafts, or other orders for the payment of money by or to the corporation and all notes and other evidences of indebtedness issued in the name of the corporation shall be signed by such officer or officers, agent or agents of the corporation, and in such manner, as shall be determined by resolution of the Board of Directors or a duly authorized committee thereof.
Section 3. Contracts. The Board of Directors may authorize any officer or officers, or any agent or agents, of the corporation to enter into any contract or to execute and deliver any instrument in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances.
Section 4. Loans. The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiary, including any officer or employee who is a director of the corporation or its subsidiary, whenever, in the judgment of the Board of Directors, such loan, guaranty or assistance may reasonably be expected to benefit the corporation. The loan, guaranty or other assistance may be with or without interest, and may be unsecured, or secured in such manner as the Board of Directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing contained in this section shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. For the avoidance of doubt, the provisions of this Article VII, Section 4 shall be subject to the applicable terms and conditions of the Stockholders Agreement.
Section 5. Fiscal Year. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors.
Section 6. Corporate Seal. The Board of Directors shall 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.
Section 7. Voting Securities Owned By Corporation. Voting securities in any other corporation held by the corporation shall be voted by the chief executive officer or president, 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 8. Inspection of Books and Records. Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporations stock ledger, a list of its stockholders, and its other books and records, and to make copies or extracts therefrom. A proper purpose shall mean any purpose reasonably related to such persons interest as a stockholder. In every instance where an attorney or other
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agent shall be the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing which authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in the State of Delaware or at its principal place of business.
Section 9. 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.
Section 10. Inconsistent Provisions. In the event that any provision of these Bylaws is or becomes inconsistent with any provision of the certificate of incorporation, the DGCL, or the Stockholders Agreement, the provision 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 VIII
AMENDMENTS
These Bylaws may be amended, altered, or repealed and new Bylaws adopted at any meeting of the Board of Directors with the approval of a majority of authorized directors, subject to the affirmative approval right of the Tulco Director in Section 2.4 of the Stockholders Agreement. The fact that the power to adopt, amend, alter, or repeal the Bylaws has been conferred upon the Board of Directors shall not divest the stockholders of the same powers.
ARTICLE IX
FORUM FOR ADJUDICATION OF DISPUTES
Unless the corporation consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware or a federal court located within the State of Delaware (each, a Chosen Court) shall be the sole and exclusive forum for (a) any derivative action or proceeding brought on behalf of the corporation, (b) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the corporation to the corporation or the corporations stockholders, (c) any action asserting a claim arising pursuant to any provision of the DGCL or the corporations certificate of incorporation or these Bylaws, or (d) any other action asserting a claim governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the corporation shall be deemed to have notice of and consented to the provisions of this Article IX.
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AMENDMENT NO. 1 TO THE
AMENDED AND RESTATED BYLAWS OF
FIGS, INC.
October 23, 2020
The Amended and Restated Bylaws of FIGS, Inc. (the Bylaws) are hereby amended as follows:
1. |
Article III, Section 2 shall be amended and restated in its entirety to read as follows: |
Number. The number of directors which shall constitute the board shall be three, as shall be established in accordance with the provisions of that certain Amended and Restated Stockholders Agreement dated as of October 23, 2020, by and among the corporations stockholders and the corporation (the Stockholders Agreement), as amended from time to time.
2. |
Article III, Section 12 shall be amended and restated in its entirety to read as follows: |
Director Conflicts of Interest. Each director who has a Material Conflict of Interest (as defined in the Stockholders Agreement) in voting on any particular matter before the Board of Directors shall recuse himself or herself prior to the vote of the Board of Directors on such matter in accordance with Section 2.10 of the Stockholders Agreement.
[Signature Page Follows]
I, the undersigned, certify that I am the duly elected and acting Co-Chief Executive Officer of the Company, and that the above amendment to the Amended and Restated Bylaws was duly adopted by an action of written consent of the Board of Directors dated October 23, 2020 and an action of written consent of the stockholders of the Company dated October 23, 2020.
By: |
/s/ Catherine Spear |
Name: | Catherine Spear | |
Title: | Co-Chief Executive Officer |
Signature Page to Bylaws Amendment
Table of Contents
Page | ||||||
Article I - Corporate Offices |
1 | |||||
1.1 |
Registered Office | 1 | ||||
1.2 |
Other Offices | 1 | ||||
Article II - Meetings of Stockholders |
1 | |||||
2.1 |
Place of Meetings | 1 | ||||
2.2 |
Annual Meeting | 1 | ||||
2.3 |
Special Meeting | 1 | ||||
2.4 |
Notice of Business to be Brought before a Meeting. | 2 | ||||
2.5 |
Notice of Nominations for Election to the Board. | 5 | ||||
2.6 |
Additional Requirements for Valid Nomination of Candidates to Serve as Director and, if Elected, to be Seated as Directors. | 7 | ||||
2.7 |
Notice of Stockholders Meetings | 9 | ||||
2.8 |
Quorum | 9 | ||||
2.9 |
Adjourned Meeting; Notice | 9 | ||||
2.10 |
Conduct of Business | 9 | ||||
2.11 |
Voting | 10 | ||||
2.12 |
Record Date for Stockholder Meetings and Other Purposes | 10 | ||||
2.13 |
Proxies | 11 | ||||
2.14 |
List of Stockholders Entitled to Vote | 11 | ||||
2.15 |
Inspectors of Election | 12 | ||||
2.16 |
Delivery to the Corporation. | 12 | ||||
Article III - Directors |
12 | |||||
3.1 |
Powers | 12 | ||||
3.2 |
Number; Term; Qualifications. | 13 | ||||
3.3 |
Resignation; Removal; Vacancies | 13 | ||||
3.4 |
Place of Meetings; Meetings by Telephone. | 13 | ||||
3.5 |
Regular Meetings | 13 | ||||
3.6 |
Special Meetings; Notice | 13 | ||||
3.7 |
Quorum | 14 | ||||
3.8 |
Board Action without a Meeting | 14 | ||||
3.9 |
Fees and Compensation of Directors | 14 | ||||
Article IV - Committees |
15 | |||||
4.1 |
Committees of Directors | 15 | ||||
4.2 |
Committee Minutes | 15 | ||||
4.3 |
Meetings and Actions of Committees | 15 | ||||
4.4 |
Subcommittees. | 16 | ||||
Article V - Officers |
16 | |||||
5.1 |
Officers | 16 | ||||
5.2 |
Appointment of Officers | 16 | ||||
5.3 |
Subordinate Officers | 16 |
i
TABLE OF CONTENTS
(continued)
Page | ||||||
5.4 |
Removal and Resignation of Officers | 16 | ||||
5.5 |
Vacancies in Offices | 17 | ||||
5.6 |
Representation of Shares of Other Corporations | 17 | ||||
5.7 |
Authority and Duties of Officers | 17 | ||||
5.8 |
Compensation. | 17 | ||||
Article VI - Records |
17 | |||||
Article VII - General Matters |
18 | |||||
7.1 |
Execution of Corporate Contracts and Instruments | 18 | ||||
7.2 |
Stock Certificates | 18 | ||||
7.3 |
Special Designation of Certificates. | 18 | ||||
7.4 |
Lost Certificates | 19 | ||||
7.5 |
Shares Without Certificates | 19 | ||||
7.6 |
Construction; Definitions | 19 | ||||
7.7 |
Dividends | 19 | ||||
7.8 |
Fiscal Year | 19 | ||||
7.9 |
Seal | 19 | ||||
7.10 |
Transfer of Stock | 20 | ||||
7.11 |
Stock Transfer Agreements | 20 | ||||
7.12 |
Registered Stockholders | 20 | ||||
7.13 |
Waiver of Notice | 20 | ||||
Article VIII - Notice |
20 | |||||
8.1 |
Delivery of Notice; Notice by Electronic Transmission | 20 | ||||
Article IX - Indemnification |
21 | |||||
9.1 |
Indemnification of Directors and Officers | 21 | ||||
9.2 |
Indemnification of Others | 22 | ||||
9.3 |
Prepayment of Expenses | 22 | ||||
9.4 |
Determination; Claim | 22 | ||||
9.5 |
Non-Exclusivity of Rights | 22 | ||||
9.6 |
Insurance | 23 | ||||
9.7 |
Other Indemnification | 23 | ||||
9.8 |
Continuation of Indemnification | 23 | ||||
9.9 |
Amendment or Repeal; Interpretation | 23 | ||||
Article X - Amendments |
24 | |||||
Article XI - Definitions |
24 |
ii
Amended and Restated Bylaws of
FIGS, Inc.
Article I - Corporate Offices
1.1 Registered Office.
The address of the registered office of FIGS, Inc. (the Corporation) in the State of Delaware, and the name of its registered agent at such address, shall be as set forth in the Corporations certificate of incorporation, as the same may be amended and/or restated from time to time (the Certificate of Incorporation).
1.2 Other Offices.
The Corporation may have additional offices at any place or places, within or outside the State of Delaware, as the Corporations board of directors (the Board) may from time to time establish or as the business of the Corporation may require.
Article II - Meetings of Stockholders
2.1 Place of Meetings.
Meetings of stockholders shall be held at any place within or outside the State of Delaware, designated by the Board. The Board may, in its sole discretion, determine that a meeting of stockholders shall not be held at any place, but may instead be held solely by means of remote communication as authorized by Section 211(a)(2) of the General Corporation Law of the State of Delaware (the DGCL). In the absence of any such designation or determination, stockholders meetings shall be held at the Corporations principal executive office.
2.2 Annual Meeting.
The Board shall designate the date and time of the annual meeting. At the annual meeting, directors shall be elected and other proper business properly brought before the meeting in accordance with Section 2.4 of these Bylaws may be transacted. The Board may postpone, reschedule or cancel any previously scheduled annual meeting of stockholders.
2.3 Special Meeting.
Special meetings of the stockholders may be called only by such persons and only in such manner as set forth in the Certificate of Incorporation.
No business may be transacted at any special meeting of stockholders other than the business specified in the notice of such meeting. The Board may postpone, reschedule or cancel any previously scheduled special meeting of stockholders.
2.4 Notice of Business to be Brought before a Meeting. This Section 2.4 shall apply to any business that may be brought before an annual meeting of stockholders other than nominations for election to the Board at such meeting, which shall be governed by Section 2.5 and Section 2.6. Stockholders seeking to nominate persons for election to the Board must comply with Section 2.5 and Section 2.6 and this Section 2.4 shall not be applicable to nominations except as expressly provided in Section 2.5 and Section 2.6.
(a) At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be (i) specified in a notice of meeting given by or at the direction of the Board, (ii) if not specified in a notice of meeting, otherwise brought before the meeting by the Board or the Chairperson of the Board, if any, or (iii) otherwise properly brought before the meeting by a stockholder present in person who (A) (1) was a record owner of shares of the Corporation both at the time of giving the notice provided for in this Section 2.4 and at the time of the meeting, (2) is entitled to vote at the meeting, and (3) has complied with this Section 2.4 in all applicable respects or (B) properly made such proposal in accordance with Rule 14a-8 under the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder (as so amended and inclusive of such rules and regulations, the Exchange Act). The foregoing clause (iii) shall be the exclusive means for a stockholder to propose business to be brought before an annual meeting of the stockholders. The only matters that may be brought before a special meeting are the matters specified in the notice of meeting given by or at the direction of the person calling the meeting pursuant to Section 2.3, and stockholders shall not be permitted to propose business to be brought before a special meeting of the stockholders. For purposes of this Section 2.4 and Section 2.5, present in person shall mean that the stockholder proposing that the business be brought before the annual meeting of the Corporation, or a qualified representative of such proposing stockholder, appear at such annual meeting, and a qualified representative of such proposing stockholder shall be a duly authorized officer, manager or partner of such stockholder or any other person 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.
(b) Without qualification, for business to be properly brought before an annual meeting by a stockholder, the stockholder must (i) provide Timely Notice (as defined below) thereof in writing and in proper form to the Secretary of the Corporation and (ii) provide any updates or supplements to such notice at the times and in the forms required by this Section 2.4. To be timely, a stockholders notice must be delivered to, or mailed and received at, the principal executive offices of the Corporation not less than ninety (90) days nor more than one hundred twenty (120) days prior to the one-year anniversary of the preceding years annual meeting; provided, however, that if the date of the annual meeting is more than thirty (30) days before or more than sixty (60) days after such anniversary date, notice by the stockholder to be timely must be so delivered, or mailed and received, not later than the ninetieth (90th) day prior to such annual meeting or, if later, the tenth (10th) day following the day on which public disclosure of the date of such annual meeting was first made by the Corporation (such notice within such time periods, Timely Notice). 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 Timely Notice as described above.
(c) To be in proper form for purposes of this Section 2.4, a stockholders notice to the Secretary of the Corporation shall set forth:
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(i) As to each Proposing Person (as defined below), (A) the name and address of such Proposing Person (including, if applicable, the name and address that appear on the Corporations books and records); and (B) the class or series and number of shares of the Corporation that are, directly or indirectly, owned of record or beneficially owned (within the meaning of Rule 13d-3 under the Exchange Act) by such Proposing Person, except that such Proposing Person shall in all events be deemed to beneficially own any shares of any class or series of the Corporation as to which such Proposing Person has a right to acquire beneficial ownership at any time in the future (the disclosures to be made pursuant to the foregoing clauses (A) and (B) are referred to as Stockholder Information);
(ii) As to each Proposing Person, (A) the full notional amount of any securities that, directly or indirectly, underlie any derivative security (as such term is defined in Rule 16a-1(c) under the Exchange Act) that constitutes a call equivalent position (as such term is defined in Rule 16a-1(b) under the Exchange Act) (Synthetic Equity Position) and that is, directly or indirectly, held or maintained by such Proposing Person with respect to any shares of any class or series of shares of the Corporation; provided that, for the purposes of the definition of Synthetic Equity Position, the term derivative security shall also include any security or instrument that would not otherwise constitute a derivative security as a result of any feature that would make any conversion, exercise or similar right or privilege of such security or instrument becoming determinable only at some future date or upon the happening of a future occurrence, in which case the determination of the amount of securities into which such security or instrument would be convertible or exercisable shall be made assuming that such security or instrument is immediately convertible or exercisable at the time of such determination; and, provided, further, that any Proposing Person satisfying the requirements of Rule 13d-1(b)(1) under the Exchange Act (other than a Proposing Person that so satisfies Rule 13d-1(b)(1) under the Exchange Act solely by reason of Rule 13d-1(b)(1)(ii)(E)) shall not be deemed to hold or maintain the notional amount of any securities that underlie a Synthetic Equity Position held by such Proposing Person as a hedge with respect to a bona fide derivatives trade or position of such Proposing Person arising in the ordinary course of such Proposing Persons business as a derivatives dealer, (B) any rights to dividends on the shares of any class or series of shares of the Corporation owned beneficially by such Proposing Person that are separated or separable from the underlying shares of the Corporation, (C) any material pending or threatened legal proceeding in which such Proposing Person is a party or material participant involving the Corporation or any of its officers or directors, or any affiliate of the Corporation, (D) any other material relationship between such Proposing Person, on the one hand, and the Corporation, any affiliate of the Corporation, on the other hand, (E) any direct or indirect material interest in any material contract or agreement of such Proposing Person with the Corporation or any affiliate of the Corporation (including, in any such case, any employment agreement, collective bargaining agreement or consulting agreement), (F) a representation that such Proposing Person intends or is part of a group which intends to deliver a proxy statement or form of proxy to holders of at least the percentage of the Corporations outstanding capital stock required to approve or adopt the proposal or otherwise solicit proxies from stockholders in support of such proposal and (G) any other information relating to such Proposing Person that would be required to be disclosed in a proxy statement or other filing required to be made in connection with solicitations of proxies or consents by such Proposing Person in support of the business proposed to be brought before the meeting pursuant to Section 14(a) of the Exchange Act (the disclosures to be made pursuant to the foregoing clauses (A) through (G) are referred to as Disclosable Interests); provided, however, that Disclosable Interests shall not include any such disclosures with respect to the ordinary course business activities of any broker, dealer, commercial bank, trust company or other nominee who is a Proposing Person solely as a result of being the stockholder directed to prepare and submit the notice required by these Bylaws on behalf of a beneficial owner; and
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(iii) As to each item of business that the stockholder proposes to bring before the annual meeting, (A) a brief description of the business desired to be brought before the annual meeting, the reasons for conducting such business at the annual meeting and any material interest in such business of each Proposing Person, (B) the text of the proposal or business (including the text of any resolutions proposed for consideration and in the event that such business includes a proposal to amend the Bylaws, the language of the proposed amendment), and (C) a reasonably detailed description of all agreements, arrangements and understandings (x) between or among any of the Proposing Persons or (y) between or among any Proposing Person and any other person or entity (including their names) in connection with the proposal of such business by such stockholder; and (D) any other information relating to such item of business that would be required to be disclosed in a proxy statement or other filing required to be made in connection with solicitations of proxies in support of the business proposed to be brought before the meeting pursuant to Section 14(a) of the Exchange Act; provided, however, that the disclosures required by this paragraph (iii) shall not include any disclosures with respect to any broker, dealer, commercial bank, trust company or other nominee who is a Proposing Person solely as a result of being the stockholder directed to prepare and submit the notice required by these Bylaws on behalf of a beneficial owner.
(d) For purposes of this Section 2.4, the term Proposing Person shall mean (i) the stockholder providing the notice of business proposed to be brought before an annual meeting, (ii) the beneficial owner or beneficial owners, if different, on whose behalf the notice of the business proposed to be brought before the annual meeting is made, and (iii) any participant (as defined in paragraphs (a)(ii)-(vi) of Instruction 3 to Item 4 of Schedule 14A) with such stockholder in such solicitation.
(e) A Proposing Person shall update and supplement its notice to the Corporation of its intent to propose business at an annual meeting, if necessary, so that the information provided or required to be provided in such notice pursuant to this Section 2.4 shall be true and correct as of the record date for stockholders entitled to vote at the meeting and as of the date that is ten (10) business days prior to the meeting or any adjournment or postponement thereof, and such update and supplement shall be delivered to, or mailed and received by, the Secretary of the Corporation at the principal executive offices of the Corporation not later than five (5) business days after the record date for stockholders entitled to vote at the meeting (in the case of the update and supplement required to be made as of such record date), and not later than eight (8) business days prior to the date for the meeting or, if practicable, any adjournment or postponement thereof (and, if not practicable, on the first practicable date prior to the date to which the meeting has been adjourned or postponed) (in the case of the update and supplement required to be made as of ten (10) business days prior to the meeting or any adjournment or postponement thereof). For the avoidance of doubt, the obligation to update and supplement as set forth in this paragraph or any other Section of these Bylaws shall not limit the Corporations rights with respect to any deficiencies in any notice provided by a stockholder, extend any applicable deadlines hereunder or enable or be deemed to permit a stockholder who has previously submitted notice hereunder to amend or update any proposal or to submit any new proposal, including by changing or adding matters, business or resolutions proposed to be brought before a meeting of the stockholders.
(f) Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at an annual meeting that is not properly brought before the meeting in accordance with this Section 2.4. The presiding officer of the meeting shall, if the facts warrant, determine that the business was not properly brought before the meeting in accordance with this Section 2.4, and if he or she should so determine, he or she shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted.
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(g) This Section 2.4 is expressly intended to apply to any business proposed to be brought before an annual meeting of stockholders other than any proposal made in accordance with Rule 14a-8 under the Exchange Act and included in the Corporations proxy statement. In addition to the requirements of this Section 2.4 with respect to any business proposed to be brought before an annual meeting, each Proposing Person shall comply with all applicable requirements of the Exchange Act with respect to any such business. Nothing in this Section 2.4 shall be deemed to affect the rights of stockholders to request inclusion of proposals in the Corporations proxy statement pursuant to Rule 14a-8 under the Exchange Act.
(h) For purposes of these Bylaws, public disclosure shall mean disclosure in a press release reported by a national 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.
2.5 Notice of Nominations for Election to the Board.
(a) Nominations of any person for election to the Board at an annual meeting or at a special meeting (but only if the election of directors is a matter specified in the notice of meeting given by or at the direction of the person calling such special meeting) may be made at such meeting only (i) as provided in the Voting Agreement (as defined below), (ii) by or at the direction of the Board, including by any committee or persons authorized to do so by the Board or these Bylaws, or (iii) by a stockholder present in person (A) who was a record owner of shares of the Corporation both at the time of giving the notice provided for in this Section 2.5 and at the time of the meeting, (B) is entitled to vote at the meeting, and (C) has complied with this Section 2.5 and Section 2.6 as to such notice and nomination. Other than nominations made by a stockholder in accordance with the Voting Agreement, the foregoing clause (iii) shall be the exclusive means for a stockholder to make any nomination of a person or persons for election to the Board at an annual meeting or special meeting.
(b) (i) Without qualification (other than as contemplated in Section 2.6(f)), for a stockholder to make any nomination of a person or persons for election to the Board at an annual meeting, the stockholder must (1) provide Timely Notice (as defined in Section 2.4) thereof in writing and in proper form to the Secretary of the Corporation, (2) provide the information, agreements and questionnaires with respect to such stockholder and its candidate for nomination as required to be set forth by this Section 2.5 and Section 2.6 and (3) provide any updates or supplements to such notice at the times and in the forms required by this Section 2.5 and Section 2.6.
(ii) Without qualification (other than as contemplated in Section 2.6(f)), if the election of directors is a matter specified in the notice of meeting given by or at the direction of the person calling a special meeting, then for a stockholder to make any nomination of a person or persons for election to the Board at a special meeting, the stockholder must (i) provide timely notice thereof in writing and in proper form to the Secretary of the Corporation at the principal executive offices of the Corporation, (ii) provide the information with respect to such stockholder and its candidate for nomination as required by this Section 2.5 and Section 2.6 and (iii) provide any updates or supplements to such notice at the times and in the forms required by this Section 2.5. To be timely, a stockholders notice for nominations to be made at a special meeting must be delivered to, or mailed and received at, the principal executive offices of the Corporation not earlier than the one hundred twentieth (120th) day prior to such special meeting and not later than the ninetieth (90th) day prior to such special meeting or, if later, the tenth (10th) day following the day on which public disclosure (as defined in Section 2.4) of the date of such special meeting was first made.
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(iii) In no event shall any adjournment or postponement of an annual meeting or special meeting or the announcement thereof commence a new time period (or extend any time period) for the giving of a stockholders notice as described above.
(iv) In no event may a Nominating Person provide Timely Notice with respect to a greater number of director candidates than are subject to election by stockholders at the applicable meeting. If the Corporation shall, subsequent to such notice, increase the number of directors subject to election at the meeting, such notice as to any additional nominees shall be due on the later of (A)(1) the conclusion of the time period for Timely Notice for an annual meeting or (2) the date set forth in Section 2.5(b)(ii) for a special meeting, and (B) the tenth day following the date of public disclosure (as defined in Section 2.4) of such increase.
(c) To be in proper form for purposes of this Section 2.5, a stockholders notice to the Secretary of the Corporation shall set forth:
(i) As to each Nominating Person (as defined below), the Stockholder Information (as defined in Section 2.4(c)(i), except that for purposes of this Section 2.5 the term Nominating Person shall be substituted for the term Proposing Person in all places it appears in Section 2.4(c)(i));
(ii) As to each Nominating Person, any Disclosable Interests (as defined in Section 2.4(c)(ii), except that for purposes of this Section 2.5 the term Nominating Person shall be substituted for the term Proposing Person in all places it appears in Section 2.4(c)(ii) and the disclosure with respect to the business to be brought before the meeting in Section 2.4(c)(ii) shall be made with respect to the nomination of persons for election to the Board at the meeting); and
(iii) As to each candidate whom a Nominating Person proposes to nominate for election as a director, (A) all information with respect to such candidate for nomination that would be required to be set forth in a stockholders notice pursuant to this Section 2.5 and Section 2.6 if such candidate for nomination were a Nominating Person, (B) all information relating to such candidate for nomination that is required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors in a contested election pursuant to Section 14(a) under the Exchange Act (including such candidates written consent to being named in the Corporations proxy statement as a nominee and to serving as a director if elected), (C) a description of any direct or indirect material interest in any material contract or agreement between or among any Nominating Person, on the one hand, and each candidate for nomination or his or her respective associates or any other participants in such solicitation, on the other hand, including, without limitation, all information that would be required to be disclosed pursuant to Item 404 under Regulation S-K if such Nominating Person were the registrant for purposes of such rule and the candidate for nomination were a director or executive officer of such registrant (the disclosures to be made pursuant to the foregoing clauses (A) through (C) are referred to as Nominee Information), and (D) a completed and signed questionnaire, representation and agreement as provided in Section 2.6(a).
(d) For purposes of this Section 2.5, the term Nominating Person shall mean (i) the stockholder providing the notice of the nomination proposed to be made at the meeting, (ii) the beneficial owner or beneficial owners, if different, on whose behalf the notice of the nomination proposed to be made at the meeting is made, and (iii) any other participant in such solicitation.
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(e) A stockholder providing notice of any nomination proposed to be made at a meeting shall further update and supplement such notice, if necessary, so that the information provided or required to be provided in such notice pursuant to this Section 2.5 shall be true and correct as of the record date for stockholders entitled to vote at the meeting and as of the date that is ten (10) business days prior to the meeting or any adjournment or postponement thereof, and such update and supplement shall be delivered to, or mailed and received by, the Secretary of the Corporation at the principal executive offices of the Corporation not later than five (5) business days after the record date for stockholders entitled to vote at the meeting (in the case of the update and supplement required to be made as of such record date), and not later than eight (8) business days prior to the date for the meeting or, if practicable, any adjournment or postponement thereof (and, if not practicable, on the first practicable date prior to the date to which the meeting has been adjourned or postponed) (in the case of the update and supplement required to be made as of ten (10) business days prior to the meeting or any adjournment or postponement thereof). For the avoidance of doubt, the obligation to update and supplement as set forth in this paragraph or any other Section of these Bylaws shall not limit the Corporations rights with respect to any deficiencies in any notice provided by a stockholder, extend any applicable deadlines hereunder or enable or be deemed to permit a stockholder who has previously submitted notice hereunder to amend or update any nomination or to submit any new nomination.
(f) In addition to the requirements of this Section 2.5 with respect to any nomination proposed to be made at a meeting, each Nominating Person shall comply with all applicable requirements of the Exchange Act with respect to any such nominations.
2.6 Additional Requirements for Valid Nomination of Candidates to Serve as Director and, if Elected, to be Seated as Directors.
(a) To be eligible to be a candidate for election as a director of the Corporation at an annual or special meeting, a candidate must be nominated in the manner prescribed in Section 2.5 and the candidate for nomination, whether nominated by the Board or by a stockholder of record, must have previously delivered (with respect to nominations by stockholders pursuant to Section 2.5, within the time period for delivery of the stockholders notice pursuant to Section 2.5), to the Secretary of the Corporation at the principal executive offices of the Corporation, (i) a completed written questionnaire (in a form provided by the Corporation upon request) with respect to the background, qualifications, stock ownership and independence of such proposed nominee and (ii) a written representation and agreement (in form provided by the Corporation upon request) that such candidate for nomination (A) is not and, if elected as a director during his or her term of office, will not become a party to (1) any agreement, arrangement or understanding with, and has not given and will not give any commitment or assurance to, any person or entity as to how such proposed nominee, if elected as a director of the Corporation, will act or vote on any issue or question that has not been disclosed to the Corporation (a Voting Commitment) or (2) any Voting Commitment that could limit or interfere with such proposed nominees ability to comply, if elected as a director of the Corporation, with such proposed nominees fiduciary duties under applicable law, (B) 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 or reimbursement for service as a director that has not been disclosed therein or otherwise to the Corporation, (C) if elected as a director of the Corporation, will comply with all applicable corporate governance, conflict of interest, confidentiality, stock ownership and trading and other policies and guidelines of the Corporation applicable to directors and in effect during such persons term in office as a director (and, if requested by any candidate for nomination, the Secretary of the Corporation shall provide to such candidate for nomination all such policies and guidelines then in effect), (D) if elected as director of the Corporation, intends to serve the entire term until the next meeting at which such candidate would face re- election and (E) consents to being named as a nominee in the Corporations proxy statement pursuant to Rule 14a-4(d) under the Exchange Act and any associated proxy card of the Corporation and agrees to serve if elected as a director.
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(b) The Board may also require any proposed candidate for nomination as a director to furnish such other information as may reasonably be requested by the Board in writing prior to the meeting of stockholders at which such candidates nomination is to be acted upon in order for the Board to determine the eligibility of such candidate for nomination to be an independent director of the Corporation, including, without limitation, eligibility in accordance with the Corporations Corporate Governance Guidelines.
(c) A candidate for nomination as a director shall further update and supplement the materials delivered pursuant to this Section 2.6, if necessary, so that the information provided or required to be provided pursuant to this Section 2.6 shall be true and correct as of the record date for stockholders entitled to vote at the meeting and as of the date that is ten (10) business days prior to the meeting or any adjournment or postponement thereof, and such update and supplement shall be delivered to, or mailed and received by, the Secretary of the Corporation at the principal executive offices of the Corporation (or any other office specified by the Corporation in any public announcement) not later than five (5) business days after the record date for stockholders entitled to vote at the meeting (in the case of the update and supplement required to be made as of such record date), and not later than eight (8) business days prior to the date for the meeting or, if practicable, any adjournment or postponement thereof (and, if not practicable, on the first practicable date prior to the date to which the meeting has been adjourned or postponed) (in the case of the update and supplement required to be made as of ten (10) business days prior to the meeting or any adjournment or postponement thereof). For the avoidance of doubt, the obligation to update and supplement as set forth in this paragraph or any other Section of these Bylaws shall not limit the Corporations rights with respect to any deficiencies in any notice provided by a stockholder, extend any applicable deadlines hereunder or enable or be deemed to permit a stockholder who has previously submitted notice hereunder to amend or update any proposal or to submit any new proposal, including by changing or adding nominees, matters, business or resolutions proposed to be brought before a meeting of the stockholders.
(d) No candidate shall be eligible for nomination as a director of the Corporation unless such candidate for nomination and the Nominating Person seeking to place such candidates name in nomination has complied with Section 2.5 and this Section 2.6, as applicable. The presiding officer at the meeting shall, if the facts warrant, determine that a nomination was not properly made in accordance with Section 2.5 and this Section 2.6, and if he or she should so determine, he or she shall so declare such determination to the meeting, the defective nomination shall be disregarded and any ballots cast for the candidate in question (but in the case of any form of ballot listing other qualified nominees, only the ballots cast for the nominee in question) shall be void and of no force or effect.
(e) Subject to Section 2.6(f) of these Bylaws, no candidate for nomination shall be eligible to be seated as a director of the Corporation unless nominated in accordance with Section 2.5 and this Section 2.6.
(f) Notwithstanding anything in these Bylaws to the contrary, for so long as any party to that certain voting agreement, dated as of [ 🌑 ], 2021, by and among the Corporation, Heather Hasson, Catherine Spear, Tulco, LLC, a Delaware limited liability company, and the trusts party thereto (as may be amended from time to time, the Voting Agreement), is entitled to nominate a director of the Corporation pursuant to the Voting Agreement, such party shall not be subject to Section 2.5 or this Section 2.6.
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2.7 Notice of Stockholders Meetings.
Unless otherwise provided by law, the Certificate of Incorporation or these Bylaws, the notice of any meeting of stockholders shall be sent or otherwise given in accordance with Section 8.1 of these Bylaws not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting. The notice shall specify the place, if any, date and time of the meeting, the means of remote communication, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at such meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called.
2.8 Quorum.
Unless otherwise provided by law, the Certificate of Incorporation or these Bylaws, the holders of a majority in voting power of the stock issued and outstanding and entitled to vote, present in person if applicable, or represented by proxy, shall constitute a quorum for the transaction of business at all meetings of the stockholders. A quorum, once established at a meeting, shall not be broken by the withdrawal of enough votes to leave less than a quorum. If, however, a quorum is not present or represented at any meeting of the stockholders, then either (i) the person presiding over the meeting or (ii) a majority in voting power of the stockholders entitled to vote at the meeting, present in person, or by remote communication, if applicable, or represented by proxy, shall have power to adjourn the meeting from time to time in the manner provided in Section 2.9 of these Bylaws until a quorum is present or represented. At any adjourned meeting at which a quorum is present or represented, any business may be transacted that might have been transacted at the meeting as originally noticed.
2.9 Adjourned Meeting; Notice.
When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time, place, if any, thereof, and the means of remote communications, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at such adjourned meeting are announced at the meeting at which the adjournment is taken. At any adjourned meeting, the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty (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 determination of stockholders entitled to vote is fixed for the adjourned meeting, the Board shall fix as the record date for determining stockholders entitled to notice of such adjourned meeting the same or an earlier date as that fixed for determination of stockholders entitled to vote at the adjourned meeting, and shall give notice of the adjourned meeting to each stockholder of record entitled to vote at such meeting as of the record date so fixed for notice of such adjourned meeting.
2.10 Conduct of Business.
The date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting shall be announced at the meeting by the person presiding over the meeting. The Board may adopt by resolution such rules and regulations for the conduct of the meeting of stockholders as it shall deem appropriate. Except to the extent inconsistent with such rules and regulations as adopted by the Board, the person presiding over any meeting of stockholders shall have the right and authority to convene and (for any or no reason) to recess and/or adjourn the meeting, to prescribe such rules, regulations and procedures (which need not be in writing) and to do all such acts as, in the judgment of such
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presiding person, are appropriate for the proper conduct of the meeting. Such rules, regulations or procedures, whether adopted by the Board or prescribed by the person presiding over 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 (including, without limitation, rules and procedures for removal of disruptive persons from the meeting); (iii) limitations on attendance at or participation in the meeting to stockholders entitled to vote at the meeting, their duly authorized and constituted proxies or such other persons as the person presiding over the meeting shall determine; (iv) restrictions on entry to the meeting after the time fixed for the commencement thereof; and (v) limitations on the time allotted to questions or comments by participants. The presiding person at any meeting of stockholders, in addition to making any other determinations that may be appropriate to the conduct of the meeting (including, without limitation, determinations with respect to the administration and/or interpretation of any of the rules, regulations or procedures of the meeting, whether adopted by the Board or prescribed by the person presiding over the meeting), shall, if the facts warrant, determine and declare to the meeting that a matter of business was not properly brought before the meeting and if such presiding person should so determine, such presiding person 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 or the person presiding over the meeting, meetings of stockholders shall not be required to be held in accordance with the rules of parliamentary procedure.
2.11 Voting.
Except as may be otherwise provided in the Certificate of Incorporation, these Bylaws or the DGCL, each stockholder shall be entitled to one (1) vote for each share of capital stock held by such stockholder.
Except as otherwise provided by the Certificate of Incorporation, at all duly called or convened meetings of stockholders at which a quorum is present, for the election of directors, a plurality of the votes cast shall be sufficient to elect a director. Except as otherwise provided by the Certificate of Incorporation, these Bylaws, the rules or regulations of any stock exchange applicable to the Corporation, or applicable law or pursuant to any regulation applicable to the Corporation or its securities, each other matter presented to the stockholders at a duly called or convened meeting at which a quorum is present shall be decided by the affirmative vote of the holders of a majority in voting power of the votes cast (excluding abstentions and broker non-votes) on such matter.
2.12 Record Date for Stockholder Meetings and Other Purposes.
In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board 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, and which record date shall, unless otherwise required by law, not be more than sixty (60) days nor less than ten (10) days before the date of such meeting. If the Board 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 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, 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 may fix a new record date for determination of stockholders entitled to vote at the adjourned meeting; 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 herewith at the adjourned meeting.
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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 capital stock, or for the purposes of any other lawful action, the Board 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 sixty (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 adopts the resolution relating thereto.
2.13 Proxies.
Each stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to act for such stockholder by proxy authorized by an instrument in writing or by a transmission permitted by law filed in accordance with the procedure established for the meeting, but no such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212 of the DGCL. A proxy may be in the form of an electronic transmission which sets forth or is submitted with information from which it can be determined that the transmission was authorized by the stockholder.
2.14 List of Stockholders Entitled to Vote.
The Corporation shall prepare, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting (provided, however, that if the record date for determining the stockholders entitled to vote is less than ten (10) days before the date of the meeting, the list shall reflect the stockholders entitled to vote as of the tenth day before the meeting date), arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. The Corporation shall not be required 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 ten (10) days prior to the meeting: (i) 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 (ii) during ordinary business hours, at the Corporations principal executive office. In the event that the Corporation determines to make the list available on an electronic network, the Corporation may take reasonable steps to ensure that such information is available only to stockholders of the Corporation. If the meeting is to be held at a place, then the list shall 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. Such list shall presumptively determine the identity of the stockholders entitled to vote at the meeting and the number of shares held by each of them. Except as otherwise provided by law, the stock ledger shall be the only evidence as to who are the stockholders entitled to examine the list of stockholders required by this Section 2.14 or to vote in person or by proxy at any meeting of stockholders.
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2.15 Inspectors of Election.
Before any meeting of stockholders, the Corporation shall appoint an inspector or inspectors of election to act at the meeting or its adjournment and make a written report thereof. The Corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If any person appointed as inspector or any alternate fails to appear or fails or refuses to act, then the person presiding over the meeting shall appoint a person to fill that vacancy.
Such inspectors shall:
(i) determine the number of shares outstanding and the voting power of each, the number of shares represented at the meeting and the validity of any proxies and ballots;
(ii) count all votes or ballots;
(iii) count and tabulate all votes;
(iv) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspector(s); and
(v) certify its or their determination of the number of shares represented at the meeting and its or their count of all votes and ballots.
Each inspector, before entering upon the discharge of the duties of inspector, shall take and sign an oath faithfully to execute the duties of inspection with strict impartiality and according to the best of such inspectors ability. Any report or certificate made by the inspectors of election is prima facie evidence of the facts stated therein. The inspectors of election may appoint such persons to assist them in performing their duties as they determine.
2.16 Delivery to the Corporation.
Whenever this Article II requires one or more persons (including a record or beneficial owner of stock) to deliver a document or information to the Corporation or any officer, employee or agent thereof (including any notice, request, questionnaire, revocation, representation or other document or agreement), such document or information shall be in writing exclusively (and not in an electronic transmission) and shall be delivered exclusively by hand (including, without limitation, overnight courier service) or by certified or registered mail, return receipt requested, and the Corporation shall not be required to accept delivery of any document not in such written form or so delivered. For the avoidance of doubt, the Corporation expressly opts out of Section 116 of the DGCL with respect to the delivery of information and documents to the Corporation required by this Article II.
Article IIIDirectors
3.1 Powers.
Except as otherwise provided by the Certificate of Incorporation or the DGCL, the business and affairs of the Corporation shall be managed by or under the direction of the Board.
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3.2 Number; Term; Qualifications.
The total number of directors constituting the Board shall be determined from time to time as provided in the Certificate of Incorporation. The Board shall be classified in the manner provided in the Certificate of Incorporation. Each director shall hold office until such time as provided in the Certificate of Incorporation. No reduction of the authorized number of directors shall have the effect of removing any director before that directors term of office expires. Directors need not be stockholders to be qualified for election or service as a director of the Corporation. The Certificate of Incorporation or these Bylaws may prescribe qualifications for directors.
3.3 Resignation; Removal; Vacancies.
Any director may resign at any time upon written or electronic transmission to the Secretary of the Corporation. Such resignation shall be effective upon delivery unless otherwise specified. Directors of the Corporation may be removed only as expressly provided in the Certificate of Incorporation. Newly created directorships resulting from any increase in the authorized number of directors or any vacancies on the Board resulting from the death, resignation, disqualification, removal from office or other cause shall be filled as set forth in the Certificate of Incorporation.
3.4 Place of Meetings; Meetings by Telephone.
The Board may hold meetings, both regular and special, either within or outside the State of Delaware.
Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, members of the Board, or any committee designated by the Board, may participate in a meeting of the Board, or any committee, by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting pursuant to this Section 3.4 shall constitute presence in person at the meeting.
3.5 Regular Meetings.
Regular meetings of the Board may be held within or outside the State of Delaware and at such time and at such place as which has been designated by the Board and publicized among all directors, either orally or in writing, by telephone, including a voice-messaging system or other system designed to record and communicate messages, facsimile, telegraph or telex, or by electronic mail or other means of electronic transmission. No further notice shall be required for regular meetings of the Board.
3.6 Special Meetings; Notice.
Special meetings of the Board for any purpose or purposes may be called at any time by the Chairperson of the Board, if any, the Chief Executive Officer or a Co-Chief Executive Officer, or a majority of the total number of directors constituting the Board.
Notice of the time and place of special meetings shall be:
(i) delivered personally by hand, by courier or by telephone;
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(ii) sent by United States first-class mail, postage prepaid;
(iii) sent by facsimile or electronic mail; or
(iv) sent by other means of electronic transmission,
directed to each director at that directors address, telephone number, facsimile number or electronic mail address, or other address for electronic transmission, as the case may be, as shown on the Corporations records.
If the notice is (i) delivered personally by hand, by courier or by telephone, (ii) sent by facsimile or electronic mail, or (iii) sent by other means of electronic transmission, it shall be delivered or sent at least twenty-four (24) hours before the time of the holding of the meeting. If the notice is sent by U.S. mail, it shall be deposited in the U.S. mail at least four (4) days before the time of the holding of the meeting. The notice need not specify the place of the meeting (if the meeting is to be held at the Corporations principal executive office) nor the purpose of the meeting.
3.7 Quorum.
At all meetings of the Board, unless otherwise provided by the Certificate of Incorporation, a majority of the total number of directors shall constitute a quorum for the transaction of business; provided that, solely for the purposes of filling vacancies pursuant to Section 3.3 of these Bylaws, a meeting of the Board may be held if a majority of the directors then in office participate in such meeting. The vote of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board, except as may be otherwise specifically provided by statute, the Certificate of Incorporation or these Bylaws. If a quorum is not present at any meeting of the Board, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present.
3.8 Board Action without a Meeting.
Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board, or of any committee thereof, may be taken without a meeting if all members of the Board or 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 the proceedings of the Board, or the committee thereof, in the same paper or electronic form as the minutes are maintained. Such action by written consent or consent by electronic transmission shall have the same force and effect as a unanimous vote of the Board.
3.9 Fees and Compensation of Directors.
Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, the Board shall have the authority to fix the compensation, including fees and reimbursement of expenses, of directors for services to the Corporation in any capacity. Any director of the Corporation may decline any or all such compensation payable to such director in his or her discretion.
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Article IVCommittees
4.1 Committees of Directors.
The Board may designate one (1) or more committees, each committee to consist, of one (1) or more of the directors of the Corporation. The Board may designate one (1) or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent permitted by applicable law or provided in the resolution of the Board or in these Bylaws, shall have and may exercise all the powers and authority of the Board in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority to (i) approve or adopt, or recommend to the stockholders, any action or matter expressly required by the DGCL to be submitted to stockholders for approval (other than the election of directors), or (ii) adopt, amend or repeal any bylaw of the Corporation.
4.2 Committee Minutes.
Each committee shall keep regular minutes of its meetings and report the same to the Board when required.
4.3 Meetings and Actions of Committees.
Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of:
(i) Section 3.4 (place of meetings; meetings by telephone);
(ii) Section 3.5 (regular meetings);
(iii) Section 3.6 (special meetings; notice);
(iv) Section 3.8 (board action without a meeting); and
(v) Section 7.13 (waiver of notice),
with such changes in the context of those Bylaws as are necessary to substitute the committee and its members for the Board and its members. However:
(i) the time of regular meetings of committees may be determined either by resolution of the Board or by resolution of the committee;
(ii) special meetings of committees may also be called by resolution of the Board or the chairperson of the applicable committee; and
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(iii) the Board may adopt rules for the governance of any committee to override the provisions that would otherwise apply to the committee pursuant to this Section 4.3, provided that such rules do not violate the provisions of the Certificate of Incorporation or applicable law.
4.4 Subcommittees.
Unless otherwise provided in the Certificate of Incorporation, these Bylaws or the resolutions of the Board designating the committee, a committee may create one (1) or more subcommittees, each subcommittee to consist of one (1) or more members of the committee, and delegate to a subcommittee any or all of the powers and authority of the committee.
Article V - Officers
5.1 Officers.
The officers of the Corporation shall include a Chief Executive Officer or Co-Chief Executive Officers, a Chief Financial Officer and a Secretary. The Corporation may also have, at the discretion of the Board, a Chairperson of the Board, a Vice Chairperson of the Board, a Treasurer, one (1) or more Vice Presidents, one (1) or more Senior Vice Presidents, one (1) or more Assistant Treasurers, one (1) or more Assistant Secretaries, and any such other officers as may be appointed in accordance with the provisions of these Bylaws. Any number of offices may be held by the same person. No officer need be a stockholder or director of the Corporation.
5.2 Appointment of Officers.
The Board shall appoint the officers of the Corporation, except such officers as may be appointed in accordance with the provisions of Section 5.3 of these Bylaws.
5.3 Subordinate Officers.
The Board may appoint, or empower the Chief Executive Officer or each of the Co-Chief Executive Officers or, in the absence of any such Chief Executive Officer or the Co-Chief Executive Officers, the Chief Financial Officer, to appoint, such other officers and agents as the business of the Corporation may require. Each of such officers and agents shall hold office for such period, have such authority, and perform such duties as are provided in these Bylaws or as the Board may from time to time determine.
5.4 Removal and Resignation of Officers.
Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by the Board or, except in the case of an officer chosen by the Board, by any officer upon whom such power of removal may be conferred by the Board. Any officer may resign at any time by giving notice in writing or by electronic transmission to the Corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice. Unless otherwise specified in the notice of resignation, the acceptance of the resignation shall not be necessary to make it effective. If a resignation is made effective at a later date and the Corporation accepts the future effective date, the Board may fill the pending vacancy before the effective date if the Board provides that the successor shall not take office until the effective date. Any resignation is without prejudice to the rights, if any, of the Corporation under any contract to which the officer is a party.
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5.5 Vacancies in Offices.
Any vacancy occurring in any office of the Corporation shall be filled by the Board or as provided in Section 5.2.
5.6 Representation of Shares of Other Corporations.
The Chairperson of the Board, if any, the Chief Executive Officer or each of the Co-Chief Executive Officers, or the Chief Financial Officer, or any other person authorized by the Board, the Chief Executive Officer or a Co-Chief Executive Officer, or the Chief Financial Officer, is authorized to vote, represent and exercise on behalf of this Corporation all rights incident to any and all shares or voting securities of any other corporation or other entity standing in the name of this Corporation. The authority granted herein may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority.
5.7 Authority and Duties of Officers.
All officers of the Corporation shall respectively have such authority and perform such duties in the management of the business of the Corporation as may be provided herein or designated from time to time by the Board and, to the extent not so provided, as generally pertain to their respective offices, subject to the oversight of the Board.
5.8 Compensation.
The compensation of the officers of the Corporation for their services as such shall be fixed from time to time by or at the direction of the Board. An officer of the Corporation shall not be prevented from receiving compensation by reason of the fact that he or she is also a director of the Corporation.
Article VI - Records
A stock ledger consisting of one or more records in which the names of all of the Corporations stockholders of record, the address and number of shares registered in the name of each such stockholder, and all issuances and transfers of stock of the Corporation are recorded in accordance with Section 224 of the DGCL shall be administered by or on behalf of the Corporation. Any records administered by or on behalf of the Corporation in the regular course of its business, including its stock ledger, books of account, and minute books, may be kept on, or by means of, or be in the form of, any information storage device, or method, or one or more electronic networks or databases (including one or more distributed electronic networks or databases), provided that the records so kept can be converted into clearly legible paper form within a reasonable time and, with respect to the stock ledger, that the records so kept (i) can be used to prepare the list of stockholders specified in Sections 219 and 220 of the DGCL, (ii) record the information specified in Sections 156, 159, 217(a) and 218 of the DGCL, and (iii) record transfers of stock as governed by Article 8 of the Uniform Commercial Code as adopted in the State of Delaware.
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Article VII - General Matters
7.1 Execution of Corporate Contracts and Instruments.
The Board, except as otherwise provided in these Bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the Corporation; such authority may be general or confined to specific instances.
7.2 Stock Certificates.
The shares of the Corporation shall be represented by certificates, provided that the Board by resolution may provide that some or all of the shares of any class or series of stock of the Corporation shall be uncertificated. Certificates for the shares of stock, if any, shall be in such form as is consistent with the Certificate of Incorporation and applicable law. Every holder of stock represented by a certificate shall be entitled to have a certificate signed by, or in the name of the Corporation by, any two officers authorized to sign stock certificates representing the number of shares registered in certificate form. The Chairperson or Vice Chairperson of the Board, if any, Chief Executive Officer (or a Co-Chief Executive Officer), the Chief Financial Officer, Vice President, the Treasurer, if any, any Assistant Treasurer, the Secretary or any Assistant Secretary of the Corporation shall be specifically authorized to sign stock certificates. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he or she were such officer, transfer agent or registrar at the date of issue.
The Corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares, or upon the books and records of the Corporation in the case of uncertificated partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend on fully paid shares, the Corporation shall declare a dividend upon partly paid shares of the same class, but only upon the basis of the percentage of the consideration actually paid thereon.
7.3 Special Designation of Certificates.
If the Corporation is authorized to issue more than one class of stock or more than one series of any class, then the powers, the designations, the preferences and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or on the back of the certificate that the Corporation shall issue to represent such class or series of stock (or, in the case of uncertificated shares, set forth in a notice provided pursuant to Section 151 of the DGCL); provided, however, that except as otherwise provided in Section 202 of the DGCL, in lieu of the foregoing requirements, there may be set forth on the face of back of the certificate that the Corporation shall issue to represent such class or series of stock (or, in the case of any uncertificated shares, included in the aforementioned notice) a statement that the Corporation will furnish without charge to each stockholder who so requests the powers, the designations, the preferences and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights.
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7.4 Lost Certificates.
Except as provided in this Section 7.4, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the Corporation and cancelled at the same time. The Corporation may issue a new certificate of stock or uncertificated shares in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the Corporation may require the owner of the lost, stolen or destroyed certificate, or such owners legal representative, to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares.
7.5 Shares Without Certificates
The Corporation may adopt a system of issuance, recordation and transfer of its shares of stock by electronic or other means not involving the issuance of certificates, provided the use of such system by the Corporation is permitted in accordance with applicable law.
7.6 Construction; Definitions.
Unless the context requires otherwise, the general provisions, rules of construction and definitions in the DGCL shall govern the construction of these Bylaws. Without limiting the generality of this provision, the singular number includes the plural and the plural number includes the singular.
7.7 Dividends.
The Board, subject to any restrictions contained in either (i) the DGCL or (ii) the Certificate of Incorporation, may declare and pay dividends upon the shares of its capital stock. Dividends may be paid in cash, in property or in shares of the Corporations capital stock.
The Board may set apart out of any of the funds of the Corporation available for dividends a reserve or reserves for any proper purpose and may abolish any such reserve. Such purposes shall include but not be limited to equalizing dividends, repairing or maintaining any property of the Corporation, and meeting contingencies.
7.8 Fiscal Year.
The fiscal year of the Corporation shall be fixed by resolution of the Board and may be changed by the Board.
7.9 Seal.
The Corporation may adopt a corporate seal, which shall be adopted and which may be altered by the Board. The Corporation may use the corporate seal by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced.
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7.10 Transfer of Stock.
Shares of the Corporation shall be transferable in the manner prescribed by law, the Certificate of Incorporation and these Bylaws. Shares of stock of the Corporation shall be transferred on the books of the Corporation only by the holder of record thereof or by such holders attorney duly authorized in writing, upon surrender to the Corporation of the certificate or certificates representing such shares endorsed by the appropriate person or persons (or by delivery of duly executed instructions with respect to uncertificated shares), with such evidence of the authenticity of such endorsement or execution, transfer, authorization and other matters as the Corporation may reasonably require, and accompanied by all necessary stock transfer stamps. No transfer of stock shall be valid as against the Corporation for any purpose until it shall have been entered in the stock records of the Corporation by an entry showing the names of the persons from and to whom it was transferred.
7.11 Stock Transfer Agreements.
The Corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes or series of stock of the Corporation to restrict the transfer of shares of stock of the Corporation of any one or more classes owned by such stockholders in any manner not prohibited by the DGCL.
7.12 Registered Stockholders.
The Corporation:
(i) shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner; and
(ii) shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of another person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the State of Delaware.
7.13 Waiver of Notice.
Whenever notice is required to be given under any provision of the DGCL, the Certificate of Incorporation or these Bylaws, a written waiver, signed by the person entitled to notice, or a waiver by electronic transmission by the person entitled to notice, whether before or after the time of the event for which notice is to be given, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice or any waiver by electronic transmission unless so required by the Certificate of Incorporation or these Bylaws.
Article VIII - Notice
8.1 Delivery of Notice; Notice by Electronic Transmission.
Without limiting the manner by which notice otherwise may be given effectively to stockholders, any notice to stockholders given by the Corporation under any provisions of the DGCL, the Certificate of Incorporation, or these Bylaws may be given in writing directed to the stockholders mailing address (or by electronic transmission directed to the stockholders electronic mail address, as applicable) as it appears on
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the records of the Corporation and shall be given (1) if mailed, when the notice is deposited in the U.S. mail, postage prepaid, (2) if delivered by courier service, the earlier of when the notice is received or left at such stockholders address or (3) if given by electronic mail, when directed to such stockholders electronic mail address unless the stockholder has notified the Corporation in writing or by electronic transmission of an objection to receiving notice by electronic mail. A notice by electronic mail must include a prominent legend that the communication is an important notice regarding the Corporation.
Without limiting the manner by which notice otherwise may be given effectively to stockholders, any notice to stockholders given by the Corporation under any provision of the DGCL, the Certificate of Incorporation or these Bylaws shall be effective if given by a form of electronic transmission consented to by the stockholder to whom the notice is given. Any such consent shall be revocable by the stockholder by written notice or electronic transmission to the Corporation. Notwithstanding the provisions of this paragraph, the Corporation may give a notice by electronic mail in accordance with the first paragraph of this section without obtaining the consent required by this paragraph.
Any notice given pursuant to the preceding paragraph shall be deemed given:
(i) |
if by facsimile telecommunication, when directed to a number at which the stockholder has consented to receive notice; |
(ii) |
if by a posting on an electronic network together with separate notice to the stockholder of such specific posting, upon the later of (A) such posting and (B) the giving of such separate notice; and |
(iii) |
if by any other form of electronic transmission, when directed to the stockholder. |
Notwithstanding the foregoing, a notice may not be given by an electronic transmission from and after the time that (1) the Corporation is unable to deliver by such electronic transmission two (2) consecutive notices given by the Corporation and (2) 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, the inadvertent failure to discover such inability shall not invalidate any meeting or other action.
An affidavit of the Secretary or an Assistant Secretary of the Corporation or of the transfer agent or 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.
Article IX - Indemnification
9.1 Indemnification of Directors and Officers.
The Corporation shall indemnify and hold harmless, to the fullest extent permitted by the DGCL as it presently exists or may hereafter be amended, any director or officer of the Corporation (a covered person) who was or is made or is threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a Proceeding) by reason of the fact that he or she, or a person for whom he or she is the legal representative, is or was a director or officer of the Corporation or, while serving as a director or officer of the Corporation, is or was serving at the request of the
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Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust, enterprise or non-profit entity, including service with respect to employee benefit plans, against all liability and loss suffered and expenses (including attorneys fees, judgments, fines ERISA excise taxes or penalties and amounts paid in settlement) reasonably incurred by such person in connection with any such Proceeding. Notwithstanding the preceding sentence, except as otherwise provided in Section 9.4, the Corporation shall be required to indemnify a person in connection with a Proceeding initiated by such person only if the Proceeding was authorized in the specific case by the Board.
9.2 Indemnification of Others.
The Corporation shall have the power to indemnify and hold harmless, to the fullest extent permitted by applicable law as it presently exists or may hereafter be amended, any employee or agent of the Corporation who was or is made or is threatened to be made a party or is otherwise involved in any Proceeding by reason of the fact that he or she, or a person for whom he or she is the legal representative, is or was an employee or agent of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust, enterprise or non-profit entity, including service with respect to employee benefit plans, against all liability and loss suffered and expenses reasonably incurred by such person in connection with any such Proceeding.
9.3 Prepayment of Expenses.
The Corporation shall to the fullest extent not prohibited by applicable law pay the expenses (including attorneys fees) incurred by any covered person, and may pay the expenses incurred by any employee or agent of the Corporation, in defending any Proceeding in advance of its final disposition; provided, however, that such payment of expenses in advance of the final disposition of the Proceeding shall be made only upon receipt of an undertaking by the person to repay all amounts advanced if it should be ultimately determined that the person is not entitled to be indemnified under this Article IX or otherwise.
9.4 Determination; Claim.
If a claim for indemnification (following the final disposition of such Proceeding) under this Article IX is not paid in full within sixty (60) days, or a claim for advancement of expenses under this Article IX is not paid in full within thirty (30) days, after a written claim therefor has been received by the Corporation the claimant may thereafter (but not before) file suit to recover the unpaid amount of such claim and, if successful in whole or in part, shall be entitled to be paid the expense of prosecuting such claim to the fullest extent permitted by law. In any such action the Corporation shall have the burden of proving that the claimant was not entitled to the requested indemnification or payment of expenses under applicable law.
9.5 Non-Exclusivity of Rights.
The rights conferred on any person by this Article IX shall not be exclusive of any other rights which such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, these Bylaws, agreement, vote of stockholders or disinterested directors or otherwise.
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9.6 Insurance.
The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust enterprise or non-profit entity against any liability 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 him or her against such liability under the provisions of the DGCL.
9.7 Other Indemnification.
The Corporations obligation, if any, to indemnify or advance expenses to any person who was or is serving at its request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, enterprise or non-profit entity shall be reduced by any amount such person may collect as indemnification or advancement of expenses from such other corporation, partnership, joint venture, trust, enterprise or non-profit enterprise.
9.8 Continuation of Indemnification.
The rights to indemnification and to prepayment of expenses provided by, or granted pursuant to, this Article IX shall continue notwithstanding that the person has ceased to be a director or officer of the Corporation and shall inure to the benefit of the estate, heirs, executors, administrators, legatees and distributees of such person.
9.9 Amendment or Repeal; Interpretation.
The provisions of this Article IX shall constitute a contract between the Corporation, on the one hand, and, on the other hand, each individual who serves or has served as a director or officer of the Corporation (whether before or after the adoption of these Bylaws), in consideration of such persons performance of such services, and pursuant to this Article IX the Corporation intends to be legally bound to each such current or former director or officer of the Corporation. With respect to current and former directors and officers of the Corporation, the rights conferred under this Article IX are present contractual rights and such rights are fully vested, and shall be deemed to have vested fully, immediately upon adoption of theses Bylaws. With respect to any directors or officers of the Corporation who commence service following adoption of these Bylaws, the rights conferred under this provision shall be present contractual rights and such rights shall fully vest, and be deemed to have vested fully, immediately upon such director or officer commencing service as a director or officer of the Corporation. Any repeal or modification of the foregoing provisions of this Article IX shall not adversely affect any right or protection (i) hereunder of any person in respect of any act or omission occurring prior to the time of such repeal or modification or (ii) under any agreement providing for indemnification or advancement of expenses to an officer or director of the Corporation in effect prior to the time of such repeal or modification.
Any reference to an officer of the Corporation in this Article IX shall be deemed to refer exclusively to the Chief Executive Officer (or a Co-Chief Executive Officer), Chief Financial Officer, and Secretary, or other officer of the Corporation appointed by (x) the Board pursuant to Article V of these Bylaws or (y) an officer to whom the Board has delegated the power to appoint officers pursuant to Article V of these Bylaws, and any reference to an officer of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise shall be deemed to refer exclusively to an officer appointed by the Board (or equivalent governing body) of such other entity pursuant to the certificate of incorporation and bylaws (or equivalent organizational documents) of such other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise. The fact that any person who is or was an employee of the Corporation or an employee of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise
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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 corporation, partnership, joint venture, trust, employee benefit plan or other enterprise (other than a title referenced in the first sentence of this paragraph) shall not result in such person being constituted as, or being deemed to be, an officer of the Corporation or of such other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise for purposes of this Article IX.
Article X - Amendments
The Board is expressly empowered to adopt, amend or repeal the Bylaws. The stockholders also shall have power to adopt, amend or repeal the Bylaws; provided, however, that such action by stockholders shall require, in addition to any other vote required by the Certificate of Incorporation or applicable law, the affirmative vote of the holders of at least 66 2/3% of the voting power of all the then-outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class.
Article XI - Definitions
As used in these Bylaws, unless the context otherwise requires, the following terms shall have the following meanings:
An 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 or databases), that creates a record that may be retained, retrieved and reviewed by a recipient thereof, and that may be directly reproduced in paper form by such a recipient through an automated process.
An electronic mail means an electronic transmission directed to a unique electronic mail address (which electronic mail shall be deemed to include any files attached thereto and any information hyperlinked to a website if such electronic mail includes the contact information of an officer or agent of the Corporation who is available to assist with accessing such files and information).
An electronic mail address means a destination, commonly expressed as a string of characters, consisting of a unique user name or mailbox (commonly referred to as the local part of the address) and a reference to an internet domain (commonly referred to as the domain part of the address), whether or not displayed, to which electronic mail can be sent or delivered.
The term person means any individual, general partnership, limited partnership, limited liability company, corporation, trust, business trust, joint stock company, joint venture, unincorporated association, cooperative or association or any other legal entity or organization of whatever nature, and shall include any successor (by merger or otherwise) of such entity.
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FIGS, Inc.
Certificate of Amendment and Restatement of Bylaws
The undersigned hereby certifies that he is the duly elected, qualified, and acting Secretary of FIGS, Inc., a Delaware corporation (the Corporation), and that the foregoing Bylaws were adopted by the Board of Directors of the Corporation on [ 🌑 ], 2021 to be effective as of [ 🌑 ], 2021.
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Todd Maron | ||
Chief Legal Officer and Secretary |
Exhibit 4.1
ZQ|CERT#|COY|CLS|RGSTRY|ACCT#|TRANSTYPE|RUN#|TRANS# Class A Common Stock Class A Common Stock PO PAR VALUE $0 0001 MR ADD ADD ADD ADD 4 3 2 1 A BOX DESIGNATION SAMPLE Certificate Shares 505006, Number * * 000000 ****************** (IF * * * 000000 ***************** ANY) ZQ00000000 **** 000000 **************** Louisville, FIGS, INC ***** 000000 *************** KY ****** 000000 ************** INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE ** Mr Alexander David Sample **** Mr Alexander David Sample **** Mr Alexander David Sample **** Mr Alexander David Sample **** Mr Alexander David Sample SEE REVERSE FOR CERTAIN DEFINITIONS 40233 **** Mr Alexander David Sample **** Mr Alexander David Sample **** Mr Alexander David Sample **** Mr Alexander David Sample **** Mr Alexander David - THIS CERTIFIES THAT Sample **** Mr Alexander David Sample **** Mr Alexander David Sample **** Mr Alexander David Sample **** Mr Alexander David Sample **** Mr Alexander David Sample **** Mr MR Alexander David SAMPLE Sample **** Mr Alexander David &Sample MRS **** Mr Alexander SAMPLE David Sample **** Mr Alexander & David Sample **** Mr Alexander David Sample **** Mr Alexander David Sample **** Mr Alexander David Sample **** Mr Alexander David Sample **** Mr Alexander David Sample **** CUSIP XXXXXX XX X 5006 Mr Alexander David Sample **** Mr Alexander David Sample **** Mr Alexander David Sample **** Mr Alexander David Sample **** Mr Alexander David Sample **** Mr Alexander David Sample **** Mr Alexander David Sample **** Mr Alexander David Sample **** Mr Alexander David Sample **** Mr Alexander David Sample **** Mr Alexander MR David Sample SAMPLE **** Mr Alexander David Sample **** &Mr Alexander MRS David Sample SAMPLE **** Mr Alexander David Sample **** Mr Alexander David Sample **** Mr Alexander David Sample **** Mr Alexander David Sample **** Mr Alexander David Sample **** Mr Alexander David Sample **** Mr Alexander David Sample **** Mr Alexander David Sample **** Mr Alexander David Sample **** Mr Alexander David Sample **** Mr Alexander David Sample **** Mr Alexander David Sample **** Mr Alexander David Sample **** Mr Alexander David Sample **** Mr Alexander David Sample **** Mr Sample **** Mr Sample is the owner of *000000**Shares****000000**Shares****0 THIS CERTIFICATE IS TRANSFERABLE IN 0000000000**Shares****000000 **Shares**** 000000**Shares**** 00 ***ZERO ^HUNDRED THOUSAND AGENT, AVAILABLE ONLINE AT 00000000** Shares **** 000000 ** Shares****000000 ZERO HUNDRED AND ZERO*** www computershare com **Shares 000000 ** Shares **** 000000**Shares****000000**S FULLY-PAID AND NON-ASSESSABLE SHARES OF CLASS A COMMON STOCK OF Figs, Inc (hereinafter called the Company), transferable on the books of the Company in person or by duly Total DTC authorized attorney, upon surrender of this Certificate properly endorsed This Certificate and the shares Holder represented hereby, are issued and shall be held subject to all of the provisions of the Certificate of Number Certificateof Insurance ID Incorporation, as amended, and the By-Laws, as amended, of the Company (copies of which are on file with the Value Company and with the Transfer Agent), to all of which each holder, by acceptance hereof, assents This Transaction Shares CUSIP/IDENTIFIER Certificate is not valid unless countersigned and registered by the Transfer Agent and Registrar Numbers 1234567890/1234567890 1234567890/1234567890 1234567890/1234567890 1234567890/1234567890 1234567890/1234567890 1234567890/1234567890 Witness the facsimile seal of the Company and the facsimile signatures of its duly authorized officers DATED DD-MMM-YYYY GS, IN I C COUNTERSIGNED AND REGISTERED: FACSIMILE SIGNATURE TO COME F O ORP RA COMPUTERSHARE TRUST COMPANY, N A Num/No 12345678901234512345678 C TE 666 555 444 333 222 111 Denom President TRANSFER AGENT AND REGISTRAR, XXXXXX 1/28/2013 Total DEL RE FACSIMILE SIGNATURE TO COME AWA 7 00 1,000,000 XX 123456 XXXXXXXXXX X By Secretary AUTHORIZED SIGNATURE
FIGS, INC THE COMPANY WILL FURNISH WITHOUT CHARGE TO EACH SHAREHOLDER WHO SO REQUESTS, A SUMMARY OF THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OF THE COMPANY AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND RIGHTS, AND THE VARIATIONS IN RIGHTS, PREFERENCES AND LIMITATIONS DETERMINED FOR EACH SERIES, WHICH ARE FIXED BY THE CERTIFICATE OF INCORPORATION OF THE COMPANY, AS AMENDED, AND THE RESOLUTIONS OF THE BOARD OF DIRECTORS OF THE COMPANY, AND THE AUTHORITY OF THE BOARD OF DIRECTORS TO DETERMINE VARIATIONS FOR FUTURE SERIES SUCH REQUEST MAY BE MADE TO THE OFFICE OF THE SECRETARY OF THE COMPANY OR TO THE TRANSFER AGENT THE BOARD OF DIRECTORS MAY REQUIRE THE OWNER OF A LOST OR DESTROYED STOCK CERTIFICATE, OR HIS LEGAL REPRESENTATIVES, TO GIVE THE COMPANY A BOND TO INDEMNIFY IT AND ITS TRANSFER AGENTS AND REGISTRARS AGAINST ANY CLAIM THAT MAY BE MADE AGAINST THEM ON ACCOUNT OF THE ALLEGED LOSS OR DESTRUCTION OF ANY SUCH CERTIFICATE The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COMas tenants in common UNIF GIFT MIN ACT Custodian (Cust) (Minor) TEN ENTas tenants by the entireties under Uniform Gifts to Minors Act (State) JT TENas joint tenants with right of survivorship UNIF TRF MIN ACT Custodian (until age ) and not as tenants in common (Cust) under Uniform Transfers to Minors Act (Minor) (State) Additional abbreviations may also be used though not in the above list PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE For value received, hereby sell, assign and transfer unto (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING POSTAL ZIP CODE, OF ASSIGNEE) Shares of the Class A Common Stock represented by the within Certificate, and do hereby irrevocably constitute and appoint Attorney to transfer the said stock on the books of the within-named Company with full power of substitution in the premises Dated: 20 Signature(s) Guaranteed: Medallion Guarantee Stamp THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (Banks, Stockbrokers, Savings and Loan Associations and Credit Unions) WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM, PURSUANT TO S E C RULE 17Ad-15 Signature: Signature: Notice: The signature to this assignment must correspond with the name as written upon the face of the certificate, in every particular, without alteration or enlargement, or any change whatever The IRS requires that the named transfer agent (we) report the cost basis of certain shares or units acquired after January 1, 2011 If your shares or units are covered by the legislation, and you requested to sell or transfer the shares or units using a specific cost basis calculation method, then we have processed as you requested If you did not specify a cost basis calculation method, then we have defaulted to the first in, first out (FIFO) method Please consult your tax advisor if you need additional information about cost basis If you do not keep in contact with the issuer or do not have any activity in your account for the time period specified by state law, your property may become subject to state unclaimed property laws and transferred to the appropriate state
Exhibit 10.1
FIGS, INC.
INDEMNIFICATION AGREEMENT
This Indemnification and Advancement Agreement (Agreement) is made as of ________ __, 2021 by and between FIGS, Inc., a Delaware corporation (the Company), and ______________, a member of the Board of Directors or an officer of the Company (Indemnitee). This Agreement supersedes and replaces any and all previous Agreements between the Company and Indemnitee covering indemnification and advancement.
RECITALS
WHEREAS, the Board of Directors of the Company (the Board) believes that highly competent persons have become more reluctant to serve publicly-held corporations as directors, officers, or in other capacities unless they are provided with adequate protection through insurance or adequate indemnification and advancement of expenses against inordinate risks of claims and actions against them arising out of their service to and activities on behalf of the corporation;
WHEREAS, the Board has determined that, in order to attract and retain qualified individuals, the Company will attempt to maintain on an ongoing basis, at its sole expense, liability insurance to protect persons serving the Company and its subsidiaries from certain liabilities. Although the furnishing of such insurance has been a customary and widespread practice among United States-based corporations and other business enterprises, the Company believes that, given current market conditions and trends, such insurance may be available to it in the future only at higher premiums and with more exclusions. At the same time, directors, officers, and other persons in service to corporations or business enterprises are being increasingly subjected to expensive and time-consuming litigation relating to, among other things, matters that traditionally would have been brought only against the Company or business enterprise itself. The amended and restated bylaws and amended and restated certificate of incorporation of the Company (each as may be amended from time to time, the Bylaws and Certificate of Incorporation, respectively) require indemnification of the officers and directors of the Company. Indemnitee may also be entitled to indemnification pursuant to the General Corporation Law of the State of Delaware (the DGCL). The Bylaws, Certificate of Incorporation, and the DGCL expressly provide that the indemnification provisions set forth therein are not exclusive, and thereby contemplate that contracts may be entered into between the Company and members of the Board, officers and other persons with respect to indemnification and advancement of expenses;
WHEREAS, the uncertainties relating to such insurance, to indemnification, and to advancement of expenses may increase the difficulty of attracting and retaining such persons;
WHEREAS, the Board has determined that the increased difficulty in attracting and retaining such persons is detrimental to the best interests of the Company and its stockholders and that the Company should act to assure such persons that there will be increased certainty of such protection in the future;
WHEREAS, it is reasonable, prudent and necessary for the Company contractually to obligate itself to indemnify, and to advance expenses on behalf of, such persons to the fullest extent permitted by Applicable Law (as defined below) so that they will serve or continue to serve the Company free from undue concern that they will not be so indemnified;
WHEREAS, this Agreement is a supplement to and in furtherance of the Bylaws, Certificate of Incorporation and any resolutions adopted pursuant thereto, and is not a substitute therefor, nor diminishes or abrogates any rights of Indemnitee thereunder; and
WHEREAS, Indemnitee does not regard the protection available under the Bylaws, Certificate of Incorporation, DGCL and insurance as adequate in the present circumstances, and may not be willing to serve or continue to serve as an officer or director without adequate additional protection, and the Company desires Indemnitee to serve or continue to serve in such capacity. Indemnitee is willing to serve, continue to serve and to take on additional service for or on behalf of the Company on the condition that Indemnitee be so indemnified and be advanced expenses.
NOW, THEREFORE, in consideration of the premises and the covenants contained herein, the Company and Indemnitee do hereby covenant and agree as follows:
Section 1. Services to the Company. Indemnitee agrees to serve as a director or officer of the Company. Indemnitee may at any time and for any reason resign from such position (subject to any other contractual obligation or any obligation imposed by operation of law). This Agreement does not create any obligation on the Company to continue Indemnitee in such position and is not an employment contract between the Company (or any of its subsidiaries or any Enterprise) and Indemnitee.
Section 2. Definitions. As used in this Agreement:
(a) Agent means any person who is authorized by the Company or an Enterprise to act for or represent the interests of the Company or an Enterprise, respectively.
(b) Applicable Law means applicable law, including as it presently exists or may hereafter be amended, but, in the case of any such amendment, only to the extent that such amendment permits the Company to provide broader indemnification rights than such law permitted the Company to provide prior to such amendment.
(c) A Change in Control occurs upon the earliest to occur after the date of this Agreement of any of the following events:
i. Acquisition of Stock by Third Party. Any Person (as defined below) that becomes a Beneficial Owner (as defined below), directly or indirectly, of securities of the Company representing fifteen percent (15%) or more of the combined voting power of the Companys then outstanding securities unless the Person was a Qualified Class B Stockholder or Qualified Class C Stockholder as defined in the Companys Amended and Restated Certificate of Incorporation or the change in relative beneficial ownership of the Companys securities by any Person results solely from a reduction in the aggregate number of outstanding shares of securities entitled to vote generally in the election of directors;
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ii. Change in Board of Directors. During any period of two (2) consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in Sections 2(b)(i), 2(b)(iii) or 2(b)(iv)) whose election by the Board or nomination for election by the Companys stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the members of the Board;
iii. Corporate Transactions. The effective date of a merger or consolidation of the Company with any other entity, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the surviving entity outstanding immediately after such merger or consolidation and with the power to elect at least a majority of the board of directors or other governing body of such surviving entity;
iv. Liquidation. The approval by the stockholders of the Company of a complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Companys assets; and
v. Other Events. There occurs any other event of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or a response to any similar item on any similar schedule or form) promulgated under the Exchange Act (as defined below), whether or not the Company is then subject to such reporting requirement.
vi. For purposes of this Section 2(b), the following terms have the following meanings:
1 |
Exchange Act means the Securities Exchange Act of 1934, as amended from time to time. |
2 |
Person has the meaning as set forth in Sections 13(d) and 14(d) of the Exchange Act; provided, however, that Person excludes (i) the Company, (ii) any trustee or other fiduciary holding securities under an employee benefit plan of the Company, and (iii) any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. |
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3 |
Beneficial Owner has the meaning given to such term in Rule 13d-3 under the Exchange Act; provided, however, that Beneficial Owner excludes any Person otherwise becoming a Beneficial Owner by reason of the stockholders of the Company approving a merger of the Company with another entity. |
(d) Corporate Status describes the status of a person who is or was acting as a director, officer, employee, fiduciary, or Agent of the Company or an Enterprise.
(e) Disinterested Director means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by Indemnitee.
(f) Enterprise means any other corporation, limited liability company, partnership, joint venture, trust, employee benefit plan or other entity for which Indemnitee is or was serving at the request of the Company as a director, officer, employee, or Agent.
(g) Expenses includes all reasonable attorneys fees, retainers, court costs, transcript costs, fees of experts and other professionals, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, any federal, state, local or foreign taxes imposed on Indemnitee as a result of the actual or deemed receipt of any payments under this Agreement, ERISA excise taxes and penalties, and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, being or preparing to be a witness in, or otherwise participating in, a Proceeding. Expenses also include (i) Expenses incurred in connection with any appeal resulting from any Proceeding, including without limitation the premium, security for, and other costs relating to any cost bond, supersedeas bond, or other appeal bond or its equivalent, and (ii) for purposes of Section 14(e) only, Expenses incurred by Indemnitee in connection with the interpretation, enforcement or defense of Indemnitees rights under this Agreement, by litigation or otherwise. Expenses, however, do not include amounts paid in settlement by Indemnitee or the amount of judgments or fines against Indemnitee.
(h) Independent Counsel means a law firm, or a member of a law firm, selected by the Company and approved by Indemnitee (which approval shall not be unreasonably withheld) or, if there has been a Change in Control, selected by Indemnitee and approved by the Company (which approval shall not be unreasonably withheld), that is experienced in matters of corporation law and neither presently is, nor in the past five years has been, retained to represent: (i) the Company or Indemnitee in any matter material to either such party (other than with respect to matters concerning the Indemnitee under this Agreement, or of other indemnitees under similar indemnification agreements), or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term Independent Counsel does not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitees rights under this Agreement.
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(i) The term Proceeding includes any threatened, pending or completed action, suit, claim, counterclaim, cross claim, arbitration, mediation, alternate dispute resolution mechanism, investigation, inquiry, administrative hearing or any other actual, threatened or completed proceeding, whether brought in the right of the Company or otherwise and whether of a civil, criminal, administrative, legislative, or investigative (formal or informal) nature, including any appeal therefrom, in which Indemnitee was, is or will be involved as a party, potential party, non-party witness or otherwise by reason of Indemnitees Corporate Status or by reason of any action taken by Indemnitee (or a failure to take action by Indemnitee) or of any action (or failure to act) on Indemnitees part while acting pursuant to Indemnitees Corporate Status, in each case whether or not serving in such capacity at the time any liability or Expense is incurred for which indemnification, reimbursement, or advancement of Expenses can be provided under this Agreement; including one pending on or before the date of this Agreement. A Proceeding also includes a situation the Indemnitee believes in good faith may lead to or culminate in the institution of a Proceeding.
Section 3. Indemnity in Third-Party Proceedings. The Company will indemnify Indemnitee in accordance with the provisions of this Section 3 if Indemnitee is, or is threatened to be made, a party to or a participant in any Proceeding, other than a Proceeding by or in the right of the Company. Pursuant to this Section 3, the Company will indemnify and hold harmless Indemnitee against, to the fullest extent permitted by law, all Expenses, judgments, 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, judgments, fines and amounts paid in settlement) actually and reasonably incurred by Indemnitee, or on Indemnitees behalf, in connection with such Proceeding or any claim, issue or matter therein, if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company and, in the case of a criminal Proceeding had no reasonable cause to believe that Indemnitees conduct was unlawful.
Section 4. Indemnity in Proceedings by or in the Right of the Company. The Company will indemnify Indemnitee in accordance with the provisions of this Section 4 if Indemnitee is, or is threatened to be made, a party to or a participant in any Proceeding by or in the right of the Company. Pursuant to this Section 4, the Company will indemnify and hold harmless Indemnitee against, to the fullest extent permitted by law, all Expenses actually and reasonably incurred by Indemnitee or on Indemnitees behalf in connection with such Proceeding or any claim, issue or matter therein, if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company. The Company will not indemnify Indemnitee for Expenses under this Section 4 related to any claim, issue or matter in a Proceeding for which Indemnitee has been finally adjudged by a court to be liable to the Company, unless, and only to the extent that, the Delaware Court of Chancery or any court in which the Proceeding was brought determines upon application by Indemnittee that, despite the adjudication of liability but in view of all the circumstances of the case, Indemnittee is fairly and reasonably entitled to indemnification.
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Section 5. Indemnification for Expenses of a Party Who is Wholly or Partly Successful. To the fullest extent permitted by law, the Company will indemnify Indemnitee against all Expenses actually and reasonably incurred by Indemnitee in connection with any Proceeding the extent that Indemnitee is successful, on the merits or otherwise. If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company will indemnify Indemnitee against all Expenses actually and reasonably incurred by Indemnitee or on Indemnitees behalf in connection with or related to each successfully resolved claim, issue or matter to the fullest extent permitted by law. For purposes of this Section 5 and without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, will be deemed to be a successful result as to such claim, issue or matter.
Section 6. Indemnification For Expenses of a Witness. To the fullest extent permitted by applicable law, the Company will indemnify Indemnitee against all Expenses actually and reasonably incurred by Indemnitee or on Indemnitees behalf in connection with any Proceeding to which Indemnitee is not a party but to which Indemnitee is a witness, deponent, interviewee, or otherwise asked to participate.
Section 7. Partial Indemnification. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of Expenses, but not, however, for the total amount thereof, the Company will indemnify Indemnitee for the portion thereof to which Indemnitee is entitled.
Section 8. Additional Indemnification. Notwithstanding any limitation in Sections 3, 4 or 5, the Company will indemnify Indemnitee to the fullest extent permitted by applicable law (including but not limited to, the DGCL and any amendments to or replacements of the DGCL adopted after the date of this Agreement that expand the Companys ability to indemnify its officers and directors) if Indemnitee is a party to or threatened to be made a party to any Proceeding (including a Proceeding by or in the right of the Company to procure a judgment in its favor) The Company shall not be obligated to make any indemnification payment to Indemnitee that is finally determined (under the procedures, and subject to the presumptions, set forth in Sections 13 and 14 hereof) to be unlawful.
Section 9. Exclusions. Notwithstanding any provision in this Agreement, the Company is not obligated under this Agreement to make any indemnification payment to Indemnitee in connection with any Proceeding:
(a) for which payment has actually been made to or on behalf of Indemnitee under any insurance policy or other indemnity provision, except to the extent provided in Section 16(b) and except with respect to any excess beyond the amount paid under any insurance policy or other indemnity provision; or
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(b) for (i) an accounting of profits made from the purchase and sale (or sale and purchase) by Indemnitee of securities of the Company within the meaning of Section 16(b) of the Exchange Act (as defined in Section 2(b) hereof) or similar provisions of state statutory law or common law, (ii) any reimbursement of the Company by the Indemnitee of any bonus or other incentive-based or equity-based compensation or of any profits realized by the Indemnitee from the sale of securities of the Company, as required in each case under the Exchange Act (including any such reimbursements that arise from an accounting restatement of the Company pursuant to Section 304 of the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act), or the payment to the Company of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 306 of the Sarbanes-Oxley Act) or (iii) any reimbursement of the Company by Indemnitee of any compensation pursuant to any compensation recoupment or clawback policy adopted by the Board or the compensation committee of the Board, in so far as any such policy adopted is limited to any stock exchange listing requirements implementing Section 10D of the Exchange Act or any other applicable laws; or
(c) initiated by Indemnitee, including any Proceeding (or any part of any Proceeding) initiated by Indemnitee against the Company or its directors, officers, employees or other indemnitees, unless (i) the Proceeding or part of any Proceeding is to enforce Indemnitees rights to indemnification or advancement, of Expenses, including a Proceeding (or any part of any Proceeding) initiated pursuant to Section 14 of this Agreement, (ii) the Board authorized the Proceeding (or any part of any Proceeding) prior to its initiation, or (iii) the Company provides the indemnification, in its sole discretion, pursuant to the powers vested in the Company under applicable law.
Section 10. Advances of Expenses.
(a) Notwithstanding any other provision of this Agreement, the Company will advance, to the extent not prohibited by law, the Expenses incurred by or on behalf of Indemnitee in connection with any Proceeding (or any part of any Proceeding) not initiated by Indemnitee or any Proceeding (or any part of any Proceeding) initiated by Indemnitee if (i) the Proceeding or part of any Proceeding is to enforce Indemnitees rights to obtain indemnification or advancement of Expenses from the Company or Enterprise, including a proceeding initiated pursuant to Section 14 or (ii) the Board authorized the Proceeding (or any part of any Proceeding) prior to its initiation. The Company will advance the Expenses within thirty (30) days after the receipt by the Company of a statement or statements requesting such advances from time to time, whether prior to or after final disposition of any Proceeding.
(b) Any advances and undertakings to repay will be unsecured and interest free. Indemnitee undertakes to repay the amounts advanced (without interest) to the extent that it is ultimately determined that Indemnitee is not entitled to be indemnified by the Company, thus Indemnitee qualifies for advances upon the execution of this Agreement and delivery to the Company. No other form of undertaking is required other than the execution of this Agreement. The Company will make advances without regard to Indemnitees ability to repay the Expenses and without regard to Indemnitees ultimate entitlement to indemnification under the other provisions of this Agreement.
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Section 11. Procedure for Notification of Claim for Indemnification or Advancement.
(a) Indemnitee will notify the Company in writing of any Proceeding with respect to which Indemnitee intends to seek indemnification or advancement of Expenses hereunder as soon as reasonably practicable following the receipt by Indemnitee of written notice thereof. Indemnitee will include in the written notification to the Company a description of the nature of the Proceeding and the facts underlying the Proceeding and provide such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification following the final disposition of such Proceeding. Indemnitees failure to notify the Company will not relieve the Company from any obligation it may have to Indemnitee under this Agreement, and any delay in so notifying the Company will not constitute a waiver by Indemnitee of any rights under this Agreement. The Secretary of the Company will, promptly upon receipt of such a request for indemnification or advancement, advise the Board in writing that Indemnitee has requested indemnification or advancement.
(b) The Company will be entitled to participate in the Proceeding at its own expense.
Section 12. Procedure Upon Application for Indemnification.
(a) Unless a Change of Control has occurred, the determination of Indemnitees entitlement to indemnification will be made:
i. by a majority vote of the Disinterested Directors, even though less than a quorum of the Board;
ii. by a committee of Disinterested Directors designated by a majority vote of the Disinterested Directors, even though less than a quorum of the Board; or
iii. if there are no such Disinterested Directors or, if such Disinterested Directors so direct, by written opinion provided by Independent Counsel selected by the Board;
iv. if so directed by the Board, by the stockholders of the Company.
(b) If a Change in Control has occurred, the determination of Indemnitees entitlement to indemnification will be made by written opinion provided by Independent Counsel selected by Indemnitee (unless Indemnitee requests such selection be made by the Board).
(c) The party selecting Independent Counsel pursuant to subsection (a)(iii) or (b) of this Section 12 will provide written notice of the selection to the other party. The notified party may, within ten (10) days after receiving written notice of the selection of Independent Counsel, deliver to the selecting party a written objection to such selection; provided, however, that such objection may be asserted only (i) on the ground that the Independent Counsel so selected does not meet the requirements of Independent Counsel as defined in Section 2 of this Agreement and the objection sets forth with particularity the factual basis of such assertion or (ii) if there is a reasonable basis to withhold approval. Absent a proper and timely objection, the
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person so selected will act as Independent Counsel. If such written objection is so made and substantiated, the Independent Counsel so selected may not serve as Independent Counsel unless and until such objection is withdrawn or the Delaware Court has determined that such objection is without merit. If, within thirty (30) days after the later of submission by Indemnitee of a written request for indemnification pursuant to Section 11(a) hereof and the final disposition of the Proceeding, Independent Counsel has not been selected or, if selected, any objection to has not been resolved, either the Company or Indemnitee may petition the Delaware Court for the appointment as Independent Counsel of a person selected by such court or by such other person as such court designates. Upon the due commencement of any judicial proceeding or arbitration pursuant to Section 14(a) of this Agreement, Independent Counsel will be discharged and relieved of any further responsibility in such capacity (subject to the applicable standards of professional conduct then prevailing).
(d) Indemnitee will cooperate with the person, persons or entity making the determination with respect to Indemnitees entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. The Company will advance and pay any Expenses incurred by Indemnitee in so cooperating with the person, persons or entity making the indemnification determination irrespective of the determination as to Indemnitees entitlement to indemnification and the Company hereby indemnifies and agrees to hold Indemnitee harmless therefrom. The Company promptly will advise Indemnitee in writing of the determination that Indemnitee is or is not entitled to indemnification, including a description of any reason or basis for which indemnification has been denied and providing a copy of any written opinion provided to the Board by Independent Counsel.
(e) If it is determined that Indemnitee is entitled to indemnification, the Company will make payment to Indemnitee within thirty (30) days after such determination.
Section 13. Presumptions and Effect of Certain Proceedings.
(a) In making a determination with respect to entitlement to indemnification hereunder, the person or persons or entity making such determination will, to the fullest extent not prohibited by law, presume Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in accordance with Section 11(a) of this Agreement, and the Company will, to the fullest extent not prohibited by law, have the burden of proof to overcome that presumption and the burden of persuasion to establish by clear and convincing evidence that Indemnitee is not so entitled. Neither the failure of the Company (including by its directors or Independent Counsel) to have made a determination prior to the commencement of any action pursuant to this Agreement that indemnification is proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor an actual determination by the Company (including by its directors or Independent Counsel) that Indemnitee has not met such applicable standard of conduct, will be a defense to the action or create a presumption that Indemnitee has not met the applicable standard of conduct.
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(b) If the determination of the Indemnitees entitlement to indemnification has not made pursuant to Section 12 within sixty (60) days after the later of (i) receipt by the Company of Indemnitees request for indemnification pursuant to Section 11(a) and (ii) the final disposition of the Proceeding for which Indemnitee requested Indemnification (the Determination Period), the requisite determination of entitlement to indemnification will, to the fullest extent not prohibited by law, be deemed to have been made and Indemnitee will be entitled to such indemnification, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitees statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law. The Determination Period may be extended for a reasonable time, not to exceed an additional thirty (30) days, if the person, persons or entity making the determination with respect to entitlement to indemnification in good faith requires such additional time for the obtaining or evaluating of documentation and/or information relating thereto; and provided, further, the Determination Period may be extended an additional fifteen (15) days if the determination of entitlement to indemnification is to be made by the stockholders pursuant to Section 12(a)(iv) of this Agreement.
(c) The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, will not (except as otherwise expressly provided in this Agreement) of itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner which Indemnitee reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that Indemnitees conduct was unlawful.
(d) For purposes of any determination of good faith, and without creating any presumption as to lack of good faith if the following circumstances to not exist, Indemnitee will be deemed to have acted in good faith if Indemnitee acted based on the records or books of account of the Company, its subsidiaries, or an Enterprise, including financial statements, or on information supplied to Indemnitee by the directors or officers of the Company, its subsidiaries, or an Enterprise in the course of their duties, or on the advice of legal counsel for the Company, its subsidiaries, or an Enterprise or on information or records given or reports made to the Company or an Enterprise by an independent certified public accountant or by an appraiser, financial advisor or other expert selected with reasonable care by or on behalf of the Company, its subsidiaries, or an Enterprise. Further, Indemnitee will be deemed to have acted in a manner not opposed to the best interests of the Company, as referred to in this Agreement if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the best interests of the participants and beneficiaries of an employee benefit plan. The provisions of this Section 13(d) is not exclusive and does not limit in any way the other circumstances in which the Indemnitee may be deemed to have met the applicable standard of conduct set forth in this Agreement, and it shall in any event be presumed that Indemnitee has at all times acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Company. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion by clear and convincing evidence.
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(e) The knowledge and/or actions, or failure to act, of any director, officer, trustee, partner, managing member, fiduciary, agent or employee of the Enterprise may not be imputed to Indemnitee for purposes of determining Indemnitees right to indemnification under this Agreement.
Section 14. Remedies of Indemnitee.
(a) Indemnitee may commence litigation against the Company in the Delaware Court of Chancery to obtain indemnification or advancement of Expenses provided by this Agreement in the event that (i) a determination is made pursuant to Section 12 of this Agreement that Indemnitee is not entitled to indemnification under this Agreement, (ii) the Company does not advance Expenses pursuant to Section 10 of this Agreement, (iii) the determination of entitlement to indemnification is not made pursuant to Section 12 of this Agreement within the Determination Period, (iv) the Company does not indemnify Indemnitee pursuant to Section 5 or 6 or the second to last sentence of Section 12(d) of this Agreement within thirty (30) days after receipt by the Company of a written request therefor, (v) the Company does not indemnify Indemnitee pursuant to Section 3, 4, 7, or 8 of this Agreement within thirty (30) days after a determination has been made that Indemnitee is entitled to indemnification, or (vi) in the event that the Company or any other person takes or threatens to take any action to declare this Agreement void or unenforceable, or institutes any litigation or other action or Proceeding designed to deny, or to recover from, the Indemnitee the benefits provided or intended to be provided to the Indemnitee hereunder. Alternatively, Indemnitee, at Indemnitees option, may seek an award in arbitration to be conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of the American Arbitration Association. Indemnitee must commence such Proceeding seeking an adjudication or an award in arbitration within one hundred and eighty (180) days following the date on which Indemnitee first has the right to commence such Proceeding pursuant to this Section 14(a); provided, however, that the foregoing clause does not apply in respect of a Proceeding brought by Indemnitee to enforce Indemnitees rights under Section 5 of this Agreement. The Company will not oppose Indemnitees right to seek any such adjudication or award in arbitration. The Company, may similarly, at the Companys option, seek an award in arbitration in the event of a dispute with Indemnitee.
(b) If a determination is made pursuant to Section 12 of this Agreement that Indemnitee is not entitled to indemnification, any judicial proceeding or arbitration commenced pursuant to this Section 14 will be conducted in all respects as a de novo trial, or arbitration, on the merits and Indemnitee may not be prejudiced by reason of that adverse determination. In any judicial proceeding or arbitration commenced pursuant to this Section 14 the Company will have the burden of proving Indemnitee is not entitled to indemnification or advancement of Expenses, as the case may be, and will not introduce evidence of the determination made pursuant to Section 12 of this Agreement.
(c) If a determination is made pursuant to Section 12 of this Agreement that Indemnitee is entitled to indemnification, the Company will be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section 14, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitees statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law.
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(d) The Company is, to the fullest extent not prohibited by law, precluded from asserting in any judicial proceeding or arbitration commenced pursuant to this Section 14 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and will stipulate in any such court or before any such arbitrator that the Company is bound by all the provisions of this Agreement.
(e) It is the intent of the Company that, to the fullest extent permitted by law, the Indemnitee not be required to incur legal fees or other Expenses associated with the interpretation, enforcement or defense of Indemnitees rights under this Agreement by litigation or otherwise because the cost and expense thereof would substantially detract from the benefits intended to be extended to the Indemnitee hereunder. The Company, to the fullest extent permitted by law, will (within thirty (30) days after receipt by the Company of a written request therefor) advance to Indemnitee such Expenses which are incurred by Indemnitee in connection with any action concerning this Agreement, Indemnitees right to indemnification or advancement of Expenses from the Company, or concerning any directors and officers liability insurance policies maintained by the Company, and will indemnify Indemnitee against any and all such Expenses unless the court determines that each of the Indemnitees claims in such action were made in bad faith or were frivolous or are prohibited by law.
Section 15. Non-exclusivity; Survival of Rights; Insurance; Subrogation.
(a) The indemnification and advancement of Expenses provided by this Agreement are not exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Certificate of Incorporation, the Bylaws, any agreement, a vote of stockholders or a resolution of directors, or otherwise. The indemnification and advancement of Expenses provided by this Agreement may not be limited or restricted by any amendment, alteration or repeal of this Agreement in any way with respect to any action taken or omitted by Indemnitee in Indemnitees Corporate Status occurring prior to any amendment, alteration or repeal of this Agreement. To the extent that a change in Delaware law, whether by statute or judicial decision, permits greater indemnification or advancement of Expenses than would be afforded currently under the Bylaws, Certificate of Incorporation, or this Agreement, it is the intent of the parties hereto that Indemnitee enjoy by this Agreement the greater benefits so afforded by such change; provided, however, that no change in applicable law shall have the effect of reducing the benefits available to Indemnitee hereunder based on Delaware law as in effect on the date hereof. No right or remedy herein conferred is intended to be exclusive of any other right or remedy, and every other right and remedy is cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, will not prevent the concurrent assertion or employment of any other right or remedy.
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(b) The Company hereby acknowledges that Indemnitee may have certain rights to indemnification, advancement of Expenses and/or insurance provided by one or more other Persons with whom or which Indemnitee may be associated. The relationship between the Company and such other Persons, other than an Enterprise, with respect to the Indemnitees rights to indemnification, advancement of Expenses, and insurance is described by this subsection, subject to the provisions of subsection (d) of this Section 16 with respect to a Proceeding concerning Indemnitees Corporate Status with an Enterprise.
i. The Company hereby acknowledges and agrees:
1) the Company is the indemnitor of first resort with respect to any request for indemnification or advancement of Expenses made pursuant to this Agreement concerning any Proceeding;
2) the Company is primarily liable for all indemnification and indemnification or advancement of Expenses obligations for any Proceeding, whether created by law, organizational or constituent documents, contract (including this Agreement) or otherwise;
3) any obligation of any other Persons with whom or which Indemnitee may be associated to indemnify Indemnitee and/or advance Expenses to Indemnitee in respect of any proceeding are secondary to the obligations of the Companys obligations;
4) the Company will indemnify Indemnitee and advance Expenses to Indemnitee hereunder to the fullest extent provided herein without regard to any rights Indemnitee may have against any other Person with whom or which Indemnitee may be associated or insurer of any such Person; and
ii. the Company irrevocably waives, relinquishes and releases (A) any other Person with whom or which Indemnitee may be associated from any claim of contribution, subrogation, reimbursement, exoneration or indemnification, or any other recovery of any kind in respect of amounts paid by the Company to Indemnitee pursuant to this Agreement and (B) any right to participate in any claim or remedy of Indemnitee against any Person, whether or not such claim, remedy or right arises in equity or under contract, statute or common law, including, without limitation, the right to take or receive from any Person, directly or indirectly, in cash or other property or by set-off or in any other manner, payment or security on account of such claim, remedy or right.
iii. In the event any other Person with whom or which Indemnitee may be associated or their insurers advances or extinguishes any liability or loss for Indemnitee, the payor has a right of subrogation against the Company or its insurers for all amounts so paid which would otherwise be payable by the Company or its insurers under this Agreement. In no event will payment by any other Person with whom or which Indemnitee may be associated or their insurers affect the obligations of the Company hereunder or shift primary liability for the Companys obligation to indemnify or advance of Expenses to any other Person with whom or which Indemnitee may be associated.
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iv. Any indemnification or advancement of Expenses provided by any other Person with whom or which Indemnitee may be associated is specifically in excess over the Companys obligation to indemnify and advance Expenses or any valid and collectible insurance (including but not limited to any malpractice insurance or professional errors and omissions insurance) provided by the Company.
(c) The Company represents that it presently has in place certain directors and officers liability insurance policies covering its directors and officers. Subject only to the provisions within this Section 15(c), the Company agrees that so long as Indemnitee shall have consented to serve or shall continue to serve as a director or officer of the Company, or both, or as an Agent of the Company, and thereafter so long as Indemnitee shall be subject to any possible Proceeding (such periods being hereinafter sometimes referred to as the Indemnification Period), the Company will use all reasonable efforts to maintain in effect for the benefit of Indemnitee one or more valid, binding and enforceable policies of directors and officers liability insurance from established and reputable insurers, providing, in all material respects, coverage both in scope and amount which are substantially similar to that presently provided including coverage in the event the Company does not or cannot, for any reason, indemnify or advance Expenses to Indemnitee as required by this Agreement. Anything in this Agreement to the contrary notwithstanding, to the extent that and for so long as the Company shall choose to continue to maintain any policies of directors and officers liability insurance during the Indemnification Period, the Company shall maintain similar and equivalent insurance for the benefit of Indemnitee during the Indemnification Period (unless such insurance shall be less favorable to Indemnitee than the Companys existing policies) to the extent such insurance coverage is reasonably available in the commercial market for directors and officers liability insurance. If, at the time of the receipt of a notice of a claim pursuant to this Agreement, the Company has director and officer liability insurance in effect, the Company will give prompt notice of such claim or of the commencement of a Proceeding, as the case may be, to the insurers in accordance with the procedures set forth in the respective policies. The Company will thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such Proceeding in accordance with the terms of such policies. Indemnitee agrees to assist the Company efforts to cause the insurers to pay such amounts and will comply with the terms of such policies, including selection of approved panel counsel, if required.
(d) The Companys obligation to indemnify or advance Expenses hereunder to Indemnitee for any Proceeding concerning Indemnitees Corporate Status with an Enterprise will be reduced by any amount Indemnitee has actually received as indemnification or advancement of Expenses from such Enterprise. The Company and Indemnitee intend that any such Enterprise (and its insurers) be the indemnitor of first resort with respect to indemnification and advancement of Expenses for any Proceeding related to or arising from Indemnitees Corporate Status with such Enterprise. The Companys obligation to indemnify and advance Expenses to Indemnitee is secondary to the obligations the Enterprise or its insurers owe to Indemnitee. Indemnitee agrees to take all reasonably necessary and desirable action to obtain from an Enterprise indemnification and advancement of Expenses for any Proceeding related to or arising from Indemnitees Corporate Status with such Enterprise.
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(e) In the event of any payment made by the Company under this Agreement, the Company will be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee from any Enterprise or insurance carrier. Indemnitee will execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights.
Section 16. Duration of Agreement. This Agreement continues until and terminates upon the later of: (a) ten (10) years after the date that Indemnitee ceases to have a Corporate Status or (b) one (1) year after the final termination of any Proceeding then pending in respect of which Indemnitee is granted rights of indemnification or advancement of Expenses hereunder and of any Proceeding commenced by Indemnitee pursuant to Section 14 of this Agreement relating thereto. The indemnification and advancement of Expenses rights provided by or granted pursuant to this Agreement are binding upon and be enforceable by the parties hereto and their respective successors and assigns (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company), continue as to an Indemnitee who has ceased to be a director, officer, employee or agent of the Company or of any other Enterprise, and inure to the benefit of Indemnitee and Indemnitees spouse, assigns, heirs, devisees, executors and administrators and other legal representatives.
Section 17. Severability. If any provision or provisions of this Agreement is held to be invalid, illegal or unenforceable for any reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) will not in any way be affected or impaired thereby and remain enforceable to the fullest extent permitted by law; (b) such provision or provisions will be deemed reformed to the extent necessary to conform to applicable law and to give the maximum effect to the intent of the parties hereto; and (c) to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) will be construed so as to give effect to the intent manifested thereby.
Section 18. Interpretation. Any ambiguity in the terms of this Agreement will be resolved in favor of Indemnitee and in a manner to provide the maximum indemnification and advancement of Expenses permitted by law. The Company and Indemnitee intend that this Agreement provide to the fullest extent permitted by law for indemnification and advancement, including in excess of that expressly provided, without limitation, by the Certificate of Incorporation, the Bylaws, vote of the Company stockholders or disinterested directors.
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Section 19. Enforcement.
(a) The Company expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on it hereby in order to induce Indemnitee to serve as a director or officer of the Company, and the Company acknowledges that Indemnitee is relying upon this Agreement in serving or continuing to serve as a director or officer of the Company.
(b) This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral, written and implied, between the parties hereto with respect to the subject matter hereof; provided, however, that this Agreement is a supplement to and in furtherance of the Certificate of Incorporation, the Bylaws and applicable law, and is not a substitute therefor, nor to diminish or abrogate any rights of Indemnitee thereunder.
Section 20. Modification and Waiver. No supplement, modification or amendment of this Agreement is binding unless executed in writing by the parties hereto. No waiver of any of the provisions of this Agreement will be deemed or constitutes a waiver of any other provisions of this Agreement nor will any waiver constitute a continuing waiver.
Section 21. Specific Performance. The parties recognize that if any provision of this Agreement is violated by the parties hereto, Indemnitee may be without an adequate remedy at law. Accordingly, in the event of any such violation, Indemnitee shall be entitled, if Indemnitee so elects, to institute Proceedings, either at law or in equity, to obtain damages, to enforce specific performance, to enjoin such violation, or to obtain any relief or any combination of the foregoing as Indemnitee may elect to pursue without the posting of any bond.
Section 22. Notice by Indemnitee and Defense of Claim.
(a) Indemnitee agrees promptly to notify the Company in writing upon being served with any summons, citation, subpoena, complaint, indictment, information or other document relating to any Proceeding or matter which may be subject to indemnification or advancement of Expenses covered hereunder. The failure of Indemnitee to so notify the Company does not relieve the Company of any obligation which it may have to the Indemnitee under this Agreement or otherwise.
(b) The Company shall be entitled to participate in the defense of any claim relating to an indemnifiable event or to assume the defense thereof, with counsel reasonably satisfactory to Indemnitee; provided that, if Indemnitee believes, after consultation with counsel selected by Indemnitee, that (i) the use of counsel chosen by the Company to represent Indemnitee would present such counsel with an actual or potential conflict of interest, (ii) the named parties in any such claim (including any impleaded parties) include the Company or any subsidiary of the Company, on the one hand, and Indemnitee, on the other hand, and Indemnitee concludes, after consultation with counsel selected by Indemnitee, that there may be one or more legal defenses available to him that are different from or in addition to those available to the
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Company or any subsidiary of the Company, or (iii) any such representation by such counsel would be precluded under the applicable standards of professional conduct then prevailing, then Indemnitee shall be entitled to retain separate counsel (but not more than one law firm, plus, if applicable, local counsel in respect of any particular claim) at the Companys expense. Notwithstanding any other provision of this Agreement, the Company shall not, without the prior written consent of Indemnitee, settle any threatened or pending indemnifiable claim which the Indemnitee is or could have been a party to unless such settlement solely involves the payment of money and includes a full and final release of the Indemnitee from all claims that are the subject matter of such indemnifiable claim. Neither the Company nor Indemnitee shall unreasonably withhold its consent to any proposed settlement; provided that Indemnitee may withhold consent to any settlement that does not provide a full and final release of Indemnitee.
Section 23. Notices. All notices, requests, demands and other communications under this Agreement will be in writing and will be deemed to have been duly given if (a) delivered by hand to the other party, (b) sent by reputable overnight courier to the other party or (c) sent by facsimile transmission or electronic mail, with receipt of oral confirmation that such communication has been received:
(a) If to Indemnitee, at the address indicated on the signature page of this Agreement, or such other address as Indemnitee provides to the Company.
(b) If to the Company to:
FIGS, Inc.:
2834 Colorado Avenue
Suite 100
Santa Monica, California 90404
Attention: Legal
Email: Legal@wearfigs.com
or to any other address as may have been furnished to Indemnitee by the Company.
Section 24. Contribution.
(a) To the fullest extent permissible under applicable law, if the indemnification provided for in this Agreement is unavailable to Indemnitee for any reason whatsoever, the Company, in lieu of indemnifying Indemnitee, will contribute to the amount incurred by Indemnitee, whether for judgments, fines, penalties, excise taxes, amounts paid or to be paid in settlement and/or for Expenses in such Proceeding, in the entire amount of any judgment or settlement of such action and/or for reasonably incurred Expenses in connection with any claim relating to an indemnifiable event under this Agreement in such proportion as is deemed fair and reasonable in light of all the circumstances of such Proceeding. Without diminishing or impairing the obligations of the Company set forth in the preceding subparagraph, if, for any reason, Indemnitee shall elect or be required by applicable law or court order to pay all
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or any portion of any judgment or settlement in any threatened, pending or completed action, suit or proceeding in which the Company is jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), the Company shall contribute to the amount of Expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred and paid or payable by Indemnitee in such proportion to the relative benefits received by the Company and all officers, directors or employees of the Company, other than Indemnitee, who are jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), on the one hand, and Indemnitee, on the other hand, from the transaction or events from which such action, suit or proceeding arose; provided, however, that the proportion determined on the basis of relative benefit may, to the extent necessary to conform to law, be further adjusted to reflect (i) the relative benefits received by the Company and Indemnitee as a result of the event(s) and/or transaction(s) giving cause to such Proceeding; and/or (ii) the relative fault of the Company (and its directors, officers, employees and agents) and Indemnitee in connection with such event(s) and/or transaction(s).
Section 25. Applicable Law and Consent to Jurisdiction. This Agreement and the legal relations among the parties are governed by, and construed and enforced in accordance with, the laws of the State of Delaware, without regard to its conflict of laws rules. Except with respect to any arbitration commenced by Indemnitee pursuant to Section 14(a) of this Agreement, the Company and Indemnitee hereby irrevocably and unconditionally (i) agree that any action or Proceeding arising out of or in connection with this Agreement may be brought only in the Delaware Court of Chancery and not in any other state or federal court in the United States of America or any court in any other country, (ii) consent to submit to the exclusive jurisdiction of the Delaware Court for purposes of any action or Proceeding arising out of or in connection with this Agreement, (iii) waive any objection to the laying of venue of any such action or Proceeding in the Delaware Court, and (iv) waive, and agree not to plead or to make, any claim that any such action or Proceeding brought in the Delaware Court has been brought in an improper or inconvenient forum.
Section 26. Identical Counterparts. This Agreement may be executed in one or more counterparts, each of which will for all purposes be deemed to be an original but all of which together constitutes one and the same Agreement. Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement.
Section 27. Headings. The headings of this Agreement are inserted for convenience only and do not constitute part of this Agreement or affect the construction thereof.
[Signature page follows]
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Exhibit 10.2
FIGS, INC.
AMENDED 2016 EQUITY INCENTIVE PLAN
ADOPTED BY THE BOARD OF DIRECTORS: APRIL 28, 2016
APPROVED BY THE STOCKHOLDERS: APRIL 28, 2016
AMENDED BY THE BOARD AND STOCKHOLDERS: OCTOBER 27, 2017 AND JUNE 26, 2020
TERMINATION DATE: APRIL 28, 2026
1. GENERAL.
(a) Eligible Stock Award Recipients. Employees, Directors and Consultants are eligible to receive Stock Awards.
(b) Available Stock Awards. The Plan provides for the grant of the following types of Stock Awards: (i) Incentive Stock Options, (ii) Nonstatutory Stock Options, (iii) Stock Appreciation Rights, (iv) Restricted Stock Awards, (v) Restricted Stock Unit Awards and (vi) Other Stock Awards.
(c) Purpose. The Plan, through the granting of Stock Awards, is intended to help the Company secure and retain the services of eligible award recipients, provide incentives for such persons to exert maximum efforts for the success of the Company and any Affiliate and provide a means by which the eligible recipients may benefit from increases in value of the Common Stock.
2. ADMINISTRATION.
(a) Administration by Board. The Board will administer the Plan. The Board may delegate administration of the Plan to a Committee or Committees, as provided in Section 2(c).
(b) Powers of Board. The Board will have the power, subject to, and within the limitations of, the express provisions of the Plan:
(i) To determine (A) who will be granted Stock Awards; (B) when and how each Stock Award will be granted; (C) what type of Stock Award will be granted; (D) the provisions of each Stock Award (which need not be identical), including when a person will be permitted to exercise or otherwise receive cash or Common Stock under the Stock Award; (E) the number of shares of Common Stock subject to a Stock Award; and (F) the Fair Market Value applicable to a Stock Award.
(ii) To construe and interpret the Plan and Stock Awards granted under it, and to establish, amend and revoke rules and regulations for administration of the Plan and Stock Awards. The Board, in the exercise of these powers, may correct any defect, omission or inconsistency in the Plan or in any Stock Award Agreement, in a manner and to the extent it will deem necessary or expedient to make the Plan or Stock Award fully effective.
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(iii) To settle all controversies regarding the Plan and Stock Awards granted under it.
(iv) To accelerate, in whole or in part, the time at which a Stock Award may be exercised or vest (or at which cash or shares of Common Stock may be issued).
(v) To suspend or terminate the Plan at any time. Except as otherwise provided in the Plan or a Stock Award Agreement, suspension or termination of the Plan will not impair a Participants rights under his or her then-outstanding Stock Award without his or her written consent except as provided in subsection (viii) below.
(vi) To amend the Plan in any respect the Board deems necessary or advisable, including, without limitation, by adopting amendments relating to Incentive Stock Options and certain nonqualified deferred compensation under Section 409A of the Code and/or to make the Plan or Stock Awards granted under the Plan compliant with the requirements for Incentive Stock Options or exempt from or compliant with the requirements for nonqualified deferred compensation under Section 409A of the Code, subject to the limitations, if any, of applicable law. However, if required by applicable law, and except as provided in Section 9(a) relating to Capitalization Adjustments, the Company will seek stockholder approval of any amendment of the Plan that (A) materially increases the number of shares of Common Stock available for issuance under the Plan, (B) materially expands the class of individuals eligible to receive Stock Awards under the Plan, (C) materially increases the benefits accruing to Participants under the Plan, (D) materially reduces the price at which shares of Common Stock may be issued or purchased under the Plan, (E) materially extends the term of the Plan, or (F) materially expands the types of Stock Awards available for issuance under the Plan. Except as provided in the Plan (including subsection (viii) below) or a Stock Award Agreement, no amendment of the Plan will impair a Participants rights under an outstanding Stock Award unless (1) the Company requests the consent of the affected Participant, and (2) such Participant consents in writing.
(vii) To submit any amendment to the Plan for stockholder approval, including, but not limited to, amendments to the Plan intended to satisfy the requirements of Section 422 of the Code regarding Incentive Stock Options.
(viii) To approve forms of Stock Award Agreements for use under the Plan and to amend the terms of any one or more Stock Awards, including, but not limited to, amendments to provide terms more favorable to the Participant than previously provided in the Stock Award Agreement, subject to any specified limits in the Plan that are not subject to Board discretion; provided however, that a Participants rights under any Stock Award will not be impaired by any such amendment unless (A) the Company requests the consent of the affected Participant, and (B) such Participant consents in writing. Notwithstanding the foregoing, (1) a Participants rights will not be deemed to have been impaired by any such amendment if the Board, in its sole discretion, determines that the amendment, taken as a whole, does not materially impair the Participants rights, and (2) subject to the limitations of applicable law, if any, the Board may amend the terms of any one or more Stock Awards without the affected Participants consent (A) to maintain the qualified status of the Stock Award as an Incentive Stock Option under Section 422 of the Code; (B) to change the terms of an Incentive Stock Option, if such change
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results in impairment of the Award solely because it impairs the qualified status of the Award as an Incentive Stock Option under Section 422 of the Code; (C) to clarify the manner of exemption from, or to bring the Stock Award into compliance with, Section 409A of the Code; or (D) to comply with other applicable laws.
(ix) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company and that are not in conflict with the provisions of the Plan or Stock Awards.
(x) To adopt such procedures and sub-plans as are necessary or appropriate to permit participation in the Plan by Employees, Directors or Consultants who are foreign nationals or employed outside the United States (provided that Board approval will not be necessary for immaterial modifications to the Plan or any Stock Award Agreement that are required for compliance with the laws of the relevant foreign jurisdiction).
(xi) To effect, with the consent of any adversely affected Participant, (A) the reduction of the exercise, purchase or strike price of any outstanding Stock Award; (B) the cancellation of any outstanding Stock Award and the grant in substitution therefor of a new (1) Option or SAR, (2) Restricted Stock Award, (3) Restricted Stock Unit Award, (4) Other Stock Award, (5) cash and/or (6) other valuable consideration determined by the Board, in its sole discretion, with any such substituted award (x) covering the same or a different number of shares of Common Stock as the cancelled Stock Award and (y) granted under the Plan or another equity or compensatory plan of the Company; or (C) any other action that is treated as a repricing under generally accepted accounting principles.
(c) Delegation to Committee. The Board may delegate some or all of the administration of the Plan to a Committee or Committees. If administration of the Plan is delegated to a Committee, the Committee will have, in connection with the administration of the Plan, the powers theretofore possessed by the Board that have been delegated to the Committee, including the power to delegate to a subcommittee of the Committee any of the administrative powers the Committee is authorized to exercise (and references in this Plan to the Board will thereafter be to the Committee or subcommittee). Any delegation of administrative powers will be reflected in resolutions, not inconsistent with the provisions of the Plan, adopted from time to time by the Board or Committee (as applicable). The Committee may, at any time, abolish the subcommittee and/or revest in the Committee any powers delegated to the subcommittee. The Board may retain the authority to concurrently administer the Plan with the Committee and may, at any time, revest in the Board some or all of the powers previously delegated.
(d) Delegation to an Officer. The Board may delegate to one (1) or more Officers the authority to do one or both of the following: (i) designate Employees who are not Officers to be recipients of Options and SARs (and, to the extent permitted by applicable law, other Stock Awards) and, to the extent permitted by applicable law, the terms of such Stock Awards, and (ii) determine the number of shares of Common Stock to be subject to such Stock Awards granted to such Employees; provided, however, that the Board resolutions regarding such delegation will specify the total number of shares of Common Stock that may be subject to the Stock Awards granted by such Officer and that such Officer may not grant a Stock Award to himself or herself.
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Any such Stock Awards will be granted on the form of Stock Award Agreement most recently approved for use by the Committee or the Board, unless otherwise provided in the resolutions approving the delegation authority. The Board may not delegate authority to an Officer who is acting solely in the capacity of an Officer (and not also as a Director) to determine the Fair Market Value pursuant to Section 13(t) below.
(e) Effect of Boards Decision. All determinations, interpretations and constructions made by the Board in good faith will not be subject to review by any person and will be final, binding and conclusive on all persons.
3. SHARES SUBJECT TO THE PLAN.
(a) Share Reserve.
(i) Subject to Section 9(a) relating to Capitalization Adjustments, the aggregate number of shares of Common Stock that may be issued pursuant to Stock Awards from and after the Effective Date will not exceed 5,746,326 shares (the Share Reserve).
(ii) For clarity, the Share Reserve in this Section 3(a) is a limitation on the number of shares of Common Stock that may be issued pursuant to the Plan. Accordingly, this Section 3(a) does not limit the granting of Stock Awards except as provided in Section 7(a).
(b) Reversion of Shares to the Share Reserve. If a Stock Award or any portion thereof (i) expires or otherwise terminates without all of the shares covered by such Stock Award having been issued or (ii) is settled in cash (i.e., the Participant receives cash rather than stock), such expiration, termination or settlement will not reduce (or otherwise offset) the number of shares of Common Stock that may be available for issuance under the Plan. If any shares of Common Stock issued pursuant to a Stock Award are forfeited back to or repurchased by the Company because of the failure to meet a contingency or condition required to vest such shares in the Participant, then the shares that are forfeited or repurchased will revert to and again become available for issuance under the Plan. Any shares reacquired by the Company in satisfaction of tax withholding obligations on a Stock Award or as consideration for the exercise or purchase price of a Stock Award will again become available for issuance under the Plan.
(c) Incentive Stock Option Limit. Subject to the Share Reserve and Section 9(a) relating to Capitalization Adjustments, the aggregate maximum number of shares of Common Stock that may be issued pursuant to the exercise of Incentive Stock Options will be a number of shares of Common Stock equal to three multiplied by the Share Reserve.
(d) Source of Shares. The stock issuable under the Plan will be shares of authorized but unissued or reacquired Common Stock, including shares repurchased by the Company on the open market or otherwise.
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4. ELIGIBILITY.
(a) Eligibility for Specific Stock Awards. Incentive Stock Options may be granted only to employees of the Company or a parent corporation or subsidiary corporation thereof (as such terms are defined in Sections 424(e) and 424(f) of the Code). Stock Awards other than Incentive Stock Options may be granted to Employees, Directors and Consultants; provided, however, that Stock Awards may not be granted to Employees, Directors and Consultants who are providing Continuous Service only to any parent of the Company, as such term is defined in Rule 405, unless (i) the stock underlying such Stock Awards is treated as service recipient stock under Section 409A of the Code (for example, because the Stock Awards are granted pursuant to a corporate transaction such as a spin off transaction), or (ii) the Company, in consultation with its legal counsel, has determined that such Stock Awards are otherwise exempt from or alternatively comply with the distribution requirements of Section 409A of the Code.
(b) Ten Percent Stockholders. A Ten Percent Stockholder will not be granted an Incentive Stock Option unless the exercise price of such Option is at least one hundred ten percent (110%) of the Fair Market Value on the date of grant and the Option is not exercisable after the expiration of five (5) years from the date of grant.
(c) Consultants. A Consultant will not be eligible for the grant of a Stock Award if, at the time of grant, either the offer or sale of the Companys securities to such Consultant is not exempt under Rule 701 because of the nature of the services that the Consultant is providing to the Company, because the Consultant is not a natural person, or because of any other provision of Rule 701, unless the Company determines that such grant need not comply with the requirements of Rule 701 and will satisfy another exemption under the Securities Act as well as comply with the securities laws of all other relevant jurisdictions.
5. PROVISIONS RELATING TO OPTIONS AND STOCK APPRECIATION RIGHTS.
Each Option or SAR will be in such form and will contain such terms and conditions as the Board deems appropriate. All Options will be separately designated Incentive Stock Options or Nonstatutory Stock Options at the time of grant, and, if certificates are issued, a separate certificate or certificates will be issued for shares of Common Stock purchased on exercise of each type of Option. If an Option is not specifically designated as an Incentive Stock Option, or if an Option is designated as an Incentive Stock Option but some portion or all of the Option fails to qualify as an Incentive Stock Option under the applicable rules, then the Option (or portion thereof) will be a Nonstatutory Stock Option. The provisions of separate Options or SARs need not be identical; provided, however, that each Stock Award Agreement will conform to (through incorporation of provisions hereof by reference in the applicable Stock Award Agreement or otherwise) the substance of each of the following provisions:
(a) Term. Subject to the provisions of Section 4(b) regarding Ten Percent Stockholders, no Option or SAR will be exercisable after the expiration of ten (10) years from the date of its grant or such shorter period specified in the Stock Award Agreement.
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(b) Exercise Price. Subject to the provisions of Section 4(b) regarding Ten Percent Stockholders, the exercise or strike price of each Option or SAR will be not less than one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the Option or SAR on the date the Stock Award is granted. Notwithstanding the foregoing, an Option or SAR may be granted with an exercise or strike price lower than one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the Stock Award if such Stock Award is granted pursuant to an assumption of or substitution for another option or stock appreciation right pursuant to a Corporate Transaction and in a manner consistent with the provisions of Section 409A of the Code and, if applicable, Section 424(a) of the Code. Each SAR will be denominated in shares of Common Stock equivalents.
(c) Purchase Price for Options. The purchase price of Common Stock acquired pursuant to the exercise of an Option may be paid, to the extent permitted by applicable law and as determined by the Board in its sole discretion, by any combination of the methods of payment set forth below. The Board will have the authority to grant Options that do not permit all of the following methods of payment (or otherwise restrict the ability to use certain methods) and to grant Options that require the consent of the Company to use a particular method of payment. The permitted methods of payment are as follows:
(i) by cash, check, bank draft or money order payable to the Company;
(ii) pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board that, prior to the issuance of the stock subject to the Option, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds;
(iii) by delivery to the Company (either by actual delivery or attestation) of shares of Common Stock;
(iv) if an Option is a Nonstatutory Stock Option, by a net exercise arrangement pursuant to which the Company will reduce the number of shares of Common Stock issuable upon exercise by the largest whole number of shares with a Fair Market Value that does not exceed the aggregate exercise price; provided, however, that the Company will accept a cash or other payment from the Participant to the extent of any remaining balance of the aggregate exercise price not satisfied by such reduction in the number of whole shares to be issued. Shares of Common Stock will no longer be subject to an Option and will not be exercisable thereafter to the extent that (A) shares issuable upon exercise are used to pay the exercise price pursuant to the net exercise, (B) shares are delivered to the Participant as a result of such exercise, and (C) shares are withheld to satisfy tax withholding obligations;
(v) according to a deferred payment or similar arrangement with the Optionholder; provided, however, that interest will compound at least annually and will be charged at the minimum rate of interest necessary to avoid (A) the imputation of interest income to the Company and compensation income to the Optionholder under any applicable provisions of the Code, and (B) the classification of the Option as a liability for financial accounting purposes; or
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(vi) in any other form of legal consideration that may be acceptable to the Board and specified in the applicable Stock Award Agreement.
(d) Exercise and Payment of a SAR. To exercise any outstanding SAR, the Participant must provide written notice of exercise to the Company in compliance with the provisions of the Stock Award Agreement evidencing such SAR. The appreciation distribution payable on the exercise of a SAR will be not greater than an amount equal to the excess of (A) the aggregate Fair Market Value (on the date of the exercise of the SAR) of a number of shares of Common Stock equal to the number of Common Stock equivalents in which the Participant is vested under such SAR, and with respect to which the Participant is exercising the SAR on such date, over (B) the strike price. The appreciation distribution may be paid in Common Stock, in cash, in any combination of the two or in any other form of consideration, as determined by the Board and contained in the Stock Award Agreement evidencing such SAR.
(e) Transferability of Options and SARs. The Board may, in its sole discretion, impose such limitations on the transferability of Options and SARs as the Board will determine. In the absence of such a determination by the Board to the contrary, the following restrictions on the transferability of Options and SARs will apply:
(i) Restrictions on Transfer. An Option or SAR will not be transferable except by will or by the laws of descent and distribution (and pursuant to subsections (ii) and (iii) below), and will be exercisable during the lifetime of the Participant only by the Participant. The Board may permit transfer of the Option or SAR in a manner that is not prohibited by applicable tax and securities laws. Except as explicitly provided herein, neither an Option nor a SAR may be transferred for consideration.
(ii) Domestic Relations Orders. Subject to the approval of the Board or a duly authorized Officer, an Option or SAR may be transferred pursuant to the terms of a domestic relations order, official marital settlement agreement or other divorce or separation instrument as permitted by Treasury Regulation 1.421-1(b)(2). If an Option is an Incentive Stock Option, such Option may be deemed to be a Nonstatutory Stock Option as a result of such transfer.
(iii) Beneficiary Designation. Subject to the approval of the Board or a duly authorized Officer, a Participant may, by delivering written notice to the Company, in a form approved by the Company (or the designated broker), designate a third party who, upon the death of the Participant, will thereafter be entitled to exercise the Option or SAR and receive the Common Stock or other consideration resulting from such exercise. In the absence of such a designation, the executor or administrator of the Participants estate will be entitled to exercise the Option or SAR and receive the Common Stock or other consideration resulting from such exercise. However, the Company may prohibit designation of a beneficiary at any time, including due to any conclusion by the Company that such designation would be inconsistent with the provisions of applicable laws.
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(f) Vesting Generally. The total number of shares of Common Stock subject to an Option or SAR may vest and therefore become exercisable in periodic installments that may or may not be equal. The Option or SAR may be subject to such other terms and conditions on the time or times when it may or may not be exercised (which may be based on the satisfaction of performance goals or other criteria) as the Board may deem appropriate. The vesting provisions of individual Options or SARs may vary. The provisions of this Section 5(f) are subject to any Option or SAR provisions governing the minimum number of shares of Common Stock as to which an Option or SAR may be exercised.
(g) Termination of Continuous Service. Except as otherwise provided in the applicable Stock Award Agreement or other agreement between the Participant and the Company, if a Participants Continuous Service terminates (other than for Cause and other than upon the Participants death or Disability), the Participant may exercise his or her Option or SAR (to the extent that the Participant was entitled to exercise such Stock Award as of the date of termination of Continuous Service) within the period of time ending on the earlier of (i) the date three (3) months following the termination of the Participants Continuous Service (or such longer or shorter period specified in the applicable Stock Award Agreement, which period will not be less than thirty (30) days if necessary to comply with applicable laws unless such termination is for Cause) and (ii) the expiration of the term of the Option or SAR as set forth in the Stock Award Agreement. If, after termination of Continuous Service, the Participant does not exercise his or her Option or SAR within the applicable time frame, the Option or SAR (as applicable) will terminate.
(h) Extension of Termination Date. Except as otherwise provided in the applicable Stock Award Agreement or other agreement between the Participant and the Company, if the exercise of an Option or SAR following the termination of the Participants Continuous Service (other than for Cause and other than upon the Participants death or Disability) would be prohibited at any time solely because the issuance of shares of Common Stock would violate the registration requirements under the Securities Act, then the Option or SAR will terminate on the earlier of (i) the expiration of a total period of three (3) months (that need not be consecutive) after the termination of the Participants Continuous Service during which the exercise of the Option or SAR would not be in violation of such registration requirements, or (ii) the expiration of the term of the Option or SAR as set forth in the applicable Stock Award Agreement. In addition, unless otherwise provided in a Participants Stock Award Agreement, if the sale of any Common Stock received upon exercise of an Option or SAR following the termination of the Participants Continuous Service (other than for Cause) would violate the Companys insider trading policy, then the Option or SAR will terminate on the earlier of (i) the expiration of a period of time (that need not be consecutive) equal to the applicable post-termination exercise period after the termination of the Participants Continuous Service during which the sale of the Common Stock received upon exercise of the Option or SAR would not be in violation of the Companys insider trading policy, or (ii) the expiration of the term of the Option or SAR as set forth in the applicable Stock Award Agreement.
(i) Disability of Participant. Except as otherwise provided in the applicable Stock Award Agreement or other agreement between the Participant and the Company, if a Participants Continuous Service terminates as a result of the Participants Disability, the Participant may exercise his or her Option or SAR (to the extent that the Participant was entitled
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to exercise such Option or SAR as of the date of termination of Continuous Service), but only within such period of time ending on the earlier of (i) the date twelve (12) months following such termination of Continuous Service (or such longer or shorter period specified in the Stock Award Agreement, which period will not be less than six (6) months if necessary to comply with applicable laws), and (ii) the expiration of the term of the Option or SAR as set forth in the Stock Award Agreement. If, after termination of Continuous Service, the Participant does not exercise his or her Option or SAR within the applicable time frame, the Option or SAR (as applicable) will terminate.
(j) Death of Participant. Except as otherwise provided in the applicable Stock Award Agreement or other agreement between the Participant and the Company, if (i) a Participants Continuous Service terminates as a result of the Participants death, or (ii) the Participant dies within the period (if any) specified in the Stock Award Agreement for exercisability after the termination of the Participants Continuous Service (for a reason other than death), then the Option or SAR may be exercised (to the extent the Participant was entitled to exercise such Option or SAR as of the date of death) by the Participants estate, by a person who acquired the right to exercise the Option or SAR by bequest or inheritance or by a person designated to exercise the Option or SAR upon the Participants death, but only within the period ending on the earlier of (i) the date eighteen (18) months following the date of death (or such longer or shorter period specified in the Stock Award Agreement, which period will not be less than six (6) months if necessary to comply with applicable laws), and (ii) the expiration of the term of such Option or SAR as set forth in the Stock Award Agreement. If, after the Participants death, the Option or SAR is not exercised within the applicable time frame, the Option or SAR (as applicable) will terminate.
(k) Termination for Cause. Except as explicitly provided otherwise in a Participants Stock Award Agreement or other individual written agreement between the Company or any Affiliate and the Participant, if a Participants Continuous Service is terminated for Cause, the Option or SAR will terminate immediately upon such Participants termination of Continuous Service, and the Participant will be prohibited from exercising his or her Option or SAR from and after the time of such termination of Continuous Service.
(l) Non-Exempt Employees. If an Option or SAR is granted to an Employee who is a non-exempt employee for purposes of the Fair Labor Standards Act of 1938, as amended, the Option or SAR will not be first exercisable for any shares of Common Stock until at least six (6) months following the date of grant of the Option or SAR (although the Stock Award may vest prior to such date). Consistent with the provisions of the Worker Economic Opportunity Act, (i) if such non-exempt Employee dies or suffers a Disability, (ii) upon a Corporate Transaction in which such Option or SAR is not assumed, continued, or substituted, (iii) upon a Change in Control, or (iv) upon the Participants retirement (as such term may be defined in the Participants Stock Award Agreement, in another agreement between the Participant and the Company, or, if no such definition, in accordance with the Companys then current employment policies and guidelines), the vested portion of any Options and SARs may be exercised earlier than six (6) months following the date of grant. The foregoing provision is intended to operate so that any income derived by a non-exempt employee in connection with the exercise or vesting
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of an Option or SAR will be exempt from his or her regular rate of pay. To the extent permitted and/or required for compliance with the Worker Economic Opportunity Act to ensure that any income derived by a non-exempt employee in connection with the exercise, vesting or issuance of any shares under any other Stock Award will be exempt from the employees regular rate of pay, the provisions of this Section 5(l) will apply to all Stock Awards and are hereby incorporated by reference into such Stock Award Agreements.
(m) Early Exercise of Options. An Option may, but need not, include a provision whereby the Optionholder may elect at any time before the Optionholders Continuous Service terminates to exercise the Option as to any part or all of the shares of Common Stock subject to the Option prior to the full vesting of the Option. Subject to the Repurchase Limitation in Section 8(m), any unvested shares of Common Stock so purchased may be subject to a repurchase right in favor of the Company or to any other restriction the Board determines to be appropriate. Provided that the Repurchase Limitation in Section 8(m) is not violated, the Company will not be required to exercise its repurchase right until at least six (6) months (or such longer or shorter period of time required to avoid classification of the Option as a liability for financial accounting purposes) have elapsed following exercise of the Option unless the Board otherwise specifically provides in the Option Agreement.
(n) Right of Repurchase. Subject to the Repurchase Limitation in Section 8(m), the Option or SAR may include a provision whereby the Company may elect to repurchase all or any part of the vested shares of Common Stock acquired by the Participant pursuant to the exercise of the Option or SAR.
(o) Right of First Refusal. The Option or SAR may include a provision whereby the Company may elect to exercise a right of first refusal following receipt of notice from the Participant of the intent to transfer all or any part of the shares of Common Stock received upon the exercise of the Option or SAR. Such right of first refusal will be subject to the Repurchase Limitation in Section 8(m). Except as expressly provided in this Section 5(o) or in the Stock Award Agreement, such right of first refusal will otherwise comply with any applicable provisions of the bylaws of the Company.
6. PROVISIONS OF STOCK AWARDS OTHER THAN OPTIONS AND SARS.
(a) Restricted Stock Awards. Each Restricted Stock Award Agreement will be in such form and will contain such terms and conditions as the Board deems appropriate. To the extent consistent with the Companys bylaws, at the Boards election, shares of Common Stock may be (i) held in book entry form subject to the Companys instructions until any restrictions relating to the Restricted Stock Award lapse; or (ii) evidenced by a certificate, which certificate will be held in such form and manner as determined by the Board. The terms and conditions of Restricted Stock Award Agreements may change from time to time, and the terms and conditions of separate Restricted Stock Award Agreements need not be identical. Each Restricted Stock Award Agreement will conform to (through incorporation of the provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions:
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(i) Consideration. A Restricted Stock Award may be awarded in consideration for (A) cash, check, bank draft or money order payable to the Company, (B) past services to the Company or an Affiliate, or (C) any other form of legal consideration (including future services) that may be acceptable to the Board, in its sole discretion, and permissible under applicable law.
(ii) Vesting. Subject to the Repurchase Limitation in Section 8(m), shares of Common Stock awarded under the Restricted Stock Award Agreement may be subject to forfeiture to the Company in accordance with a vesting schedule to be determined by the Board.
(iii) Termination of Participants Continuous Service. If a Participants Continuous Service terminates, the Company may receive through a forfeiture condition or a repurchase right, any or all of the shares of Common Stock held by the Participant that have not vested as of the date of termination of Continuous Service under the terms of the Restricted Stock Award Agreement.
(iv) Transferability. Rights to acquire shares of Common Stock under the Restricted Stock Award Agreement will be transferable by the Participant only upon such terms and conditions as are set forth in the Restricted Stock Award Agreement, as the Board will determine in its sole discretion, so long as Common Stock awarded under the Restricted Stock Award Agreement remains subject to the terms of the Restricted Stock Award Agreement.
(v) Dividends. A Restricted Stock Award Agreement may provide that any dividends paid on Restricted Stock will be subject to the same vesting and forfeiture restrictions as apply to the shares subject to the Restricted Stock Award to which they relate.
(b) Restricted Stock Unit Awards. Each Restricted Stock Unit Award Agreement will be in such form and will contain such terms and conditions as the Board deems appropriate. The terms and conditions of Restricted Stock Unit Award Agreements may change from time to time, and the terms and conditions of separate Restricted Stock Unit Award Agreements need not be identical. Each Restricted Stock Unit Award Agreement will conform to (through incorporation of the provisions hereof by reference in the Agreement or otherwise) the substance of each of the following provisions:
(i) Consideration. At the time of grant of a Restricted Stock Unit Award, the Board will determine the consideration, if any, to be paid by the Participant upon delivery of each share of Common Stock subject to the Restricted Stock Unit Award. The consideration to be paid (if any) by the Participant for each share of Common Stock subject to a Restricted Stock Unit Award may be paid in any form of legal consideration that may be acceptable to the Board, in its sole discretion, and permissible under applicable law.
(ii) Vesting. At the time of the grant of a Restricted Stock Unit Award, the Board may impose such restrictions on or conditions to the vesting of the Restricted Stock Unit Award as it, in its sole discretion, deems appropriate.
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(iii) Payment. A Restricted Stock Unit Award may be settled by the delivery of shares of Common Stock, their cash equivalent, any combination thereof or in any other form of consideration, as determined by the Board and contained in the Restricted Stock Unit Award Agreement.
(iv) Additional Restrictions. At the time of the grant of a Restricted Stock Unit Award, the Board, as it deems appropriate, may impose such restrictions or conditions that delay the delivery of the shares of Common Stock (or their cash equivalent) subject to a Restricted Stock Unit Award to a time after the vesting of such Restricted Stock Unit Award.
(v) Dividend Equivalents. Dividend equivalents may be credited in respect of shares of Common Stock covered by a Restricted Stock Unit Award, as determined by the Board and contained in the Restricted Stock Unit Award Agreement. At the sole discretion of the Board, such dividend equivalents may be converted into additional shares of Common Stock covered by the Restricted Stock Unit Award in such manner as determined by the Board. Any additional shares covered by the Restricted Stock Unit Award credited by reason of such dividend equivalents will be subject to all of the same terms and conditions of the underlying Restricted Stock Unit Award Agreement to which they relate.
(vi) Termination of Participants Continuous Service. Except as otherwise provided in the applicable Restricted Stock Unit Award Agreement, such portion of the Restricted Stock Unit Award that has not vested will be forfeited upon the Participants termination of Continuous Service.
(vii) Compliance with Section 409A of the Code. Notwithstanding anything to the contrary set forth herein, any Restricted Stock Unit Award granted under the Plan that is not exempt from the requirements of Section 409A of the Code shall contain such provisions so that such Restricted Stock Unit Award will comply with the requirements of Section 409A of the Code. Such restrictions, if any, shall be determined by the Board and contained in the Restricted Stock Unit Award Agreement evidencing such Restricted Stock Unit Award. For example, such restrictions may include, without limitation, a requirement that any Common Stock that is to be issued in a year following the year in which the Restricted Stock Unit Award vests must be issued in accordance with a fixed pre-determined schedule.
(c) Other Stock Awards. Other forms of Stock Awards valued in whole or in part by reference to, or otherwise based on, Common Stock, including the appreciation in value thereof (e.g., options or stock rights with an exercise price or strike price less than one hundred percent (100%) of the Fair Market Value of the Common Stock at the time of grant) may be granted either alone or in addition to Stock Awards provided for under Section 5 and the preceding provisions of this Section 6. Subject to the provisions of the Plan, the Board will have sole and complete authority to determine the persons to whom and the time or times at which such Other Stock Awards will be granted, the number of shares of Common Stock (or the cash equivalent thereof) to be granted pursuant to such Other Stock Awards and all other terms and conditions of such Other Stock Awards.
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7. COVENANTS OF THE COMPANY.
(a) Availability of Shares. The Company will keep available at all times the number of shares of Common Stock reasonably required to satisfy then-outstanding Stock Awards.
(b) Securities Law Compliance. The Company will seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to grant Stock Awards and to issue and sell shares of Common Stock upon exercise of the Stock Awards; provided, however, that this undertaking will not require the Company to register under the Securities Act the Plan, any Stock Award or any Common Stock issued or issuable pursuant to any such Stock Award. If, after reasonable efforts and at a reasonable cost, the Company is unable to obtain from any such regulatory commission or agency the authority that counsel for the Company deems necessary for the lawful issuance and sale of Common Stock under the Plan, the Company will be relieved from any liability for failure to issue and sell Common Stock upon exercise of such Stock Awards unless and until such authority is obtained. A Participant will not be eligible for the grant of a Stock Award or the subsequent issuance of cash or Common Stock pursuant to the Stock Award if such grant or issuance would be in violation of any applicable securities law.
(c) No Obligation to Notify or Minimize Taxes. The Company will have no duty or obligation to any Participant to advise such holder as to the time or manner of exercising such Stock Award. Furthermore, the Company will have no duty or obligation to warn or otherwise advise such holder of a pending termination or expiration of a Stock Award or a possible period in which the Stock Award may not be exercised. The Company has no duty or obligation to minimize the tax consequences of a Stock Award to the holder of such Stock Award.
8. MISCELLANEOUS.
(a) Use of Proceeds from Sales of Common Stock. Proceeds from the sale of shares of Common Stock pursuant to Stock Awards will constitute general funds of the Company.
(b) Corporate Action Constituting Grant of Stock Awards. Corporate action constituting a grant by the Company of a Stock Award to any Participant will be deemed completed as of the date of such corporate action, unless otherwise determined by the Board, regardless of when the instrument, certificate, or letter evidencing the Stock Award is communicated to, or actually received or accepted by, the Participant. In the event that the corporate records (e.g., Board consents, resolutions or minutes) documenting the corporate action constituting the grant contain terms (e.g., exercise price, vesting schedule or number of shares) that are inconsistent with those in the Stock Award Agreement as a result of a clerical error in the papering of the Stock Award Agreement, the corporate records will control and the Participant will have no legally binding right to the incorrect term in the Stock Award Agreement.
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(c) Stockholder Rights. No Participant will be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares of Common Stock subject to a Stock Award unless and until (i) such Participant has satisfied all requirements for exercise of, or the issuance of shares of Common Stock under, the Stock Award pursuant to its terms, and (ii) the issuance of the Common Stock subject to the Stock Award has been entered into the books and records of the Company.
(d) No Employment or Other Service Rights. Nothing in the Plan, any Stock Award Agreement or any other instrument executed thereunder or in connection with any Stock Award granted pursuant thereto will confer upon any Participant any right to continue to serve the Company or an Affiliate in the capacity in effect at the time the Stock Award was granted or will affect the right of the Company or an Affiliate to terminate (i) the employment of an Employee with or without notice and with or without cause, (ii) the service of a Consultant pursuant to the terms of such Consultants agreement with the Company or an Affiliate, or (iii) the service of a Director pursuant to the bylaws of the Company or an Affiliate, and any applicable provisions of the corporate law of the state in which the Company or the Affiliate is incorporated, as the case may be.
(e) Change in Time Commitment. In the event a Participants regular level of time commitment in the performance of his or her services for the Company and any Affiliates is reduced (for example, and without limitation, if the Participant is an Employee of the Company and the Employee has a change in status from a full-time Employee to a part-time Employee) after the date of grant of any Stock Award to the Participant, the Board has the right in its sole discretion to (x) make a corresponding reduction in the number of shares subject to any portion of such Stock Award that is scheduled to vest or become payable after the date of such change in time commitment, and (y) in lieu of or in combination with such a reduction, extend the vesting or payment schedule applicable to such Stock Award. In the event of any such reduction, the Participant will have no right with respect to any portion of the Stock Award that is so reduced or extended.
(f) Incentive Stock Option Limitations. To the extent that the aggregate Fair Market Value (determined at the time of grant) of Common Stock with respect to which Incentive Stock Options are exercisable for the first time by any Optionholder during any calendar year (under all plans of the Company and any Affiliates) exceeds one hundred thousand dollars ($100,000) (or such other limit established in the Code) or otherwise does not comply with the rules governing Incentive Stock Options, the Options or portions thereof that exceed such limit (according to the order in which they were granted) or otherwise do not comply with such rules will be treated as Nonstatutory Stock Options, notwithstanding any contrary provision of the applicable Option Agreement(s).
(g) Investment Assurances. The Company may require a Participant, as a condition of exercising or acquiring Common Stock under any Stock Award, (i) to give written assurances satisfactory to the Company as to the Participants knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Stock Award; and (ii) to give written assurances satisfactory to the
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Company stating that the Participant is acquiring Common Stock subject to the Stock Award for the Participants own account and not with any present intention of selling or otherwise distributing the Common Stock. The foregoing requirements, and any assurances given pursuant to such requirements, will be inoperative if (A) the issuance of the shares upon the exercise or acquisition of Common Stock under the Stock Award has been registered under a then currently effective registration statement under the Securities Act, or (B) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the Common Stock.
(h) Withholding Obligations. Unless prohibited by the terms of a Stock Award Agreement, the Company may, in its sole discretion, satisfy any federal, state or local tax withholding obligation relating to a Stock Award by any of the following means or by a combination of such means: (i) causing the Participant to tender a cash payment; (ii) withholding shares of Common Stock from the shares of Common Stock issued or otherwise issuable to the Participant in connection with the Stock Award; provided, however, that no shares of Common Stock are withheld with a value exceeding the minimum amount of tax required to be withheld by law (or such lesser amount as may be necessary to avoid classification of the Stock Award as a liability for financial accounting purposes); (iii) withholding cash from a Stock Award settled in cash; (iv) withholding payment from any amounts otherwise payable to the Participant; or (v) by such other method as may be set forth in the Stock Award Agreement.
(i) Electronic Delivery. Any reference herein to a written agreement or document will include any agreement or document delivered electronically or posted on the Companys intranet (or other shared electronic medium controlled by the Company to which the Participant has access).
(j) Deferrals. To the extent permitted by applicable law, the Board, in its sole discretion, may determine that the delivery of Common Stock or the payment of cash, upon the exercise, vesting or settlement of all or a portion of any Stock Award may be deferred and may establish programs and procedures for deferral elections to be made by Participants. Deferrals by Participants will be made in accordance with Section 409A of the Code. Consistent with Section 409A of the Code, the Board may provide for distributions while a Participant is still an employee or otherwise providing services to the Company. The Board is authorized to make deferrals of Stock Awards and determine when, and in what annual percentages, Participants may receive payments, including lump sum payments, following the Participants termination of Continuous Service, and implement such other terms and conditions consistent with the provisions of the Plan and in accordance with applicable law.
(k) Compliance with Section 409A of the Code. To the extent that the Board determines that any Stock Award granted hereunder is subject to Section 409A of the Code, the Stock Award Agreement evidencing such Stock Award shall incorporate the terms and conditions necessary to avoid the consequences specified in Section 409A(a)(1) of the Code. To the extent applicable, the Plan and Stock Award Agreements shall be interpreted in accordance with Section 409A of the Code.
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(l) Compliance with Exemption Provided by Rule 12h-1(f). If at the end of the Companys most recently completed fiscal year: (i) the aggregate of the number of persons who hold outstanding compensatory employee stock options to purchase shares of Common Stock granted pursuant to the Plan or otherwise (such persons, Holders of Options) equals or exceeds five hundred (500), and (ii) the Companys assets exceed $10 million, then the following restrictions will apply during any period during which the Company does not have a class of its securities registered under Section 12 of the Exchange Act and is not required to file reports under Section 15(d) of the Exchange Act: (A) the Options and, prior to exercise, the shares of Common Stock to be issued on exercise of the Options may not be transferred until the Company is no longer relying on the exemption provided by Rule 12h-1(f) promulgated under the Exchange Act (Rule 12h-1(f)), except: (1) as permitted by Rule 701(c) promulgated under the Securities Act, (2) to a guardian upon the disability of the Holder of Options, or (3) to an executor upon the death of the Holder of Options (collectively, the Permitted Transferees); provided, however, the following transfers are permitted: (i) transfers by Holders of Options to the Company, and (ii) transfers in connection with a change of control or other acquisition involving the Company, if following such transaction, the Options no longer remain outstanding and the Company is no longer relying on the exemption provided by Rule 12h-1(f); provided further, that any Permitted Transferees may not further transfer the Options; (B) except as otherwise provided in (A) above, the Options and shares of Common Stock issuable on exercise of the Options are restricted as to any pledge, hypothecation, or other transfer, including any short position, any put equivalent position as defined by Rule 16a-1(h) promulgated under the Exchange Act, or any call equivalent position as defined by Rule 16a-1(b) promulgated under the Exchange Act by Holders of Options prior to exercise of an Option until the Company is no longer relying on the exemption provided by Rule 12h-1(f); and (C) at any time that the Company is relying on the exemption provided by Rule 12h-1(f), the Company will deliver to Holders of Options (whether by physical or electronic delivery or written notice of the availability of the information on an internet site) the information required by Rule 701(e)(3), (4), and (5) promulgated under the Securities Act every six (6) months, including financial statements that are not more than one hundred eighty (180) days old; provided, however, that the Company may condition the delivery of such information upon the Holder of Options agreement to maintain its confidentiality.
(m) Repurchase Limitation. The terms of any repurchase right will be specified in the Stock Award Agreement. The repurchase price for vested shares of Common Stock will be the Fair Market Value of the shares of Common Stock on the date of repurchase. The repurchase price for unvested shares of Common Stock will be the lower of (i) the Fair Market Value of the shares of Common Stock on the date of repurchase or (ii) their original purchase price. However, the Company will not exercise its repurchase right until at least six (6) months (or such longer or shorter period of time necessary to avoid classification of the Stock Award as a liability for financial accounting purposes) have elapsed following delivery of shares of Common Stock subject to the Stock Award, unless otherwise specifically provided by the Board.
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9. ADJUSTMENTS UPON CHANGES IN COMMON STOCK; OTHER CORPORATE EVENTS.
(a) Capitalization Adjustments. In the event of a Capitalization Adjustment, the Board will appropriately and proportionately adjust: (i) the class(es) and maximum number of securities subject to the Plan pursuant to Section 3(a), (ii) the class(es) and maximum number of securities that may be issued pursuant to the exercise of Incentive Stock Options pursuant to Section 3(c), and (iii) the class(es) and number of securities and price per share of stock subject to outstanding Stock Awards. The Board will make such adjustments, and its determination will be final, binding and conclusive.
(b) Dissolution or Liquidation. Except as otherwise provided in the Stock Award Agreement, in the event of a dissolution or liquidation of the Company, all outstanding Stock Awards (other than Stock Awards consisting of vested and outstanding shares of Common Stock not subject to a forfeiture condition or the Companys right of repurchase) will terminate immediately prior to the completion of such dissolution or liquidation, and the shares of Common Stock subject to the Companys repurchase rights or subject to a forfeiture condition may be repurchased or reacquired by the Company notwithstanding the fact that the holder of such Stock Award is providing Continuous Service, provided, however, that the Board may, in its sole discretion, cause some or all Stock Awards to become fully vested, exercisable and/or no longer subject to repurchase or forfeiture (to the extent such Stock Awards have not previously expired or terminated) before the dissolution or liquidation is completed but contingent on its completion.
(c) Corporate Transaction. The following provisions will apply to Stock Awards in the event of a Corporate Transaction unless otherwise provided in the instrument evidencing the Stock Award or any other written agreement between the Company or any Affiliate and the Participant or unless otherwise expressly provided by the Board at the time of grant of a Stock Award. In the event of a Corporate Transaction, then, notwithstanding any other provision of the Plan, the Board may take one or more of the following actions with respect to Stock Awards, contingent upon the closing or completion of the Corporate Transaction:
(i) arrange for the surviving corporation or acquiring corporation (or the surviving or acquiring corporations parent company) to assume or continue the Stock Award or to substitute a similar stock award for the Stock Award (including, but not limited to, an award to acquire the same consideration paid to the stockholders of the Company pursuant to the Corporate Transaction);
(ii) arrange for the assignment of any reacquisition or repurchase rights held by the Company in respect of Common Stock issued pursuant to the Stock Award to the surviving corporation or acquiring corporation (or the surviving or acquiring corporations parent company);
(iii) accelerate the vesting, in whole or in part, of the Stock Award (and, if applicable, the time at which the Stock Award may be exercised) to a date prior to the effective time of such Corporate Transaction as the Board determines (or, if the Board does not determine such a date, to the date that is five (5) days prior to the effective date of the Corporate
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Transaction), with such Stock Award terminating if not exercised (if applicable) at or prior to the effective time of the Corporate Transaction; provided, however, that the Board may require Participants to complete and deliver to the Company a notice of exercise before the effective date of a Corporate Transaction, which exercise is contingent upon the effectiveness of such Corporate Transaction;
(iv) arrange for the lapse, in whole or in part, of any reacquisition or repurchase rights held by the Company with respect to the Stock Award;
(v) cancel or arrange for the cancellation of the Stock Award, to the extent not vested or not exercised prior to the effective time of the Corporate Transaction, in exchange for such cash consideration, if any, as the Board, in its sole discretion, may consider appropriate; and
(vi) make a payment, in such form as may be determined by the Board equal to the excess, if any, of (A) the value of the property the Participant would have received upon the exercise of the Stock Award immediately prior to the effective time of the Corporate Transaction, over (B) any exercise price payable by such holder in connection with such exercise. For clarity, this payment may be zero ($0) if the value of the property is equal to or less than the exercise price. Payments under this provision may be delayed to the same extent that payment of consideration to the holders of the Companys Common Stock in connection with the Corporate Transaction is delayed as a result of escrows, earn outs, holdbacks or any other contingencies.
The Board need not take the same action or actions with respect to all Stock Awards or portions thereof or with respect to all Participants. The Board may take different actions with respect to the vested and unvested portions of a Stock Award.
(d) Change in Control. A Stock Award may be subject to additional acceleration of vesting and exercisability upon or after a Change in Control as may be provided in the Stock Award Agreement for such Stock Award or as may be provided in any other written agreement between the Company or any Affiliate and the Participant, but in the absence of such provision, no such acceleration will occur.
10. PLAN TERM; EARLIER TERMINATION OR SUSPENSION OF THE PLAN.
(a) Plan Term. The Board may suspend or terminate the Plan at any time. Unless terminated sooner by the Board, the Plan will automatically terminate on the day before the tenth (10th) anniversary of the earlier of (i) the date the Plan is adopted by the Board, or (ii) the date the Plan is approved by the stockholders of the Company. No Stock Awards may be granted under the Plan while the Plan is suspended or after it is terminated.
(b) No Impairment of Rights. Suspension or termination of the Plan will not impair rights and obligations under any Stock Award granted while the Plan is in effect except with the written consent of the affected Participant or as otherwise permitted in the Plan.
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11. EFFECTIVE DATE OF PLAN.
This Plan will become effective on the Effective Date.
12. CHOICE OF LAW.
The laws of the State of Delaware will govern all questions concerning the construction, validity and interpretation of this Plan, without regard to that states conflict of laws rules.
13. DEFINITIONS. As used in the Plan, the following definitions will apply to the capitalized terms indicated below:
(a) Affiliate means, at the time of determination, any parent or majority-owned subsidiary of the Company, as such terms are defined in Rule 405. The Board will have the authority to determine the time or times at which parent or majority-owned subsidiary status is determined within the foregoing definition.
(b) Board means the Board of Directors of the Company.
(c) Capitalization Adjustment means any change that is made in, or other events that occur with respect to, the Common Stock subject to the Plan or subject to any Stock Award after the Effective Date without the receipt of consideration by the Company through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, large nonrecurring cash dividend, stock split, reverse stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure, or any similar equity restructuring transaction, as that term is used in Statement of Financial Accounting Standards Board Accounting Standards Codification Topic 718 (or any successor thereto). Notwithstanding the foregoing, the conversion of any convertible securities of the Company will not be treated as a Capitalization Adjustment.
(d) Cause will have the meaning ascribed to such term in any written agreement between the Participant and the Company defining such term and, in the absence of such agreement, such term means, with respect to a Participant, the occurrence of any of the following events: (i) such Participants commission of any felony or any crime involving fraud, dishonesty or moral turpitude under the laws of the United States or any state thereof; (ii) such Participants attempted commission of, or participation in, a fraud or act of dishonesty against the Company; (iii) such Participants intentional, material violation of any contract or agreement between the Participant and the Company or of any statutory duty owed to the Company; (iv) such Participants unauthorized use or disclosure of the Companys confidential information or trade secrets; or (v) such Participants gross misconduct. The determination that a termination of the Participants Continuous Service is either for Cause or without Cause will be made by the Company, in its sole discretion. Any determination by the Company that the Continuous Service of a Participant was terminated with or without Cause for the purposes of outstanding Stock Awards held by such Participant will have no effect upon any determination of the rights or obligations of the Company or such Participant for any other purpose.
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(e) Change in Control means the occurrence, in a single transaction or in a series of related transactions, of any one or more of the following events:
(i) any Exchange Act Person becomes the Owner, directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the combined voting power of the Companys then outstanding securities other than by virtue of a merger, consolidation or similar transaction. Notwithstanding the foregoing, a Change in Control will not be deemed to occur (A) on account of the acquisition of securities of the Company directly from the Company, (B) on account of the acquisition of securities of the Company by an investor, any affiliate thereof or any other Exchange Act Person that acquires the Companys securities in a transaction or series of related transactions the primary purpose of which is to obtain financing for the Company through the issuance of equity securities or (C) solely because the level of Ownership held by any Exchange Act Person (the Subject Person) exceeds the designated percentage threshold of the outstanding voting securities as a result of a repurchase or other acquisition of voting securities by the Company reducing the number of shares outstanding, provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of voting securities by the Company, and after such share acquisition, the Subject Person becomes the Owner of any additional voting securities that, assuming the repurchase or other acquisition had not occurred, increases the percentage of the then outstanding voting securities Owned by the Subject Person over the designated percentage threshold, then a Change in Control will be deemed to occur;
(ii) there is consummated a merger, consolidation or similar transaction involving (directly or indirectly) the Company and, immediately after the consummation of such merger, consolidation or similar transaction, the stockholders of the Company immediately prior thereto do not Own, directly or indirectly, either (A) outstanding voting securities representing more than fifty percent (50%) of the combined outstanding voting power of the surviving Entity in such merger, consolidation or similar transaction or (B) more than fifty percent (50%) of the combined outstanding voting power of the parent of the surviving Entity in such merger, consolidation or similar transaction, in each case in substantially the same proportions as their Ownership of the outstanding voting securities of the Company immediately prior to such transaction;
(iii) the stockholders of the Company approve or the Board approves a plan of complete dissolution or liquidation of the Company, or a complete dissolution or liquidation of the Company will otherwise occur, except for a liquidation into a parent corporation;
(iv) there is consummated a sale, lease, exclusive license or other disposition of all or substantially all of the consolidated assets of the Company and its Subsidiaries, other than a sale, lease, license or other disposition of all or substantially all of the consolidated assets of the Company and its Subsidiaries to an Entity, more than fifty percent (50%) of the combined voting power of the voting securities of which are Owned by stockholders of the Company in substantially the same proportions as their Ownership of the outstanding voting securities of the Company immediately prior to such sale, lease, license or other disposition; or
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(v) individuals who, on the date the Plan is adopted by the Board, are members of the Board (the Incumbent Board) cease for any reason to constitute at least a majority of the members of the Board; provided, however, that if the appointment or election (or nomination for election) of any new Board member was approved or recommended by a majority vote of the members of the Incumbent Board then still in office, such new member will, for purposes of this Plan, be considered as a member of the Incumbent Board.
Notwithstanding the foregoing definition or any other provision of this Plan, (A) the term Change in Control will not include a sale of assets, merger or other transaction effected exclusively for the purpose of changing the domicile of the Company, and (B) the definition of Change in Control (or any analogous term) in an individual written agreement between the Company or any Affiliate and the Participant will supersede the foregoing definition with respect to Stock Awards subject to such agreement; provided, however, that if no definition of Change in Control or any analogous term is set forth in such an individual written agreement, the foregoing definition will apply.
(f) Code means the Internal Revenue Code of 1986, as amended, including any applicable regulations and guidance thereunder.
(g) Committee means a committee of one or more Directors to whom authority has been delegated by the Board in accordance with Section 2(c).
(h) Common Stock means the common stock of the Company.
(i) Company means Figs, Inc., a Delaware corporation.
(j) Consultant means any person, including an advisor, who is (i) engaged by the Company or an Affiliate to render consulting or advisory services and is compensated for such services, or (ii) serving as a member of the board of directors of an Affiliate and is compensated for such services. However, service solely as a Director, or payment of a fee for such service, will not cause a Director to be considered a Consultant for purposes of the Plan.
(k) Continuous Service means that the Participants service with the Company or an Affiliate, whether as an Employee, Director or Consultant, is not interrupted or terminated. A change in the capacity in which the Participant renders service to the Company or an Affiliate as an Employee, Director or Consultant or a change in the Entity for which the Participant renders such service, provided that there is no interruption or termination of the Participants service with the Company or an Affiliate, will not terminate a Participants Continuous Service; provided, however, that if the Entity for which a Participant is rendering services ceases to qualify as an Affiliate, as determined by the Board in its sole discretion, such Participants Continuous Service will be considered to have terminated on the date such Entity ceases to qualify as an Affiliate. For example, a change in status from an Employee of the Company to a Consultant of an Affiliate or to a Director will not constitute an interruption of Continuous Service. To the extent permitted by law, the Board or the chief executive officer of the Company, in that partys sole discretion, may determine whether Continuous Service will be considered interrupted in the case of (i) any leave of absence approved by the Board or chief
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executive officer, including sick leave, military leave or any other personal leave, or (ii) transfers between the Company, an Affiliate, or their successors. Notwithstanding the foregoing, a leave of absence will be treated as Continuous Service for purposes of vesting in a Stock Award only to such extent as may be provided in the Companys leave of absence policy, in the written terms of any leave of absence agreement or policy applicable to the Participant, or as otherwise required by law.
(l) Corporate Transaction means the consummation, in a single transaction or in a series of related transactions, of any one or more of the following events:
(i) a sale or other disposition of all or substantially all, as determined by the Board in its sole discretion, of the consolidated assets of the Company and its Subsidiaries;
(ii) a sale or other disposition of at least ninety percent (90%) of the outstanding securities of the Company;
(iii) a merger, consolidation or similar transaction following which the Company is not the surviving corporation; or
(iv) a merger, consolidation or similar transaction following which the Company is the surviving corporation but the shares of Common Stock outstanding immediately preceding the merger, consolidation or similar transaction are converted or exchanged by virtue of the merger, consolidation or similar transaction into other property, whether in the form of securities, cash or otherwise.
(m) Director means a member of the Board.
(n) Disability means, with respect to a Participant, the inability of such Participant to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than twelve (12) months as provided in Sections 22(e)(3) and 409A(a)(2)(c)(i) of the Code, and will be determined by the Board on the basis of such medical evidence as the Board deems warranted under the circumstances.
(o) Effective Date means the effective date of this Plan, which is the earlier of (i) the date that this Plan is first approved by the Companys stockholders, and (ii) the date this Plan is adopted by the Board.
(p) Employee means any person employed by the Company or an Affiliate. However, service solely as a Director, or payment of a fee for such services, will not cause a Director to be considered an Employee for purposes of the Plan.
(q) Entity means a corporation, partnership, limited liability company or other entity.
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(r) Exchange Act means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.
(s) Exchange Act Person means any natural person, Entity or group (within the meaning of Section 13(d) or 14(d) of the Exchange Act), except that Exchange Act Person will not include (i) the Company or any Subsidiary of the Company, (ii) any employee benefit plan of the Company or any Subsidiary of the Company or any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any Subsidiary of the Company, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, (iv) an Entity Owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their Ownership of stock of the Company; or (v) any natural person, Entity or group (within the meaning of Section 13(d) or 14(d) of the Exchange Act) that, as of the Effective Date, is the Owner, directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the combined voting power of the Companys then outstanding securities.
(t) Fair Market Value means, as of any date, the value of the Common Stock determined by the Board in compliance with Section 409A of the Code or, in the case of an Incentive Stock Option, in compliance with Section 422 of the Code.
(u) Incentive Stock Option means an option granted pursuant to Section 5 of the Plan that is intended to be, and that qualifies as, an incentive stock option within the meaning of Section 422 of the Code.
(v) Nonstatutory Stock Option means any option granted pursuant to Section 5 of the Plan that does not qualify as an Incentive Stock Option.
(w) Officer means any person designated by the Company as an officer.
(x) Option means an Incentive Stock Option or a Nonstatutory Stock Option to purchase shares of Common Stock granted pursuant to the Plan.
(y) Option Agreement means a written agreement between the Company and an Optionholder evidencing the terms and conditions of an Option grant. Each Option Agreement will be subject to the terms and conditions of the Plan.
(z) Optionholder means a person to whom an Option is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Option.
(aa) Other Stock Award means an award based in whole or in part by reference to the Common Stock which is granted pursuant to the terms and conditions of Section 6(c).
(bb) Other Stock Award Agreement means a written agreement between the Company and a holder of an Other Stock Award evidencing the terms and conditions of an Other Stock Award grant. Each Other Stock Award Agreement will be subject to the terms and conditions of the Plan.
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(cc) Own, Owned, Owner, Ownership A person or Entity will be deemed to Own, to have Owned, to be the Owner of, or to have acquired Ownership of securities if such person or Entity, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares voting power, which includes the power to vote or to direct the voting, with respect to such securities.
(dd) Participant means a person to whom a Stock Award is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Stock Award.
(ee) Plan means this Figs, Inc. 2016 Equity Incentive Plan.
(ff) Restricted Stock Award means an award of shares of Common Stock which is granted pursuant to the terms and conditions of Section 6(a).
(gg) Restricted Stock Award Agreement means a written agreement between the Company and a holder of a Restricted Stock Award evidencing the terms and conditions of a Restricted Stock Award grant. Each Restricted Stock Award Agreement will be subject to the terms and conditions of the Plan.
(hh) Restricted Stock Unit Award means a right to receive shares of Common Stock which is granted pursuant to the terms and conditions of Section 6(b).
(ii) Restricted Stock Unit Award Agreement means a written agreement between the Company and a holder of a Restricted Stock Unit Award evidencing the terms and conditions of a Restricted Stock Unit Award grant. Each Restricted Stock Unit Award Agreement will be subject to the terms and conditions of the Plan.
(jj) Rule 405 means Rule 405 promulgated under the Securities Act.
(kk) Rule 701 means Rule 701 promulgated under the Securities Act.
(ll) Securities Act means the Securities Act of 1933, as amended.
(mm) Stock Appreciation Right or SAR means a right to receive the appreciation on Common Stock that is granted pursuant to the terms and conditions of Section 5.
(nn) Stock Appreciation Right Agreement means a written agreement between the Company and a holder of a Stock Appreciation Right evidencing the terms and conditions of a Stock Appreciation Right grant. Each Stock Appreciation Right Agreement will be subject to the terms and conditions of the Plan.
(oo) Stock Award means any right to receive Common Stock granted under the Plan, including an Incentive Stock Option, a Nonstatutory Stock Option, a Restricted Stock Award, a Restricted Stock Unit Award, a Stock Appreciation Right or any Other Stock Award.
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(pp) Stock Award Agreement means a written agreement between the Company and a Participant evidencing the terms and conditions of a Stock Award grant. Each Stock Award Agreement will be subject to the terms and conditions of the Plan.
(qq) Subsidiary means, with respect to the Company, (i) any corporation of which more than fifty percent (50%) of the outstanding capital stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether, at the time, stock of any other class or classes of such corporation will have or might have voting power by reason of the happening of any contingency) is at the time, directly or indirectly, Owned by the Company, and (ii) any partnership, limited liability company or other entity in which the Company has a direct or indirect interest (whether in the form of voting or participation in profits or capital contribution) of more than fifty percent (50%) .
(rr) Ten Percent Stockholder means a person who Owns (or is deemed to Own pursuant to Section 424(d) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Affiliate.
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Exhibit 10.3
FIGS, INC.
STOCK OPTION GRANT NOTICE
(2016 EQUITY INCENTIVE PLAN)
Figs, Inc. (the Company), pursuant to its 2016 Equity Incentive Plan (the Plan), hereby grants to Optionholder an option to purchase the number of shares of the Companys Common Stock set forth below. This option is subject to all of the terms and conditions as set forth in this notice, in the Option Agreement, the Plan and the Notice of Exercise, all of which are attached hereto and incorporated herein in their entirety. Capitalized terms not explicitly defined herein but defined in the Plan or the Option Agreement will have the same definitions as in the Plan or the Option Agreement. If there is any conflict between the terms in this notice and the Plan, the terms of the Plan will control.
Optionholder: |
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Date of Grant: |
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Vesting Commencement Date: |
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Number of Shares Subject to Option: |
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Exercise Price (Per Share): |
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Total Exercise Price: |
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Expiration Date: |
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Type of Grant: | ☐ Incentive Stock Option1 | ☐ Nonstatutory Stock Option | ||
Exercise Schedule: | ☒ Same as Vesting Schedule | ☐ Early Exercise Permitted | ||
Vesting Schedule: | [Sample of standard vesting. One-fourth (1/4th) of the shares vest one year after the Vesting Commencement Date; the balance of the shares vest in a series of thirty-six (36) successive equal monthly installments measured from the first anniversary of the Vesting Commencement Date, subject to Optionholders Continuous Service as of each such date.] | |||
Payment: | By one or a combination of the following items (described in the Option Agreement): | |||
☒ By cash, check, bank draft or money order payable to the Company | ||||
☒ Pursuant to a Regulation T Program if the shares are publicly traded | ||||
☒ By delivery of already-owned shares if the shares are publicly traded | ||||
☐ By deferred payment | ||||
☒ If and only to the extent this option is a Nonstatutory Stock Option, and subject to the Companys consent at the time of exercise, by a net exercise arrangement |
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If this is an Incentive Stock Option, it (plus other outstanding Incentive Stock Options) cannot be first exercisable for more than $100,000 in value (measured by exercise price) in any calendar year. Any excess over $100,000 is a Nonstatutory Stock Option. |
Additional Terms/Acknowledgements: Optionholder acknowledges receipt of, and understands and agrees to, this Stock Option Grant Notice, the Option Agreement and the Plan. Optionholder acknowledges and agrees that this Stock Option Grant Notice and the Option Agreement may not be modified, amended or revised except as provided in the Plan. Optionholder further acknowledges that as of the Date of Grant, this Stock Option Grant Notice, the Option Agreement, and the Plan set forth the entire understanding between Optionholder and the Company regarding this option award and supersede all prior oral and written agreements, promises and/or representations on that subject with the exception of (i) options previously granted and delivered to Optionholder, and (ii) the following agreements only. By accepting this option, you consent to receive such documents by electronic delivery and to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third party designated by the Company.
OTHER AGREEMENTS: |
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FIGS, INC. | OPTIONHOLDER: | |||||||
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Signature | Signature | |||||||
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ATTACHMENTS: Option Agreement, Equity Incentive Plan and Notice of Exercise
ATTACHMENT I
OPTION AGREEMENT
ATTACHMENT II
EQUITY INCENTIVE PLAN
ATTACHMENT III
NOTICE OF EXERCISE
FIGS, INC.
2016 EQUITY INCENTIVE PLAN
OPTION AGREEMENT
(INCENTIVE STOCK OPTION OR NONSTATUTORY STOCK OPTION)
Pursuant to your Stock Option Grant Notice (Grant Notice) and this Option Agreement, Figs, Inc. (the Company) has granted you an option under its 2016 Equity Incentive Plan (the Plan) to purchase the number of shares of the Companys Common Stock indicated in your Grant Notice at the exercise price indicated in your Grant Notice. The option is granted to you effective as of the date of grant set forth in the Grant Notice (the Date of Grant). If there is any conflict between the terms in this Option Agreement and the Plan, the terms of the Plan will control. Capitalized terms not explicitly defined in this Option Agreement or in the Grant Notice but defined in the Plan will have the same definitions as in the Plan.
The details of your option, in addition to those set forth in the Grant Notice and the Plan, are as follows:
1. VESTING. Your option will vest as provided in your Grant Notice. Vesting will cease upon the termination of your Continuous Service.
2. NUMBER OF SHARES AND EXERCISE PRICE. The number of shares of Common Stock subject to your option and your exercise price per share in your Grant Notice will be adjusted for Capitalization Adjustments.
3. EXERCISE RESTRICTION FOR NON-EXEMPT EMPLOYEES. If you are an Employee eligible for overtime compensation under the Fair Labor Standards Act of 1938, as amended (that is, a Non-Exempt Employee), and except as otherwise provided in the Plan, you may not exercise your option until you have completed at least six (6) months of Continuous Service measured from the Date of Grant, even if you have already been an employee for more than six (6) months. Consistent with the provisions of the Worker Economic Opportunity Act, you may exercise your option as to any vested portion prior to such six (6) month anniversary in the case of (i) your death or disability, (ii) a Corporate Transaction in which your option is not assumed, continued or substituted, (iii) a Change in Control or (iv) your termination of Continuous Service on your retirement (as defined in the Companys benefit plans).
4. EXERCISE PRIOR TO VESTING (EARLY EXERCISE). If permitted in your Grant Notice (i.e., the Exercise Schedule indicates Early Exercise Permitted) and subject to the provisions of your option, you may elect at any time that is both (i) during the period of your Continuous Service and (ii) during the term of your option, to exercise all or part of your option, including the unvested portion of your option; provided, however, that:
(a) a partial exercise of your option will be deemed to cover first vested shares of Common Stock and then the earliest vesting installment of unvested shares of Common Stock;
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(b) any shares of Common Stock so purchased from installments that have not vested as of the date of exercise will be subject to the purchase option in favor of the Company as described in the Companys form of Early Exercise Stock Purchase Agreement;
(c) you will enter into the Companys form of Early Exercise Stock Purchase Agreement with a vesting schedule that will result in the same vesting as if no early exercise had occurred; and
(d) if your option is an Incentive Stock Option, then, to the extent that the aggregate Fair Market Value (determined at the Date of Grant) of the shares of Common Stock with respect to which your option plus all other Incentive Stock Options you hold are exercisable for the first time by you during any calendar year (under all plans of the Company and its Affiliates) exceeds one hundred thousand dollars ($100,000), your option(s) or portions thereof that exceed such limit (according to the order in which they were granted) will be treated as Nonstatutory Stock Options.
5. METHOD OF PAYMENT. You must pay the full amount of the exercise price for the shares you wish to exercise. You may pay the exercise price in cash or by check, bank draft or money order payable to the Company or in any other manner permitted by your Grant Notice, which may include one or more of the following:
(a) Provided that at the time of exercise the Common Stock is publicly traded, pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board that, prior to the issuance of Common Stock, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds. This manner of payment is also known as a broker-assisted exercise, same day sale, or sell to cover.
(b) Provided that at the time of exercise the Common Stock is publicly traded, by delivery to the Company (either by actual delivery or attestation) of already-owned shares of Common Stock that are owned free and clear of any liens, claims, encumbrances or security interests, and that are valued at Fair Market Value on the date of exercise. Delivery for these purposes, in the sole discretion of the Company at the time you exercise your option, will include delivery to the Company of your attestation of ownership of such shares of Common Stock in a form approved by the Company. You may not exercise your option by delivery to the Company of Common Stock if doing so would violate the provisions of any law, regulation or agreement restricting the redemption of the Companys stock.
(c) If this option is a Nonstatutory Stock Option, subject to the consent of the Company at the time of exercise, by a net exercise arrangement pursuant to which the Company will reduce the number of shares of Common Stock issued upon exercise of your option by the largest whole number of shares with a Fair Market Value that does not exceed the aggregate exercise price. You must pay any remaining balance of the aggregate exercise price not satisfied by the net exercise in cash or other permitted form of payment. Shares of Common Stock will no longer be outstanding under your option and will not be exercisable thereafter if those shares (i) are used to pay the exercise price pursuant to the net exercise, (ii) are delivered to you as a result of such exercise, and (iii) are withheld to satisfy your tax withholding obligations.
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(d) Pursuant to the following deferred payment alternative:
(i) Not less than one hundred percent (100%) of the aggregate exercise price, plus accrued interest, will be due four (4) years from date of exercise or, at the Companys election, upon termination of your Continuous Service.
(ii) Interest will be compounded at least annually and will be charged at the minimum rate of interest necessary to avoid (1) the treatment as interest, under any applicable provisions of the Code, of any amounts other than amounts stated to be interest under the deferred payment arrangement and (2) the classification of your option as a liability for financial accounting purposes.
(iii) In order to elect the deferred payment alternative, you must, as a part of your written notice of exercise, give notice of the election of this payment alternative and, in order to secure the payment of the deferred exercise price to the Company hereunder, if the Company so requests, you must tender to the Company a promissory note and a pledge agreement covering the purchased shares of Common Stock, both in form and substance satisfactory to the Company, or such other or additional documentation as the Company may request.
6. WHOLE SHARES. You may exercise your option only for whole shares of Common Stock.
7. SECURITIES LAW COMPLIANCE. In no event may you exercise your option unless the shares of Common Stock issuable upon exercise are then registered under the Securities Act or, if not registered, the Company has determined that your exercise and the issuance of the shares would be exempt from the registration requirements of the Securities Act. The exercise of your option also must comply with all other applicable laws and regulations governing your option, and you may not exercise your option if the Company determines that such exercise would not be in material compliance with such laws and regulations (including any restrictions on exercise required for compliance with Treas. Reg. 1.401(k)-1(d)(3), if applicable).
8. TERM. You may not exercise your option before the Date of Grant or after the expiration of the options term. The term of your option expires, subject to the provisions of Section 5(h) of the Plan, upon the earliest of the following:
(a) immediately upon the termination of your Continuous Service for Cause;
(b) three (3) months after the termination of your Continuous Service for any reason other than Cause, your Disability or your death (except as otherwise provided in Section 8(d) below); provided, however, that if during any part of such three (3) month period your option is not exercisable solely because of the condition set forth in the section above relating to Securities Law Compliance, your option will not expire until the earlier of the Expiration Date or until it has been exercisable for an aggregate period of three (3) months after the termination of your Continuous Service; provided further, that if (i) you are a Non-Exempt Employee, (ii)
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your Continuous Service terminates within six (6) months after the Date of Grant, and (iii) you have vested in a portion of your option at the time of your termination of Continuous Service, your option will not expire until the earlier of (x) the later of (A) the date that is seven (7) months after the Date of Grant, and (B) the date that is three (3) months after the termination of your Continuous Service, and (y) the Expiration Date;
(c) twelve (12) months after the termination of your Continuous Service due to your Disability (except as otherwise provided in Section 8(d)) below;
(d) eighteen (18) months after your death if you die either during your Continuous Service or within three (3) months after your Continuous Service terminates for any reason other than Cause;
(e) the Expiration Date indicated in your Grant Notice; or
(f) the day before the tenth (10th) anniversary of the Date of Grant.
If your option is an Incentive Stock Option, note that to obtain the federal income tax advantages associated with an Incentive Stock Option, the Code requires that at all times beginning on the Date of Grant and ending on the day three (3) months before the date of your options exercise, you must be an employee of the Company or an Affiliate, except in the event of your death or your permanent and total disability, as defined in Section 22(e)(3) of the Code. (The definition of disability in Section 22(e)(3) of the Code. The Company has provided for extended exercisability of your option under certain circumstances for your benefit but cannot guarantee that your option will necessarily be treated as an Incentive Stock Option if you continue to provide services to the Company or an Affiliate as a Consultant or Director after your employment terminates or if you otherwise exercise your option more than three (3) months after the date your employment with the Company or an Affiliate terminates.
9. EXERCISE.
(a) You may exercise the vested portion of your option (and the unvested portion of your option if your Grant Notice so permits) during its term by (i) delivering a Notice of Exercise (in a form designated by the Company) or completing such other documents and/or procedures designated by the Company for exercise and (ii) paying the exercise price and any applicable withholding taxes to the Companys Secretary, stock plan administrator, or such other person as the Company may designate, together with such additional documents as the Company may then require.
(b) By exercising your option you agree that, as a condition to any exercise of your option, the Company may require you to enter into an arrangement providing for the payment by you to the Company of any tax withholding obligation of the Company arising by reason of (i) the exercise of your option, (ii) the lapse of any substantial risk of forfeiture to which the shares of Common Stock are subject at the time of exercise, or (iii) the disposition of shares of Common Stock acquired upon such exercise.
(c) If your option is an Incentive Stock Option, by exercising your option you agree that you will notify the Company in writing within fifteen (15) days after the date of any disposition of any of the shares of the Common Stock issued upon exercise of your option that occurs within two (2) years after the Date of Grant or within one (1) year after such shares of Common Stock are transferred upon exercise of your option.
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(d) By exercising your option you agree that you will not sell, dispose of, transfer, make any short sale of, grant any option for the purchase of, or enter into any hedging or similar transaction with the same economic effect as a sale with respect to any shares of Common Stock or other securities of the Company held by you, for a period of one hundred eighty (180) days following the effective date of a registration statement of the Company filed under the Securities Act or such longer period as the underwriters or the Company will request to facilitate compliance with FINRA Rule 2711 or NYSE Member Rule 472 or any successor or similar rules or regulation (the Lock-Up Period); provided, however, that nothing contained in this section will prevent the exercise of a repurchase option, if any, in favor of the Company during the Lock-Up Period. You further agree to execute and deliver such other agreements as may be reasonably requested by the Company or the underwriters that are consistent with the foregoing or that are necessary to give further effect thereto. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to your shares of Common Stock until the end of such period. You also agree that any transferee of any shares of Common Stock (or other securities) of the Company held by you will be bound by this Section 9(d). The underwriters of the Companys stock are intended third party beneficiaries of this Section 9(d) and will have the right, power and authority to enforce the provisions hereof as though they were a party hereto.
10. TRANSFERABILITY. Except as otherwise provided in this Section 10, your option is not transferable, except by will or by the laws of descent and distribution, and is exercisable during your life only by you.
(a) Certain Trusts. Upon receiving written permission from the Board or its duly authorized designee, you may transfer your option to a trust if you are considered to be the sole beneficial owner (determined under Section 671 of the Code and applicable state law) while the option is held in the trust. You and the trustee must enter into transfer and other agreements required by the Company.
(b) Domestic Relations Orders. Upon receiving written permission from the Board or its duly authorized designee, and provided that you and the designated transferee enter into transfer and other agreements required by the Company, you may transfer your option pursuant to the terms of a domestic relations order, official marital settlement agreement or other divorce or separation instrument as permitted by Treasury Regulation 1.421-1(b)(2) that contains the information required by the Company to effectuate the transfer. You are encouraged to discuss the proposed terms of any division of this option with the Company prior to finalizing the domestic relations order or marital settlement agreement to help ensure the required information is contained within the domestic relations order or marital settlement agreement. If this option is an Incentive Stock Option, this option may be deemed to be a Nonstatutory Stock Option as a result of such transfer.
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(c) Beneficiary Designation. Upon receiving written permission from the Board or its duly authorized designee, you may, by delivering written notice to the Company, in a form approved by the Company and any broker designated by the Company to handle option exercises, designate a third party who, on your death, will thereafter be entitled to exercise this option and receive the Common Stock or other consideration resulting from such exercise. In the absence of such a designation, your executor or administrator of your estate will be entitled to exercise this option and receive, on behalf of your estate, the Common Stock or other consideration resulting from such exercise.
11. RIGHT OF FIRST REFUSAL. Shares of Common Stock that you acquire upon exercise of your option are subject to any right of first refusal that may be described in the Companys bylaws in effect at such time the Company elects to exercise its right; provided, however, that if there is no right of first refusal described in the Companys bylaws at such time, the right of first refusal described below will apply. The Companys right of first refusal will expire on the first date upon which any security of the Company is listed (or approved for listing) upon notice of issuance on a national securities exchange or quotation system (the Listing Date).
(a) Prior to the Listing Date, you may not validly Transfer (as defined below) any shares of Common Stock acquired upon exercise of your option, or any interest in such shares, unless such Transfer is made in compliance with the following provisions:
(i) Before there can be a valid Transfer of any shares of Common Stock or any interest therein, the record holder of the shares of Common Stock to be transferred (the Offered Shares) will give written notice (by registered or certified mail) to the Company. Such notice will specify the identity of the proposed transferee, the cash price offered for the Offered Shares by the proposed transferee (or, if the proposed Transfer is one in which the holder will not receive cash, such as an involuntary transfer, gift, donation or pledge, the holder will state that no purchase price is being proposed), and the other terms and conditions of the proposed Transfer. The date such notice is mailed will be hereinafter referred to as the Notice Date and the record holder of the Offered Shares will be hereinafter referred to as the Offeror. If, from time to time, there is any stock dividend, stock split or other change in the character or amount of any of the outstanding Common Stock which is subject to the provisions of your option, then in such event any and all new, substituted or additional securities to which you are entitled by reason of your ownership of the shares of Common Stock acquired upon exercise of your option will be immediately subject to the Companys Right of First Refusal (as defined below) with the same force and effect as the shares subject to the Right of First Refusal immediately before such event.
(ii) For a period of thirty (30) calendar days after the Notice Date, or such longer period as may be required to avoid the classification of your option as a liability for financial accounting purposes, the Company will have the option to purchase all (but not less than all) of the Offered Shares at the purchase price and on the terms set forth in Section 11(a)(iii) (the Companys Right of First Refusal). In the event that the proposed Transfer is one involving no payment of a purchase price, the purchase price will be deemed to be the Fair Market Value of the Offered Shares as determined in good faith by the Board in its discretion. The Company may exercise its Right of First Refusal by mailing (by registered or certified mail) written notice of exercise of its Right of First Refusal to the Offeror prior to the end of said thirty (30) days (including any extension required to avoid classification of the option as a liability for financial accounting purposes).
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(iii) The price at which the Company may purchase the Offered Shares pursuant to the exercise of its Right of First Refusal will be the cash price offered for the Offered Shares by the proposed transferee (as set forth in the notice required under Section 11(a)(i)), or the Fair Market Value as determined by the Board in the event no purchase price is involved. To the extent consideration other than cash is offered by the proposed transferee, the Company will not be required to pay any additional amounts to the Offeror other than the cash price offered (or the Fair Market Value, if applicable). The Companys notice of exercise of its Right of First Refusal will be accompanied by full payment for the Offered Shares and, upon such payment by the Company, the Company will acquire full right, title and interest to all of the Offered Shares.
(iv) If, and only if, the option given pursuant to Section 11(a)(ii) is not exercised, the Transfer proposed in the notice given pursuant to Section 11(a)(i) may take place; provided, however, that such Transfer must, in all respects, be exactly as proposed in said notice except that such Transfer may not take place either before the tenth (10th) calendar day after the expiration of the thirty (30) day option exercise period or after the ninetieth (90th) calendar day after the expiration of the thirty (30) day option exercise period, and if such Transfer has not taken place prior to said ninetieth (90th) day, such Transfer may not take place without once again complying with this Section 11(a). The option exercise periods in this Section 11(a)(iv) will be adjusted to include any extension required to avoid the classification of your option as a liability for financial accounting purposes.
(b) As used in this Section 11, the term Transfer means any sale, encumbrance, pledge, gift or other form of disposition or transfer of shares of Common Stock or any legal or equitable interest therein; provided, however, that the term Transfer does not include a transfer of such shares or interests by will or intestacy to your Immediate Family (as defined below). In such case, the transferee or other recipient will receive and hold the shares of Common Stock so transferred subject to the provisions of this Section, and there will be no further transfer of such shares except in accordance with the terms of this Section 11. As used herein, the term Immediate Family will mean your spouse, the lineal descendant or antecedent, father, mother, brother or sister, child, adopted child, grandchild or adopted grandchild of you or your spouse, or the spouse of any child, adopted child, grandchild or adopted grandchild of you or your spouse.
(c) None of the shares of Common Stock purchased on exercise of your option will be transferred on the Companys books nor will the Company recognize any such Transfer of any such shares or any interest therein unless and until all applicable provisions of this Section 11 have been complied with in all respects. The certificates of stock evidencing shares of Common Stock purchased on exercise of your option will bear an appropriate legend referring to the transfer restrictions imposed by this Section 11.
(d) To ensure that the shares subject to the Companys Right of First Refusal will be available for repurchase by the Company, the Company may require you to deposit the certificates evidencing the shares that you purchase upon exercise of your option with an escrow agent designated by the Company under the terms and conditions of an escrow agreement
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approved by the Company. If the Company does not require such deposit as a condition of exercise of your option, the Company reserves the right at any time to require you to so deposit the certificates in escrow. As soon as practicable after the expiration of the Companys Right of First Refusal, the agent will deliver to you the shares and any other property no longer subject to such restriction. In the event the shares and any other property held in escrow are subject to the Companys exercise of its Right of First Refusal, the notices required to be given to you will be given to the escrow agent, and any payment required to be given to you will be given to the escrow agent. Within thirty (30) days after payment by the Company for the Offered Shares, the escrow agent will deliver the Offered Shares that the Company has repurchased to the Company and will deliver the payment received from the Company to you.
12. RIGHT OF REPURCHASE. To the extent provided in the Companys bylaws in effect at such time the Company elects to exercise its right, the Company will have the right to repurchase all or any part of the shares of Common Stock you acquire pursuant to the exercise of your option.
13. OPTION NOT A SERVICE CONTRACT. Your option is not an employment or service contract, and nothing in your option will be deemed to create in any way whatsoever any obligation on your part to continue in the employ of the Company or an Affiliate, or of the Company or an Affiliate to continue your employment. In addition, nothing in your option will obligate the Company or an Affiliate, their respective stockholders, boards of directors, officers or employees to continue any relationship that you might have as a Director or Consultant for the Company or an Affiliate.
14. WITHHOLDING OBLIGATIONS.
(a) At the time you exercise your option, in whole or in part, and at any time thereafter as requested by the Company, you hereby authorize withholding from payroll and any other amounts payable to you, and otherwise agree to make adequate provision for (including by means of a same day sale pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board to the extent permitted by the Company), any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Company or an Affiliate, if any, which arise in connection with the exercise of your option.
(b) If this option is a Nonstatutory Stock Option, then upon your request and subject to approval by the Company, and compliance with any applicable legal conditions or restrictions, the Company may withhold from fully vested shares of Common Stock otherwise issuable to you upon the exercise of your option a number of whole shares of Common Stock having a Fair Market Value, determined by the Company as of the date of exercise, not in excess of the minimum amount of tax required to be withheld by law (or such lower amount as may be necessary to avoid classification of your option as a liability for financial accounting purposes). If the date of determination of any tax withholding obligation is deferred to a date later than the date of exercise of your option, share withholding pursuant to the preceding sentence shall not be permitted unless you make a proper and timely election under Section 83(b) of the Code, covering the aggregate number of shares of Common Stock acquired upon such exercise with respect to which such determination is otherwise deferred, to accelerate the determination of such tax withholding obligation to the date of exercise of your option. Notwithstanding the filing
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of such election, shares of Common Stock shall be withheld solely from fully vested shares of Common Stock determined as of the date of exercise of your option that are otherwise issuable to you upon such exercise. Any adverse consequences to you arising in connection with such share withholding procedure shall be your sole responsibility.
(c) You may not exercise your option unless the tax withholding obligations of the Company and/or any Affiliate are satisfied. Accordingly, you may not be able to exercise your option when desired even though your option is vested, and the Company will have no obligation to issue a certificate for such shares of Common Stock or release such shares of Common Stock from any escrow provided for herein, if applicable, unless such obligations are satisfied.
15. TAX CONSEQUENCES. You hereby agree that the Company does not have a duty to design or administer the Plan or its other compensation programs in a manner that minimizes your tax liabilities. You will not make any claim against the Company, or any of its Officers, Directors, Employees or Affiliates related to tax liabilities arising from your option or your other compensation. In particular, you acknowledge that this option is exempt from Section 409A of the Code only if the exercise price per share specified in the Grant Notice is at least equal to the fair market value per share of the Common Stock on the Date of Grant and there is no other impermissible deferral of compensation associated with the option. Because the Common Stock is not traded on an established securities market, the Fair Market Value is determined by the Board, perhaps in consultation with an independent valuation firm retained by the Company. You acknowledge that there is no guarantee that the Internal Revenue Service will agree with the valuation as determined by the Board, and you will not make any claim against the Company, or any of its Officers, Directors, Employees or Affiliates in the event that the Internal Revenue Service asserts that the valuation determined by the Board is less than the fair market value as subsequently determined by the Internal Revenue Service.
16. NOTICES. Any notices provided for in your option or the Plan will be given in writing (including electronically) and will be deemed effectively given upon receipt or, in the case of notices delivered by mail by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the last address you provided to the Company. The Company may, in its sole discretion, decide to deliver any documents related to participation in the Plan and this option by electronic means or to request your consent to participate in the Plan by electronic means. By accepting this option, you consent to receive such documents by electronic delivery and to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third party designated by the Company.
17. GOVERNING PLAN DOCUMENT. Your option is subject to all the provisions of the Plan, the provisions of which are hereby made a part of your option, and is further subject to all interpretations, amendments, rules and regulations, which may from time to time be promulgated and adopted pursuant to the Plan. If there is any conflict between the provisions of your option and those of the Plan, the provisions of the Plan will control.
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NOTICE OF EXERCISE AND AGREEMENT
FIGS, Inc. 2834 Colorado Ave, Suite 100 |
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Santa Monica, CA 90404 | Date of Exercise: _______________ |
This constitutes notice to FIGS, Inc. (the Company) that the undersigned purchaser (Purchaser) hereby elects to purchase the below number of shares (the Shares) of Common Stock of the Company (the Common Stock) for the price set forth below under Purchasers stock option, subject to the terms and conditions set forth on Exhibit A hereto.
Type of option (check one): |
Incentive ☐ | Nonstatutory ☐ | ||||||
Stock option dated: |
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Number of Shares as to which option is exercised: |
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Certificates to be issued in name of: |
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Total exercise price: |
$ | ______________ | $ | ______________ | ||||
Cash payment delivered herewith: |
$ | ______________ | $ | ______________ |
The undersigned Purchaser acknowledges receipt of, and understands and agrees to, the terms and conditions set forth in Exhibit A attached to this Notice of Exercise and Agreement (this Agreement), which are incorporated by reference.
Very truly yours, |
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(Signature) |
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Name (Please Print) |
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Exhibit A
Terms and Conditions of Stock Option Exercise
(1) Additional Documents and Agreements. Purchaser agrees (a) to provide such additional documents as the Company may require pursuant to the terms of the 2016 Equity Incentive Plan (the Plan), (b) to provide for the payment to the Company (in the manner designated by the Company) of the Companys withholding obligation, if any, relating to the exercise of this option, and (c) if this exercise relates to an incentive stock option, to notify the Company in writing within fifteen (15) days after the date of any disposition of any of the Shares issued upon exercise of this option that occurs within two (2) years after the date of grant of this option or within one (1) year after such Shares are issued upon exercise of this option.
(2) Lock-Up. Purchaser agrees that, if required by the Company (or a representative of the underwriters) in connection with the first underwritten registration of the offering of any securities of the Company under the Securities Act, Purchaser will not sell, dispose of, transfer, make any short sale of, grant any option for the purchase of, or enter into any hedging or similar transaction with the same economic effect as a sale with respect to any shares of Common Stock or other securities of the Company for a period of one hundred eighty (180) days following the effective date of a registration statement of the Company filed under the Securities Act (or such longer period as the underwriters or the Company shall request to facilitate compliance with FINRA Rule 2711 or NYSE Member Rule 472 or any successor or similar rule or regulation) (the Lock-Up Period). Purchaser further agrees to execute and deliver such other agreements as may be reasonably requested by the Company or the underwriters that are consistent with the foregoing or that are necessary to give further effect thereto. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such period.
(3) Transfer Restrictions. Purchaser acknowledges and agrees that the Shares are subject to the restrictions on transfer and right of first refusal set forth in Section 7 and Section 8 of Article VI of the Companys Amended and Restated Bylaws attached hereto as Attachment 1, as may be amended and/or restated from time to time.
(4) Inspection Rights Waiver. Purchaser hereby acknowledges and agrees that it has been advised and fully understands that a stockholder of a Delaware corporation has certain rights under Section 220 (Section 220) of the Delaware General Corporation Law, as amended from time to time, and is entitled, upon written demand under oath stating the purpose thereof, to inspect for any proper purpose, and to make copies and extracts from, the Companys stock ledger, a list of its stockholders, and its other books and records, and the books and records of subsidiaries of the Company, if any, under the circumstances and in the manner provided in Section 220 (any and all such rights, the Inspection Rights). Purchaser hereby unconditionally, irrevocably, and forever waives its Inspection Rights, whether such Inspection Rights would be exercised or pursued directly or indirectly pursuant to Section 220 or otherwise (including, without limitation, by, through or from another stockholder of the Company), and Purchaser further covenants and agrees not to directly or indirectly commence, voluntarily aid in any way, prosecute, assign, transfer, or cause to be commenced any demand, claim, action, cause of action, or other proceeding in the pursuit or exercise of Inspection Rights.
2.
(5) Voting Agreement. At all meetings of the Companys stockholders and in connection with all actions by the Companys stockholders by written consent in lieu of meetings, if the holders of a majority of the shares of the Companys voting stock then-outstanding (the Majority Holders) approve or reject any matter, or vote to elect or remove any person as a director of the Company, then Purchaser shall vote (in person, by proxy, or by action by written consent, as applicable) all shares of capital stock of the Company directly or indirectly owned of record or beneficially by Purchaser, including the Shares, in the same manner as the Majority Holders to approve or reject such matter or to elect or remove such person as a director. Purchaser shall take all actions and execute all documents reasonably requested by the Company in order to comply with the purposes and intent of this Section 5.
(6) Drag-Along. If the Majority Holders propose to sell, assign or transfer, directly or indirectly, all of their shares of capital stock of the Company to any third party (a Drag-Along Transfer), the Majority Holders may exercise drag-along rights in accordance with and subject to the terms, conditions and procedures set forth in this Section 6 (Drag-Along Rights).
(a) |
The Majority Holders shall give written notice (a Drag-Along Notice) at least fifteen (15) days prior to the consummation of such proposed Drag-Along Transfer to Purchaser of any election by the Majority Holders to exercise their drag-along rights hereunder, setting forth (i) the shares proposed to be transferred, (ii) the consideration to be received for such shares, (iii) the identity of the prospective transferee, and (iv) any other material terms and conditions of the proposed transaction. Such notice shall also specify the aggregate number of Shares Purchaser shall be required to transfer. Any transfer of Shares by Purchaser pursuant to the terms hereof shall be for the same amount and form of consideration per share as the Majority Holders will receive in such Drag-Along Transfer, as specified in the Drag-Along Notice. |
(b) |
Within seven (7) days of delivery of the Drag-Along Notice, Purchaser shall deliver to the Majority Holders such instruments of transfer as shall be reasonably requested by the Majority Holders or the prospective transferee, including, as applicable, one or more stock certificates, properly endorsed for transfer to the transferee, together with a limited power-of-attorney authorizing the Majority Holders to transfer such Shares on the terms set forth in the Drag-Along Notice. |
(c) |
In the event that any transfer pursuant to this Section 6 is structured as a merger, consolidation or business combination, or any sale of all or substantially all assets, Purchaser must further agree to (i) vote or provide a written consent in favor of the transaction, (ii) take such other action within its power, at no cost to it (other than fees and expenses payable to its advisors (which shall be paid by Purchaser), as may be required to effect such transaction, and (iii) take all action to waive any dissenters, appraisal or other similar rights with respect thereto. |
(d) |
If the Drag-Along Transfer is not consummated with in one hundred eighty (180) days after delivery of the Drag-Along Notice, the Majority Holders shall (i) return to each Drag-Along Holder the limited power-of-attorney and all certificates representing the shares that Purchaser delivered pursuant to this Section 6 and any other documents in the possession of the Majority Holders executed by Purchaser in connection with the proposed Drag-Along Transfer. |
3.
(e) |
Notwithstanding the foregoing, a Drag-Along Holder will not be required to comply with this Section 6 in connection with any proposed Drag-Along Transfer, unless: |
i. |
any representations and warranties to be made by Purchaser in connection with the Drag-Along Transfer are limited to representations and warranties related to authority, ownership and the ability to convey title to the Shares, including, but not limited to, representations and warranties that (i) Purchaser holds all right, title and interest in and to the Shares that Purchaser purports to hold, free and clear of all liens and encumbrances, (ii) the obligations of Purchaser in connection with the transaction have been duly authorized, if applicable, (iii) the documents to be entered into by Purchaser have been duly executed by Purchaser and delivered to the acquirer and are enforceable against Purchaser in accordance with their respective terms; and (iv) neither the execution and delivery of documents to be entered into in connection with the transaction, nor the performance of Purchasers obligations thereunder, will cause a breach or violation of the terms of any agreement, law or judgment, order or decree of any court or governmental agency; |
ii. |
Purchaser shall not be liable for the inaccuracy of any representation or warranty made by any other person in connection with the Drag-Along Transfer, other than the Company (except to the extent that funds may be paid out of an escrow established to cover breach of representations, warranties and covenants of the Company as well as breach by any stockholder of any of identical representations, warranties and covenants provided by all stockholders); |
iii. |
the liability for indemnification, if any, of Purchaser in the Drag-Along Transfer and for the inaccuracy of any representations and warranties made by the Company, the Majority Holders or the Purchaser in connection with such Drag-Along Transfer, is several and not joint (except to the extent that funds may be paid out of an escrow established to cover breach of representations, warranties and covenants of the Company as well as breach by any stockholder of any of identical representations, warranties and covenants provided by all stockholders), and subject to any provisions of the Companys certificate of incorporation and bylaws, as amended, related to the allocation of the escrow, is pro rata in proportion to, and does not exceed, the amount of consideration paid to Purchaser in connection with such Drag-Along Transfer; and |
iv. |
upon the consummation of the Drag-Along Transfer, Purchaser will receive the same amount and form of consideration per share for Purchasers shares as is received by the Majority Holders. |
4.
(f) |
All costs and expenses incurred by Purchaser in connection with any Drag-Along Transfer, including, without limitation, transfer taxes and legal, accounting and investment banking fees, shall be borne by Purchaser. |
(g) |
Notwithstanding anything herein to the contrary, there shall be no liability on the part of the Majority Holders to Purchaser if a Drag-Along Transfer is not consummated for any reason, and the Majority Holders shall not be obligated to consummate the proposed Drag-Along Transfer, regardless of whether the Majority Holders have delivered a Drag-Along Notice in respect of such proposed Drag-Along Transfer. |
(7) Power of Attorney. In order to secure the performance of Purchasers obligations under Section 5 and Section 6, Purchaser hereby irrevocably appoints the Chief Executive Officer of the Company as Purchasers attorney-in-fact and proxy of Purchaser (with full power of substitution) to vote, provide a written consent or take any other action with respect to Purchasers shares if, and only in the event that, Purchaser fails to vote or provide a written consent with respect to Purchasers shares in accordance with the terms of Section 5 or 6 or fails to take any other action in accordance with the terms of Section 5 or 6 within three (3) days of a request for such vote, written consent or action. Upon such failure, the Chief Executive Officer of the Company shall have and is hereby irrevocably granted a proxy to vote or provide a written consent with respect to Purchasers shares for the purposes of taking the actions required by Section 5 and Section 6. Purchaser intends this proxy to be, and it shall be, irrevocable and coupled with an interest, and Purchaser shall take such further action and execute such other instruments as may be necessary to effectuate the intent of this proxy.
(8) Governing Law; Severability. This Agreement shall be governed in all respects by the internal laws of the State of Delaware, without regard to principles of conflicts of law. If any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, portions of such provision, or such provision in its entirety, to the extent necessary, shall be severed from this Agreement, and such court will replace such illegal, void or unenforceable provision of this Agreement with a valid and enforceable provision that will achieve, to the extent possible, the same economic, business and other purposes of the illegal, void or unenforceable provision. The balance of this Agreement shall be enforceable in accordance with its terms.
(9) Termination. Section 5 and Section 6 above shall terminate and be of no further force or effect upon the closing of an initial public offering of the Companys common stock pursuant to an effective registration statement under the Securities Act of 1933, as amended.
5.
Attachment 1
Bylaws
6.
Exhibit 10.4
FIGS, INC.
RESTRICTED STOCK UNIT GRANT NOTICE
(AMENDED 2016 EQUITY INCENTIVE PLAN)
Figs, Inc. (the Company), pursuant to its Amended 2016 Equity Incentive Plan (the Plan), has granted to Participant (as of the date indicated below) a Restricted Stock Unit Award for the number of shares of the Companys Common Stock (RSUs) set forth below (the Award). The Award is subject to all of the terms and conditions as set forth in this Restricted Stock Unit Grant Notice (this Grant Notice) and in the Plan and the Restricted Stock Unit Agreement (the Agreement), both of which are attached hereto and incorporated herein in their entirety. Capitalized terms not otherwise defined herein will have the meanings set forth in the Plan or the Agreement, as applicable. In the event of any conflict between the terms in this Grant Notice or the Agreement and the Plan, the terms of the Plan will control.
Participant: |
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Date of Grant: |
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Vesting Commencement Date: |
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Number of RSUs: |
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Expiration Date: | The Expiration Date for an RSU is the date of termination of Participants Continuous Service. | |
Vesting: | Participant will receive a benefit with respect to an RSU only if it vests. Except as explicitly set forth below, two vesting requirements must be satisfied on or before the Expiration Date specified above in order for an RSU to vest a time and service-based requirement (the Service-Based Requirement) and the Liquidity Event Requirement (each set forth below). An RSU will vest (and therefore becomes a Vested RSU) on the first date upon which both the Service-Based Requirement and the Liquidity Event Requirement are satisfied with respect to that particular RSU (the Vesting Date). All RSUs that do not become Vested RSUs on or before the Expiration Date will be immediately forfeited to the Company upon expiration at no cost to the Company. | |
Service-Based | ||
Requirement: | The Service-Based Requirement will be satisfied in installments as follows: 6.25% of the total number of RSUs will satisfy the Service-Based Requirement on each of the first 16 Quarterly Dates following the Vesting Commencement Date, subject to Participants Continuous Service through each such date. For the avoidance of doubt, upon termination of Participants Continuous Service, any RSUs that have yet to become Vested RSUs will be forfeited at no cost to the Company and Participant will have no further right, title or interest in or to such RSUs or the shares of Common Stock underlying them. | |
Quarterly Date means each of March 1, June 1, September 1 and December 1. | ||
Liquidity Event | ||
Requirement: | The Liquidity Event Requirement will be satisfied as to any then-outstanding RSUs on the earliest of the following: (1) the effective date of a registration statement of the Company filed under the Securities Act for the sale of the Companys Common Stock or (2) immediately prior to the closing of a Change in Control. |
Vesting | ||
Acceleration: | Notwithstanding anything to the contrary in this Grant Notice or the Agreement, if Participants Continuous Service terminates for a reason other than Cause or the Participants voluntary cessation of Continuous Service prior to the Liquidity Event Requirement being satisfied, then all of the RSUs for which the Service-Based Requirement has been satisfied will accelerate vesting and become Vested RSUs. In the event of an acceleration of vesting as specified in this paragraph, the Participant may elect to have shares withheld to satisfy any Tax Related Items (as defined in the Agreement). | |
Further, notwithstanding anything to the contrary in this Grant Notice or the Agreement, if Participant has a Qualifying CIC Termination prior to the second anniversary of the Date of Grant, then 100% of the RSUs that are then outstanding and unvested will accelerate vesting and become Vested RSUs (it being understood that forfeiture of any unvested RSUs due to termination of Continuous Service will be tolled to the extent necessary to effectuate the vesting acceleration contemplated by this paragraph). | ||
Further, notwithstanding anything to the contrary in this Grant Notice or the Agreement, if a Change in Control occurs on or after the second anniversary of the Date of Grant, then, provided Participant remains in Continuous Service through immediately prior to the Change in Control, 100% of the RSUs that are then outstanding and unvested will accelerate vesting and become Vested RSUs immediately prior to the Change in Control. | ||
For the avoidance of doubt, no more than 100% of the total RSUs may become Vested RSUs. | ||
Employment Agreement means that certain Employment Agreement by and between the Company and dated . | ||
Qualifying CIC Termination means a termination of Participants Continuous Service either (1) by the Company or one of its Affiliates (or a successor of the Company or an Affiliate of the Company) other than for death, disability, or Cause (as defined in the Employment Agreement) or (2) by Participant for Good Reason (as defined in the Employment Agreement), in each case, during the period beginning on the date that is three (3) months prior to the effective date of a Change in Control and ending on the date that is twelve (12) months after the effective date of a Change in Control. | ||
Settlement: | If an RSU vests as provided for above, the Company will issue one share of Common Stock for each Vested RSU. The shares will be issued in accordance with the issuance schedule set forth in Section 5 of the Agreement. |
Additional Terms/Acknowledgements: Participant acknowledges receipt of, and understands and agrees to, this Grant Notice, the Agreement and the Plan. Participant further acknowledges that as of the Date of Grant, this Grant Notice, the Agreement and the Plan set forth the entire understanding between Participant and the Company regarding this Award and supersede all prior oral and written agreements, offer letters, promises and/or representations on that subject with the exception of (1) equity awards previously granted and delivered to Participant, (2) any compensation recovery policy that is adopted by the Company or is otherwise required by applicable law and (3) any written employment or severance arrangement that would provide for vesting acceleration of this Award upon the terms and conditions set forth therein (provided that if there is any conflict in the vesting and/or acceleration terms, those contained in this Grant Notice and the Agreement will control).
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By accepting the Award, Participant acknowledges having received and read the Grant Notice, the Agreement and the Plan (the Grant Documents) and agrees to all of the terms and conditions set forth in these documents. Furthermore, by accepting the Award, Participant consents to receive such documents by electronic delivery and to participate in the Plan through an on-line or electronic system established and maintained by the Company or a third party designated by the Company.
Notwithstanding the above, if Participant has not actively accepted the Award within 90 days of the Date of Grant set forth in this Grant Notice, Participant is deemed to have accepted the Award, subject to all of the terms and conditions of the Grant Documents.
FIGS, INC. | PARTICIPANT: | |||||||
By: |
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Signature | Signature | |||||||
Date: |
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Name & Title: |
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Date: |
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ATTACHMENTS:
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Attachment I: Restricted Stock Unit Agreement |
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Attachment II: Amended 2016 Equity Incentive Plan |
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ATTACHMENT I
FIGS, INC.
RESTRICTED STOCK UNIT AGREEMENT
(AMENDED 2016 EQUITY INCENTIVE PLAN)
Pursuant to the Restricted Stock Unit Grant Notice (the Grant Notice) and this Restricted Stock Unit Agreement (the Agreement), Figs, Inc. (the Company) has granted to you a Restricted Stock Unit Award for the number of shares of the Companys Common Stock (RSUs) indicated in the Grant Notice (the Award) under its Amended 2016 Equity Incentive Plan (the Plan). The Award is granted to you effective as of the Date of Grant set forth in the Grant Notice for this Award. Capitalized terms not explicitly defined in this Agreement will have the same meanings given to them in the Plan or Grant Notice, as applicable. The terms and conditions of the Award, in addition to those set forth in the Grant Notice and the Plan, are as follows.
1. NATURE OF THE AWARD. The Award represents the right to be issued on a future date the number of shares of the Companys Common Stock as indicated in the Grant Notice upon the satisfaction of the terms set forth in this Agreement. Except as otherwise provided herein, you will not be required to make any payment to the Company with respect to your receipt of the Award, the vesting of the RSUs or the issuance of the underlying shares of Common Stock.
2. VESTING. Subject to the limitations contained herein, the Award will vest in accordance with the vesting schedule provided in the Grant Notice. Upon termination of your Continuous Service, any RSUs that have yet to satisfy any time and service-based requirement, including the Service-Based Requirement, will be forfeited at no cost to the Company and you will have no further right, title or interest in or to such RSUs or the shares of Common Stock covered thereby.
3. NUMBER OF SHARES.
(a) The number of RSUs subject to the Award will be adjusted from time to time for Capitalization Adjustments, as provided in the Plan.
(b) Any additional RSUs, shares, cash or other property that become subject to the Award pursuant to this Section 3, if any, will be subject, in a manner determined by the Board, to the same forfeiture restrictions, restrictions on transferability, and time and manner of issuance as applicable to the other shares covered by the Award.
(c) Notwithstanding the provisions of this Section 3, no fractional shares or rights for fractional shares of Common Stock will be created pursuant to this Section 3. The Board will, in its sole discretion, determine an equivalent benefit for any fractional shares or fractional shares that might be created by the adjustments referred to in this Section 3.
4. SECURITIES LAW AND OTHER COMPLIANCE. You may not be issued any shares under the Award unless either (a) the shares are registered under the Securities Act; or (b) the Company has determined that such issuance would be exempt from the registration requirements of the Securities Act. The Award also must comply with other applicable laws and regulations governing the Award, and you will not receive such shares if the Company determines that such receipt would not be in material compliance with such laws and regulations.
5. DATE OF ISSUANCE.
(a) Subject to the satisfaction of the Tax-Related Items set forth in Section 11 of this Agreement, in the event one or more RSUs vest, the Company will issue to you one (1) share of Common Stock for each RSU that vests on the applicable Vesting Date (subject to any adjustment under Section 3 above) (such date, the Original Issuance Date).
(b) If the Original Issuance Date falls on a date that is not a business day, issuance will instead occur on the next following business day. In addition, to the extent applicable at a Vesting Date when the Common Stock is registered under the Securities Act, if:
(i) the Original Issuance Date does not occur (1) during an open window period applicable to you, as determined by the Company in accordance with the Companys then-effective policy on trading in Company securities, or (2) on a date when you are otherwise permitted to sell shares of Common Stock on an established stock exchange or stock market (including but not limited to under a previously established written trading plan that meets the requirements of Rule 10b5-1 under the Exchange Act and was entered into in compliance with the Companys policies (a 10b5-1 Arrangement)), and
(ii) either (1) no Tax-Related Items apply, or (2) the Company decides, prior to the Original Issuance Date, (A) not to satisfy the Tax-Related Items by withholding shares of Common Stock from the shares of Common Stock otherwise due, on the Original Issuance Date, to you under this Award, and (B) not to permit you to enter into a same day sale commitment with a broker-dealer pursuant to Section 11 of this Agreement (including but not limited to a commitment under a 10b5-1 Arrangement) and (C) not to permit you to pay the Tax-Related Items in cash,
then the shares of Common Stock that would otherwise be issued to you on the Original Issuance Date will not be issued on such Original Issuance Date and will instead be issued on the first business day when you are not prohibited from selling shares of Common Stock in the open public market, but in no event later than (a) December 31 of the calendar year in which the Original Issuance Date occurs (that is, the last day of your taxable year in which the Original Issuance Date occurs), or (b) if and only if permitted in a manner that complies with Treasury Regulations Section 1.409A-1(b)(4), the date that is the 15th day of the third calendar month of the year immediately following the year in which the shares of Common Stock covered by this Award are no longer subject to a substantial risk of forfeiture within the meaning of Treasury Regulations Section 1.409A-1(d).
(c) The form of such issuance (e.g., a stock certificate or electronic entry evidencing such shares of Common Stock) will be determined by the Company. In all cases, the issuance of shares under this Award is intended to comply with Treasury Regulations Section 1.409A-1(b)(4) and will be construed and administered in such a manner.
6. DIVIDENDS. You will receive no benefit or adjustment to your RSUs with respect to any cash dividend, stock dividend or other distribution except as provided in the Plan with respect to a Capitalization Adjustment.
7. LOCK-UP PERIOD. By acquiring shares of Common Stock under your Award, you agree that you will not sell, dispose of, transfer, make any short sale of, grant any option for the purchase of, or enter into any hedging or similar transaction with the same economic effect as a sale with respect to, any shares of Common Stock or other securities of the Company held by you, for a period of one hundred eighty (180) days following the effective date of a registration statement of the Company filed under the Securities Act or such longer period as the underwriters or the Company will request to facilitate compliance with FINRA Rule 2241 or any successor or similar rule or regulation (the Lock-Up Period); provided,
2
however, that nothing contained in this Section 7 will prevent the exercise of a repurchase option, if any, in favor of the Company during the Lock-Up Period. You further agree to execute and deliver such other agreements as may be reasonably requested by the Company or the underwriters that are consistent with the foregoing or that are necessary to give further effect thereto. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to your shares of Common Stock until the end of such period. You also agree that any transferee of any shares of Common Stock or other securities of the Company held by you will be bound by this Section 7. The underwriters of the Companys stock are intended third party beneficiaries of this Section 7 and will have the right, power and authority to enforce the provisions of this Section 7 as though they were a party to this Agreement.
8. TRANSFER RESTRICTIONS. Shares of Common Stock that you acquire upon vesting and settlement of your Award are subject to any restrictions on transfer and/or right of first refusal that may be set forth in the Companys bylaws in effect at such time the Company elects to exercise its right. In addition to any other limitation on transfer created by applicable securities laws, you will not sell, assign, hypothecate, donate, encumber or otherwise dispose of all or any part of the shares subject to your Award or any interest in such shares, whether voluntarily or by operation of law, by gift, by entering into a contract that requires shares to be issued at a future date, or otherwise, except in compliance with this Agreement, the Companys bylaws and applicable securities law.
9. RESTRICTIVE LEGENDS. The shares of Common Stock issued in respect of your Award will be endorsed with appropriate legends as determined by the Company.
10. AWARD NOT AN EMPLOYMENT OR SERVICE CONTRACT.
(a) Subject to applicable law, your employment or other service with the Company or any Affiliate is not for any specified term and may be terminated by you or by the Company or an Affiliate at any time, for any reason, with or without cause and with or without notice. Nothing in this Agreement (including, but not limited to, the vesting of the Award pursuant to Section 2 or the issuance of the shares subject to the Award), the Plan or any covenant of good faith and fair dealing that may be found implicit in this Agreement or the Plan will: (i) confer upon you any right to continue in the employ of, or affiliation with, the Company or an Affiliate; (ii) constitute any promise or commitment by the Company or an Affiliate regarding the fact or nature of future positions, future work assignments, future compensation or any other term or condition of employment or affiliation; (iii) confer any right or benefit under this Agreement or the Plan unless such right or benefit has specifically accrued under the terms of this Agreement or Plan; or (iv) deprive the Company or an Affiliate of the right to terminate your employment or engagement at will (subject to applicable law) and without regard to any future vesting opportunity that you may have.
(b) By accepting this Award, you acknowledge and agree that the right to continue vesting in the Award pursuant to Section 2 and the schedule set forth in the Grant Notice is earned only by continuing as an employee, director or consultant at the will of the Company or an Affiliate (not through the act of being hired, being granted this Award or any other award or benefit) and that the Company has the right to reorganize, sell, spin-out or otherwise restructure one or more of its businesses or Affiliates at any time or from time to time, as it deems appropriate (a reorganization). You further acknowledge and agree that such reorganization could result in the termination of your Continuous Service, or the termination of Affiliate status of your employer and the loss of benefits available to you under this Agreement, including but not limited to, the termination of the right to continue vesting in the Award.
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11. RESPONSIBILITY FOR TAXES.
(a) You acknowledge that, regardless of any action taken by the Company, the ultimate liability for all income tax (including U.S. federal, state, and local taxes and/or non-U.S. taxes), social insurance, payroll tax, fringe benefits tax, payment on account or other tax-related items related to your participation in the Plan and legally applicable to you or deemed by the Company in its sole discretion to be an appropriate charge to you even if legally applicable to the Company (Tax-Related Items) is and remains your responsibility and may exceed the amount actually withheld by the Company.
(b) Prior to any relevant taxable or tax withholding event, as applicable, you agree to make adequate arrangements satisfactory to the Company and/or your employer (if not the Company) to satisfy all Tax-Related Items. In this regard, you authorize the Company or its agent to satisfy their withholding obligations with regard to all Tax-Related Items, if any, by any of the following methods or by a combination of such methods: (i) withholding from any compensation otherwise payable to you by the Company or your employer; (ii) causing you to tender a cash payment; (iii) entering on your behalf (pursuant to this authorization without further consent) into a same day sale commitment with a broker dealer that is a member of the Financial Industry Regulatory Authority (a FINRA Dealer) whereby you irrevocably elect to sell a portion of the shares to be issued under the Award to satisfy the Tax-Related Items and whereby the FINRA Dealer irrevocably commits to forward the proceeds necessary to satisfy the Tax-Related Items directly to the Company and/or its Affiliates; (iv) withholding shares of Common Stock from the shares of Common Stock issued or otherwise issuable to you in connection with the Award with a Fair Market Value (measured as of the date the applicable shares of Common Stock are issued to you or, if and as determined by the Company, the date on which the Tax-Related Items are required to be calculated) equal to the amount of such Tax-Related Items; or (v) any other method of withholding determined by the Company and permitted by applicable law. The Company will use commercially reasonable efforts (as determined by the Company in its sole discretion) to facilitate the satisfaction of Tax-Related Items by you using one of the methods described in clauses (iii) and (iv) of the preceding sentence or by permitting you to sell shares of Common Stock in any initial public offering by the Company. However, the Company does not guarantee that you will be able to satisfy any Tax-Related Items through any of the methods described in the preceding sentence and in all circumstances you remain responsible for timely and fully satisfying the Tax-Related Items. Depending on the withholding method used, the Company may withhold or account for Tax-Related Items by considering applicable minimum statutory withholding rates or other applicable withholding rates, including up to the maximum applicable rate in your jurisdiction to the extent permitted under the Plan, in which case you may receive a refund of any over-withheld amount in cash and will have no entitlement to the equivalent in shares of Common Stock. In the event any under-withholding results from the application of minimum statutory or other withholding rates, you may be required to pay additional amounts to the tax authorities. If the obligation for Tax-Related Items is satisfied by withholding in shares of Common Stock, for tax purposes, you are deemed to have been issued the full number of shares of Common Stock subject to the vested portion of the Award, notwithstanding that a number of the shares of Common Stock are held back solely for the purpose of paying the Tax-Related Items.
(c) Finally, you agree to pay to the Company or your employer any amount of Tax-Related Items that the Company or your employer may be required to withhold or account for as a result of your participation in the Plan that cannot be satisfied by any of the withholding methods previously described. Notwithstanding any contrary provision of the Plan, the Grant Notice or this Agreement, if you fail to make satisfactory arrangements for the payment of any Tax-Related Items when due, you permanently will forfeit the RSUs on which the Tax-Related Items were not satisfied and will also permanently forfeit any right to receive shares of Common Stock thereunder. In that case, the RSUs will be returned to the Plan at no cost to the Company.
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12. INVESTMENT REPRESENTATIONS. In connection with your receipt of the Award and the Common Stock under your Award, you represent to the Company the following:
(a) You are aware of the Companys business affairs and financial condition and have acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Common Stock. You are acquiring the Common Stock for investment for your own account only and not with a view to, or for resale in connection with, any distribution thereof within the meaning of the Securities Act.
(b) You understand that the Common Stock has not been registered under the Securities Act by reason of a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of your investment intent as expressed in this Agreement.
(c) You further acknowledge and understand that the Common Stock must be held indefinitely unless the Common Stock is subsequently registered under the Securities Act or an exemption from such registration is available. You further acknowledge and understand that the Company is under no obligation to register the Common Stock. You understand that the certificate evidencing the Common Stock will be imprinted with a legend that prohibits the transfer of the Common Stock unless the Common Stock is registered or such registration is not required in the opinion of counsel for the Company.
(d) You are familiar with the provisions of Rules 144 and 701 under the Securities Act, as in effect from time to time, which, in substance, permit limited public resale of restricted securities acquired, directly or indirectly, from the issuer thereof (or from an affiliate of such issuer), in a non-public offering subject to the satisfaction of certain conditions. Rule 701 provides that if the issuer qualifies under Rule 701 at the time of issuance of the securities, such issuance will be exempt from registration under the Securities Act. In the event the Company becomes subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the securities exempt under Rule 701 may be sold by you 90 days thereafter, subject to the satisfaction of certain of the conditions specified by Rule 144 and the Lock-Up Period agreement described in Section 7.
(e) In the event that the sale of the Common Stock does not qualify under Rule 701 at the time of issuance, then the Common Stock may be resold by you in certain limited circumstances subject to the provisions of Rule 144, which requires, among other things: (i) the availability of certain public information about the Company; and (ii) the resale occurring following the required holding period under Rule 144 after you have purchased, and made full payment of (within the meaning of Rule 144), the securities to be sold.
(f) You further understand that at the time you wish to sell the Common Stock there may be no public market upon which to make such a sale, and that, even if such a public market then exists, the Company may not be satisfying the current public information requirements of Rule 144 or 701, and that, in such event, you would be precluded from selling the Common Stock under Rule 144 or 701 even if the minimum holding period requirement had been satisfied.
13. NO OBLIGATION TO MINIMIZE TAXES. You acknowledge that the Company is not making representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the Award, including, but not limited to, the grant, vesting or settlement of the Award, the subsequent sale of shares of Common Stock acquired pursuant to such settlement and the receipt of any dividends and/or any dividend equivalent payments. Further, you acknowledge that the Company does not have any duty or obligation to minimize your liability for Tax-Related Items arising from the Award or to achieve any particular tax result and will not be liable to you for any Tax-Related Items arising in connection with the Award. If you become subject to taxation in more than one jurisdiction, the Company and/or your employer (or former employer, as applicable) may be required to withhold or account for Tax-Related Items in more than one jurisdiction.
5
14. NO ADVICE REGARDING GRANT. The Company is not providing any tax, legal or financial advice, nor is the Company making any recommendations regarding your participation in the Plan, or your acquisition or sale of the underlying shares of Common Stock. You are hereby advised to consult with your own personal tax, financial and/or legal advisors regarding the Tax-Related Items arising in connection with the Award and by accepting the Award, you have agreed that you have done so or knowingly and voluntarily declined to do so.
15. UNSECURED OBLIGATION. The Award is unfunded, and as a holder of a vested Award, you will be considered an unsecured creditor of the Company with respect to the Companys obligation, if any, to issue shares pursuant to this Agreement. You will not have voting or any other rights as a stockholder of the Company with respect to the shares to be issued pursuant to this Agreement until such shares are issued to you pursuant to Section 5 of this Agreement. Upon such issuance, you will obtain full voting and other rights as a stockholder of the Company. Nothing contained in this Agreement, and no action taken pursuant to its provisions, will create or be construed to create a trust of any kind or a fiduciary relationship between you and the Company or any other person.
16. NOTICES. Any notices provided for in the Grant Notice, this Agreement or the Plan will be given in writing and will be deemed effectively given upon receipt or, in the case of notices delivered by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the last address you provided to the Company. Notwithstanding the foregoing, the Company may, in its sole discretion, decide to deliver any documents related to participation in the Plan and this Award by electronic means or to request your consent to participate in the Plan by electronic means. You hereby consent to receive such documents by electronic delivery and, if requested, to agree to participate in the Plan through an on-line or electronic system established and maintained by the Company or a third party designated by the Company.
17. MISCELLANEOUS.
(a) As a condition to the grant of your Award or to the Companys issuance of any shares of Common Stock under this Agreement, the Company may require you to execute certain customary agreements entered into with the holders of capital stock of the Company, including without limitation, a right of first refusal and co-sale agreement and a stockholders agreement.
(b) The rights and obligations of the Company under the Award will be transferable to any one or more persons or entities, and all covenants and agreements hereunder will inure to the benefit of, and be enforceable by, the Companys successors and assigns. Your rights and obligations under the Award may only be assigned with the prior written consent of the Company.
(c) You agree upon request to execute any further documents or instruments necessary or desirable in the sole determination of the Company to carry out the purposes or intent of the Award.
(d) You acknowledge and agree that you have reviewed the documents provided to you in relation to the Award in their entirety, have had an opportunity to obtain the advice of counsel prior to executing and accepting the Award, and fully understand all provisions of such documents.
(e) This Agreement will be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required.
6
(f) All obligations of the Company under the Plan and this Agreement will be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company.
(g) The Company reserves the right to impose other requirements on your participation in the Plan, on the Award and on any shares of Common Stock acquired under the Plan, to the extent the Company determines it is necessary or advisable for legal or administrative reasons, and to require you to sign any additional agreements or undertakings that may be necessary to accomplish the foregoing.
18. GOVERNING PLAN DOCUMENT. The Award is subject to all the provisions of the Plan, the provisions of which are hereby made a part of the Award, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. Except as expressly provided herein, in the event of any conflict between the provisions of the Award and those of the Plan, the provisions of the Plan will control.
19. SEVERABILITY. If all or any part of this Agreement or the Plan is declared by any court or governmental authority to be unlawful or invalid, such unlawfulness or invalidity will not invalidate any portion of this Agreement or the Plan not declared to be unlawful or invalid. Any Section of this Agreement (or part of such a Section) so declared to be unlawful or invalid will, if possible, be construed in a manner which will give effect to the terms of such Section or part of a Section to the fullest extent possible while remaining lawful and valid.
20. GOVERNING LAW AND VENUE. The interpretation, performance and enforcement of this Agreement will be governed by the law of the state of Delaware without regard to such states conflict of laws rules. For purposes of litigating any dispute that arises directly or indirectly from the relationship of the parties evidenced by this grant or the Agreement, the parties hereby submit to and consent to the exclusive jurisdiction of the State of California and agree that such litigation shall be conducted only in the courts of Los Angeles County, California, or the United States federal courts for the Central District of California, and no other courts, where this grant is made and/or to be performed.
21. EFFECT ON OTHER EMPLOYEE BENEFIT PLANS. The value of the Award subject to this Agreement will not be included as compensation, earnings, salaries, or other similar terms used when calculating your benefits under any employee benefit plan sponsored by the Company or any Affiliate, except as such plan otherwise expressly provides. The Company expressly reserves its rights to amend, modify, or terminate any of the Companys or any Affiliates employee benefit plans.
22. AMENDMENT. This Agreement may not be modified, amended or terminated except by an instrument in writing, signed by you and by a duly authorized representative of the Company. Notwithstanding the foregoing, this Agreement may be amended solely by the Board by a writing which specifically states that it is amending this Agreement, so long as a copy of such amendment is delivered to you, and provided that, except as otherwise expressly provided in the Plan, no such amendment adversely affecting your rights hereunder may be made without your written consent. Without limiting the foregoing, the Board reserves the right to change, by written notice to you, the provisions of this Agreement in any way it may deem necessary or advisable to carry out the purpose of the grant as a result of any change in applicable laws or regulations or any future law, regulation, ruling, or judicial decision, provided that any such change will be applicable only to rights relating to that portion of the Award which is then subject to restrictions as provided herein.
7
23. COMPLIANCE WITH SECTION 409A OF THE CODE. This Award is intended to comply with the short-term deferral rule set forth in Treasury Regulations Section 1.409A-1(b)(4). Notwithstanding the foregoing, if it is determined that the Award fails to satisfy the requirements of the short-term deferral rule and is otherwise deferred compensation subject to Section 409A, and if you are a Specified Employee (within the meaning set forth Section 409A(a)(2)(B)(i) of the Code) as of the date of your separation from service (within the meaning of Treasury Regulations Section 1.409A-1(h)), then the issuance of any shares that would otherwise be made upon the date of the separation from service or within the first six months thereafter will not be made on the originally scheduled date(s) and will instead be issued in a lump sum on the date that is six months and one day after the date of the separation from service, with the balance of the shares issued thereafter in accordance with the original vesting and issuance schedule set forth above, but if and only if such delay in the issuance of the shares is necessary to avoid the imposition of taxation on you in respect of the shares under Section 409A of the Code. Each installment of shares that vests is intended to constitute a separate payment for purposes of Treasury Regulations Section 1.409A-2(b)(2). Notwithstanding any contrary provision of the Plan, the Grant Notice, or of this Agreement, under no circumstances will the Company reimburse you for any taxes or other costs under Section 409A or any other tax law or rule. All such taxes and costs are solely your responsibility.
* * *
This Agreement will be deemed to be accepted by you upon the signing (which may be electronic)
by you of the Restricted Stock Unit Grant Notice to which it is attached or by the deemed
acceptance of this Agreement, as described in the Restricted Stock Unit Grant Notice.
8
ATTACHMENT II
AMENDED 2016 EQUITY INCENTIVE PLAN
9
Exhibit 10.9
Execution Version
J.P. Morgan
CREDIT AGREEMENT
dated as of
December 2, 2020
between
FIGS, INC.
and
JPMORGAN CHASE BANK, N.A.
TABLE OF CONTENTS
Page | ||||||
ARTICLE I Definitions |
1 | |||||
Section 1.01 |
Defined Terms | 1 | ||||
Section 1.02 |
Classification of Loans and Borrowings | 25 | ||||
Section 1.03 |
Terms Generally | 26 | ||||
Section 1.04 |
Accounting Terms; GAAP | 26 | ||||
Section 1.05 |
Interest Rates; LIBOR Notification | 27 | ||||
Section 1.06 |
Pro Forma Adjustments for Acquisitions and Dispositions | 27 | ||||
Section 1.07 |
Status of Obligations | 27 | ||||
ARTICLE II The Credits |
28 | |||||
Section 2.01 |
Revolving Commitments | 28 | ||||
Section 2.02 |
Loans and Borrowings | 28 | ||||
Section 2.03 |
Borrowing Procedures; Requests for Revolving Borrowings | 28 | ||||
Section 2.04 |
Letters of Credit | 29 | ||||
Section 2.05 |
Funding of Borrowings | 32 | ||||
Section 2.06 |
Interest Elections | 33 | ||||
Section 2.07 |
Termination and Reduction of Commitment | 34 | ||||
Section 2.08 |
Repayment and Amortization of Loans; Evidence of Debt | 35 | ||||
Section 2.09 |
Prepayment of Loans | 35 | ||||
Section 2.10 |
Fees | 36 | ||||
Section 2.11 |
Interest | 37 | ||||
Section 2.12 |
Alternate Rate of Interest; Illegality | 38 | ||||
Section 2.13 |
Increased Costs | 39 | ||||
Section 2.14 |
Break Funding Payments | 40 | ||||
Section 2.15 |
Withholding of Taxes; Gross-Up | 40 | ||||
Section 2.16 |
Payments Generally; Allocation of Proceeds | 42 | ||||
Section 2.17 |
Returned Payments | 43 | ||||
ARTICLE III Representations and Warranties |
43 | |||||
Section 3.01 |
Organization; Powers | 43 | ||||
Section 3.02 |
Authorization; Enforceability | 44 | ||||
Section 3.03 |
Governmental Approvals; No Conflicts | 44 | ||||
Section 3.04 |
Financial Condition; No Material Adverse Change | 44 | ||||
Section 3.05 |
Properties | 44 | ||||
Section 3.06 |
Litigation and Environmental Matters | 45 | ||||
Section 3.07 |
Compliance with Laws and Agreements; No Default | 45 | ||||
Section 3.08 |
Investment Company Status | 45 | ||||
Section 3.09 |
Taxes | 45 | ||||
Section 3.10 |
ERISA | 45 | ||||
Section 3.11 |
Disclosure | 46 |
i
Section 3.12 |
Material Agreements | 46 | ||||
Section 3.13 |
Solvency | 46 | ||||
Section 3.14 |
Insurance | 47 | ||||
Section 3.15 |
Capitalization and Subsidiaries | 47 | ||||
Section 3.16 |
Security Interest in Collateral | 47 | ||||
Section 3.17 |
Employment Matters | 47 | ||||
Section 3.18 |
Margin Regulations | 47 | ||||
Section 3.19 |
Use of Proceeds | 48 | ||||
Section 3.20 |
No Burdensome Restrictions | 48 | ||||
Section 3.21 |
Anti-Corruption Laws and Sanctions | 48 | ||||
Section 3.22 |
Plan Assets; Prohibited Transactions | 48 | ||||
Section 3.23 |
Affiliate Transactions | 48 | ||||
ARTICLE IV Conditions |
49 | |||||
Section 4.01 |
Effective Date | 49 | ||||
Section 4.02 |
Each Credit Event | 51 | ||||
ARTICLE V Affirmative Covenants |
52 | |||||
Section 5.01 |
Financial Statements and Other Information | 52 | ||||
Section 5.02 |
Notices of Material Events | 54 | ||||
Section 5.03 |
Existence; Conduct of Business | 55 | ||||
Section 5.04 |
Payment of Obligations | 55 | ||||
Section 5.05 |
Maintenance of Properties | 55 | ||||
Section 5.06 |
Books and Records; Inspection Rights | 55 | ||||
Section 5.07 |
Compliance with Laws and Material Contractual Obligations | 56 | ||||
Section 5.08 |
Use of Proceeds | 56 | ||||
Section 5.09 |
Accuracy of Information | 56 | ||||
Section 5.10 |
Insurance | 57 | ||||
Section 5.11 |
Appraisals | 57 | ||||
Section 5.12 |
Casualty and Condemntation | 57 | ||||
Section 5.13 |
Depository Banks | 57 | ||||
Section 5.14 |
Additional Collateral; Further Assurances | 57 | ||||
ARTICLE VI Negative Covenants |
59 | |||||
Section 6.01 |
Indebtedness | 59 | ||||
Section 6.02 |
Liens | 61 | ||||
Section 6.03 |
Fundamental Changes | 62 | ||||
Section 6.04 |
Investments, Loans, Advances, Guarantees and Acquisitions | 63 | ||||
Section 6.05 |
Asset Sales | 64 | ||||
Section 6.06 |
Sale and Leaseback Transactions | 65 | ||||
Section 6.07 |
Swap Agreements | 66 | ||||
Section 6.08 |
Restricted Payments; Certain Payments of Indebtedness | 66 | ||||
Section 6.09 |
Transactions with Affiliates | 67 | ||||
Section 6.10 |
Restrictive Agreements | 67 |
ii
Section 6.11 |
Amendment of Material Documents | 67 | ||||
Section 6.12 |
Financial Covenant | 67 | ||||
ARTICLE VII Events of Default |
68 | |||||
ARTICLE VIII Miscellaneous |
71 | |||||
Section 8.01 |
Notices | 71 | ||||
Section 8.02 |
Waivers; Amendments | 72 | ||||
Section 8.03 |
Expenses; Indemnity; Damage Waiver | 72 | ||||
Section 8.04 |
Successors and Assigns | 74 | ||||
Section 8.05 |
Survival | 75 | ||||
Section 8.06 |
Counterparts; Integration; Effectiveness; Electronic Execution | 76 | ||||
Section 8.07 |
Severability | 76 | ||||
Section 8.08 |
Right of Setoff | 76 | ||||
Section 8.09 |
Governing Law; Jurisdiction; Consent to Service of Process | 77 | ||||
Section 8.10 |
WAIVER OF JURY TRIAL | 77 | ||||
Section 8.11 |
Headings | 78 | ||||
Section 8.12 |
Confidentiality | 78 | ||||
Section 8.13 |
Nonreliance; Violation of Law | 79 | ||||
Section 8.14 |
USA PATRIOT Act | 79 | ||||
Section 8.15 |
Disclosure | 79 | ||||
Section 8.16 |
Interest Rate Limitation | 79 | ||||
Section 8.17 |
No Fiduciary Duty, etc | 79 | ||||
Section 8.18 |
Marketing Consent | 80 | ||||
ARTICLE IX Loan Guaranty |
81 | |||||
Section 9.01 |
Guaranty | 81 | ||||
Section 9.02 |
Guaranty of Payment | 81 | ||||
Section 9.03 |
No Discharge or Diminishment of Loan Guaranty | 81 | ||||
Section 9.04 |
Defenses Waived | 82 | ||||
Section 9.05 |
Rights of Subrogation | 83 | ||||
Section 9.06 |
Reinstatement; Stay of Acceleration | 83 | ||||
Section 9.07 |
Information | 83 | ||||
Section 9.08 |
Termination | 83 | ||||
Section 9.09 |
Taxes | 83 | ||||
Section 9.10 |
Maximum Liability | 83 | ||||
Section 9.11 |
Contribution | 84 | ||||
Section 9.12 |
Liability Cumulative | 84 | ||||
Section 9.13 |
Keepwell | 85 |
EXHIBITS:
Exhibit ABorrowing Request
Exhibit B Interest Election Request
Exhibit CCompliance Certificate
Exhibit DJoinder Agreement
iii
CREDIT AGREEMENT dated as of December 2, 2020 (as it may be amended or modified from time to time, this Agreement), between FIGS, INC., a Delaware corporation, as Borrower, the other Loan Parties party hereto, and JPMORGAN CHASE BANK, N.A., as Lender.
The parties hereto agree as follows:
ARTICLE I
Definitions
SECTION 1.01. Defined Terms. As used in this Agreement, the following terms have the meanings specified below:
Account has the meaning assigned to such term in the Security Agreement.
Account Debtor means any Person obligated on an Account.
Adjusted LIBO Rate means, with respect to any Eurodollar Borrowing for any Interest Period or for any CBFR Borrowing, an interest rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to (a) the LIBO Rate for such Interest Period multiplied by (b) the Statutory Reserve Rate.
Adjusted One Month LIBOR Rate means, for any day, an interest rate per annum equal to the sum of (i) 2.50% per annum plus (ii) the Adjusted LIBO Rate for a one-month interest period on such day (or if such day is not a Business Day, the immediately preceding Business Day); provided that, for the avoidance of doubt, the Adjusted LIBO Rate for any day shall be based on the LIBO Screen Rate at approximately 11:00 a.m. London time on such day; provided further, that, if the LIBO Screen Rate at such time shall be less than 0.50%, such rate shall be deemed to be 0.50% for purposes of this Agreement.
Affiliate means, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the specified Person.
Anti-Corruption Laws means all laws, rules, and regulations of any jurisdiction applicable to the Borrower or any of its Subsidiaries from time to time concerning or relating to bribery or corruption.
Applicable Rate means, for any day, (a) with respect to any Eurodollar Loan, one and three quarters percent (1.75%) per annum and (b) with respect to any CBFR Loan, three quarters of a percent (0.75%) per annum.
Availability means, at any time, an amount equal to (a) the Revolving Commitment minus (b) the Revolving Exposure.
Availability Period means the period from and including the Effective Date to but excluding the earlier of the Revolving Credit Maturity Date and the date of termination of the Revolving Commitment.
1
Banking Services means each and any of the following bank services provided to any Loan Party or any Subsidiary by the Lender or any of its Affiliates: (a) credit cards for commercial customers (including, without limitation, commercial credit cards and purchasing cards), (b) stored value cards, (c) merchant processing services, and (d) treasury management services (including, without limitation, controlled disbursement, automated clearinghouse transactions, return items, any direct debit scheme or arrangement, overdrafts and interstate depository network services).
Banking Services Obligations means any and all obligations of the Loan Parties or their Subsidiaries, whether absolute or contingent and howsoever and whensoever created, arising, evidenced or acquired (including all renewals, extensions and modifications thereof and substitutions therefor) in connection with Banking Services.
Bankruptcy Event means, with respect to any Person, when such Person becomes the subject of a voluntary or involuntary bankruptcy or insolvency proceeding, or has had a receiver, conservator, trustee, administrator, custodian, assignee for the benefit of creditors or similar Person charged with the reorganization or liquidation of its business appointed for it, or, in the good faith determination of the Lender, has taken any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any such proceeding or appointment or has had any order for relief in such proceeding entered in respect thereof, provided that a Bankruptcy Event shall not result solely by virtue of any ownership interest, or the acquisition of any ownership interest, in such Person by a Governmental Authority or instrumentality thereof, unless such ownership interest results in or provides such Person with immunity from the jurisdiction of courts within the U.S. or from the enforcement of judgments or writs of attachment on its assets or permits such Person (or such Governmental Authority or instrumentality) to reject, repudiate, disavow or disaffirm any contracts or agreements made by such Person.
Benchmark Transition Event means the occurrence of one or more of the following events with respect to the LIBO Rate:
(1) a public statement or publication of information by or on behalf of the administrator of the LIBO Screen Rate announcing that such administrator has ceased or will cease to provide the LIBO Screen Rate, permanently or indefinitely, provided that, at the time of such statement or publication, there is no successor administrator that will continue to provide the LIBO Screen Rate;
(2) a public statement or publication of information by the regulatory supervisor for the administrator of the LIBO Screen Rate, the U.S. Federal Reserve System, an insolvency official with jurisdiction over the administrator for the LIBO Screen Rate, a resolution authority with jurisdiction over the administrator for the LIBO Screen Rate or a court or an entity with similar insolvency or resolution authority over the administrator for the LIBO Screen Rate, which states that the administrator of the LIBO Screen Rate has ceased or will cease to provide the LIBO Screen Rate permanently or indefinitely, provided that, at the time of such statement or publication, there is no successor administrator that will continue to provide the LIBO Screen Rate; or
(3) a public statement or publication of information by the regulatory supervisor for the administrator of the LIBO Screen Rate announcing that the LIBO Screen Rate is no longer representative.
2
Beneficial Ownership Certification means a certification regarding beneficial ownership as required by the Beneficial Ownership Regulation.
Beneficial Ownership Regulation means 31 C.F.R. § 1010.230.
BHC Act Affiliate of a party means an affiliate (as such term is defined under, and interpreted in accordance with, 12 U.S.C. 1841(k) of such party.
Borrower means FIGS, INC., a Delaware corporation.
Borrowing means Revolving Loans of the same Type, made, converted or continued on the same date and, in the case of Eurodollar Loans, as to which a single Interest Period is in effect.
Borrowing Request means a request by the Borrower for a Borrowing in accordance with Section 2.03, which shall be in the form of Exhibit A hereto or any other form satisfactory to, or provided by, the Lender.
Burdensome Restrictions means any consensual encumbrance or restriction of the type described in clause (a) or (b) of Section 6.10.
Business Day means any day that is not a Saturday, Sunday or other day on which commercial banks in San Francisco are authorized or required by law to remain closed; provided that, when used in connection with a Eurodollar Loan, the term Business Day shall also exclude any day on which banks are not open for general business in London.
Capital Expenditures means, without duplication, any expenditure or commitment to expend money for any purchase or other acquisition of any asset which would be classified as a fixed or capital asset on a consolidated balance sheet of the Borrower and its Subsidiaries prepared in accordance with GAAP.
Capital Lease Obligations of any Person means the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases or financing leases on a balance sheet of such Person under GAAP, and the amount of such obligations shall be the capitalized amount thereof determined in accordance with GAAP; provided, however, that, for the avoidance of doubt, any obligations relating to a lease that was accounted for by such Person as an operating lease as of the Effective Date and any similar lease entered into after the Effective Date by such Person shall be accounted for as obligations relating to an operating lease and not as Capital Lease Obligations
CB Floating Rate means the Prime Rate; provided that the CB Floating Rate shall never be less than the Adjusted One Month LIBOR Rate on such day (or if such day is not a Business Day, the immediately preceding Business Day). Any change in the CB Floating Rate due to a change in the Prime Rate or the Adjusted One Month LIBOR Rate shall be effective from and including the effective date of such change in the Prime Rate or the Adjusted One Month LIBOR Rate, respectively.
3
CBFR, when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, bear interest at a rate determined by reference to the CB Floating Rate.
CFC means a controlled foreign corporation within the meaning of Section 957(a) of the Code.
Change in Control means (a) any person or group (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act), other than the Permitted Holder, becomes, or obtains rights (whether by means of warrants, options, or otherwise) to become, the beneficial owner (as defined in Rules 13(d)-3 and 13(d)-5 under the Exchange Act), directly or indirectly, of at least 50.1% of the outstanding voting Equity Interests of the Borrower on a fully diluted basis; or (b) occupation at any time of a majority of the seats (other than vacant seats) on the board of directors of the Borrower by Persons who were not (i) directors of the Borrower on the date of this Agreement or nominated, or appointed or approved for consideration by shareholders for election by the board of directors of the Company, (ii) approved by the board of directors of the Borrower as director candidates prior to their election, nor (iii) appointed by directors so nominated, or appointed.
Change in Law means the occurrence after the date of this Agreement of any of the following: (a) the adoption of or taking effect of any law, rule, regulation or treaty, (b) any change in any law, rule, regulation or treaty or in the administration, interpretation, implementation or application thereof by any Governmental Authority or (c) compliance by the Lender (or, for purposes of Section 2.13(b), by any lending office of the Lender or by the Lenders holding company, if any) with any request, guideline, requirement or directive (whether or not having the force of law) of any Governmental Authority made or issued after the date of this Agreement; provided that, notwithstanding anything herein to the contrary, (x) the Dodd-Frank Wall Street Reform and Consumer Protection Act and all requests, rules, guidelines, requirements or directives thereunder or issued in connection therewith or in the implementation thereof, and (y) all requests, rules, guidelines, requirements or directives promulgated by the Bank for International Settlements, the Basel Committee on Banking Supervision (or any successor or similar authority) or the U.S. or foreign regulatory authorities, in each case pursuant to Basel III, shall in each case be deemed to be a Change in Law, regardless of the date enacted, adopted, issued or implemented.
Charges has the meaning assigned to such term in Section 8.16.
Class, when used in reference to (a) any Loan or Borrowing, refers to such Loan, or the Loans comprising such Borrowing, as Revolving Loans, and (b) any Commitment, refers to such Commitment as a Revolving Commitment.
Code means the Internal Revenue Code of 1986, as amended from time to time.
Collateral means any and all property owned, leased or operated by a Person covered by the Collateral Documents and any and all other property of any Loan Party, now existing or hereafter acquired, that may at any time be, become or be intended to be, subject to a security interest or Lien in favor of the Lender, on behalf of the Secured Parties, to secure the Secured Obligations, provided that the Collateral shall not include any Excluded Assets.
4
Collateral Access Agreement has the meaning assigned to such term in the Security Agreement.
Collateral Documents means, collectively, the Security Agreement, the IP Security Agreement and any other agreements, instruments and documents executed in connection with this Agreement that are intended to create, perfect or evidence Liens to secure the Secured Obligations, including, without limitation, all other security agreements, pledge agreements, mortgages, deeds of trust, loan agreements, notes, guarantees, subordination agreements, pledges, powers of attorney, consents, assignments, contracts, fee letters, notices, leases, financing statements and all other written matter whether theretofore, now or hereafter executed by any Loan Party and delivered to the Lender.
Commercial LC Exposure means, at any time, the sum of (a) the aggregate undrawn amount of all outstanding commercial Letters of Credit plus (b) the aggregate amount of all LC Disbursements relating to commercial Letters of Credit that have not yet been reimbursed by or on behalf of the Borrower.
Commitment means the Revolving Commitments.
Commodity Exchange Act means the Commodity Exchange Act (7 U.S.C. § 1 et seq.), as amended from time to time, and any successor statute.
Compliance Certificate means a certificate of a Financial Officer in substantially the form of Exhibit C.
Connection Income Taxes means Other Connection Taxes that are imposed on or measured by net income (however denominated) or that are franchise Taxes or branch profits Taxes.
Control means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. Controlling and Controlled have meanings correlative thereto.
Covered Entity means any of the following:
(a) a covered entity as that term is defined in, and interpreted in accordance with, 12 C.F.R. § 252.82(b);
(b) a covered bank as that term is defined in, and interpreted in accordance with, 12 C.F.R.§ 47.3(b); or
(c) a covered FSI as that term is defined in, and interpreted in accordance with, 12 C.F.R.§ 382.2(b).
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Covered Party has the meaning assigned to it in Section 8.19.
Default means any event or condition which constitutes an Event of Default or which upon notice, lapse of time or both would, unless cured or waived, become an Event of Default.
Default Right has the meaning assigned to that term in, and shall be interpreted in accordance with, 12 C.F.R. §§ 252.81, 47.2 or 382.1, as applicable.
Disclosure Letter means that certain Disclosure Letter of even date herewith, that was delivered to and accepted by Lender as of the Effective Date, to which each of the Schedules to such Disclosure Letter referenced herein is attached. Each reference to a Schedule of the Disclosure Letter shall refer to the applicable Schedule attached to the Disclosure Letter.
Disposition or Dispose means the sale, transfer, license, lease or other disposition (in one transaction or in a series of transactions and whether effected pursuant to a Division or otherwise) of any property by any Person (including any sale and leaseback transaction and any issuance of Equity Interests by a Subsidiary of such Person), including any sale, assignment, transfer or other disposal, with or without recourse, of any notes or accounts receivable or any rights and claims associated therewith.
Dividing Person has the meaning assigned to it in the definition of Division.
Division means the division of the assets, liabilities and/or obligations of a Person (the Dividing Person) among two or more Persons (whether pursuant to a plan of division or similar arrangement), which may or may not include the Dividing Person and pursuant to which the Dividing Person may or may not survive.
Division Successor means any Person that, upon the consummation of a Division of a Dividing Person, holds all or any portion of the assets, liabilities and/or obligations previously held by such Dividing Person immediately prior to the consummation of such Division. A Dividing Person which retains any of its assets, liabilities and/or obligations after a Division shall be deemed a Division Successor upon the occurrence of such Division.
Disclosed Matters means the actions, suits, proceedings and environmental matters disclosed in Schedule 3.06 of the Disclosure Letter.
Document has the meaning assigned to such term in the Security Agreement.
Dollars, dollars or $ refers to lawful money of the U.S.
Domestic Foreign Holding Company means any Domestic Subsidiary that owns no material assets (directly or through one or more disregarded entities) other than capital stock (including any debt instrument treated as equity for U.S. federal income tax purposes) of one or more foreign subsidiaries that are CFCs.
Domestic Subsidiary shall mean each Subsidiary of the Borrower that is organized under the laws of a jurisdiction located in the United States, but excluding any Domestic Foreign Holding Company.
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EBITDA means, for any period, Net Income for such period plus (a) without duplication and to the extent deducted in determining Net Income for such period, the sum of (i) Interest Expense for such period, (ii) income tax expense for such period, (iii) all amounts attributable to depreciation and amortization expense for such period, (iv) unrealized losses in respect of Swap Agreements, (v) any extraordinary non-cash charges for such period, (vi) any other non-cash charges for such period, including realized non-cash foreign exchange losses, non-cash stock based compensation charges, and noncash losses due to transitioning to GAAP accounting policies (but excluding any non-cash charge in respect of an item that was included in Net Income in a prior period), (vii) fees and expenses directly incurred or paid in connection with (1) the Loan Documents, (2) any transaction not prohibited by this Agreement, and (3) to the extent permitted under the Loan Documents, issuances or incurrence of Indebtedness, issuances of Equity Interests (including any initial public offering) or refinancing transactions and modifications of instruments (including any amortization or write-off of debt issuance or deferred financing costs, premiums, prepayment penalties, commissions, discounts, yield and other fees and charges), (viii) any non-recurring charges, costs, losses, fees and expenses directly incurred or paid directly as a result of discontinued operations or any sale or disposition of any asset of the Borrower or any of its Subsidiaries, (ix) (1) any costs (including expenses and fees) incurred to the extent covered by indemnification provisions in any agreement or otherwise reimbursable by a third party, and (2) any costs incurred with respect to liability, casualty events or business interruption, to the extent covered by insurance and received during such period, (x) expected cost savings, operating expense reductions, restructuring charges and expenses and synergies related to Dispositions, restructurings, cost savings initiatives, operating improvements and other similar initiatives projected by the Borrower in good faith to be realized as a result of any disposition, restructuring activity, consolidation, integration, operational change, or any investment, in each case within the four consecutive fiscal quarters following the consummation thereof, calculated as though such cost savings and other reductions had been realized on the first day of such period and net of the amount of actual benefits received during such period from such, in each case, in an aggregate amount not to exceed 15% of EBITDA for such period (calculated after giving effect to all adjustments and addbacks); (xi) any costs, charges, accruals, reserves or expenses attributable to the undertaking and/or implementation of cost savings initiatives, operating expense reductions, integration, transition, facilities opening and pre-opening, business optimization and other restructuring and integration costs, charges accruals, reserves and expenses (including, without limitation, inventory optimization programs, software development costs, costs related to the closure or consolidation of facilities, stores and distribution centers, curtailments, costs related to entry into new markets, costs related to preopening and opening of stores, distribution centers or other facilities, consulting fees, signing costs, retention or completion bonuses, relocation expenses, severance payments, modifications to pension and post-retirement employee benefit plans and new systems design and implementation costs and project startup costs), in each case, in an aggregate amount not to exceed 15% of EBITDA for such period (calculated after giving effect to all adjustments and addbacks); (xii) any costs, fees, or expenses related to or in connection with any litigation; (xiii) any extraordinary freight charges, costs, or expenses up to $5,000,000 per fiscal year (or such greater amount as may be agreed by the Lender) incurred as a result of economic conditions outside of the control of the Borrower and its Subsidiaries; (xiv) net losses (including all fees, expenses and charges related thereto) on the retirement or extinguishment of Indebtedness; and (xv) nonrecurring cash charges up to $5,000,000 per fiscal year (or such greater amount as may be agreed by the Lender) minus (b) without duplication and to the extent included in Net Income, (i) any cash payments made during such period in respect of non-cash charges described in clause (a)(vi) taken in a prior period and (ii) any extraordinary gains and any non-cash items of income for such period, all calculated for the Borrower and its Subsidiaries on a consolidated basis in accordance with GAAP.
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ECP means an eligible contract participant as defined in Section 1(a)(18) of the Commodity Exchange Act or any regulations promulgated thereunder and the applicable rules issued by the Commodity Futures Trading Commission and/or the SEC.
Effective Date means the date on which the conditions specified in Section 4.01 are satisfied (or waived in accordance with Section 8.02).
Electronic Signature means an electronic sound, symbol, or process attached to, or associated with, a contract or other record and adopted by a Person with the intent to sign, authenticate or accept such contract or record.
Electronic System means any electronic system, including e-mail, e-fax, web portal access for the Borrower, and any other Internet or extranet-based site, whether such electronic system is owned, operated or hosted by the Lender and any of its respective Related Parties or any other Person, providing for access to data protected by passcodes or other security system.
Environmental Laws means all laws, rules, regulations, codes, ordinances, orders, decrees, judgments, injunctions, notices or binding agreements issued, promulgated or entered into by any Governmental Authority, relating in any way to the (i) environment, (ii) preservation or reclamation of natural resources, (iii) the management, Release or threatened Release of any Hazardous Material or (iv) health and safety matters.
Environmental Liability means any liability, contingent or otherwise (including any liability for damages, costs of environmental remediation, fines, penalties or indemnities), of the Borrower or any Subsidiary directly or indirectly resulting from or based upon (a) any violation of any Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (c) any exposure to any Hazardous Materials, (d) the Release or threatened Release of any Hazardous Materials into the environment or (e) any contract, agreement or other consensual arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing.
Equipment has the meaning assigned to such term in the Security Agreement.
Equity Interests means shares of capital stock, partnership interests, membership interests in a limited liability company, beneficial interests in a trust or other equity ownership interests in a Person, and any warrants, options or other rights entitling the holder thereof to purchase or acquire any of the foregoing, but excluding any debt securities convertible into any of the foregoing.
ERISA means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the rules and regulations promulgated thereunder.
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ERISA Affiliate means any trade or business (whether or not incorporated) that, together with the Borrower, is treated as a single employer under Section 414(b) or (c) of the Code or Section 4001(14) of ERISA or, solely for purposes of Section 302 of ERISA and Section 412 of the Code, is treated as a single employer under Section 414 of the Code.
ERISA Event means (a) any reportable event, as defined in Section 4043 of ERISA or the regulations issued thereunder, with respect to a Plan (other than an event for which the 30-day notice period is waived); (b) the failure to satisfy the minimum funding standard (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived; (c) the filing pursuant to Section 412(c) of the Code or Section 302(c) of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan; (d) the incurrence by the Borrower or any ERISA Affiliate of any liability under Title IV of ERISA with respect to the termination of any Plan; (e) the receipt by the Borrower or any ERISA Affiliate from the PBGC or a plan administrator of any notice relating to an intention to terminate any Plan or Plans or to appoint a trustee to administer any Plan; (f) the incurrence by the Borrower or any ERISA Affiliate of any liability with respect to the withdrawal or partial withdrawal of the Borrower or any ERISA Affiliate from any Plan or Multiemployer Plan; or (g) the receipt by the Borrower or any ERISA Affiliate of any notice, or the receipt by any Multiemployer Plan from the Borrower or any ERISA Affiliate of any notice, concerning the imposition upon the Borrower or any ERISA Affiliate of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent, in critical status or in reorganization, within the meaning of Title IV of ERISA.
Eurodollar, when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, bear interest at a rate determined by reference to the Adjusted LIBO Rate.
Event of Default has the meaning assigned to such term in Article VII.
Excluded Accounts means (a) escrow accounts and trust accounts, (b) payroll accounts, (c) accounts used for payroll taxes and/or withheld income taxes, (d) accounts used for employee wage and benefit payments, (e) accounts pledged to secure performance (including to secure letters of credit and bank guarantees) to the extent constituting Liens permitted by Section 6.02, (f) custodial accounts, (g) accounts that are swept to a zero balance on a daily basis to a deposit account that is subject to a control agreement and (h) other similar deposit or securities accounts.
Excluded Assets means:
(a) any fee-owned real property other than Material Real Property (including any leasehold interests therein);
(b) assets in respect of which pledges and security interests are prohibited by applicable law, rule or regulation or agreements with any Governmental Authority (other than to the extent that such prohibition would be rendered ineffective pursuant to Section 9-406, 9-407, 9-408, 9-409 or other applicable provisions of the UCC of any relevant jurisdiction or any other applicable law); provided that, immediately upon the ineffectiveness, lapse or termination of any such prohibitions, such assets shall automatically cease to constitute Excluded Assets;
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(c) Equity Interests in any Person other than wholly-owned Subsidiaries to the extent not permitted by customary terms in such Persons organizational or joint venture documents (unless any such restriction would be rendered ineffective pursuant to Section 9-406, 9-407, 9-408, 9-409 or other applicable provisions of the UCC of any relevant jurisdiction or any other applicable law);
(d) any lease, license or other agreement or any property subject to a purchase money security interest, similar arrangement or other contractual restriction, to the extent that a grant of a security interest therein would violate or invalidate such lease, license or agreement, purchase money or other arrangement or contractual restriction or creates a right of termination in favor of any other party thereto (other than the Lender) (other than (i) proceeds and receivables thereof, the assignment of which is expressly deemed effective under the UCC notwithstanding such prohibition, (ii) to the extent that any such term has been waived or (iii) to the extent any such term would be rendered ineffective pursuant to Section 9-406, 9-407, 9-408, 9-409 or other applicable provisions of the UCC of any relevant jurisdiction or any other applicable law); provided that, immediately upon the ineffectiveness, lapse or termination of any such express term, such assets shall automatically cease to constitute Excluded Assets;
(e) any intent-to-use application for registration of a trademark filed pursuant to Section 1(b) of the Lanham Act, 15 U.S.C. § 1051, prior to the filing of a Statement of Use pursuant to Section 1(d) of the Lanham Act of an Amendment to Allege Use pursuant to Section 1(c) of the Lanham Act with respect thereto, solely to the extent, if any, that and solely during the period, if any, in which, the grant of a security interest therein would impair the validity or enforceability of any registration that issues from such intent-to-use application under applicable federal law;
(f) Margin Stock;
(g) all commercial tort claims (as defined in the UCC) below $500,000;
(h) voting Equity Interests in a Foreign Subsidiary that is a CFC and voting Equity Interests in a Domestic Foreign Holding Company, in each case, in excess of 65% of the total voting Equity Interests in such Subsidiary; and
(i) any other assets where the cost of obtaining or perfecting a security interest in such assets exceeds the practical benefit to the Lender afforded thereby as reasonably determined by the Lender in writing (in consultation with the Borrower);
provided that, Excluded Assets shall not include any proceeds, products, substitutions or replacements of Excluded Assets (unless such proceeds, products, substitutions or replacements would otherwise constitute Excluded Assets).
Excluded Swap Obligation means, with respect to any Loan Guarantor, any Swap Obligation if, and to the extent that, all or a portion of the Guarantee of such Loan Guarantor of, or the grant by such Guarantor of a security interest to secure, such Swap Obligation (or any Guarantee thereof) is or becomes illegal under the Commodity Exchange Act or any rule, regulation or order of the Commodity Futures Trading Commission (or the application or official interpretation of any thereof) by virtue of such Loan Guarantors failure for any reason to constitute
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an ECP at the time the Guarantee of such Loan Guarantor or the grant of such security interest becomes or would become effective with respect to such Swap Obligation. If a Swap Obligation arises under a master agreement governing more than one swap, such exclusion shall apply only to the portion of such Swap Obligation that is attributable to swaps for which such Guarantee or security interest is or becomes illegal.
Excluded Taxes means any of the following Taxes imposed on or with respect to the Lender or required to be withheld or deducted from a payment to the Lender: (a) Taxes imposed on or measured by net income (however denominated), franchise Taxes, and branch profits Taxes, in each case, (i) imposed as a result of the Lender being organized under the laws of, or having its principal office or its applicable lending office located in, the jurisdiction imposing such Tax (or any political subdivision thereof) or (ii) that are Other Connection Taxes, (b) U.S. federal withholding Taxes imposed on amounts payable to or for the account of the Lender with respect to an applicable interest in a Loan, Letter of Credit or Commitment pursuant to a law in effect on the date on which (i) the Lender acquires such interest in the Loan, Letter of Credit or Commitment or (ii) the Lender changes its lending office, except in each case to the extent that, pursuant to Section 2.15, amounts with respect to such Taxes were payable either to the Lenders assignor immediately before the Lender acquired the applicable interest in such Loan, Letter of Credit or Commitment or to the Lender immediately before it changed its lending office and (c) any withholding Taxes imposed under FATCA.
FATCA means Sections 1471 through 1474 of the Code as of the date of this Agreement (or any amended or successor version that is substantively comparable and not materially more onerous to comply with), any current or future regulations or official interpretations thereof and any agreement entered into pursuant to Section 1471(b)(1) of the Code and any fiscal or regulatory legislation, rules or practices adopted pursuant to any intergovernmental agreement, treaty or convention among Governmental Authorities and implementing such Sections of the Code.
Federal Funds Effective Rate means, for any day, the rate calculated by the NYFRB based on such days federal funds transactions by depositary institutions, as determined in such manner as the NYFRB shall set forth on its public website from time to time, and published on the next succeeding Business Day by the NYFRB as the effective federal funds rate, provided that, if the Federal Funds Effective Rate as so determined would be less than zero, such rate shall be deemed to zero for the purposes of this Agreement.
Federal Reserve Board means the Board of Governors of the Federal Reserve System of the United States of America.
Financial Officer means the chief financial officer, principal accounting officer, treasurer or controller of the Borrower.
Flood Hazard Property: any real property that is in an area designated by the Federal Emergency Management Agency as having special flood or mud slide hazards.
Foreign Subsidiary means each Subsidiary of the Borrower that is not a Domestic Subsidiary.
Funding Account has the meaning assigned to such term in Section 4.01(h).
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GAAP means generally accepted accounting principles in the U.S.
Governmental Authority means the government of the U.S., any other nation or any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government.
Guarantee of or by any Person (the guarantor) means any obligation, contingent or otherwise, of the guarantor guaranteeing or having the economic effect of guaranteeing any Indebtedness or other obligation of any other Person (the primary obligor) in any manner, whether directly or indirectly, and including any obligation of the guarantor, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation or to purchase (or to advance or supply funds for the purchase of) any security for the payment thereof, (b) to purchase or lease property, securities or services for the purpose of assuring the owner of such Indebtedness or other obligation of the payment thereof, (c) to maintain working capital, equity capital or any other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness or other obligation or (d) as an account party in respect of any letter of credit or letter of guaranty issued to support such Indebtedness or obligation; provided that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business or customary and reasonable indemnity obligations in effect on the Effective Date or entered into in connection with any acquisition or disposition of assets permitted under this Agreement (other than such obligations with respect to Indebtedness). The amount of any Guarantee shall be deemed to be an amount equal to the lesser of (a) the stated or determinable amount of the primary payment obligation in respect of which such Guarantee is made and (b) the maximum amount for which the guaranteeing Person may be liable pursuant to the terms of the instrument embodying such Guarantee, unless such primary payment obligation and the maximum amount for which such guaranteeing Person may be liable are not stated or determinable, in which case the amount of the Guarantee shall be such guaranteeing Persons maximum reasonably possible liability in respect thereof as reasonably determined by the Borrower in good faith.
Guaranteed Obligations has the meaning assigned to such term in Section 9.01.
Guarantors means all Loan Guarantors, and the term Guarantor means each or any one of them individually.
Hazardous Materials means: (a) any substance, material, or waste that is included within the definitions of hazardous substances, hazardous materials, hazardous waste, toxic substances, toxic materials, toxic waste, or words of similar import in any Environmental Law; (b) those substances listed as hazardous substances by the United States Department of Transportation (or any successor agency) (49 C.F.R. 172.101 and amendments thereto) or by the Environmental Protection Agency (or any successor agency) (40 C.F.R. Part 302 and amendments thereto); and (c) any substance, material, or waste that is petroleum, petroleum-related, or a petroleum by-product, asbestos or asbestos-containing material, polychlorinated biphenyls, flammable, explosive, radioactive, freon gas, radon, or a pesticide, herbicide, or any other agricultural chemical.
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Impacted Interest Period has the meaning assigned to such term in the definition of LIBO Rate.
Indebtedness of any Person means, without duplication, (a) all obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such Person under conditional sale or other title retention agreements relating to property acquired by such Person, (d) all obligations of such Person in respect of the deferred purchase price of property or services if and to the extent such obligation would appear as a liability upon the balance sheet of the specified Person in accordance with GAAP (excluding (i) accounts payable or other liability to trade creditors incurred in the ordinary course of business and not overdue for more than ninety (90) days and (ii) deferred compensation and severance, pension, health and welfare retirement and equivalent benefits to current or former employees, directors or managers of such Person and its Subsidiaries), (e) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such Person, whether or not the Indebtedness secured thereby has been assumed, provided that, if such Person has not assumed or otherwise become liable in respect of such Indebtedness, such obligations shall be deemed to be in an amount equal to the lesser of (i) the unpaid amount of such Indebtedness and (ii) fair market value of such property at the time of determination (in the Borrowers good faith estimate), (f) all Guarantees by such Person of Indebtedness of others, (g) all Capital Lease Obligations of such Person, (h) all direct obligations of such Person as an account party in respect (i) of letters of credit and (ii) letters of guaranty, (i) all obligations, contingent or otherwise, of such Person in respect of bankers acceptances, (j) obligations under any earn-out (which for all purposes of this Agreement shall be valued at the maximum potential amount payable with respect to each such earn-out), (k) any other Off-Balance Sheet Liability, and (l) net obligations, whether absolute or contingent and howsoever and whensoever created, arising, evidenced or acquired (including all renewals, extensions and modifications thereof and substitutions therefor), under (i) any and all Swap Agreements, and (ii) any and all cancellations, buy backs, reversals, terminations or assignments of any Swap Agreement transaction. The Indebtedness of any Person shall include the Indebtedness of any other entity (including any partnership in which such Person is a general partner) to the extent such Person is liable therefor as a result of such Persons ownership interest in or other relationship with such entity, except to the extent the terms of such Indebtedness provide that such Person is not liable therefor. Indebtedness shall not include operating leases.
Indemnified Taxes means (a) Taxes, other than Excluded Taxes, imposed on or with respect to any payment made by or on account of any obligation of any Loan Party under any Loan Document and (b) to the extent not otherwise described in the foregoing clause (a), Other Taxes.
Indemnitee has the meaning assigned to such term in Section 8.03(b).
Information has the meaning assigned to such term in Section 8.12.
Interest Election Request means a request by the Borrower to convert or continue a Borrowing in accordance with Section 2.06, which shall be in the form of Exhibit B hereto or any other form satisfactory to, or provided by, the Lender.
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Interest Expense means, with reference to any period, total interest expense (including that attributable to Capital Lease Obligations) of the Borrower and its Subsidiaries for such period with respect to all outstanding Indebtedness of the Borrower and its Subsidiaries (including all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers acceptances and net costs under Swap Agreements in respect of interest rates, to the extent such net costs are allocable to such period in accordance with GAAP), calculated for the Borrower and its Subsidiaries on a consolidated basis for such period in accordance with GAAP.
Interest Payment Date means (a) with respect to any CBFR Loan, the first day of each calendar month and the Revolving Credit Maturity Date, as applicable, and (b) with respect to any Eurodollar Loan, the last day of each Interest Period applicable to the Borrowing of which such Loan is a part and, in the case of a Eurodollar Borrowing with an Interest Period of more than three (3) months duration, each day prior to the last day of such Interest Period that occurs at intervals of three months duration after the first day of such Interest Period and the Revolving Credit Maturity Date, as applicable.
Interest Period means, with respect to any Eurodollar Borrowing, the period commencing on the date of such Eurodollar Borrowing and ending on the numerically corresponding day in the calendar month that is one, three or six months (or, with the consent of the Lender, twelve months) thereafter, as the Borrower may elect; provided that (i) if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day and (ii) any Interest Period that commences on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the last calendar month of such Interest Period) shall end on the last Business Day of the last calendar month of such Interest Period. For purposes hereof, the date of a Borrowing initially shall be the date on which such Borrowing is made and thereafter, in the case of a Borrowing, shall be the effective date of the most recent conversion or continuation of such Borrowing.
Interpolated Rate means, at any time, for any Interest Period, the rate per annum (rounded to the same number of decimal places as the LIBO Screen Rate) determined by the Lender (which determination shall be conclusive and binding absent manifest error) to be equal to the rate that results from interpolating on a linear basis between: (a) the LIBO Screen Rate for the longest period (for which the LIBO Screen Rate is available) that is shorter than the Impacted Interest Period and (b) the LIBO Screen Rate for the shortest period (for which the LIBO Screen Rate is available) that exceeds the Impacted Interest Period, in each case, at such time; provided, that, if any Interpolated Rate shall be less than 0.50%, such rate shall be deemed to be 0.50% for purposes of this Agreement.
Inventory has the meaning assigned to such term in the Security Agreement.
IP Security Agreement means that certain Intellectual Property Security Agreement (including any and all supplements thereto), dated as of the date hereof among the Loan Parties party thereto and the Lender, as the same may be amended, restated, supplemented or otherwise modified from time to time.
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IRS means the United States Internal Revenue Service.
Joinder Agreement means a Joinder Agreement in substantially the form of Exhibit D.
LC Collateral Account has the meaning assigned to such term in Section 2.04(h).
LC Disbursement means any payment made by the Lender pursuant to a Letter of Credit.
LC Exposure means, at any time, the sum of the Commercial LC Exposure and the Standby LC Exposure at such time.
Lender means JPMorgan Chase Bank, N.A., its successors and assigns.
Letters of Credit means the letters of credit issued pursuant to this Agreement, and the term Letter of Credit means any one of them or each of them singularly, as the context may require.
Letter of Credit Agreement has the meaning assigned to it in Section 2.04(b).
LIBO Rate means, with respect to any Eurodollar Borrowing for any applicable Interest Period or for any CBFR Borrowing, the LIBO Screen Rate at approximately 11:00 a.m., London time, two (2) Business Days prior to the commencement of such Interest Period; provided that, if the LIBO Screen Rate shall not be available at such time for such Interest Period (an Impacted Interest Period), then the LIBO Rate shall be the Interpolated Rate.
LIBO Screen Rate means, for any day and time, with respect to any Eurodollar Borrowing for any Interest Period or for any CBFR Borrowing, the London interbank offered rate as administered by ICE Benchmark Administration (or any other Person that takes over the administration of such rate for Dollars) for a period equal in length to such Interest Period as displayed on such day and time on pages LIBOR01 or LIBOR02 of the Reuters screen that displays such rate (or, in the event such rate does not appear on a Reuters page or screen, on any successor or substitute page on such screen that displays such rate, or on the appropriate page of such other information service that publishes such rate from time to time as selected by the Lender in its reasonable discretion); provided that, if the LIBO Screen Rate as so determined would be less than 0.50%, such rate shall be deemed to be 0.50% for the purposes of this Agreement; provided further that, notwithstanding the foregoing, with respect to the definition of Adjusted One Month LIBOR Rate only, if the LIBO Screen Rate as so determined would be less than zero, such rate shall be deemed to be zero.
Lien means, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, hypothecation, encumbrance, charge or security interest in, on or of such asset, (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement (or any financing lease having substantially the same economic effect as any of the foregoing) relating to such asset and (c) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities.
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Loan Documents means, collectively, this Agreement, each promissory note issued pursuant to this Agreement, each Letter of Credit Agreement, each Collateral Document, the Loan Guaranty, each Compliance Certificate or other certification delivered in connection with this Agreement, and each other agreement, instrument, document and certificate identified in Section 4.01 executed and delivered to, or in favor of, the Lender and including each other pledge, power of attorney, consent, assignment, contract, notice, letter of credit agreements, whether heretofore, now or hereafter executed by or on behalf of any Loan Party, and delivered to the Lender in connection with this Agreement or the transactions contemplated hereby. Any reference in this Agreement or any other Loan Document to a Loan Document shall include all appendices, exhibits or schedules thereto, and all amendments, restatements, supplements or other modifications thereto, and shall refer to this Agreement or such Loan Document as the same may be in effect at any and all times such reference becomes operative.
Loan Guarantor means each Loan Party.
Loan Guaranty means Article IX of this Agreement.
Loan Parties means, collectively, the Borrower and any other Person, subject to the terms of Section 5.14 hereof, who becomes a party to this Agreement pursuant to a Joinder Agreement and their respective successors and assigns, and the term Loan Party shall mean any one of them or all of them individually, as the context may require.
Loans means the loans and advances made by the Lender pursuant to this Agreement.
Margin Stock means margin stock within the meaning of Regulations T, U and X, as applicable.
Material Adverse Effect means a material adverse effect on (a) the business, operations, or financial condition of the Loan Parties, taken as a whole, (b) the ability of any Loan Party to perform any of its Obligations, (c) the value of the Collateral taken as a whole or the priority of Lenders Liens (on behalf of itself and the other Secured Parties) thereon, or (d) the rights of or benefits available to the Lender under any of the Loan Documents.
Material Indebtedness means Indebtedness (other than the Loans and Letters of Credit), or obligations in respect of one or more Swap Agreements, of any one or more of the Loan Parties in an aggregate principal amount exceeding $5,000,000. For purposes of determining Material Indebtedness, the principal amount of the obligations of the Loan Parties in respect of any Swap Agreement at any time shall be the maximum aggregate amount (giving effect to any netting agreements) that such Loan Party would be required to pay if such Swap Agreement were terminated at such time.
Material Real Property: any parcel of real property (other than a parcel with a fair market value of less than $10,000,000) owned in fee by any Loan Party.
Maximum Rate has the meaning assigned to such term in Section 8.16.
Moodys means Moodys Investors Service, Inc.
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Mortgage: each mortgage, deed of trust and deed to secure debt in form and substance reasonably acceptable to the Lender, as the same may be amended, supplemented or otherwise modified from time to time.
Multiemployer Plan means a multiemployer plan as defined in Section 4001(a)(3) of ERISA.
Net Income means, for any period, the consolidated net income (or loss) determined for the Borrower and its Subsidiaries, on a consolidated basis in accordance with GAAP; provided that there shall be excluded (a) the income (or deficit) of any Person accrued prior to the date it becomes a Subsidiary or is merged into or consolidated with the Borrower or any Subsidiary, and (b) the income (or deficit) of any Person (other than a Subsidiary) in which the Borrower or any Subsidiary has an ownership interest, except to the extent that any such income is actually received by the Borrower or such Subsidiary in the form of dividends or similar distributions.
NYFRB means the Federal Reserve Bank of New York.
NYFRB Rate means, for any day, the greater of (a) the Federal Funds Effective Rate in effect on such day and (b) the Overnight Bank Funding Rate in effect on such day(or for any day that is not a Business Day, for the immediately preceding Business Day); provided that if none of such rates are published for any day that is a Business Day, the term NYFRB Rate means the rate for a federal funds transaction quoted at 11:00 a.m. on such day received by the Lender from a federal funds broker of recognized standing selected by it; provided, further, that if any of the aforesaid rates as so determined would be less than zero, such rate shall be deemed to be zero for purposes of this Agreement.
Obligated Party has the meaning assigned to such term in Section 9.02.
Obligations means all unpaid principal of and accrued and unpaid interest on the Loans, all LC Exposure, all accrued and unpaid fees, and all expenses, reimbursements, indemnities and other obligations and indebtedness (including interest and fees accruing during the pendency of any bankruptcy, insolvency, receivership or other similar proceeding, regardless of whether allowed or allowable in such proceeding), obligations and liabilities of any of the Loan Parties to the Lender or any indemnified party, individually or collectively, existing on the Effective Date or arising thereafter, direct or indirect, joint or several, absolute or contingent, matured or unmatured, liquidated or unliquidated, secured or unsecured, arising by contract, operation of law or otherwise, arising or incurred under this Agreement or any of the other Loan Documents or in respect of any of the Loans made or reimbursement or other obligations incurred or any of the Letters of Credit or other instruments at any time evidencing any thereof; provided that the definition of Obligations shall not create or include any guarantee by any Loan Party of any Excluded Swap Obligations of such Loan Party for purposes of determining any obligations of any Loan Party.
OFAC means the Office of Foreign Assets Control of the United States Department of the Treasury.
Off-Balance Sheet Liability of a Person means (a) any repurchase obligation or liability of such Person with respect to accounts or notes receivable sold by such Person, (b) any indebtedness, liability or obligation under any so-called synthetic lease transaction entered into by such Person, or (c) any indebtedness, liability or obligation arising with respect to any other transaction which is the functional equivalent of or takes the place of borrowing but which does not constitute a liability on the balance sheet of such Person (other than operating leases).
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Other Connection Taxes means, with respect to the Lender, Taxes imposed as a result of a present or former connection between the Lender and the jurisdiction imposing such Taxes (other than a connection arising from the Lender having executed, delivered, become a party to, performed its obligations under, received payments under, received or perfected a security interest under, engaged in any other transaction pursuant to, or enforced, any Loan Document), or sold or assigned an interest in any Loan, Letter of Credit, or any Loan Document.
Other Taxes means all present or future stamp, court or documentary, intangible, recording, filing or similar Taxes that arise from any payment made under, from the execution, delivery, performance, enforcement or registration of, from the receipt or perfection of a security interest under, or otherwise with respect to, any Loan Document, except any such Taxes that are Other Connection Taxes imposed with respect to an assignment.
Overnight Bank Funding Rate means, for any day, the rate comprised of both overnight federal funds and overnight Eurodollar borrowings by U.S.-managed banking offices of depository institutions (as such composite rate shall be determined by the NYFRB as set forth on its public website from time to time) and published on the next succeeding Business Day by the NYFRB as an overnight bank funding rate.
Paid in Full or Payment in Full means, (i) the indefeasible payment in full in cash of all outstanding Loans and LC Disbursements, together with accrued and unpaid interest thereon, (ii) the termination, expiration, or cancellation and return of all outstanding Letters of Credit (or alternatively, with respect to each such Letter of Credit, the furnishing to the Lender of a cash deposit, or at the discretion of the Lender a back-up standby letter of credit satisfactory to the Lender, in an amount equal to 105% of the LC Exposure as of the date of such payment), (iii) the indefeasible payment in full in cash of the accrued and unpaid fees, (iv) the indefeasible payment in full in cash of all reimbursable expenses and other Secured Obligations (other than Unliquidated Obligations for which no claim has been made and other obligations expressly stated to survive such payment and termination of this Agreement), together with accrued and unpaid interest thereon, (v) the termination of all Commitments, and (vi) the termination of the Swap Agreement Obligations and the Banking Services Obligations or entering into other arrangements satisfactory to the Secured Parties counterparties thereto.
Participant has the meaning assigned to such term in Section 8.04(c).
Participant Register has the meaning assigned to such term in Section 8.04(c).
PBGC means the Pension Benefit Guaranty Corporation referred to and defined in ERISA and any successor entity performing similar functions.
Permitted Encumbrances means:
(a) Liens imposed by law for Taxes that are not delinquent for a period of more than ninety (90) days or are being contested in compliance with Section 5.04;
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(b) carriers, landlords, warehousemens, mechanics, materialmens, repairmens and other like Liens imposed by law, arising in the ordinary course of business and securing obligations that are not overdue by more than ninety (90) days or are being contested in compliance with Section 5.04;
(c) pledges and deposits (i) made in the ordinary course of business in compliance with workers compensation, unemployment insurance and other social security laws or regulations or employment laws or to secure other public, statutory or regulatory obligations and (ii) with respect to letters of credit, bank guarantees or similar instruments issued for the account of the Borrower or any Subsidiary in the ordinary course of business supporting obligations of the type set forth in clause (c)(i) above;
(d) pledges and deposits to (i) secure the performance of bids, trade and commercial contracts, government contracts, leases, statutory obligations, surety and appeal bonds, performance and completion bonds and other obligations of a like nature, in each case in the ordinary course of business and (ii) in respect of letters of credit, bank guarantees or similar instruments issued for the account of the Borrower or any Subsidiary in the ordinary course of business supporting obligations of the type set forth in clause (d)(i);
(e) judgment Liens in respect of judgments that do not constitute an Event of Default under clause (k) of Article VII or securing appeal or surety bonds related to such judgments;
(f) easements, zoning restrictions, rights-of-way and similar encumbrances on real property imposed by law or arising in the ordinary course of business that do not secure any monetary obligations and do not materially detract from the value of the affected property or interfere with the ordinary conduct of business of the Borrower or any Subsidiary;
(g) bankers liens, rights of setoff or similar rights and remedies as to deposit accounts or other funds maintained with depository institutions and payment processors; provided that such deposit accounts or funds are not established or deposited for the purpose of providing collateral for any Indebtedness;
(h) any interest or title of a licensor under any license or sublicense entered into by the Borrower or any Subsidiary as a licensee or sublicensee (i) existing on the date hereof and set forth on Schedule 6.02 of the Disclosure Letter or (ii) in the ordinary course of its business;
(i) non-exclusive licenses, sublicenses, leases or subleases granted (i) between or among any of the Loan Parties or any of their Subsidiaries (or any combination thereof) or (ii) to other Persons permitted under Section 6.03;
(j) possessory Liens in favor of brokers and dealers arising in connection with the acquisition or disposition of Permitted Investments;
(k) statutory Liens of landlords;
(l) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; and
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(m) any interest or title of a lessor, sublessor, licensor or sublicensor under any leases, subleases, licenses or sublicenses entered into by the Company or any Subsidiary as lessee, sublessee, sublessor, licensor or sublicensor in the ordinary course of business.
Permitted Holder means Tulco LLC, a Delaware limited liability company.
Permitted Investments means:
(a) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the U.S. (or by any agency thereof to the extent such obligations are backed by the full faith and credit of the U.S.), in each case maturing within one year from the date of acquisition thereof;
(b) investments in commercial paper maturing within 270 days from the date of acquisition thereof and having, at such date of acquisition, the highest credit rating obtainable from S&P or from Moodys;
(c) investments in certificates of deposit, bankers acceptances and time deposits maturing within 180 days from the date of acquisition thereof issued or guaranteed by or placed with, and money market deposit accounts issued or offered by, any domestic office of any commercial bank organized under the laws of the U.S. or any state thereof which has a combined capital and surplus and undivided profits of not less than $500,000,000;
(d) fully collateralized repurchase agreements with a term of not more than 30 days for securities described in clause (a) above and entered into with a financial institution satisfying the criteria described in clause (c) above; and
(e) money market funds that (i) comply with the criteria set forth in Securities and Exchange Commission Rule 2a-7 under the Investment Company Act of 1940, (ii) are rated AAA by S&P and Aaa by Moodys and (iii) have portfolio assets of at least $500,000,000;
(f) investments with average maturities of 12 months or less from the date of acquisition in money market funds rated AAA- (or the equivalent thereof) or better by S&P or Aaa3 (or the equivalent thereof) or better by Moodys (or, if at any time neither Moodys nor S&P shall be rating such obligations, an equivalent rating from another nationally recognized statistical rating agency); and
(g) investment funds investing substantially all of their assets in securities of the types described in clauses (a) through (f) above.
Permitted Lien means any Lien permitted under Section 6.02.
Person means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity.
Plan means any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code or Section 302 of ERISA, and in respect of which the Borrower or any ERISA Affiliate is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an employer as defined in Section 3(5) of ERISA.
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Plan Asset Regulations means 29 CFR § 2510.3-101 et seq., as modified by Section 3(42) of ERISA, as amended from time to time.
Prime Rate means the rate of interest last quoted by The Wall Street Journal as the Prime Rate in the U.S. or, if The Wall Street Journal ceases to quote such rate, the highest per annum interest rate published by the Federal Reserve Board in Federal Reserve Statistical Release H.15 (519) (Selected Interest Rates) as the bank prime loan rate or, if such rate is no longer quoted therein, any similar rate quoted therein (as determined by the Lender) or any similar release by the Federal Reserve Board (as determined by the Lender). Each change in the Prime Rate shall be effective from and including the date such change is publicly announced or quoted as being effective.
Projections has the meaning assigned to such term in Section 5.01(f).
QFC has the meaning assigned to the term qualified financial contract in, and shall be interpreted in accordance with, 12 U.S.C. 5390(c)(8)(D).
QFC Credit Support has the meaning assigned to it in Section 8.19.
Qualified ECP Guarantor means, in respect of any Swap Obligation, each Loan Party that has total assets exceeding $10,000,000 at the time the relevant Loan Guaranty or grant of the relevant security interest becomes or would become effective with respect to such Swap Obligation or such other person as constitutes an eligible contract participant under the Commodity Exchange Act or any regulations promulgated thereunder and can cause another person to qualify as an eligible contract participant at such time by entering into a keepwell under Section 1a(18)(A)(v)(II) of the Commodity Exchange Act.
Refinance Indebtedness has the meaning assigned to such term in Section 6.01(f).
Regulation D means Regulation D of the Federal Reserve Board, as in effect from time to time and all official rulings and interpretations thereunder or thereof.
Regulation U means Regulation U of the Federal Reserve Board, as in effect from time to time and all official rulings and interpretations thereunder or thereof.
Related Parties means, with respect to any specified Person, such Persons Affiliates and the respective directors, officers, partners, members, trustees, employees, agents, administrators, managers, representatives and advisors of such Person and such Persons Affiliates.
Release means any releasing, spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, migrating, disposing, or dumping of any substance into the environment.
Report means reports prepared by the Lender or another Person showing the results of appraisals, field examinations or audits pertaining to the Borrowers assets from information furnished by or on behalf of the Borrower, after the Lender has exercised its rights of inspection pursuant to this Agreement.
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Requirement of Law means, with respect to any Person, (a) the charter, articles or certificate of organization or incorporation and bylaws or operating, management or partnership agreement, or other organizational or governing documents of such Person and (b) any statute, law (including common law), treaty, rule, regulation, code, ordinance, order, decree, writ, judgment, injunction or determination of any arbitrator or court or other Governmental Authority (including Environmental Laws), in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject.
Responsible Officer means the Chief Executive Officer, President, Financial Officer, or other executive officer of the Borrower.
Restricted Payment means any dividend or other distribution (whether in cash, securities or other property) with respect to any Equity Interests in the Borrower or any Subsidiary, or any payment (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, acquisition, cancellation or termination of any such Equity Interests or any option, warrant or other right to acquire any such Equity Interests. Notwithstanding the foregoing, and for the avoidance of doubt, the conversion of any convertible debt security into an Equity Interests shall not constitute a Restricted Payment.
Revolving Commitment means the commitment of the Lender to make Revolving Loans and issue Letters of Credit hereunder, as such commitment may be reduced or terminated from time to time pursuant to Section 2.07. The initial amount of the Lenders Revolving Commitment is $50,000,000.
Revolving Credit Maturity Date means December 2, 2025, or any earlier date on which the Revolving Commitment is reduced to zero or otherwise terminated pursuant to the terms hereof.
Revolving Exposure means, at any time, the sum of the aggregate outstanding principal amount of the Lenders Revolving Loans and its LC Exposure at such time.
Revolving Loan means a Loan made pursuant to Section 2.01(a).
S&P means Standard & Poors Ratings Services, a Standard & Poors Financial Services LLC business.
Sale and Leaseback Transaction has the meaning assigned to such term in Section 6.06.
Sanctioned Country means, at any time, a country, region or territory which is the subject or target of any Sanctions (at the time of this Agreement, Crimea, Cuba, Iran, North Korea, and Syria).
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Sanctioned Person means, at any time, (a) any Person listed in any Sanctions-related list of designated Persons maintained by the Office of Foreign Assets Control of the U.S. Department of the Treasury, the U.S. Department of State, by the United Nations Security Council, the European Union, any European Union member state, Her Majestys Treasury of the United Kingdom, or other relevant sanctions authority, (b) any Person operating, organized or resident in a Sanctioned Country, (c) any Person owned or controlled by any such Person or Persons described in the foregoing clauses (a) or (b), or (d) any Person otherwise the subject of any Sanctions.
Sanctions means all economic or financial sanctions or trade embargoes imposed, administered or enforced from time to time by (a) the U.S. government, including those administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury or the U.S. Department of State, or (b) the United Nations Security Council, the European Union, any European Union member state or Her Majestys Treasury of the United Kingdom or other relevant sanctions authority.
SEC means the Securities and Exchange Commission of the U.S.
Secured Obligations means all Obligations, together with all (i) Banking Services Obligations and (ii) Swap Agreement Obligations owing to the Lender or its Affiliates; provided, however, that the definition of Secured Obligations shall not create any guarantee by any Loan Guarantor of (or grant of security interest by any Loan Guarantor to support, as applicable) any Excluded Swap Obligations of such Loan Guarantor for purposes of determining any obligations of any Loan Guarantor.
Secured Parties means (a) the Lender, (b) each provider of Banking Services, to the extent the Banking Services Obligations in respect thereof constitute Secured Obligations, (c) each counterparty to any Swap Agreement, to the extent the obligations thereunder constitute Secured Obligations, (d) the beneficiaries of each indemnification obligation undertaken by any Loan Party under any Loan Document and (e) the successors and assigns of each of the foregoing.
Security Agreement means that certain Pledge and Security Agreement (including any and all supplements thereto), dated as of the date hereof, among the Loan Parties and the Lender, for the benefit of the Secured Parties, and any other pledge or security agreement entered into, after the date of this Agreement by any other Loan Party (as required by this Agreement or any other Loan Document) or any other Person for the benefit of the Lender, on behalf of the Secured Parties, as the same may be amended, restated, supplemented or otherwise modified from time to time.
Standby LC Exposure means, at any time, the sum of (a) the aggregate undrawn amount of all standby Letters of Credit outstanding at such time plus (b) the aggregate amount of all LC Disbursements relating to standby Letters of Credit that have not yet been reimbursed by or on behalf of the Borrower at such time.
Statements has the meaning assigned to such term in Section 2.16(d).
Statutory Reserve Rate means a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentage (including any marginal, special, emergency or supplemental reserves) established by the Federal Reserve Board to which the Lender is subject with respect to the Adjusted LIBO Rate, for eurocurrency funding (currently referred to as Eurocurrency liabilities in Regulation D). Such reserve percentages shall include those imposed pursuant to
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Regulation D of the Federal Reserve Board. Eurodollar Loans shall be deemed to constitute eurocurrency funding and to be subject to such reserve requirements without benefit of or credit for proration, exemptions or offsets that may be available from time to time to the Lender under Regulation D of the Federal Reserve Board or any comparable regulation. The Statutory Reserve Rate shall be adjusted automatically on and as of the effective date of any change in any reserve percentage.
subsidiary means, with respect to any Person (the parent) at any date, any corporation, limited liability company, partnership, association or other entity the accounts of which would be consolidated with those of the parent in the parents consolidated financial statements if such financial statements were prepared in accordance with GAAP as of such date, as well as any other corporation, limited liability company, partnership, association or other entity (a) of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power or, in the case of a partnership, more than 50% of the general partnership interests are, as of such date, owned, controlled or held, or (b) that is, as of such date, otherwise Controlled, by the parent and/or by the parent and one or more subsidiaries of the parent.
Subordinated Indebtedness of a Person means any Indebtedness of such Person, the payment of which is subordinated to payment of the Secured Obligations to the written reasonable satisfaction of the Lender.
Subsidiary means any direct or indirect subsidiary of the Borrower or a Loan Party, as applicable.
Supported QFC has the meaning assigned to it in Section 9.21.
Swap Agreement means any agreement with respect to any swap, forward, spot, future, credit default or derivative transaction or any option or similar agreement involving, or settled by reference to, one or more rates, currencies, commodities, equity or debt instruments or securities, or economic, financial or pricing indices or measures of economic, financial or pricing risk or value or any similar transaction or any combination of these transactions; provided that no phantom stock or similar plan providing for payments only on account of services provided by current or former directors, officers, employees or consultants of the Borrower or the Subsidiaries shall be a Swap Agreement.
Swap Agreement Obligations means any and all obligations of the Loan Parties or their Subsidiaries, whether absolute or contingent and howsoever and whensoever created, arising, evidenced or acquired (including all renewals, extensions and modifications thereof and substitutions therefor), under (a) any Swap Agreement permitted hereunder with the Lender or an Affiliate of the Lender, and (b) any cancellations, buy backs, reversals, terminations or assignments of any Swap Agreement transaction permitted hereunder with the Lender or an Affiliate of the Lender.
Swap Obligation means, with respect to any Loan Guarantor, any obligation to pay or perform under any agreement, contract or transaction that constitutes a swap within the meaning of section 1a(47) of the Commodity Exchange Act or any rules or regulations promulgated thereunder.
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Taxes means any and all present or future taxes, levies, imposts, duties, deductions, withholdings (including backup withholding), value added taxes, or any other goods and services, use or sales taxes, assessments, fees or other charges imposed by any Governmental Authority, including any interest, additions to tax or penalties applicable thereto.
Total Indebtedness means, at any date, the aggregate principal amount of all Indebtedness determined for the Borrower and its Subsidiaries on a consolidated basis at such date.
Total Leverage Ratio means, on any date, the ratio of (a) Total Indebtedness on such date to (b) EBITDA for the twelve-month period ended on or most recently prior to such date.
Transactions means the execution, delivery and performance by the Borrower of this Agreement and the other Loan Documents, the borrowing of Loans and other credit extensions, the use of the proceeds thereof and the issuance of Letters of Credit hereunder.
Type, when used in reference to any Loan or Borrowing, refers to whether the rate of interest on such Loan, or on the Loans comprising such Borrowing, is determined by reference to the Adjusted LIBO Rate or the CB Floating Rate.
UCC means the Uniform Commercial Code as in effect from time to time in the State of California or in any other state, the laws of which are required to be applied in connection with the issue of perfection of security interests.
Unliquidated Obligations means, at any time, any Secured Obligations (or portion thereof) that are contingent in nature or unliquidated at such time, including any Secured Obligation that is: (i) an obligation to reimburse a bank for drawings not yet made under a letter of credit issued by it; (ii) any other obligation (including any guarantee) that is contingent in nature at such time; or (iii) an obligation to provide collateral to secure any of the foregoing types of obligations.
U.S. means the United States of America.
U.S. Special Resolution Regime has the meaning assigned to it in Section 8.19.
USA PATRIOT Act means the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001.
Withdrawal Liability means liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA.
Zero Percent LCs has the meaning assigned to such term in Section 2.04(g).
SECTION 1.02. Classification of Loans and Borrowings. For purposes of this Agreement, Loans may be classified and referred to by Class (e.g., a Revolving Loan) or by Type (e.g., a Eurodollar Loan) or by Class and Type (e.g., a Eurodollar Revolving Loan). Borrowings also may be classified and referred to by Class (e.g., a Revolving Borrowing) or by Type (e.g., a Eurodollar Borrowing) or by Class and Type (e.g., a Eurodollar Revolving Borrowing).
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SECTION 1.03. Terms Generally. The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words include, includes and including shall be deemed to be followed by the phrase without limitation. The word law shall be construed as referring to all statutes, rules, regulations, codes and other laws (including official rulings and interpretations thereunder having the force of law or with which affected Persons customarily comply) and all judgments, orders and decrees of all Governmental Authorities. The word will shall be construed to have the same meaning and effect as the word shall. Unless the context requires otherwise (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, restated, supplemented or otherwise modified (subject to any restrictions on such amendments, restatements, supplements or modifications set forth herein), (b) any definition of or reference to any statute, rule or regulation shall be construed as referring thereto as from time to time amended, supplemented or otherwise modified (including by succession of comparable successor laws), (c) any reference herein to any Person shall be construed to include such Persons successors and assigns (subject to any restrictions on assignments set forth herein) and, in the case of any Governmental Authority, any other Governmental Authority that shall have succeeded to any or all functions thereof, (d) the words herein, hereof and hereunder, and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (e) all references herein to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Agreement, (f) any reference in any definition to the phrase at any time or for any period shall refer to the same time or period for all calculations or determinations within such definition, and (g) the words asset and property shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights.
SECTION 1.04. Accounting Terms; GAAP. (a) Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time; provided that, if after the date hereof there occurs any change in GAAP or in the application thereof on the operation of any provision hereof and the Borrower notifies the Lender that the Borrower requests an amendment to any provision hereof to eliminate the effect of such change in GAAP or in the application thereof (or if the Lender notifies the Borrower that the Lender requests an amendment to any provision hereof for such purpose), regardless of whether any such notice is given before or after such change in GAAP or in the application thereof, then such provision shall be interpreted on the basis of GAAP as in effect and applied immediately before such migration or change shall have become effective until such notice shall have been withdrawn or such provision amended in accordance herewith. Notwithstanding any other provision contained herein, all terms of an accounting or financial nature used herein shall be construed, and all computations of amounts and ratios referred to herein shall be made (i) without giving effect to any election under Financial Accounting Standards Board Accounting Standards Codification 825-10-25 (or any other Accounting Standards Codification or Financial Accounting Standard having a similar result or effect) to value any Indebtedness or other liabilities of any Loan Party, the Borrower, or any Subsidiary at fair value, as defined therein and (ii)
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without giving effect to any treatment of Indebtedness in respect of convertible debt instruments under Financial Accounting Standards Board Accounting Standards Codification 470-20 (or any other Accounting Standards Codification or Financial Accounting Standard having a similar result or effect) to value any such Indebtedness in a reduced or bifurcated manner as described therein, and such Indebtedness shall at all times be valued at the full stated principal amount thereof.
(b) Notwithstanding anything to the contrary contained in Section 1.04(a) or in the definition of Capital Lease Obligations, in the event of an accounting change requiring all leases to be capitalized, only those leases (assuming for purposes hereof that such leases were in existence on the date hereof) that would constitute capital leases in conformity with GAAP on the date hereof shall be considered capital leases, and all calculations and deliverables under this Agreement or any other Loan Document shall be made or delivered, as applicable, in accordance therewith.
SECTION 1.05. Interest Rates; LIBOR Notification. The interest rate on Eurodollar Loans is determined by reference to the LIBO Rate, which is derived from the London interbank offered rate (LIBOR). LIBOR is intended to represent the rate at which contributing banks may obtain short-term borrowings from each other in the London interbank market. In July 2017, the U.K. Financial Conduct Authority announced that, after the end of 2021, it would no longer persuade or compel contributing banks to make rate submissions to the ICE Benchmark Administration (together with any successor to the ICE Benchmark Administrator, the IBA) for purposes of the IBA setting LIBOR. As a result, it is possible that commencing in 2022, LIBOR may no longer be available or may no longer be deemed an appropriate reference rate upon which to determine the interest rate on Eurodollar Loans. In light of this eventuality, public and private sector industry initiatives are currently underway to identify new or alternative reference rates to be used in place of LIBOR. In the event a Benchmark Transition Event occurs, Section 2.12(c) of this Agreement provides a mechanism for determining an alternative rate of interest. The Lender will notify the Borrower, pursuant to Section 2.12(c), in advance of any change to the reference rate upon which the interest rate of Eurodollar Loans is based. However, the Lender does not warrant or accept any responsibility for, and shall not have any liability with respect to, the administration, submission or any other matter related to LIBOR or other rates in the definition of LIBO Rate or with respect to any alternative, successor rate thereto, or replacement rate thereof, including without limitation, whether the composition or characteristics of any such alternative, successor or replacement reference rate will be similar to, or produce the same value or economic equivalence of the LIBO Rate or have the same volume or liquidity as did LIBOR prior to its discontinuance or unavailability.
SECTION 1.06. Pro Forma Adjustments for Acquisitions and Dispositions. To the extent the Borrower or any Subsidiary makes any acquisition permitted pursuant to Section 6.04 or disposition of assets outside the ordinary course of business permitted by Section 6.05 during the period of four fiscal quarters of the Borrower most recently ended, the Total Leverage Ratio shall be calculated after giving pro forma effect thereto (including pro forma adjustments arising out of events which are directly attributable to the acquisition or the disposition of assets, are factually supportable and are expected to have a continuing impact, in each case as determined on a basis consistent with Article 11 of Regulation S-X of the Securities Act of 1933, as amended, as interpreted by the SEC, and as certified by a Financial Officer), as if such acquisition or such disposition (and any related incurrence, repayment or assumption of Indebtedness) had occurred in the first day of such four-quarter period.
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ARTICLE II
The Credits
SECTION 2.01. Revolving Commitments. Subject to the terms and conditions set forth herein, the Lender agrees to make Revolving Loans in dollars to the Borrower from time to time during the Availability Period in an aggregate principal amount that will not result in (i) the Revolving Exposure exceeding the Revolving Commitment. Within the foregoing limits and subject to the terms and conditions set forth herein, the Borrower may borrow, prepay and reborrow Revolving Loans.
SECTION 2.02. Loans and Borrowings.
(a) Each Loan shall be made as part of a Borrowing consisting of Loans of the same Class and Type.
(b) Subject to Section 2.12, each Revolving Borrowing shall be comprised entirely of CBFR Loans or Eurodollar Loans as the Borrower may request in accordance herewith, provided that all Revolving Borrowings made on the Effective Date must be made as CBFR Borrowings but may be converted into Eurodollar Borrowings in accordance with Section 2.06. The Lender at its option may make any Eurodollar Loan by causing any domestic or foreign branch or Affiliate of the Lender to make such Loan (and in the case of an Affiliate, the provisions of Sections 2.12, 2.13, 2.14, and 2.15 shall apply to such Affiliate to the same extent as to the Lender); provided that any exercise of such option shall not affect the obligation of the Borrower to repay such Loan in accordance with the terms of this Agreement.
(c) At the commencement of each Interest Period for any Eurodollar Borrowing, such Borrowing shall be in an aggregate amount that is an integral multiple of $100,000 and not less than $500,000. CBFR Borrowings may be in any amount. Borrowings of more than one Type and Class may be outstanding at the same time; provided that there shall not at any time be more than a total of ten (10) Eurodollar Borrowings outstanding.
(d) Notwithstanding any other provision of this Agreement, the Borrower shall not be entitled to request, or to elect to convert or continue, any Borrowing if the Interest Period requested with respect thereto would end after the Revolving Credit Maturity Date.
SECTION 2.03. Borrowing Procedures; Requests for Revolving Borrowings. To request a Borrowing, the Borrower shall notify the Lender of such request either in writing (delivered by hand or fax) by delivering a Borrowing Request signed by a Responsible Officer of the Borrower or through Electronic System, if arrangements for doing so have been approved by the Lender, (a) in the case of a Eurodollar Borrowing, not later than 1:00 p.m., Eastern time, one (1) Business Day before the date of the proposed Borrowing or (b) in the case of a CBFR Borrowing, not later than 3:00 p.m., Eastern time, on the date of the proposed Borrowing; provided that any such notice of a CBFR Revolving Borrowing to finance the reimbursement of an LC Disbursement as contemplated by Section 2.04(d) may be given not later than noon, Eastern time, on the date of the proposed Borrowing. Each such Borrowing Request shall be irrevocable. Each such Borrowing Request shall specify the following information in compliance with Section 2.01:
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(i) the Class of Borrowing, the aggregate amount of the requested Borrowing, and a breakdown of the separate wires comprising such Borrowing;
(ii) the date of such Borrowing, which shall be a Business Day; and
(iii) the initial Interest Period to be applicable thereto, which shall be a period contemplated by the definition of the term Interest Period.
If no Interest Period is specified with respect to any requested Eurodollar Borrowing, then the Borrower shall be deemed to have selected an Interest Period of one (1) months duration.
SECTION 2.04. Letters of Credit.
(a) General. Subject to the terms and conditions set forth herein, the Borrower may request the issuance of Letters of Credit denominated in dollars as the applicant thereof for the support of its or its Subsidiaries obligations, in a form reasonably acceptable to the Lender, at any time and from time to time during the Availability Period. In the event of any inconsistency between the terms and conditions of this Agreement and the terms and conditions of any Letter of Credit Agreement, the terms and conditions of this Agreement shall control. Notwithstanding anything herein to the contrary, the Lender shall have no obligation hereunder to issue, and shall not issue, any Letter of Credit (i) the proceeds of which would be made available to any Person (A) to fund any activity or business of or with any Sanctioned Person, or in any country or territory that, at the time of such funding, is the subject of any Sanctions or (B) in any manner that would result in a violation of any Sanctions by any party to this Agreement, (ii) if any order, judgment or decree of any Governmental Authority or arbitrator shall by its terms purport to enjoin or restrain the Lender from issuing such Letter of Credit, or any Requirement of Law relating to the Lender or any request or directive (whether or not having the force of law) from any Governmental Authority with jurisdiction over the Lender shall prohibit, or request that the Lender refrain from, the issuance of letters of credit generally or such Letter of Credit in particular or shall impose upon the Lender with respect to such Letter of Credit any restriction, reserve or capital requirement (for which the Lender is not otherwise compensated hereunder) not in effect on the Effective Date, or shall impose upon the Lender any unreimbursed loss, cost or expense which was not applicable on the Effective Date and which the Lender in good faith deems material to it, or (iii) if the issuance of such Letter of Credit would violate one or more policies of the Lender applicable to letters of credit generally; provided that, notwithstanding anything herein to the contrary, (x) the Dodd-Frank Wall Street Reform and Consumer Protection Act and all requests, rules, guidelines, requirements or directives thereunder or issued in connection therewith or in the implementation thereof, and (y) all requests, rules, guidelines, requirements or directives promulgated by the Bank for International Settlements, the Basel Committee on Banking Supervision (or any successor or similar authority) or the United States or foreign regulatory authorities, in each case pursuant to Basel III, shall in each case be deemed not to be in effect on the Effective Date for purposes of clause (ii) above, regardless of the date enacted, adopted, issued or implemented.
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(b) Notice of Issuance, Amendment, Renewal, Extension; Certain Conditions. To request the issuance of a Letter of Credit (or the amendment, renewal or extension of an outstanding Letter of Credit), the Borrower shall hand deliver or fax (or transmit through Electronic System, if arrangements for doing so have been approved by the Lender) to the Lender (reasonably in advance of the requested date of issuance, amendment, renewal or extension, but in any event no less than three (3) Business Days) a notice requesting the issuance of a Letter of Credit, or identifying the Letter of Credit to be amended, renewed or extended, and specifying the date of issuance, amendment, renewal or extension (which shall be a Business Day), the date on which such Letter of Credit is to expire (which shall comply with paragraph (c) of this Section), the amount of such Letter of Credit, the name and address of the beneficiary thereof, and such other information as shall be necessary to prepare, amend, renew or extend such Letter of Credit. In addition, as a condition to any such Letter of Credit issuance, the Borrower shall have entered into a continuing agreement (or other letter of credit agreement) for the issuance of letters of credit and/or shall submit a letter of credit application, in each case, as required by the Lender and using Lenders standard form (each, a Letter of Credit Agreement). A Letter of Credit shall be issued, amended, renewed or extended only if (and upon issuance, amendment, renewal or extension of each Letter of Credit the Borrower shall be deemed to represent and warrant that), after giving effect to such issuance, amendment, renewal or extension (i) the LC Exposure shall not exceed the Revolving Commitment minus the aggregate outstanding principal amount of the Revolving Exposure, (ii) the Revolving Exposure shall not exceed the Revolving Commitment.
(c) Expiration Date. Each Letter of Credit shall expire (or be subject to termination or non-renewal by notice from the Lender to the beneficiary thereof) at or prior to the close of business on the earlier of (i) the date one year after the date of the issuance of such Letter of Credit (or, in the case of any renewal or extension thereof, including, without limitation, any automatic renewal provision, one year after such renewal or extension) and (ii) the date that is five Business Days prior to the Revolving Credit Maturity Date.
(d) Reimbursement. If the Lender shall make any LC Disbursement in respect of a Letter of Credit, the Borrower shall reimburse such LC Disbursement by paying to the Lender an amount equal to such LC Disbursement not later than 2:00 p.m., Eastern time, on (i) the Business Day that the Borrower receives notice of such LC Disbursement, if such notice is received prior to noon, Eastern time, on the day of receipt, or (ii) the Business Day immediately following the day that the Borrower receives such notice, if such notice is received after noon, Eastern time, on the day of receipt; provided that, if such LC Disbursement is greater than or equal to $500,000, the Borrower may, subject to the conditions to borrowing set forth herein, request in accordance with Section 2.03 or 2.05 that such payment be financed with a CBFR Revolving Borrowing in an equivalent amount and, to the extent so financed, the Borrowers obligation to make such payment shall be discharged and replaced by the resulting CBFR Revolving Borrowing.
(e) Obligations Absolute. The Borrowers obligation to reimburse LC Disbursements as provided in paragraph (d) of this Section shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement under any and all circumstances whatsoever and irrespective of any (i) lack of validity or enforceability of any Letter of Credit, any Letter of Credit Agreement or this Agreement, or any term or provision therein or herein, (ii) draft or other document presented under a Letter of Credit proving to be forged, fraudulent or invalid in any respect or any statement therein being untrue or inaccurate in any respect, (iii) payment by the Lender under a Letter of Credit against presentation of a draft or other document that does not comply with the terms of such Letter of Credit, or (iv) other event or circumstance whatsoever, whether or not similar to any of the foregoing, that might, but for the provisions of this Section, constitute a legal or equitable discharge of, or provide a right of setoff
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against, the Borrowers obligations hereunder. Neither the Lender nor any of its Related Parties, shall have any liability or responsibility by reason of or in connection with the issuance or transfer of any Letter of Credit, any payment or failure to make any payment thereunder (irrespective of any of the circumstances referred to in the preceding sentence), or any error, omission, interruption, loss or delay in transmission or delivery of any draft, notice or other communication under or relating to any Letter of Credit (including any document required to make a drawing thereunder), any error in interpretation of technical terms or any consequence arising from causes beyond the control of the Lender; provided that the foregoing shall not be construed to excuse the Lender from liability to the Borrower to the extent of any direct damages (as opposed to special, indirect, consequential or punitive damages, claims in respect of which are hereby waived by the Borrower to the extent permitted by applicable law) suffered by the Borrower that are caused by the Lenders failure to exercise care when determining whether drafts and other documents presented under a Letter of Credit comply with the terms thereof. The parties hereto expressly agree that, in the absence of gross negligence or willful misconduct on the part of the Lender (as finally determined by a court of competent jurisdiction), the Lender shall be deemed to have exercised care in each such determination. In furtherance of the foregoing and without limiting the generality thereof, the parties agree that, with respect to documents presented which appear on their face to be in substantial compliance with the terms of a Letter of Credit, the Lender may, in its sole discretion, either accept and make payment upon such documents without responsibility for further investigation, regardless of any notice or information to the contrary, or refuse to accept and make payment upon such documents if such documents are not in strict compliance with the terms of such Letter of Credit.
(f) Disbursement Procedures. The Lender shall, promptly following its receipt thereof, examine all documents purporting to represent a demand for payment under a Letter of Credit. The Lender shall promptly notify the Borrower by telephone (confirmed by fax or through Electronic Systems) of such demand for payment and whether the Lender has made or will make an LC Disbursement thereunder; provided that any failure to give or delay in giving such notice shall not relieve the Borrower of its obligation to reimburse the Lender with respect to any such LC Disbursement.
(g) Interim Interest. If the Lender shall make any LC Disbursement, then, unless the Borrower shall reimburse such LC Disbursement in full on the date such LC Disbursement is made, the unpaid amount thereof (other than with respect to Zero Percent LCs) shall bear interest, for each day from and including the date such LC Disbursement is made to but excluding the date that the Borrower reimburses such LC Disbursement, at the rate per annum then applicable to CBFR Revolving Loans and such interest shall be due and payable on the date when such reimbursement is due; provided that, for the avoidance of doubt, LC Disbursements of up to $3,500,000 shall bear interest at a rate of 0% per annum (the Zero Percent LCs); provided, further, that if the Borrower fails to reimburse such LC Disbursement when due pursuant to paragraph (d) of this Section, then Section 2.11(c) shall apply. Interest accrued pursuant to this paragraph shall be for the account of the Lender.
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(h) Cash Collateralization. If any Event of Default shall occur and be continuing, on the Business Day that the Borrower receives notice from the Lender demanding the deposit of cash collateral pursuant to this paragraph, the Borrower shall deposit in an account with the Lender, in the name and for the benefit of the Lender (the LC Collateral Account), an amount in cash equal to 102% of the amount of the LC Exposure as of such date plus accrued and unpaid interest thereon; provided that the obligation to deposit such cash collateral shall become effective immediately, and such deposit shall become immediately due and payable, without demand or other notice of any kind, upon the occurrence of any Event of Default with respect to the Borrower described in clause (h) or (i) of Article VII. The Borrower also shall deposit cash collateral in accordance with this paragraph as and to the extent required by Section 2.09(b). Each such deposit shall be held by the Lender as collateral for the payment and performance of the Secured Obligations. The Lender shall have exclusive dominion and control, including the exclusive right of withdrawal, over the LC Collateral Account and the Borrower hereby grants the Lender a security interest in the LC Collateral Account and all moneys or other assets on deposit therein or credited thereto. Other than any interest earned on the investment of such deposits, which investments shall be made at the option and sole discretion of the Lender and at the Borrowers risk and expense, such deposits shall not bear interest. Interest or profits, if any, on such investments shall accumulate in such account. Moneys in such account shall be applied by the Lender for LC Disbursements for which it has not been reimbursed and, to the extent not so applied, shall be held for the satisfaction of the reimbursement obligations of the Borrower for the LC Exposure at such time or, if the maturity of the Loans has been accelerated, be applied to satisfy other Secured Obligations. If the Borrower is required to provide an amount of cash collateral hereunder as a result of the occurrence of an Event of Default, such amount (to the extent not applied as aforesaid) shall be returned to the Borrower within three (3) Business Days after all such Events of Default have been cured or waived as confirmed in writing by the Lender.
(i) LC Exposure Determination. For all purposes of this Agreement, the amount of a Letter of Credit that, by its terms or the terms of any document related thereto, provides for one or more automatic increases in the stated amount thereof shall be deemed to be the maximum stated amount of such Letter of Credit after giving effect to all such increases, whether or not such maximum stated amount is in effect at the time of determination.
(j) Letters of Credit Issued for Account of Subsidiaries. Notwithstanding that a Letter of Credit issued or outstanding hereunder supports any obligations of, or is for the account of, a Subsidiary, or states that a Subsidiary is the account party, applicant, customer, instructing party, or the like of or for such Letter of Credit, and without derogating from any rights of the Lender (whether arising by contract, at law, in equity or otherwise) against such Subsidiary in respect of such Letter of Credit, the Borrower (i) shall reimburse, indemnify and compensate the Lender hereunder for such Letter of Credit (including to reimburse any and all drawings thereunder) as if such Letter of Credit had been issued solely for the account of the Borrower and (ii) irrevocably waives any and all defenses that might otherwise be available to it as a guarantor or surety of any or all of the obligations of such Subsidiary in respect of such Letter of Credit. The Borrower hereby acknowledges that the issuance of such Letters of Credit for its Subsidiaries inures to the benefit of the Borrower, and that the Borrowers business derives substantial benefits from the businesses of such Subsidiaries.
SECTION 2.05. Funding of Borrowings. The Lender shall make each Loan to be made by it hereunder on the proposed date thereof available to the Borrower by promptly crediting the amounts in immediately available funds, to the Funding Account; provided that CBFR Revolving Loans made to finance the reimbursement of an LC Disbursement as provided in Section 2.04(d) shall be remitted to the Lender.
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SECTION 2.06. Interest Elections.
(a) Each Borrowing initially shall be of the Type specified in the applicable Borrowing Request and, in the case of a Eurodollar Borrowing, shall have an initial Interest Period as specified in such Borrowing Request. Thereafter, the Borrower may elect to convert such Borrowing to a different Type or to continue such Borrowing and, in the case of a Eurodollar Borrowing, may elect Interest Periods therefor, all as provided in this Section. The Borrower may elect different options with respect to different portions of the affected Borrowing, and the Loans comprising each such portion shall be considered a separate Borrowing.
(b) To make an election pursuant to this Section, the Borrower shall notify the Lender of such election either in writing (delivered by hand or fax) by delivering an Interest Election Request signed by a Responsible Officer of the Borrower or through Electronic System, if arrangements for doing so have been approved by the Lender, by the time that a Borrowing Request would be required under Section 2.03 if the Borrower were requesting a Borrowing of the Type resulting from such election to be made on the effective date of such election. Each such Interest Election Request shall be irrevocable.
(c) Each telephonic and written Interest Election Request (including requests submitted through Electronic System) shall specify the following information in compliance with Section 2.02:
(i) the Borrowing to which such Interest Election Request applies and, if different options are being elected with respect to different portions thereof, the portions thereof to be allocated to each resulting Borrowing (in which case the information to be specified pursuant to clauses (iii) and (iv) below shall be specified for each resulting Borrowing);
(ii) the effective date of the election made pursuant to such Interest Election Request, which shall be a Business Day;
(iii) the Interest Period to be applicable thereto after giving effect to such election, which shall be a period contemplated by the definition of the term Interest Period.
If any such Interest Election Request does not specify an Interest Period, then the Borrower shall be deemed to have selected an Interest Period of one (1) months duration.
(d) If the Borrower fails to deliver a timely Interest Election Request with respect to a Eurodollar Borrowing prior to the end of the Interest Period applicable thereto, then, unless such Borrowing is repaid as provided herein, at the end of such Interest Period such Borrowing shall be converted to a CBFR Borrowing. Notwithstanding any contrary provision hereof, if an Event of Default has occurred and is continuing and the Lender so notifies the Borrower, then, so long as an Event of Default is continuing (i) no outstanding Borrowing may be converted to or continued as a Eurodollar Borrowing and (ii) unless repaid, each Eurodollar Borrowing shall be converted to a CBFR Borrowing at the end of the Interest Period applicable thereto.
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SECTION 2.07. Termination or Reduction of Commitment; Increase in Revolving Commitment.
(a) Unless previously terminated, the Revolving Commitment shall terminate on the Revolving Credit Maturity Date.
(b) The Borrower may at any time terminate the Revolving Commitment upon the Payment in Full of the Secured Obligations.
(c) The Borrower shall notify the Lender of any election to terminate the Revolving Commitment under paragraph (b) or (c) of this Section at least three (3) Business Days prior to the effective date of such termination, specifying such election and the effective date thereof. Each notice delivered by the Borrower pursuant to this Section shall be irrevocable; provided that a notice of termination of the Revolving Commitment delivered by the Borrower may state that such notice is conditioned upon the effectiveness of other credit facilities, in which case such notice may be revoked by the Borrower (by notice to the Lender on or prior to the specified effective date) if such condition is not satisfied.
(d) The Borrower may from time to time permanently reduce a part of the Revolving Commitment. The Borrower shall notify the Lender of any election to reduce the Revolving Commitment at least three (3) Business Days prior to the effective date of such reduction, specifying such election and the effective date thereof. Each notice delivered by the Borrower pursuant to this Section shall be irrevocable. The reduction of the Revolving Commitment shall be effective upon prepayment of the amount by which the principal amount of the Revolving Exposure exceeds the reduced amount of the Revolving Commitment resulting from such reduction, including, without limitation, payment of all interest accrued thereon, in accordance with the terms of Section 2.11; provided that, the Revolving Commitment may not be reduced such that the Revolving Commitment would be less than the Revolving Exposure.
(e) The Borrower shall have the right to request an increase to the Revolving Commitments by obtaining additional Revolving Commitments up to an aggregate amount of $25,000,000, either from the Lender or another lending institution acceptable to Lender, provided that (i) any such request for an increase shall be in a minimum amount of $5,000,000, (ii) the Borrower may make a maximum of two (2) such requests each year, (iii) after giving effect thereto, the sum of the total of the additional Commitments does not exceed $75,000,000 during the term of this Agreement, (iv) the Lender has approved the identity of any such new Lender, such approvals not to be unreasonably withheld, (v) any such new Lender assumes all of the rights and obligations of a Lender hereunder, and (vi) the procedures described in Sections 2.07(e) below have been satisfied. Nothing contained in this Section 2.07 shall constitute, or otherwise be deemed to be, a commitment on the part of the Lender to increase its Commitment hereunder at any time.
(f) Any amendment hereto for such an increase or addition shall be in form and substance satisfactory to the Lender. As a condition precedent to such an increase or addition, the Borrower shall deliver to the Lender (i) a certificate of each Loan Party signed by an authorized officer of such Loan Party (A) certifying and attaching the resolutions adopted by such Loan Party approving or consenting to such increase, and (B) in the case of the Borrower, certifying that,
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before and after giving effect to such increase or addition, (1) the representations and warranties contained in Article III and the other Loan Documents are true and correct, except to the extent that such representations and warranties specifically refer to an earlier date, in which case they are true and correct as of such earlier date, (2) no Default exists and (3) the Borrower is in compliance (on a pro forma basis) with the covenants contained in Section 6.12 and (ii) documents consistent with those delivered on the Effective Date, to the extent requested by the Lender.
SECTION 2.08. Repayment of Loans; Evidence of Debt.
(a) The Borrower hereby unconditionally promises to pay the Lender the then unpaid principal amount of each Revolving Loan on the Revolving Credit Maturity Date.
(b) The Lender shall maintain in accordance with its usual practice an account or accounts evidencing the Indebtedness of the Borrower to the Lender resulting from each Loan made by the Lender, including the amounts of principal and interest payable and paid to the Lender from time to time hereunder.
(c) The Lender shall maintain accounts in which it shall record (i) the amount of each Loan made hereunder, the Class and Type thereof and the Interest Period applicable thereto, if any, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to the Lender hereunder and (iii) the amount of any sum received by the Lender hereunder.
(d) The entries made in the accounts maintained pursuant to paragraph (b) and (c) of this Section shall be prima facie evidence of the existence and amounts of the obligations recorded therein; provided that the failure of the Lender to maintain such accounts or any error therein shall not in any manner affect the obligation of the Borrower to repay the Loans in accordance with the terms of this Agreement.
(e) The Lender may request that Loans made by it be evidenced by a promissory note. In such event, the Borrower shall prepare, execute and deliver to the Lender a promissory note payable to the Lender (or, if requested by the Lender, to the Lender and its registered assigns) and in a form approved by the Lender. Thereafter, the Loans evidenced by such promissory note and interest thereon shall at all times (including after assignment pursuant to Section 8.04) be represented by one or more promissory notes in such form.
SECTION 2.09. Prepayment of Loans.
(a) The Borrower shall have the right at any time and from time to time to prepay any Borrowing in whole or in part, subject to prior notice in accordance with paragraph (c) of this Section and, if applicable, payment of any break funding expenses under Section 2.14.
(b) In the event and on such occasion that the Revolving Exposure exceeds the Revolving Commitment, the Borrower shall prepay the Revolving Loans, and/or LC Exposure (or, if no such Borrowings are outstanding, deposit cash collateral in the LC Collateral Account in an aggregate amount equal to such excess, in accordance with Section 2.04(h)).
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(c) The Borrower shall notify the Lender by telephone (confirmed by fax) or through Electronic System, if arrangements for doing so have been approved by the Lender, of any prepayment under this Section: (i) in the case of prepayment of a Eurodollar Borrowing, not later than 1:00 p.m., Eastern time, three (3) Business Days before the date of prepayment, or (ii) in the case of prepayment of a CBFR Borrowing, not later than 1:00 p.m., Eastern time, one (1) Business Day before the date of prepayment. Each such notice shall be irrevocable and shall specify the prepayment date and the principal amount of each Borrowing or portion thereof to be prepaid; provided that if a notice of prepayment is given in connection with a conditional notice of termination of the Revolving Commitment as contemplated by Section 2.07, then such notice of prepayment may be revoked if such notice of termination is revoked in accordance with Section 2.07. Each partial prepayment of any Revolving Borrowing shall be in an amount that would be permitted in the case of an advance of a Borrowing of the same Type as provided in Section 2.02, except as necessary to apply fully the required amount of a mandatory prepayment. Each prepayment of a Borrowing shall be applied ratably to the Loans included in the prepaid Borrowing. Prepayments shall be accompanied by (i) accrued interest to the extent required by Section 2.11 and (ii) break funding payments pursuant to Section 2.14.
SECTION 2.10. Fees.
(a) The Borrower agrees to pay to the Lender a commitment fee, which shall accrue at one quarter of one percent (0.25%) per annum, on the daily amount of the undrawn portion of the Revolving Commitment of the Lender during the period from and including the Effective Date to but excluding the date on which the Lenders Revolving Commitment terminates; it being understood that the LC Exposure shall be included in the drawn portion of the Revolving Commitment for purposes of calculating the commitment fee. Accrued commitment fees shall be payable in arrears on the last day of March, June, September and December of each year and on the date on which the Revolving Commitment terminates, commencing on the first such date to occur after the date hereof. All commitment fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day).
(b) Other than with respect to the Zero Percent LCs, the Borrower agrees to pay (i) to the Lender a letter of credit fee with respect to Letters of Credit, which shall accrue at the same Applicable Rate used to determine the interest rate applicable to Eurodollar Loans on the daily amount of the Lenders LC Exposure (excluding any portion thereof attributable to unreimbursed LC Disbursements) during the period from and including the Effective Date to but excluding the later of the date on which the Lenders Revolving Commitment terminates and the date on which the Lender ceases to have any LC Exposure, and (ii) the Lenders standard fees and commissions with respect to the issuance, amendment, cancellation, negotiation, transfer, presentment, renewal or extension of any Letter of Credit or processing of drawings thereunder. Letter of credit fees accrued through and including the last day of March, June, September and December of each year shall be payable on the third Business Day following such last day, commencing on the first such date to occur after the Effective Date; provided that all such fees shall be payable on the date on which the Revolving Commitment terminates and any such fees accruing after the date on which the Revolving Commitment terminates shall be payable on demand. Any other fees payable to the Lender pursuant to this paragraph shall be payable within ten (10) days after demand. All letter of credit fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day).
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(c) The Borrower agrees to pay to the Lender an upfront fee in an aggregate amount equal to $100,000. The entire upfront fee shall be deemed fully earned by the Lender and shall be due and payable in full on the Effective Date.
(d) All fees payable hereunder shall be paid on the dates due, in immediately available funds, to the Lender. Fees paid shall not be refundable under any circumstances.
SECTION 2.11. Interest.
(a) The Loans comprising each CBFR Borrowing shall bear interest at the CB Floating Rate plus the Applicable Rate.
(b) The Loans comprising each Eurodollar Borrowing shall bear interest at the Adjusted LIBO Rate for the Interest Period in effect for such Borrowing plus the Applicable Rate.
(c) Notwithstanding the foregoing, during the occurrence and continuance of an Event of Default, the Lender may, at its option, by notice to the Borrower, declare that (i) all Loans shall bear interest at 2% per annum plus the rate otherwise applicable to such Loans as provided in the preceding paragraphs of this Section or (ii) in the case of any other amount outstanding hereunder, such amount shall accrue at 2% per annum plus the rate applicable to such fee or other obligation as provided hereunder.
(d) Accrued interest on each Loan (for CBFR Loans, accrued through the last day of the prior calendar month) shall be payable in arrears on each Interest Payment Date for such Loan and, in the case of Revolving Loans, upon termination of the Revolving Commitment; provided that (i) interest accrued pursuant to paragraph (c) of this Section shall be payable on demand, (ii) in the event of any repayment or prepayment of any Loan (other than a prepayment of a CBFR Revolving Loan prior to the end of the Availability Period), accrued interest on the principal amount repaid or prepaid shall be payable on the date of such repayment or prepayment and (iii) in the event of any conversion of any Eurodollar Loan prior to the end of the current Interest Period therefor, accrued interest on such Loan shall be payable on the effective date of such conversion.
(e) All interest hereunder shall be computed on the basis of a year of 360 days, except that interest computed by reference to the CB Floating Rate shall be computed on the basis of a year of 365 days (or 366 days in a leap year), and in each case shall be payable for the actual number of days elapsed (including the first day but excluding the last day). The applicable CB Floating Rate, Adjusted LIBO Rate or LIBO Rate shall be determined by the Lender, and such determination shall be conclusive absent manifest error.
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SECTION 2.12. Alternate Rate of Interest; Illegality.
(a) If prior to the commencement of any Interest Period for a Eurodollar Borrowing:
(i) the Lender determines (which determination shall be conclusive and binding absent manifest error) that adequate and reasonable means do not exist for ascertaining the Adjusted LIBO Rate or the LIBO Rate, as applicable (including, without limitation, by means of an Interpolated Rate or because the LIBO Screen Rate is not available or published on a current basis) for such Interest Period; provided that no Benchmark Transition Event shall have occurred at such time; or
(ii) the Lender determines the Adjusted LIBO Rate or the LIBO Rate, as applicable, for such Interest Period will not adequately and fairly reflect the cost to the Lender of making or maintaining its Loans (or Loan) included in such Borrowing for such Interest Period; provided that no Benchmark Transition Event shall have occurred at such time;
then the Lender shall give notice thereof to the Borrower by telephone, fax or through an Electronic System as provided in Section 8.01 as promptly as practicable thereafter and, until the Lender notifies the Borrower that the circumstances giving rise to such notice no longer exist, (A) any Interest Election Request that requests the conversion of any Borrowing to, or continuation of any Borrowing as, a Eurodollar Borrowing shall be ineffective and any such Eurodollar Borrowing shall be repaid or converted into a CBFR Borrowing on the last day of the then current Interest Period applicable thereto, and (B) if any Borrowing Request requests a Eurodollar Borrowing, such Borrowing shall be made as a CBFR Borrowing.
(b) If the Lender determines that any Requirement of Law has made it unlawful, or if any Governmental Authority has asserted that it is unlawful, for the Lender or its applicable lending office to make, maintain, fund or continue any Eurodollar Borrowing, or any Governmental Authority has imposed material restrictions on the authority of the Lender to purchase or sell, or to take deposits of, dollars in the London interbank market, then, on notice thereof by the Lender to the Borrower, any obligations of the Lender to make, maintain, fund or continue Eurodollar Loans or to convert CBFR Borrowings to Eurodollar Borrowings will be suspended until the Lender notifies the Borrower that the circumstances giving rise to such determination no longer exist. Upon receipt of such notice, the Borrower will upon demand from the Lender, either prepay or convert all Eurodollar Borrowings of the Lender to CBFR Borrowings, either on the last day of the Interest Period therefor, if the Lender may lawfully continue to maintain such Eurodollar Borrowings to such day, or immediately, if the Lender may not lawfully continue to maintain such Loans. Upon any such prepayment or conversion, the Borrower will also pay accrued interest on the amount so prepaid or converted.
(c) If a Benchmark Transition Event occurs, then the Lender may, by notice to Borrower, select an alternate rate of interest for the LIBO Rate that gives due consideration to the then-evolving or prevailing market convention for determining a rate of interest for loans in US Dollars at such time (the Alternate Rate); Borrower acknowledges that the Alternate Rate may include a mathematical adjustment using any then-evolving or prevailing market convention or method for determining a spread adjustment for the replacement of the LIBO Rate. For avoidance of doubt, all references to the LIBO Rate shall be deemed to be references to the Alternate Rate when the Alternate Rate becomes effective in accordance with this section. In addition, the Lender will have the right, from time to time by notice to Borrower to make technical, administrative or operational changes (including, without limitation, changes to the definition of CB Floating Rate, the definition of Interest Period, timing and frequency of determining rates and making payments of interest and other administrative matters) that the Lender decides in its reasonable
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discretion may be appropriate to reflect the adoption and implementation of the Alternate Rate. The Alternate Rate, together with all such technical, administrative and operational changes as specified in any notice, shall become effective at the later of (i) the fifth Business Day after the Lender has provided notice to the Borrower (the Notice Date) and (ii) a date specified by the Lender in the notice, without any further action or consent of the Borrower, so long as Lender has not received, by 5:00pm Eastern time on the Notice Date, written notice of objection to the Alternate Rate from the Borrower. Any determination, decision, or election that may be made by the Lender pursuant to this section, including any determination with respect to a rate or adjustment or the occurrence or non-occurrence of an event, circumstance or date, and any decision to take or refrain from taking any action, will be conclusive and binding absent manifest error and may be made in its sole discretion and without consent from the Borrower. Until an Alternate Rate shall be determined in accordance with this section, the interest rate shall be equal to the sum of (a) the greater of (x) Prime Rate and (y) 2.50%, plus (b) the Applicable Rate with respect to the appropriate CBFR Spread specified within such Applicable Rate definition. In no event shall the Alternate Rate be less than zero.
SECTION 2.13. Increased Costs. (a) If any Change in Law shall:
(i) impose, modify or deem applicable any reserve, special deposit, liquidity or similar requirement (including any compulsory loan requirement, insurance charge or other assessment) against assets of, deposits with or for the account of, or credit extended by, the Lender (except any such reserve requirement reflected in the Adjusted LIBO Rate); or
(ii) impose on the Lender or the London interbank market any other condition, cost or expense (other than Taxes) affecting this Agreement or Loans made by the Lender or any Letter of Credit; or
(iii) subject the Lender to any Taxes (other than (A) Indemnified Taxes, (B) Taxes described in clauses (b) through (d) of the definition of Excluded Taxes and (C) Connection Income Taxes) on its loans, loan principal, letters of credit, commitments, or other obligations, or its deposits, reserves, other liabilities or capital attributable thereto;
and the result of any of the foregoing shall be to increase the cost to the Lender of making, continuing, converting into or maintaining any Loan (or of maintaining its obligation to make any such Loan) or to increase the cost to the Lender of issuing or maintaining any Letter of Credit or to reduce the amount of any sum received or receivable by the Lender hereunder (whether of principal, interest or otherwise), then the Borrower will pay to the Lender such additional amount or amounts as will compensate the Lender for such additional costs incurred or reduction suffered.
(b) If the Lender determines that any Change in Law regarding capital or liquidity requirements has or would have the effect of reducing the rate of return on the Lenders capital or on the capital of the Lenders holding company as a consequence of this Agreement, the Commitment of or the Loans made by Letters of Credit issued by the Lender to a level below that which the Lender or the Lenders holding company could have achieved but for such Change in Law (taking into consideration the Lenders policies and the policies of the Lenders holding company with respect to capital adequacy and liquidity), then from time to time the Borrower will pay to the Lender such additional amount or amounts as will compensate the Lender or the Lenders holding company for any such reduction suffered.
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(c) A certificate of the Lender setting forth the amount or amounts necessary to compensate the Lender or its holding company, as the case may be, as specified in paragraph (a) or (b) of this Section shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay the Lender the amount shown as due on any such certificate within ten (10) days after receipt thereof.
(d) Failure or delay on the part of the Lender to demand compensation pursuant to this Section shall not constitute a waiver of the Lenders right to demand such compensation; provided that the Borrower shall not be required to compensate the Lender pursuant to this Section for any increased costs or reductions incurred more than 270 days prior to the date that the Lender notifies the Borrower of the Change in Law giving rise to such increased costs or reductions and of the Lenders intention to claim compensation therefor; provided further that, if the Change in Law giving rise to such increased costs or reductions is retroactive, then the 270-day period referred to above shall be extended to include the period of retroactive effect thereof.
SECTION 2.14. Break Funding Payments. In the event of (a) the payment of any principal of any Eurodollar Loan other than on the last day of an Interest Period applicable thereto (including as a result of an Event of Default or as a result of any prepayment pursuant to Section 2.09), (b) the conversion of any Eurodollar Loan other than on the last day of the Interest Period applicable thereto, or (c) the failure to borrow, convert, continue or prepay any Eurodollar Loan on the date specified in any notice delivered pursuant hereto (regardless of whether such notice may be revoked under Section 2.07(d) and is revoked in accordance therewith), then, in any such event, the Borrower shall compensate the Lender for the loss, cost and expense attributable to such event. In the case of a Eurodollar Loan, such loss, cost or expense to the Lender shall be deemed to include an amount determined by the Lender to be the excess, if any, of (i) the amount of interest which would have accrued on the principal amount of such Eurodollar Loan had such event not occurred, at the Adjusted LIBO Rate that would have been applicable to such Eurodollar Loan, for the period from the date of such event to the last day of the then current Interest Period therefor (or, in the case of a failure to borrow, convert or continue, for the period that would have been the Interest Period for such Eurodollar Loan), over (ii) the amount of interest which would accrue on such principal amount for such period at the interest rate which the Lender would bid were it to bid, at the commencement of such period, for dollar deposits of a comparable amount and period from other banks in the eurodollar market. A certificate of the Lender setting forth any amount or amounts that the Lender is entitled to receive pursuant to this Section shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay the Lender the amount shown as due on any such certificate within ten (10) days after receipt thereof.
SECTION 2.15. Withholding of Taxes; Gross-Up.
(a) Payments Free of Taxes. Any and all payments by or on account of any obligation of any Loan Party under any Loan Document shall be made without deduction or withholding for any Taxes, except as required by applicable law. If any applicable law (as determined in the good faith discretion of an applicable withholding agent) requires the deduction or withholding of any Tax from any such payment by a withholding agent, then the applicable withholding agent shall
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be entitled to make such deduction or withholding and shall timely pay the full amount deducted or withheld to the relevant Governmental Authority in accordance with applicable law and, if such Tax is an Indemnified Tax, then the sum payable by the applicable Loan Party shall be increased as necessary so that after such deduction or withholding has been made (including such deductions and withholdings applicable to additional sums payable under this Section 2.15), the Lender receives an amount equal to the sum it would have received had no such deduction or withholding been made.
(b) Payment of Other Taxes by Loan Parties. The Loan Parties shall timely pay to the relevant Governmental Authority in accordance with applicable law, or at the option of the Lender, timely reimburse it for, Other Taxes.
(c) Evidence of Payment. As soon as practicable after any payment of Taxes by any Loan Party to a Governmental Authority pursuant to this Section 2.15, such Loan Party shall deliver to the Lender the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment, or other evidence of such payment reasonably satisfactory to the Lender.
(d) Indemnification by the Borrower. The Loan Parties shall jointly and severally indemnify the Lender, within ten (10) days after demand therefor, for the full amount of any Indemnified Taxes (including Indemnified Taxes imposed or asserted on or attributable to amounts payable under this Section) payable or paid by the Lender or required to be withheld or deducted from a payment to the Lender and any reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to any Loan Party by the Lender shall be conclusive absent manifest error.
(e) Treatment of Certain Refunds. If the Lender determines, in its sole discretion exercised in good faith, that it has received a refund of any Taxes as to which it has been indemnified pursuant to this Section 2.15 (including by the payment of additional amounts pursuant to this Section 2.15), it shall pay to the indemnifying party an amount equal to such refund (but only to the extent of indemnity payments made under this Section 2.15 with respect to the Taxes giving rise to such refund), net of all out-of-pocket expenses (including Taxes) of the Lender and without interest (other than any interest paid by the relevant Governmental Authority with respect to such refund). Such indemnifying party, upon the request of the Lender, shall repay to the Lender the amount paid to the Lender (plus any penalties, interest or other charges imposed by the relevant Governmental Authority) in the event the Lender is required to repay such refund to such Governmental Authority. Notwithstanding anything to the contrary in this paragraph (e), in no event will the Lender be required to pay any amount to any indemnifying party pursuant to this paragraph (e), the payment of which would place the Lender in a less favorable net after-Tax position than the Lender would have been in if the Tax subject to indemnification and giving rise to such refund had not been deducted, withheld or otherwise imposed and the indemnification payments or additional amounts giving rise to such refund had never been paid. This paragraph (e) shall not be construed to require the Lender to make available its Tax returns (or any other information relating to its Taxes that it deems confidential) to the indemnifying party or any other Person.
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(f) Survival. Each partys obligations under this Section 2.15 shall survive the resignation or replacement of the Lender or any assignment of rights by, or the replacement of, the Lender, the termination of the Commitment and the repayment, satisfaction or discharge of all obligations under any Loan Document (including the Payment in Full of the Secured Obligations).
(g) Defined Terms. For purposes of this Section 2.15, the term applicable law includes FATCA.
SECTION 2.16. Payments Generally; Allocation of Proceeds.
(a) The Borrower shall make each payment or prepayment required to be made by it hereunder (whether of principal, interest, fees or reimbursement of LC Disbursements, or of amounts payable under Sections 2.13, 2.14 or 2.15, or otherwise) prior to 5:00 p.m., Eastern time, on the date when due or the date fixed for any prepayment hereunder, in immediately available funds, without setoff, recoupment or counterclaim. Any amounts received after such time on any date may, in the discretion of the Lender, be deemed to have been received on the next succeeding Business Day for purposes of calculating interest thereon. All such payments shall be made to the Lender at its offices at 560 Mission Street, 4th Floor, San Francisco, CA 94105. Unless otherwise provided for herein, if any payment hereunder shall be due on a day that is not a Business Day, the date for payment shall be extended to the next succeeding Business Day, and, in the case of any payment accruing interest, interest thereon shall be payable for the period of such extension. All payments hereunder shall be made in dollars.
(b) All payments and any proceeds of Collateral received by the Lender (i) not constituting either (A) a specific payment of principal, interest, fees or other sum payable under the Loan Documents (which shall be applied as specified by the Borrower), or (B) a mandatory prepayment (which shall be applied in accordance with Section 2.09) or (ii) after an Event of Default has occurred and is continuing and the Lender so elects, such funds shall be applied ratably first, to pay any fees, indemnities, or expense reimbursements then due to the Lender from the Borrower, second, to pay interest then due and payable on the Loans ratably, third, to prepay principal on the Loans and unreimbursed LC Disbursements and to pay any amounts owing in respect of Swap Agreement Obligations and Banking Services Obligations, ratably, fourth, to pay an amount to the Lender equal to one hundred two percent (102%) of the aggregate LC Exposure, to be held as cash collateral for such Obligations, fifth, to the payment of any other Secured Obligation due to the Lender from the Borrower or any other Loan Party. Notwithstanding anything to the contrary contained in this Agreement, unless so directed by the Borrower, or unless a Default is in existence, the Lender shall not apply any payment which it receives to any Eurodollar Loan of a Class, except (i) on the expiration date of the Interest Period applicable thereto, or (ii) in the event, and only to the extent, that there are no outstanding CBFR Loans of the same Class and, in any such event, the Borrower shall pay the break funding payment required in accordance with Section 2.14. The Lender shall have the continuing and exclusive right to apply and reverse and reapply any and all such proceeds and payments to any portion of the Secured Obligations.
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(c) At the election of the Lender, all payments of principal, interest, LC Disbursements, fees, premiums, reimbursable expenses (including, without limitation, all reimbursement for fees, costs and expenses pursuant to Section 8.03), and other sums payable under the Loan Documents, may be paid from the proceeds of Borrowings made hereunder, whether made following a request by the Borrower pursuant to Section 2.03 or a deemed request as provided in this Section or may be deducted from any deposit account of the Borrower maintained with the Lender. The Borrower hereby irrevocably authorizes the Lender to (i) make a Borrowing for the purpose of paying each payment of principal, interest and fees as it becomes due hereunder or any other amount due under the Loan Documents and agrees that all such amounts charged shall constitute Loans, and that all such Borrowings shall be deemed to have been requested pursuant to Section 2.03 and (ii) charge any deposit account of the Borrower maintained with the Lender for each payment of principal, interest and fees as it becomes due hereunder or any other amount due under the Loan Documents.
(d) The Lender may from time to time provide the Borrower with account statements or invoices with respect to any of the Secured Obligations (the Statements). The Lender is under no duty or obligation to provide Statements, which, if provided, will be solely for the Borrowers convenience. Statements may contain estimates of the amounts owed during the relevant billing period, whether of principal, interest, fees or other Secured Obligations. If the Borrower pays the full amount indicated on a Statement on or before the due date indicated on such Statement, the Borrower shall not be in default of payment with respect to the billing period indicated on such Statement; provided, that acceptance by the Lender of any payment that is less than the total amount actually due at that time (including but not limited to any past due amounts) shall not constitute a waiver of the Lenders right to receive payment in full at another time.
SECTION 2.17. Returned Payments. If after receipt of any payment which is applied to the payment of all or any part of the Obligations (including a payment effected through exercise of a right of setoff), the Lender is for any reason compelled to surrender such payment or proceeds to any Person because such payment or application of proceeds is invalidated, declared fraudulent, set aside, determined to be void or voidable as a preference, impermissible setoff, or a diversion of trust funds, or for any other reason (including pursuant to any settlement entered into by the Lender in its discretion), then the Obligations or part thereof intended to be satisfied shall be revived and continued and this Agreement shall continue in full force as if such payment or proceeds had not been received by the Lender. The provisions of this Section 2.17 shall be and remain effective notwithstanding any contrary action which may have been taken by the Lender in reliance upon such payment or application of proceeds. The provisions of this Section 2.17 shall survive the termination of this Agreement.
ARTICLE III
Representations and Warranties
Each Loan Party represents and warrants to the Lender that (and where applicable, agrees):
SECTION 3.01. Organization; Powers. Each Loan Party and each Subsidiary is duly organized or formed, validly existing and in good standing under the laws of the jurisdiction of its organization, has all requisite power and authority to carry on its business as now conducted and, except where the failure to do so, individually or in the aggregate, would not reasonably be expected to result in a Material Adverse Effect, is qualified to do business in, and is in good standing in, every jurisdiction where such qualification is required.
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SECTION 3.02. Authorization; Enforceability. The Transactions are within each Loan Partys corporate or other organizational powers and have been duly authorized by all necessary corporate or other organizational actions and, if required, actions by equity holders. Each Loan Document to which each Loan Party is a party has been duly executed and delivered by such Loan Party and constitutes a legal, valid and binding obligation of such Loan Party, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law.
SECTION 3.03. Governmental Approvals; No Conflicts. The Transactions (a) do not require any consent or approval of, registration or filing with, or any other action by, any Governmental Authority, except such as have been obtained or made and are in full force and effect and except for filings necessary to perfect Liens created pursuant to the Loan Documents, (b) will not violate any Requirement of Law applicable to any Loan Party or any Subsidiary, (c) will not violate or result in a default under any indenture, agreement or other instrument binding upon any Loan Party or any Subsidiary or the assets of any Loan Party or any Subsidiary, or give rise to a right thereunder to require any payment to be made by any Loan Party or any Subsidiary, and (d) will not result in the creation or imposition of, or other requirement to create, any Lien on any asset of any Loan Party or any Subsidiary, except Liens created pursuant to the Loan Documents.
SECTION 3.04. Financial Condition; No Material Adverse Change.
(a) The Borrower has heretofore furnished to the Lender its consolidated balance sheet and statements of income, stockholders equity and cash flows (i) as of and for the fiscal year ended December 31, 2019, from independent public accountants, and (ii) as of and for the fiscal month ended June 30, 2020, certified by a Financial Officer. Such financial statements present fairly, in all material respects, the financial position and results of operations and cash flows of the Borrower and its consolidated Subsidiaries as of such dates and for such periods in accordance with GAAP, subject to normal year-end audit adjustments and the absence of footnotes in the case of the statements referred to in clause (ii) above.
(b) No event, change or condition has occurred that has had, or could reasonably be expected to have, a Material Adverse Effect, since December 31, 2019.
SECTION 3.05. Properties.
(a) As of the date of this Agreement, Schedule 3.05 to the Disclosure Letter sets forth the address of each parcel of Material Real Property that is owned or leased by any Loan Party. Each of Loan Party and its Subsidiaries has good title to, or valid leasehold interests in, all its real and personal property, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect.
(b) Each Loan Party and each Subsidiary owns, or is licensed to use, all trademarks, tradenames, copyrights, patents and other intellectual property necessary to its business as currently conducted, and the use thereof by each Loan Party and its Subsidiaries does not infringe in any material respect upon the rights of any other Person.
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SECTION 3.06. Litigation and Environmental Matters.
(a) There are no actions, suits or proceedings by or before any arbitrator or Governmental Authority pending against or, to the knowledge of any Loan Party, threatened against or affecting any Loan Party or any Subsidiary (i) as to which there is a reasonable possibility of an adverse determination and that, if adversely determined, could reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect (other than the Disclosed Matters set forth on Schedule 3.06 of the Disclosure Letter (as may be updated from time to time)) or (ii) that involve any Loan Document or the Transactions.
(b) Except for the Disclosed Matters, (i) no Loan Party or any Subsidiary has received notice of any claim with respect to any Environmental Liability or knows of any basis for any Environmental Liability and (ii) and except with respect to any other matters that, individually or in the aggregate, would not reasonably be expected to result in a Material Adverse Effect, no Loan Party or any Subsidiary (A) has failed to comply with any Environmental Law or to obtain, maintain or comply with any permit, license or other approval required under any Environmental Law (B) has become subject to any Environmental Liability, (C) has received notice of any claim with respect to any Environmental Liability or (D) knows of any basis for any Environmental Liability.
(c) Since the date of this Agreement, there has been no change in the status of the Disclosed Matters that, individually or in the aggregate, has resulted in, or materially increased the likelihood of, a Material Adverse Effect.
SECTION 3.07. Compliance with Laws and Agreements. Except where the failure to do so, individually or in the aggregate, would not reasonably be expected to result in a Material Adverse Effect, each Loan Party and each Subsidiary is in compliance with (i) each Requirement of Law applicable to it or its property and (ii) all indentures, agreements and other instruments binding upon it or its property.
SECTION 3.08. Investment Company Status. No Loan Party or any Subsidiary is an investment company as defined in, or subject to regulation under, the Investment Company Act of 1940.
SECTION 3.09. Taxes. Each Loan Party and each Subsidiary has timely filed or caused to be filed all Tax returns and reports required to have been filed and has paid or caused to be paid all Taxes required to have been paid by it, except (a) Taxes that are being contested in good faith by appropriate proceedings and for which such Loan Party or such Subsidiary, as applicable, has set aside on its books adequate reserves or (b) to the extent that the failure to do so could not reasonably be expected to result in a liability in excess of $5,000,000.
SECTION 3.10. ERISA. No ERISA Event has occurred or is reasonably expected to occur that, when taken together with all other such ERISA Events for which liability is reasonably expected to occur, could result in a Material Adverse Effect. The present value of all accumulated benefit obligations under each Plan (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the date of the most recent financial statements reflecting such amounts, exceed the fair market value of the assets of such Plan such
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that any requisite funding of such Plan could reasonably be expected to result in a Material Adverse Effect, and the present value of all accumulated benefit obligations of all underfunded Plans (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the date of the most recent financial statements reflecting such amounts, exceed the fair market value of the assets of all such underfunded Plans such that any requisite funding of all such Plans could reasonably be expected to result in a Material Adverse Effect.
SECTION 3.11. Disclosure. (a) The Loan Parties have disclosed to the Lender all agreements, instruments and corporate or other restrictions to which any Loan Party or any Subsidiary is subject, and all other matters known to it, that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect. None of the reports, financial statements, certificates or other information (other than Projections, any other projected financial information, forward looking statements and statements of a general economic nature) furnished by or on behalf of any Loan Party or any Subsidiary to the Lender in connection with the negotiation of this Agreement or any other Loan Document (as modified or supplemented by other information so furnished), taken as a whole, contains any material misstatement of fact or, when taken as a whole, omits to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not materially misleading; provided that, with respect to the Projections and other projected financial information, the Loan Parties represent only that such information was prepared in good faith based upon assumptions believed to be reasonable at the time delivered and, if such Projections or other projected financial information was delivered prior to the Effective Date, as of the Effective Date, it being understood and agreed that such Projections and other projected financial information are subject to uncertainties and contingencies, many of which are beyond the control of the Loan parties, and as such, such Projections and other projected financial information is not a guarantee of financial performance and such differences may be material.
(b) As of the Effective Date, to the best knowledge of the Borrower, the information included in the Beneficial Ownership Certification provided on or prior to the Effective Date to the Lender in connection with this Agreement is true and correct in all respects.
SECTION 3.12. Reserved.
SECTION 3.13. Solvency. (a) Immediately after the consummation of the Transactions to occur on the Effective Date, (i) the fair value of the assets of the Loan Parties, taken as a whole, at a fair valuation, will exceed its debts and liabilities, subordinated, contingent or otherwise; (ii) the present fair saleable value of the property of the Loan Parties, taken as a whole, will be greater than the amount that will be required to pay the probable liability of its debts and other liabilities, subordinated, contingent or otherwise, as such debts and other liabilities become absolute and matured; (iii) the Loan Parties, taken as a whole, will be able to pay their debts and liabilities, subordinated, contingent or otherwise, as such debts and liabilities become absolute and matured; and (iv) no Loan Party will have unreasonably small capital with which to conduct the business in which it is engaged as such business is now conducted and is proposed to be conducted after the Effective Date.
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(b) No Loan Party intends to, nor will permit any Subsidiary to, and no Loan Party believes that it or any Subsidiary will, incur debts beyond its ability to pay such debts as they mature, taking into account the timing of and amounts of cash to be received by it or any such Subsidiary and the timing of the amounts of cash to be payable on or in respect of its Indebtedness or the Indebtedness of any such Subsidiary.
SECTION 3.14. Insurance. The Loan Parties believe that the insurance maintained by or on behalf of the Loan Parties and their Subsidiaries is adequate and is customary for companies engaged in the same or similar businesses operating in the same or similar locations.
SECTION 3.15. Capitalization and Subsidiaries. As of the date of this Agreement, Schedule 3.15 of the Disclosure Letter sets forth (a) a correct and complete list of the name and relationship to the Borrower of each Subsidiary, (b) a true and complete listing of each class of each of the Borrowers authorized Equity Interests, of which all of such issued Equity Interests are validly issued, outstanding, fully paid and non-assessable, and owned beneficially and of record by the Persons identified on Schedule 3.15 to the Disclosure Letter, and (c) the type of entity of the Borrower and each Subsidiary. All of the issued and outstanding Equity Interests owned by any Loan Party have been (to the extent such concepts are relevant with respect to such ownership interests) duly authorized and issued and are fully paid and non-assessable.
SECTION 3.16. Security Interest in Collateral. The provisions of this Agreement and the other Loan Documents create legal and valid Liens on all the Collateral in favor of the Lender, for the benefit of the Secured Parties, and upon the filing of UCC financing statements, the recording of mortgages and the taking of actions or making of filings with the United States Patent and Trademark Office of the United States Copyright Office, as applicable, with respect to the Loan Parties intellectual property, such Liens constitute perfected and continuing Liens on the Collateral, to the extent perfection can be obtained by the filing of an initial UCC financing statement, the recording of a mortgage or a filing with the United States patent and Trademark Office or the United States Copyright Office, as applicable, securing the Secured Obligations, enforceable against the applicable Loan Party (subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors rights generally and subject to general principles of equity, regardless, of whether considered in a proceeding in equity or at law), and having priority over all other Liens on the Collateral except in the case of (a) Permitted Encumbrances, to the extent any such Permitted Encumbrances would have priority over the Liens in favor of the Lender pursuant to any applicable law or agreement permitted hereunder, and (b) Liens perfected only by possession (including possession of any certificate of title), to the extent the Lender has not obtained or does not maintain possession of such Collateral.
SECTION 3.17. Employment Matters. As of the Effective Date, there are no strikes, lockouts or slowdowns against any Loan Party or any Subsidiary pending or, to the knowledge of any Loan Party, threatened in writing. The hours worked by and payments made to employees of the Loan Parties and their Subsidiaries have not been in violation in any material respect of the Fair Labor Standards Act or any other applicable federal, state, local or foreign law dealing with such matters.
SECTION 3.18. Margin Regulations. No Loan Party is engaged and will not engage, principally or as one of its important activities, in the business of purchasing or carrying Margin Stock, or extending credit for the purpose of purchasing or carrying Margin Stock, and no part of the proceeds of Borrowing or Letter of Credit extension hereunder will be used to purchase or carry any Margin Stock. Following the application of the proceeds of each Borrowing or drawing under each Letter of Credit, not more than 25% of the value of the assets (either of any Loan Party only or of the Loan Parties and their Subsidiaries on a consolidated basis) will be Margin Stock.
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SECTION 3.19. Use of Proceeds. The proceeds of the Loans have been used and will be used, whether directly or indirectly as set forth in Section 5.08.
SECTION 3.20. No Burdensome Restrictions. No Loan Party is subject to any Burdensome Restrictions except Burdensome Restrictions permitted under Section 6.10.
SECTION 3.21. Anti-Corruption Laws and Sanctions. Each Loan Party has implemented and maintains in effect policies and procedures designed to ensure compliance by such Loan Party, its Subsidiaries and their respective directors, officers, employees and agents with Anti-Corruption Laws and applicable Sanctions, and such Loan Party, its Subsidiaries and their respective officers and directors and to the knowledge of such Loan Party its employees and agents, are in compliance with Anti-Corruption Laws and applicable Sanctions in all material respects. None of (a) any Loan Party, any Subsidiary, any of their respective officers or employees, or to the knowledge of any such Loan Party or Subsidiary, any of their respective directors, or (b) to the knowledge of any such Loan Party or Subsidiary, any agent of such Loan Party or any Subsidiary that will act in any capacity in connection with or benefit from the credit facility established hereby, is a Sanctioned Person. No Borrowing or Letter of Credit, use of proceeds, Transaction or other transaction contemplated by this Agreement or the other Loan Documents will violate Anti-Corruption Laws or applicable Sanctions.
SECTION 3.22. Plan Assets; Prohibited Transactions. None of the Loan Parties or any of their Subsidiaries is an entity deemed to hold plan assets (within the meaning of the Plan Asset Regulations), and neither the execution, delivery nor performance of the transactions contemplated under this Agreement, including the making of any Loan and the issuance of any Letter of Credit hereunder, will give rise to a non-exempt prohibited transaction under Section 406 of ERISA or Section 4975 of the Code.
SECTION 3.23. Affiliate Transactions. Except as set forth on Schedule 3.23 of the Disclosure Letter, as of the date of this Agreement, there are no existing or proposed agreements, arrangements, understandings or transactions between any Loan Party and any of the officers, members, managers, directors, stockholders, parents, holders of other Equity Interests, employees or Affiliates (other than Subsidiaries) of any Loan Party or any members of their respective immediate families, in each case other than such contracts, agreements, or transactions permitted under Section 6.09.
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ARTICLE IV
Conditions
SECTION 4.01. Effective Date. The obligations of the Lender to make Loans and to issue Letters of Credit hereunder shall not become effective until the date on which each of the following conditions is satisfied (or waived in accordance with Section 8.02):
(a) Credit Agreement and Loan Documents. The Lender (or its counsel) shall have received (i) from each party hereto either (A) a counterpart of this Agreement signed on behalf of such party or (B) written evidence satisfactory to the Lender (which may include fax or other electronic transmission of a signed signature page of this Agreement) that such party has signed a counterpart of this Agreement and (ii) duly executed copies of the Loan Documents and such other certificates, documents, instruments and agreements as the Lender shall reasonably request in connection with the transactions contemplated by this Agreement and the other Loan Documents.
(b) Financial Statements and Projections. The Lender shall have received (i) audited consolidated financial statements of Borrower for the 2018 and 2019 fiscal years, (ii) unaudited interim consolidated financial statements of Borrower for each fiscal month and quarter ended after the date of the latest applicable financial statements delivered pursuant to clause (i) of this paragraph as to which such financial statements are available, and such financial statements shall not, in the reasonable judgment of the Lender, reflect any material adverse change in the consolidated financial condition of Borrower, as reflected in the audited, consolidated financial statements described in clause (i) of this paragraph and (iii) satisfactory Projections through December 31, 2024.
(c) Closing Certificates; Certified Certificate of Incorporation; Good Standing Certificates. The Lender shall have received (i) a certificate of each Loan Party, dated the Effective Date and executed by its Secretary or Assistant Secretary, which shall (A) certify the resolutions of its Board of Directors, members or other body authorizing the execution, delivery and performance of the Loan Documents to which it is a party, (B) identify by name and title and bear the signatures of the officers of such Loan Party authorized to sign the Loan Documents to which it is a party and, in the case of the Borrower, its Financial Officers, and (C) contain appropriate attachments, including the charter, articles or certificate of organization or incorporation of each Loan Party certified by the relevant authority of the jurisdiction of organization of such Loan Party and a true and correct copy of its bylaws or operating, management or partnership agreement, or other organizational or governing documents, and (ii) a long form good standing certificate for each Loan Party from its jurisdiction of organization.
(d) No Default Certificate. The Lender shall have received a certificate, signed by a Financial Officer of the Borrower, dated as of the Effective Date (i) stating that no Default has occurred and is continuing, (ii) stating that the representations and warranties contained in the Loan Documents are true and correct in all material respects as of such date (or if any representation and warranty is made as of a specified date stating such representation and warranty was true as of such specified date and if any representation and warranty is subject to any materiality qualifier, such representation and warranty is true and correct in all material respects), and (iii) certifying as to any other factual matters as may be reasonably requested by the Lender.
(e) Fees. The Lender shall have received all fees required to be paid, and all expenses required to be reimbursed for which invoices have been presented (including the reasonable fees and expenses of legal counsel), on or before the Effective Date. All such amounts will be paid with proceeds of Loans made on the Effective Date and will be reflected in the funding instructions given by the Borrower to the Lender on or before the Effective Date.
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(f) Lien Searches. The Lender shall have received the results of a recent lien search in the jurisdiction of organization of each Loan Party and each jurisdiction where assets of the Loan Parties are located, and such search shall reveal no Liens on any of the assets of the Loan Parties except for Liens permitted by Section 6.02 or discharged on or prior to the Effective Date pursuant to a pay-off letter or other documentation reasonably satisfactory to the Lender.
(g) Pay-off Letter. The Lender shall have received satisfactory pay-off letters for all existing Indebtedness required to be repaid and which confirms that all Liens upon any of the property of the Loan Parties constituting Collateral will be terminated concurrently with such payment and all letters of credit issued or guaranteed as part of such Indebtedness shall have been cash collateralized or supported by a Letter of Credit.
(h) Funding Account. The Lender shall have received a notice setting forth the deposit account of the Borrower (the Funding Account) to which the Lender is authorized by the Borrower to transfer the proceeds of any Borrowings requested or authorized pursuant to this Agreement.
(i) Control Agreements. The Lender shall have received a deposit account control agreement required to be provided pursuant to the Security Agreement and Section 5.13 of this Agreement.
(j) Solvency. The Lender shall have received a solvency certificate signed by a Financial Officer dated the Effective Date in form and substance reasonably satisfactory to the Lender.
(k) Closing Availability. After giving effect to all Borrowings to be made on the Effective Date and the issuance of any Letters of Credit on the Effective Date and payment of all fees and expenses due hereunder, and with all of the Loan Parties Indebtedness, the Borrowers Availability shall not be less than the Revolving Commitment.
(l) Pledged Equity Interests; Stock Powers; Pledged Notes. The Lender shall have received (i) the certificates representing the Equity Interests pledged pursuant to the Security Agreement, together with an undated stock power for each such certificate executed in blank by a duly authorized officer of the pledgor thereof and (ii) each promissory note (if any) pledged to the Lender pursuant to the Security Agreement endorsed (without recourse) in blank (or accompanied by an executed transfer form in blank) by the pledgor thereof.
(m) Filings, Registrations and Recordings. Each document (including any Uniform Commercial Code financing statement) required by the Collateral Documents or under law or reasonably requested by the Lender to be filed, registered or recorded in order to create in favor of the Lender, for the benefit of the Secured Parties, a perfected Lien on the Collateral described therein, prior and superior in right to any other Person (other than with respect to Liens expressly permitted by Section 6.02), shall be in proper form for filing, registration or recordation.
(n) Insurance. The Lender shall have received evidence of insurance coverage in form, scope, and substance reasonably satisfactory to the Lender and otherwise in compliance with the terms of this Agreement and the Security Agreement.
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(o) Letter of Credit Application. The Lender shall have received a properly completed letter of credit application (whether standalone or pursuant to a master agreement, as applicable) if the issuance of a Letter of Credit will be required on the Effective Date. The Borrower shall have executed the Lenders master agreement for the issuance of commercial Letters of Credit.
(p) Legal Due Diligence. The Lender and its counsel shall have completed all legal due diligence, the results of which shall be satisfactory to Lender in its sole discretion.
(q) USA PATRIOT Act, Etc. (i) The Lender shall have received, (x) at least five (5) days prior to the Effective Date, all documentation and other information regarding the Borrower requested in connection with applicable know your customer and anti-money laundering rules and regulations, including the USA PATRIOT Act, to the extent requested in writing of the Borrower at least ten (10) days prior to the Effective Date, and (y) a properly completed and signed IRS Form W-8 or W-9, as applicable, for each Loan Party, and (ii) the Lender shall have received, to the extent the Borrower qualifies as a legal entity customer under the Beneficial Ownership Regulation, a Beneficial Ownership Certification in relation to the Borrower at least five (5) days prior to the Effective Date.
(r) Other Documents. The Lender shall have received such other documents as the Lender or its counsel may have reasonably requested.
The Lender shall notify the Borrower of the Effective Date, and such notice shall be conclusive and binding. Notwithstanding the foregoing, the obligations of the Lender to make Loans and to issue Letters of Credit hereunder shall not become effective unless each of the foregoing conditions is satisfied (or waived pursuant to Section 8.02) (and, in the event such conditions are not so satisfied or waived, the Commitment shall terminate at such time).
SECTION 4.02. Each Credit Event. The obligation of the Lender to make a Loan on the occasion of any Borrowing, and to issue, amend, renew or extend any Letter of Credit, is subject to the satisfaction of the following conditions:
(a) The representations and warranties of the Loan Parties set forth in the Loan Documents shall be true and correct in all material respects with the same effect as though made on and as of the date of such Borrowing or the date of issuance, amendment, renewal or extension of such Letter of Credit, as applicable (it being understood and agreed that any representation or warranty which by its terms is made as of a specified date shall be required to be true and correct only as of such specified date, and that any representation or warranty which is subject to any materiality qualifier shall be required to be true and correct in all material respects).
(b) At the time of and immediately after giving effect to such Borrowing or the issuance, amendment, renewal or extension of such Letter of Credit, as applicable, no Default shall have occurred and be continuing.
(c) After giving effect to any Borrowing or the issuance, amendment, renewal or extension of any Letter of Credit, Availability shall not be less than zero.
(d) No event shall have occurred and no condition shall exist which has or could be reasonably expected to have a Material Adverse Effect.
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(e) Borrower shall have delivered a Borrowing Request to the Lender in accordance with Section 2.03.
Each Borrowing and each issuance, amendment, renewal or extension of a Letter of Credit shall be deemed to constitute a representation and warranty by the Borrower on the date thereof as to the matters specified in paragraphs (a), (b), (c), and (d) of this Section.
ARTICLE V
Affirmative Covenants
Until all of the Secured Obligations shall have been Paid in Full, each Loan Party executing this Agreement covenants and agrees, jointly and severally with all of the other Loan Parties, with the Lender that:
SECTION 5.01. Financial Statements and Other Information. The Borrower will furnish to the Lender:
(a) within 180 days after the end of each fiscal year of the Borrower, its audited consolidated balance sheet and related statements of operations, stockholders equity and cash flows as of the end of and for such year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on by independent public accountants reasonably acceptable to the Lender (without a going concern or like qualification, commentary or exception, and without any qualification or exception as to the scope of such audit, other than solely with respect to, or resulting solely from, (i) any actual or projected inability to satisfy any financial covenant for any period under this Agreement or (ii) the impending maturity within twelve (12) months of any Indebtedness under this Agreement) to the effect that such consolidated financial statements present fairly in all material respects the financial condition and results of operations of the Borrower and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP consistently applied;
(b) within 45 days after the end of each fiscal quarter of the Borrower, its consolidated balance sheet and related statements of operations, stockholders equity and cash flows as of the end of and for such fiscal quarter and the then elapsed portion of the fiscal year, setting forth in each case in comparative form the figures for the corresponding period or periods of (or, in the case of the balance sheet, as of the end of) the previous fiscal year, all certified by a Financial Officer as presenting fairly in all material respects the financial condition and results of operations of the Borrower and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP consistently applied, subject to normal year-end audit adjustments and the absence of footnotes;
(c) concurrently with any delivery of financial statements under clause (a) or (b) above, a Compliance Certificate executed by a Financial Officer (i) certifying, in the case of the financial statements delivered under clause (b) or (c) above, as presenting fairly in all material respects the financial condition and results of operations of the Borrower and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP consistently applied, subject to normal year-end audit adjustments and the absence of footnotes, (ii) certifying as to whether a Default has occurred
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and, if a Default has occurred, specifying the details thereof and any action taken or proposed to be taken with respect thereto, (iii) setting forth reasonably detailed calculations demonstrating compliance with Section 6.12 and (iv) stating whether any change in GAAP or in the application thereof has occurred since the date of the audited financial statements referred to in Section 3.04 and, if any such change has occurred, specifying the effect of such change on the financial statements accompanying such certificate;
(d) [reserved];
(e) as soon as available, but in any event no later than 60 days following the end of each fiscal year of the Borrower, a copy of the plan and forecast (including a projected consolidated balance sheet, income statement and cash flow statement) of the Borrower for each month of the then-current fiscal year (the Projections), in form reasonably satisfactory to the Lender (and the Lender agrees that it is satisfied with the form of Projections provided by the Borrower prior to the date hereof);
(f) as soon as possible and in any event within 30 days of filing thereof, copies of all tax returns filed by any Loan Party with the U.S. Internal Revenue Service;
(g) promptly after the same become publicly available, copies of all periodic and other reports, proxy statements and other materials filed by any Loan Party or any Subsidiary with the SEC, or any Governmental Authority succeeding to any or all of the functions of the SEC, or with any national securities exchange, or distributed by the Borrower to its shareholders generally, as the case may be;
(h) promptly after receipt thereof by the Borrower or any Subsidiary, copies of each notice or other correspondence received from the SEC (or comparable agency in any applicable non-U.S. jurisdiction) concerning any investigation or possible investigation or other inquiry by the SEC or such other agency regarding financial or other operational results of the Borrower or any Subsidiary thereof;
(i) promptly following any request therefor, (x) such other information regarding the operations, changes in ownership of Equity Interests, business affairs and financial condition of any Loan Party or any Subsidiary, or compliance with the terms of this Agreement, as the Lender may reasonably request and (y) information and documentation reasonably requested by the Lender for purposes of compliance with applicable know your customer and anti-money laundering rules and regulations, including the USA PATRIOT Act and the Beneficial Ownership Regulation; and
(j) promptly after any request therefor by the Lender, copies of (i) any documents described in Section 101(k)(1) of ERISA that the Borrower or any ERISA Affiliate may request with respect to any Multiemployer Plan and (ii) any notices described in Section 101(l)(1) of ERISA that the Borrower or any ERISA Affiliate may request with respect to any Multiemployer Plan; provided that if the Borrower or any ERISA Affiliate has not requested such documents or notices from the administrator or sponsor of the applicable Multiemployer Plan, the Borrower or the applicable ERISA Affiliate shall promptly make a request for such documents and notices from such administrator or sponsor and shall provide copies of such documents and notices promptly after receipt thereof.
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Documents required to be delivered pursuant to Section 5.01(a), (b) or (g) (to the extent any such documents are included in materials otherwise filed with the SEC) may be delivered electronically and, if so delivered, shall be deemed to have been delivered on the date (i) on which such materials are publicly available as posted on the Electronic Data Gathering, Analysis and Retrieval system (EDGAR); or (ii) on which such documents are posted on the Borrowers behalf on an Internet or intranet website, if any, to which the Lender has access (whether a commercial, third-party website or whether made available by the Lender); provided that: (A) upon written request by the Lender to the Borrower, the Borrower shall deliver paper copies of such documents to the Lender until a written request to cease delivering paper copies is given by the Lender and (B) the Borrower shall notify the Lender (by facsimile or through Electronic System) of the posting of any such documents and provide to the Lender through Electronic System electronic versions (i.e., soft copies) of such documents. The Lender shall have no obligation to request the delivery of or to maintain paper copies of the documents referred to above.
SECTION 5.02. Notices of Material Events. Borrower will furnish to the Lender prompt (but in any event within any time period that may be specified below) written notice of the following:
(a) as soon as practicable, and in any event within three (3) Business Days after a Responsible Officer of a Loan Party has knowledge of the existence thereof, the occurrence of any Default;
(b) receipt of any notice of any investigation by a Governmental Authority or any litigation or proceeding commenced or threatened in writing against any Loan Party or any Subsidiary that (i) if adversely determined could reasonably be expected to result in damages in excess of $5,000,000 (and not covered by insurance), (ii) seeks injunctive relief, (iii) is asserted or instituted against any Plan, its fiduciaries or its assets, (iv) alleges criminal misconduct by any Loan Party or any Subsidiary, (v) alleges the violation of, or seeks to impose remedies under any Environmental Law or related Requirement of Law, or seeks to impose Environmental Liability, in each case if adversely determined could reasonably be expected to result in damages in excess of $5,000,000 (and not covered by insurance), (vi) asserts tax liens on the part of any Loan Party or any Subsidiary in respect of any unpaid tax, fee, assessment, or other governmental charge in each case if adversely determined could reasonably be expected to result in damages in excess of $5,000,000 (and not covered by insurance), and except to the extent contested in good faith, or (vii) involves any product recall in excess of $5,000,000;
(c) any material change in accounting or financial reporting practices by the Borrower or any Subsidiary;
(d) the occurrence of any ERISA Event that, alone or together with any other ERISA Events that have occurred, could reasonably be expected to result in a Material Adverse Effect;
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(e) within two (2) Business Days after the occurrence thereof, any Loan Party entering into a Swap Agreement or an amendment to a Swap Agreement, together with copies of all agreements evidencing such Swap Agreement or amendment;
(f) any change in the credit ratings from a credit rating agency, or the placement by a credit rating agency of any Loan Party on a Credit Watch or WatchList or any similar list, in each case with negative implications, or the cessation by a credit rating agency of, or its intent to cease, rating such Loan Partys debt;
(g) any other development that results in, or could reasonably be expected to result in, a Material Adverse Effect; and
(h) any change in the information provided in the Beneficial Ownership Certification delivered to such Lender that would result in a change to the list of beneficial owners identified in such certification.
Each notice delivered under this Section shall be accompanied by a statement of a Financial Officer or other executive officer of the Borrower setting forth the details of the event or development requiring such notice and any action taken or proposed to be taken with respect thereto.
SECTION 5.03. Existence. Each Loan Party will, and will cause each Subsidiary to do or cause to be done all things necessary to preserve, renew and keep in full force and effect its legal existence and the rights, qualifications, licenses, permits, franchises, governmental authorizations, intellectual property rights, licenses and permits material to the conduct of its business, and maintain all requisite authority to conduct its business in each jurisdiction in which its business is conducted except where the failure to maintain such authority would not reasonably be expected to have a Material Adverse Effect; provided that the foregoing shall not prohibit any merger, consolidation, liquidation, or dissolution permitted under Section 6.03.
SECTION 5.04. Payment of Obligations. Each Loan Party will, and will cause each Subsidiary to, pay or discharge all Material Indebtedness and all other material liabilities and obligations, in excess of $5,000,000, including Taxes, before the same shall become delinquent or in default, except where (a) the validity or amount thereof is being contested in good faith by appropriate proceedings, (b) such Loan Party or Subsidiary has set aside on its books adequate reserves with respect thereto in accordance with GAAP and (c) the failure to make payment would not reasonably be expected to result in a Material Adverse Effect.
SECTION 5.05. Maintenance of Properties. Each Loan Party will, and will cause each Subsidiary to, keep and maintain all property owned or leased by any Loan Party material to the conduct of its business in good working order and condition, ordinary wear and tear excepted.
SECTION 5.06. Books and Records; Inspection Rights. Each Loan Party will, and will cause each Subsidiary to, (a) keep proper books of record and account in which full, true and correct entries are made of all material dealings and transactions in relation to its business and (b) permit any representatives designated by the Lender (including employees of the Lender or any consultants, accountants, lawyers, agents and appraisers retained by the Lender), upon reasonable prior notice and during the usual business hours of a Loan Party, to visit and inspect its properties,
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conduct at the Loan Partys premises field examinations of such Loan Partys assets, liabilities, books and records, including examining and making extracts from its books and records (other than (i) materials protected by the attorney-client privilege, (ii) materials which the Borrower or such Subsidiary, as applicable, may not disclose without violation of a confidentiality obligation binding upon it or the disclosure of which is prohibited by law or (iii) information that constitutes non-financial trade secrets or non-financial proprietary information that is not reasonably related to the actual or projected financial results or results of operations of the Loan Parties), and to discuss its affairs, finances and condition with its officers and independent accountants, all at such reasonable times; provided that if no Event of Default has occurred and is continuing, the Lender shall not conduct more than one field examination in any 12 month period. The Loan Parties acknowledge that the Lender, after exercising its rights of inspection may prepare certain Reports pertaining to the Loan Parties assets for internal use by the Lender. Such Reports shall be deemed Information and shall be subject to the confidentiality obligations provided in Section 8.12.
SECTION 5.07. Compliance with Laws. Each Loan Party will, and will cause each Subsidiary to, (i) comply with each Requirement of Law applicable to it or its property (including, without limitation, Environmental Laws) except where the failure to be in compliance would not have a Material Adverse Effect. Each Loan Party will maintain in effect and enforce policies and procedures, to the extent applicable, designed to ensure compliance by such Loan Party, its Subsidiaries and their respective directors, officers, employees and agents with Anti-Corruption Laws and applicable Sanctions.
SECTION 5.08. Use of Proceeds.
(a) The proceeds of the Loans and the Letters of Credit will be used only for working capital and general corporate purposes. No part of the proceeds of any Loan and no Letter of Credit will be used, whether directly or indirectly, (i) for any purpose that entails a violation of any of the regulations of the Federal Reserve Board, including Regulations T, U and X or (ii) to make any Acquisition. Letters of Credit will be issued only to support working capital and general corporate purposes.
(b) The Borrower will not request any Borrowing or Letter of Credit, and the Borrower shall not use, and shall procure that its Subsidiaries and its or their respective directors, officers, employees and agents shall not use, the proceeds of any Borrowing or Letter of Credit (a) in furtherance of an offer, payment, promise to pay, or authorization of the payment or giving of money, or anything else of value, to any Person in violation of any Anti-Corruption Laws, (b) for the purpose of funding, financing or facilitating any activities, business or transaction of or with any Sanctioned Person, or in any Sanctioned Country, except to the extent permitted for a Person required to comply with Sanctions, or (c) in any manner that would result in the violation of any Sanctions applicable to any party hereto.
SECTION 5.09. Accuracy of Information. The Loan Parties will ensure that any information, including financial statements or other documents (other than Projections, other projected financial information, forward looking statements and statements of a general economic nature), furnished to the Lender in connection with this Agreement or any other Loan Document or any amendment or modification hereof or thereof or waiver hereunder or thereunder (as modified or supplemented by other information so furnished), when taken as a whole, contains no
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material misstatement of fact or omits to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not materially misleading, and the furnishing of such information shall be deemed to be a representation and warranty by the Borrower on the date thereof as to the matters specified in this Section 5.09; provided that, with respect to the Projections or any other projected financial information, the Loan Parties will cause the Projections to be prepared in good faith based upon assumptions believed to be reasonable at the time, it being understood and agreed that such Projections and other projected financial information are subject to uncertainties and contingencies, many of which are beyond the control of the Loan Parties, and as such, such Projections and other projected financial information is not a guarantee of financial performance and actual results may differ from such Projections and other projected financial information and such difference may be material.
SECTION 5.10. Insurance. Each Loan Party will, and will cause each Subsidiary to, maintain with financially sound and reputable carriers (a) insurance in such amounts and such hazards, as is customarily maintained by companies of established repute engaged in the same or similar businesses operating in the same or similar locations and (b) all insurance required pursuant to the Collateral Documents. The Borrower will furnish to the Lender, upon the reasonable request of the Lender, additional information in reasonable detail as to the insurance so maintained.
SECTION 5.11. Reserved.
SECTION 5.12. Reserved.
SECTION 5.13. Collateral Access Agreement(s); Depository Banks. The Borrower shall use its best efforts to obtain a Collateral Access Agreement in respect of the Borrowers chief executive office located at 2834 Colorado Ave, Suite 100 Santa Monica, California, and in respect of each U.S. warehouse holding more than $5,000,000 in inventory of the Borrower. Within ninety (90) days after the Effective Date (or such later date as the Lender may agree), each Loan Party and each Subsidiary will maintain the Lender as its principal depository bank, including for the maintenance of operating, administrative, cash management, collection activity, and other deposit accounts for the conduct of its business. During such ninety (90) day period, the Loan Parties will cause each deposit account, securities account or commodities account maintained with a financial institution other than Lender (other than Excluded Accounts) to be subject to a control agreement in favor of the Lender.
SECTION 5.14. Additional Collateral; Further Assurances.
(a) Subject to any applicable Requirement of Law, each Loan Party will cause each of its Subsidiaries that is not a CFC formed or acquired after the date of this Agreement to become a Loan Party by executing a Joinder Agreement within 60 days of formation. In connection therewith, the Lender shall have received all documentation and other information regarding such newly formed or acquired Subsidiaries as may be required to comply with the applicable know your customer rules and regulations, including the USA Patriot Act. Upon execution and delivery thereof, each such Person (x) shall automatically become a Loan Guarantor hereunder and thereupon shall have all of the rights, benefits, duties, and obligations in such capacity under the Loan Documents and (y) will grant Liens to the Lender, for the benefit of the Secured Parties, in any property of such Loan Party which constitutes Collateral, including any parcel of real property located in the U.S. owned by any Loan Party.
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(b) Each Loan Party will cause (i) 100% of the issued and outstanding Equity Interests of each of its Domestic Subsidiaries (other than any Domestic Foreign Holding Company), and (ii) 65% (or such greater percentage that, due to a change in applicable law after the date hereof, (1) could not reasonably be expected to cause the undistributed earnings of such Foreign Subsidiary as determined for U.S. federal income tax purposes to be treated as a deemed dividend to such Foreign Subsidiarys U.S. parent and (2) could not reasonably be expected to cause any material adverse tax consequences) of the issued and outstanding Equity Interests entitled to vote (within the meaning of Treas. Reg. Section 1.956-2(c)(2)) and 100% of the issued and outstanding Equity Interests not entitled to vote (within the meaning of Treas. Reg. Section 1.956-2(c)(2)) in each Foreign Subsidiary and Domestic Foreign Holding Company directly owned by the Borrower or any Loan Party to be subject at all times to a first priority, perfected Lien in favor of the Lender for the benefit of the Secured Parties, subject to Permitted Liens, pursuant to the terms and conditions of the Loan Documents or other security documents as the Lender shall reasonably request.
(c) Without limiting the foregoing, each Loan Party will execute and deliver, or cause to be executed and delivered, to the Lender such documents, agreements and instruments, and will take or cause to be taken such further actions (including the filing and recording of financing statements, fixture filings, mortgages, deeds of trust and other documents and such other actions or deliveries of the type required by Section 4.01, as applicable), which may be required by any Requirement of Law or which the Lender may, from time to time, reasonably request to carry out the terms and conditions of this Agreement and the other Loan Documents and to ensure perfection and priority of the Liens created or intended to be created by the Collateral Documents, all in form and substance reasonably satisfactory to the Lender and all at the expense of the Loan Parties.
(d) If any Material Real Property is acquired by any Loan Party after the Effective Date, the Borrower will notify the Lender and, if requested by the Lender, cause such assets to be subjected to a Lien securing the Secured Obligations. In connection with any such acquisition of a fee interest in Material Real Property, the Loan Parties shall deliver to the Lender a Mortgage, title insurance policy (in such amount and containing such endorsements and affirmative coverages as the Lender shall reasonably require), survey, local counsel opinion, updated property insurance certificates naming the Lender as lender mortgagee and such other documents, instruments, agreements, convents, estoppels and other materials as the Lender shall reasonably require, each in form and substance reasonably satisfactory to the Lender. In addition to the foregoing, the Loan Parties shall deliver to the Lender prior to the execution and delivery of such Mortgage evidence as to (A) whether any such real property is a Flood Hazard Property and (B) if any such real property is a Flood Hazard Property, (1) whether the community in which such real property is located is participating in the National Flood Insurance Program, (2) the applicable Loan Partys written acknowledgment of receipt of written notification from the Lender (a) as to the fact that such real property is a Flood Hazard Property and (b) as to whether the community in which each such Flood Hazard Property is located is participating in the National Flood Insurance Program and (3) copies of insurance policies or certificates of insurance of the Loan Parties and their Subsidiaries evidencing flood insurance reasonably satisfactory to the Lender and naming the Lender as additional loss payee, in each case, in accordance with applicable Requirements of Law.
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ARTICLE VI
Negative Covenants
Until all of the Secured Obligations shall have been Paid in Full, each Loan Party executing this Agreement covenants and agrees, jointly and severally with all of the other Loan Parties, with the Lender that:
SECTION 6.01. Indebtedness. No Loan Party will, nor will it permit any Subsidiary to, create, incur, assume or suffer to exist any Indebtedness, except:
(a) the Secured Obligations;
(b) Indebtedness existing on the date hereof and set forth in Schedule 6.01 of the Disclosure Letter and any extensions, renewals, refinancings and replacements of any such Indebtedness in accordance with clause (f) hereof;
(c) Indebtedness of (i) any Loan Party or any Subsidiary to (ii) other Loan Party or any other Subsidiary, provided that Indebtedness of any Subsidiary that is not a Loan Party to the Borrower or any other Loan Party shall be subject to Section 6.04;
(d) Guarantees by any Loan Party or any Subsidiary of the Indebtedness of any other Loan Party or any Subsidiary, provided that (i) the Indebtedness so Guaranteed is permitted by this Section 6.01, (ii) Guarantees by any Loan Party of Indebtedness of any non-Loan Party shall, in each case, be subject to Section 6.04;
(e) Indebtedness of the Borrower or any Subsidiary incurred to finance the acquisition, construction, repair, replacement, or improvement of any fixed or capital assets, including Equipment (whether or not constituting purchase money Indebtedness), including Capital Lease Obligations and any Indebtedness assumed in connection with the acquisition of any such assets or secured by a Lien on any such assets prior to the acquisition thereof, and extensions, renewals and replacements of any such Indebtedness in accordance with clause (f) below; provided that (i) such Indebtedness is incurred prior to or within 90 days after such acquisition or the completion of such construction or improvement and (ii) the aggregate principal amount of Indebtedness permitted by this clause (e) together with any Refinance Indebtedness in respect thereof permitted by clause (f) below, shall not exceed $5,000,000 at any time outstanding;
(f) Indebtedness which represents extensions, renewals, refinancing or replacements (such Indebtedness being so extended, renewed, refinanced or replaced being referred to herein as the Refinance Indebtedness) of any of the Indebtedness described in clauses (b) and (e) hereof (such Indebtedness being referred to herein as the Original Indebtedness); provided that (i) such Refinance Indebtedness does not materially increase the principal amount or interest rate of the Original Indebtedness to be materially more burdensome upon the Loan Parties, (ii) any Liens securing such Refinance Indebtedness are not extended to any additional property of any Loan Party or any Subsidiary, (iii) no Loan Party or any Subsidiary that is not originally obligated with respect to repayment of such Original Indebtedness is required to become obligated with respect to such Refinance Indebtedness, (iv) such Refinance Indebtedness does not result in a shortening of the average weighted maturity of such Original Indebtedness and (v) if such Original Indebtedness was subordinated in right of payment to the Secured Obligations, then the terms and conditions of such Refinance Indebtedness must include subordination terms and conditions that are at least as favorable to the Lender as those that were applicable to such Original Indebtedness;
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(g) Indebtedness owed to any Person providing workers compensation, health, disability or other employee benefits or property, casualty or liability insurance, pursuant to reimbursement or indemnification obligations to such Person, in each case incurred in the ordinary course of business;
(h) Indebtedness of any Loan Party in respect of performance bonds, bid bonds, appeal bonds, surety bonds and similar obligations, in each case provided in the ordinary course of business;
(i) Subordinated Indebtedness;
(j) unsecured indebtedness in connection with corporate credit cards issued to the Borrower and its Subsidiaries;
(k) Indebtedness in respect of netting services, overdraft protections, payment processing, automatic clearinghouse arrangements, arrangements in respect of pooled deposit or sweep accounts, check endorsement guarantees and otherwise in connection with deposit accounts or cash management services;
(l) Indebtedness consisting of insurance premium financing;
(m) Indebtedness representing deferred compensation, severance and health and welfare retirement benefits to current and former employees of any Loan Party or its Subsidiaries incurred in the ordinary course of business;
(n) Indebtedness under Swap Agreements;
(o) Indebtedness of Foreign Subsidiaries, and guarantees thereof by Foreign Subsidiaries, in respect of local lines of credit, letters of credit, bank guarantees and similar extensions of credit, in an aggregate principal amount not to exceed $10,000,000, at any time outstanding;
(p) Indebtedness permitted under Section 6.04;
(q) any Indebtedness incurred in the ordinary course of business under any agreement to provide cash management services, including treasury, depository, overdraft, credit or debit card, stored value card, purchase card, pooling, netting, electronic funds transfer and other cash management arrangements; and
(r) other Indebtedness in an aggregate principal amount not exceeding $5,000,000 at any time outstanding.
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SECTION 6.02. Liens. No Loan Party will, nor will it permit any Subsidiary to, create, incur, assume or permit to exist any Lien on any property or asset now owned or hereafter acquired by it, or assign or sell any income or revenues (including Accounts) or rights in respect of any thereof, except:
(a) Liens created pursuant to any Loan Document;
(b) Permitted Encumbrances;
(c) any Lien on any property or asset of the Borrower or any Subsidiary existing on the date hereof and set forth in Schedule 6.02 of the Disclosure Letter; provided that (i) such Lien shall not apply to any other property or asset of the Borrower or any Subsidiary and (ii) such Lien shall secure only those obligations which it secures on the date hereof and extensions, renewals and replacements thereof that do not increase the outstanding principal amount thereof;
(d) Liens on fixed or capital assets acquired, constructed or improved by the Borrower or any Subsidiary; provided that (i) such Liens secure Indebtedness permitted by clause (e) of Section 6.01, and (ii) such Liens shall not apply to any other property or assets of the Borrower or any Subsidiary;
(e) any Lien existing on any property or asset (other than Accounts and Inventory) prior to the acquisition thereof by the Borrower or any Subsidiary or existing on any property or asset (other than Accounts and Inventory) of any Person that becomes a Loan Party after the date hereof prior to the time such Person becomes a Loan Party; provided that (i) such Lien is not created in contemplation of or in connection with such acquisition or such Person becoming a Loan Party, as the case may be, (ii) such Lien shall not apply to any other property or assets of the Loan Party and (iii) such Lien shall secure only those obligations which it secures on the date of such acquisition or the date such Person becomes a Loan Party, as the case may be, and extensions, renewals and replacements thereof that do not increase the outstanding principal amount thereof;
(f) Liens of a collecting bank arising in the ordinary course of business under Section 4-210 of the UCC in effect in the relevant jurisdiction covering only the items being collected upon;
(g) Liens arising out of Sale and Leaseback Transactions permitted by Section 6.06;
(h) Liens granted by a Subsidiary that is not a Loan Party in favor of the Borrower or another Loan Party in respect of Indebtedness owed by such Subsidiary;
(i) Liens permitted under Section 6.01(h) and (n), securing Indebtedness in an aggregate principal amount not to exceed $2,500,000;
(j) Liens securing Indebtedness permitted under Section 6.01(o);
(k) in the case of (A) any Subsidiary that is not a wholly owned Subsidiary or (B) the Equity Interests in any Person that is not a Subsidiary, any encumbrance or restriction, including any put and call arrangements, related to Equity Interests in such Subsidiary or such other Person set forth in the organization documents of such Subsidiary or such other Person or any related joint venture, shareholders or similar agreement;
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(l) Liens in the nature of the right of setoff in favor of counterparties to contractual agreements with the Borrower or any Subsidiary in the ordinary course of business;
(m) Liens arising out of conditional sale, title retention, consignment or similar arrangements for the sale of goods entered into by the Borrower or any Subsidiary in the ordinary course of business;
(n) Liens on specific items of Inventory or other goods and proceeds thereof of any Person securing such Persons obligations in respect of bankers acceptances or letters of credit issued or created for the account of such person to facilitate the purchase, shipment or storage of such Inventory or such other goods in the ordinary course of business;
(o) Liens on insurance policies and the proceeds thereof securing Indebtedness permitted by Section 6.01(m);
(p) Liens securing Subordinated Indebtedness; and
(q) Liens securing obligations outstanding in an aggregate principal amount not to exceed $5,000,000.
Notwithstanding the foregoing, none of the Liens permitted pursuant to this Section 6.02 may at any time attach to any Loan Partys (i) Accounts, other than those permitted under clause (a) of the definition of Permitted Encumbrances and clause (a) above and (ii) Inventory, other than those permitted under clauses (a) and (b) of the definition of Permitted Encumbrances and clause (a) above.
SECTION 6.03. Fundamental Changes.
(a) No Loan Party will, nor will it permit any Subsidiary to, merge into or consolidate with any other Person, or permit any other Person to merge into or consolidate with it, or otherwise Dispose of all or substantially all/any substantial part of its assets, or all or substantially all of the stock of any of its Subsidiaries (in each case, whether now owned or hereafter acquired), or liquidate, divide or dissolve, except that, if at the time thereof and immediately after giving effect thereto no Event of Default shall have occurred and be continuing, (i) any Subsidiary of the Borrower may merge into the Borrower in a transaction in which the Borrower is the surviving entity, (ii) any Loan Party (other than the Borrower) may merge into any other Loan Party in a transaction in which the surviving entity is a Loan Party, (iii) any Subsidiary that is not a Loan Party may liquidate, divide or dissolve if the Borrower determines in good faith that such liquidation, division or dissolution is in the best interests of the Borrower and is not materially disadvantageous to the Lender; provided that any such merger involving a Person that is not a wholly owned Subsidiary immediately prior to such merger shall not be permitted unless also permitted by Section 6.04, (iv) a Loan Party may sell, transfer, lease or otherwise dispose of its assets to a Loan Party, any Subsidiary may sell, transfer, lease or otherwise dispose of its assets to a Loan Party and any Subsidiary that is not a Loan Party may sell, transfer, lease or otherwise dispose of its assets to any other Subsidiary that is not a Loan Party, and (v) in connection with any acquisition permitted under Section 6.04;
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(b) No Loan Party will, nor will it permit any Subsidiary to, engage to any material extent in any business other than businesses of the type conducted by the Borrower and its Subsidiaries on the date hereof and businesses reasonably related, ancillary, or complementary thereto and logical extensions thereof.
(c) No Loan Party will, nor will it permit any Subsidiary to change its fiscal year or any fiscal quarter from the basis in effect on the Effective Date.
(d) Subject to any applicable Requirement of Law or relevant accounting standards, no Loan Party will change the accounting basis upon which its financial statements are prepared.
(e) Subject to any applicable Requirement of Law, no Loan Party will change the tax filing elections it has made under the Code.
SECTION 6.04. Investments, Loans, Advances, Guarantees and Acquisitions. No Loan Party will, nor will it permit any Subsidiary to, form any subsidiary after the Effective Date, or purchase, hold or acquire (including pursuant to any merger with any Person that was not a Loan Party and a wholly owned Subsidiary prior to such merger) any Equity Interests, evidences of indebtedness or other securities (including any option, warrant or other right to acquire any of the foregoing) of, make or permit to exist any loans or advances to, Guarantee any obligations of, or make or permit to exist any investment or any other interest in, any other Person, or purchase or otherwise acquire (in one transaction or a series of transactions) any assets of any other Person constituting a business unit (whether through purchase of assets, merger or otherwise), except:
(a) Permitted Investments;
(b) investments in existence on the date hereof and described in Schedule 6.04 of the Disclosure Letter and any modification, replacement, renewal or extension thereof to the extent not involving any additional investment;
(c) investments by the Loan Parties and their Subsidiaries in Equity Interests in their respective Subsidiaries, provided that, in each case, any such Equity Interests held by a Loan Party shall be pledged pursuant to the Security Agreement (subject to the limitations applicable to Equity Interests of a Subsidiary referred to in Section 5.14) and (ii) the aggregate amount of investments by Loan Parties in non-Loan Parties (together with outstanding intercompany loans permitted by Section 6.04(d)) shall not exceed $10,000,000 at any time outstanding (in each case determined without regard to any write-downs or write-offs);
(d) loans or advances made by (i) any Loan Party or any Subsidiary to (ii) any other Loan Party or any other Subsidiary, provided that the amount of such loans and advances made by Loan Parties to non-Loan Parties (together with outstanding investments permitted by Section 6.04(c)) shall not exceed $10,000,000 at any time outstanding (in each case determined without regard to any write-downs or write-offs);
(e) Guarantees constituting Indebtedness permitted by Section 6.01;
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(f) (i) investments not to exceed $5,000,000 in the aggregate in any fiscal year consisting of travel advances, entertainment expenses, employee relocation loans, and other employee loans and advances in the ordinary course of business, and (ii) loans to employees, officers or directors relating to the purchase of Equity Interests of the Borrower or its Subsidiaries pursuant to employee equity purchase agreements approved by the Borrowers or such Subsidiarys board of directors;
(g) notes payable, or stock or other securities issued by Account Debtors to a Loan Party pursuant to negotiated agreements with respect to settlement of such Account Debtors Accounts in the ordinary course of business, consistent with past practices;
(h) investments in the form of Swap Agreements permitted by Section 6.07;
(i) investments received in connection with the disposition of assets permitted by Section 6.05;
(j) investments constituting deposits described in clauses (c) and (d) of the definition of the term Permitted Encumbrances;
(k) extensions of trade credit to customers in the ordinary course of business;
(l) investments (including debt obligations) received in connection with the bankruptcy or reorganization of customers or suppliers and in settlement of delinquent obligations of, and other disputes with, customers or suppliers arising in the ordinary course of business;
(m) investments consisting of notes receivable of, or prepaid royalties and other credit extensions to, customers and suppliers in the ordinary course of business; provided that this clause (n) shall not apply to investments of the Borrower in any Subsidiary;
(n) investments consisting of the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of the Borrowers business;
(o) any transfer of intellectual property between the Borrower and any Loan Party, undertaken in good faith as part of any board-approved program intended to improve the tax efficiency of Borrowers and any of its Subsidiaries;
(p) Guarantees of obligations (other than Indebtedness for borrowed money) of Subsidiaries that are not Loan Parties for the acquisition of services, supplies and inventory in the ordinary course of business; and
(q) other investments from time to time not to exceed $5,000,000 at any one time.
SECTION 6.05. Asset Sales. No Loan Party will, nor will it permit any Subsidiary to, Dispose of any asset, including any Equity Interest owned by it, nor will the Borrower permit any Subsidiary to issue any additional Equity Interest in such Subsidiary (other than to the Borrower or another Subsidiary in compliance with Section 6.04), except:
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(a) Dispositions of (i) Inventory in the ordinary course of business and (ii) used, obsolete, unmerchantable, worn out or surplus equipment or property in the ordinary course of business, (iii) property no longer used or useful to the business of the Loan Parties and their respective Subsidiaries in the ordinary course of business and (iv) equipment or real property to the extent that (A) such property is exchanged for credit against the purchase price of similar replacement property or (B) the proceeds of such sale, transfer of disposition are reasonably promptly applied to the purchase price of such replacement property;
(b) Dispositions of assets to the Borrower or any Subsidiary, provided that any such Dispositions involving a Subsidiary that is not a Loan Party shall be made in compliance with Section 6.09;
(c) Dispositions of Accounts (excluding sales or dispositions in a factoring arrangement) in connection with the compromise, settlement or collection thereof;
(d) Dispositions of Permitted Investments and other investments permitted by clauses (i) and (j) of Section 6.04;
(e) Sale and Leaseback Transactions permitted by Section 6.06;
(f) Dispositions resulting from any casualty or other insured damage to, or any taking under power of eminent domain or by condemnation or similar proceeding of, any property or asset of the Borrower or any Subsidiary;
(g) leases or subleases of real property granted in the ordinary course of business (and in the ordinary course of such Persons business), and leases, subleases, non-exclusive licenses or sublicenses of personal property (other than intellectual property) granted in the ordinary course of business, if the leases, subleases, licenses and sublicenses do not prohibit granting the Lender a security interest therein;
(h) non-exclusive licenses of intellectual property granted to third parties in the ordinary course of business, and licenses of intellectual property that could not result in a legal transfer of title of licensed property that may be exclusive in respects other than territory and that may be exclusive as to territory only as to discrete geographical areas outside of the United States;
(i) the granting of Liens permitted by Section 6.02; and
(j) Dispositions of assets (other than Equity Interests in a Subsidiary unless all Equity Interests in such Subsidiary are sold) that are not permitted by any other clause of this Section, provided that the aggregate fair market value of all assets Disposed of in reliance upon this paragraph (j) shall not exceed $5,000,000 during any fiscal year of the Borrower.
SECTION 6.06. Sale and Leaseback Transactions. No Loan Party will, nor will it permit any Subsidiary to, enter into any arrangement, directly or indirectly, whereby it shall sell or transfer any property, real or personal, used or useful in its business, whether now owned or hereafter acquired, and thereafter rent or lease such property or other property that it intends to use for substantially the same purpose or purposes as the property sold or transferred (a Sale and Leaseback Transaction), except for any such sale of any fixed or capital assets by any Borrower or any Subsidiary that is made for cash consideration in an amount not less than the fair value of such fixed or capital asset and is consummated within 90 days after such Borrower or such Subsidiary acquires or completes the construction of such fixed or capital asset.
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SECTION 6.07. Swap Agreements. No Loan Party will, nor will it permit any Subsidiary to, enter into any Swap Agreement, except (a) Swap Agreements entered into to hedge or mitigate risks to which the Borrower or any Subsidiary has actual exposure (other than those in respect of Equity Interests of the Borrower or any Subsidiary), and (b) Swap Agreements entered into in order to effectively cap, collar or exchange interest rates (from floating to fixed rates, from one floating rate to another floating rate or otherwise) with respect to any interest-bearing liability or investment of the Borrower or any Subsidiary.
SECTION 6.08. Restricted Payments; Certain Payments of Indebtedness.
(a) No Loan Party will, nor will it permit any Subsidiary to, declare or make, or agree to declare or make, directly or indirectly, any Restricted Payment, or incur any obligation (contingent or otherwise) to do so, except (i) the Borrower may declare and pay dividends with respect to its common stock payable solely in additional shares of its common stock, and, with respect to its preferred stock, payable solely in additional shares of such preferred stock or in shares of its common stock, (ii) Subsidiaries may declare and pay dividends ratably with respect to their Equity Interests, (iii) the Borrower may purchase of capital stock from former or current employees, officers, consultants and directors pursuant to employee stock purchase plans, stockholder plans, director or consultant stock option plans, employee stock option agreements, restricted stock agreements, equity incentive plans or other similar agreements or plans; provided such purchases do not exceed $5,000,000 in the aggregate per fiscal year, and (iv) the Borrower may make Restricted Payments, not exceeding $5,000,000 during any fiscal year, pursuant to and in accordance with stock option plans or other benefit plans for management or employees of the Borrower and its Subsidiaries.
(b) No Loan Party will, nor will it permit any Subsidiary to, make or agree to pay or make, directly or indirectly, any payment or other distribution (whether in cash, securities or other property) of or in respect of principal of or interest on any Indebtedness, or any payment or other distribution (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, acquisition, cancellation or termination of any Indebtedness, except:
(i) payment of Indebtedness created under the Loan Documents;
(ii) payment of regularly scheduled interest and principal payments as and when due in respect of any Indebtedness permitted under Section 6.01, other than payments prohibited by any applicable subordination provisions thereof;
(iii) refinancings of Indebtedness to the extent permitted by Section 6.01; and
(iv) payment of secured Indebtedness that becomes due as a result of the voluntary sale or transfer of the property or assets securing such Indebtedness to the extent such sale or transfer is permitted by the terms of Section 6.05.
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SECTION 6.09. Transactions with Affiliates. No Loan Party will, nor will it permit any Subsidiary to, sell, lease or otherwise transfer any property or assets to, or purchase, lease or otherwise acquire any property or assets from, or otherwise engage in any other transactions with, any of its Affiliates, except (a) transactions that (i) are in the ordinary course of business and (ii) are at prices and on terms and conditions, when taken as a whole, not less favorable to such Loan Party or such Subsidiary than could be obtained on an arms-length basis from unrelated third parties, (b) transactions between or among the Loan Parties not involving any other Affiliate, (c) any investment permitted by Section 6.04, (d) any Indebtedness permitted under Section 6.01, (e) any Restricted Payment permitted by Section 6.08, (f) loans or advances to employees permitted under Section 6.04, (g) the payment of reasonable fees to directors of the Borrower or any Subsidiary who are not employees of the Borrower or any Subsidiary, and compensation and employee benefit arrangements paid to, and indemnities provided for the benefit of, directors, officers or employees of the Borrower or its Subsidiaries in the ordinary course of business, and (h) any issuances of securities or other payments, awards or grants in cash, securities or otherwise pursuant to, or the funding of, employment agreements, equity based awards, stock options and stock ownership plans approved by the Borrowers board of directors.
SECTION 6.10. Restrictive Agreements. No Loan Party will, nor will it permit any Subsidiary to, directly or indirectly enter into, incur or permit to exist any agreement or other arrangement that prohibits, restricts or imposes any condition upon (a) the ability of such Loan Party or any Subsidiary to create, incur or permit to exist any Lien upon any of its property or assets, or (b) the ability of any Subsidiary to pay dividends or other distributions with respect to any Equity Interests or to make or repay loans or advances to the Borrower or any other Subsidiary or to Guarantee Indebtedness of the Borrower or any other Subsidiary; provided that (i) the foregoing shall not apply to restrictions and conditions imposed by any Requirement of Law or by any Loan Document, (ii) the foregoing shall not apply to restrictions and conditions existing on the date hereof identified on Schedule 6.10 of the Disclosure Letter (but shall apply to any extension or renewal of, or any amendment or modification expanding the scope of, any such restriction or condition), (iii) the foregoing shall not apply to customary restrictions and conditions contained in agreements relating to the sale of a Subsidiary pending such sale, provided such restrictions and conditions apply only to the Subsidiary that is to be sold and such sale is permitted hereunder, (iv) clause (a) of the foregoing shall not apply to restrictions or conditions imposed by any agreement relating to secured Indebtedness permitted by this Agreement if such restrictions or conditions apply only to the property or assets securing such Indebtedness and (v) clause (a) of the foregoing shall not apply to customary provisions in leases and other contracts restricting the assignment thereof.
SECTION 6.11. Amendment of Material Documents. No Loan Party will, nor will it permit any Subsidiary to, amend, modify or waive any of its rights under (a) any agreement relating to any Subordinated Indebtedness except in accordance with the terms of any subordination agreement or intercreditor agreement or (b) its charter, articles or certificate of organization or incorporation and bylaws or operating, management or partnership agreement, or other organizational or governing documents, to the extent any such amendment, modification or waiver would be materially adverse to the Lender.
SECTION 6.12. Financial Covenant. The Borrower will not permit the Total Leverage Ratio, measured as of the last day of each fiscal quarter, to be greater than or equal to 3.0 to 1.0.
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ARTICLE VII
Events of Default
If any of the following events (Events of Default) shall occur:
(a) the Borrower shall fail to pay any principal of any Loan or any reimbursement obligation in respect of any LC Disbursement when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof;
(b) the Borrower shall fail to pay any interest on any Loan or any fee or any other amount (other than an amount referred to in clause (a) of this Article) payable under this Agreement or any other Loan Document, when and as the same shall become due and payable, and such failure shall continue unremedied for a period of five (5) Business Days;
(c) any representation or warranty made or deemed made by or on behalf of any Loan Party in or in connection with this Agreement or any other Loan Document or any amendment or modification hereof or thereof or waiver hereunder or thereunder, or in any report, certificate, financial statement or other document furnished pursuant to or in connection with this Agreement or any other Loan Document or any amendment or modification hereof or thereof or waiver hereunder or thereunder, shall prove to have been materially incorrect when made or deemed made;
(d) any Loan Party shall fail to observe or perform any covenant, condition or agreement contained in Section 5.02(a), 5.03 (with respect to a Loan Partys existence) or 5.08 or in Article VI;
(e) any Loan Party shall fail to observe or perform any covenant, condition or agreement contained in this Agreement or any other Loan Document (other than those which constitute a default under another Section of this Article VII), and such failure shall continue unremedied for a period of thirty (30) days after the earlier of any knowledge of a Responsible Officer of the Borrower of such breach or notice thereof from the Lender;
(f) any Loan Party shall fail to make any payment (whether of principal or interest and regardless of amount) in respect of any Material Indebtedness, when and as the same shall become due and payable (after giving effect to any applicable grace period set forth in the documents governing such Material Indebtedness and to the extent not waived);
(g) any event or condition occurs that results in any Material Indebtedness becoming due prior to its scheduled maturity or that enables or permits (with or without the giving of notice, the lapse of time or both) the holder or holders of any Material Indebtedness or any trustee or agent on its or their behalf to cause any Material Indebtedness to become due, or to require the prepayment, repurchase, redemption or defeasance thereof, prior to its scheduled maturity; provided that this clause (g) shall not apply to secured Indebtedness that becomes due as a result of the voluntary sale or transfer of the property or assets securing such Indebtedness to the extent such sale or transfer is permitted by the terms of Section 6.05;
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(h) an involuntary proceeding shall be commenced or an involuntary petition shall be filed seeking (i) liquidation, reorganization or other relief in respect of a Loan Party or its debts, or of a substantial part of its assets, under any federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect or (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for any Loan Party or any Subsidiary or for a substantial part of its assets, and, in any such case, such proceeding or petition shall continue undismissed for sixty (60) days or an order or decree approving or ordering any of the foregoing shall be entered;
(i) any Loan Party shall (i) voluntarily commence any proceeding or file any petition seeking liquidation, reorganization or other relief under any federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or petition described in clause (h) of this Article, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for such Loan Party or for a substantial part of its assets, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors or (vi) take any action for the purpose of effecting any of the foregoing;
(j) any Loan Party shall become unable, admit in writing its inability, or publicly declare its intention not to, or fail generally, to pay its debts as they become due;
(k) one or more judgments for the payment of money in an aggregate amount in excess of $5,000,000 (to the extent not covered by insurance) shall be rendered against any Loan Party and the same shall remain undischarged for a period of sixty (60) consecutive days during which execution shall not be effectively stayed or bonded, or any action shall be legally taken by a judgment creditor to attach or levy upon any assets of any Loan Party to enforce any such judgment or any Loan Party shall fail within sixty (60) days to discharge one or more non-monetary judgments or orders which, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect, which judgments or orders, in any such case, are not stayed on appeal or otherwise being appropriately contested in good faith by proper proceedings diligently pursued;
(l) an ERISA Event shall have occurred that, when taken together with all other ERISA Events that have occurred, could reasonably be expected to result in a Material Adverse Effect;
(m) a Change in Control shall occur;
(n) the Loan Guaranty shall fail to remain in full force or effect or any action shall be taken to discontinue or to assert the invalidity or unenforceability of the Loan Guaranty, or any individual Guarantor dies or a guardian or conservator is appointed for any individual Guarantor or all or any portion of their property, or any Guarantor shall fail to comply with any of the terms or provisions of the Loan Guaranty to which it is a party, or any Guarantor shall deny that it has any further liability under the Loan Guaranty to which it is a party, or shall give notice to such effect, including, but not limited to notice of termination delivered pursuant to Section 9.08;
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(o) except as permitted by the terms of any Collateral Document, (i) any Collateral Document shall for any reason fail to create a valid security interest in any Collateral purported to be covered thereby other than by reason of any actions or failure to act by the Lender, or (ii) any Lien securing any Secured Obligation shall cease to be a perfected, first priority Lien other than by reason of any actions or failure to act by the Lender;
(p) any Collateral Document shall fail to remain in full force or effect or any action shall be taken to discontinue or to assert the invalidity or unenforceability of any Collateral Document except pursuant to the terms thereof; or
(q) any intercreditor agreement or subordination agreement at any time after its execution and delivery and for any reason other than as expressly permitted hereunder or thereunder has been revoked or invalidated, or any Loan Party shall contest or support any other Person in any action that seeks to contest, the validity or effectiveness of any such intercreditor agreement or subordination agreement;
then, and in every such event (other than an event with respect to the Borrower described in clause (h) or (i) of this Article), and at any time thereafter during the continuance of such event, the Lender may, by notice to the Borrower, take either or both of the following actions, at the same or different times: (i) terminate the Commitment, whereupon the Commitment shall terminate immediately, (ii) declare the Loans then outstanding to be due and payable in whole (or in part, but ratably as among the Classes of Loans and the Loans of each Class at the time outstanding, in which case any principal not so declared to be due and payable may thereafter be declared to be due and payable), whereupon the principal of the Loans so declared to be due and payable, together with accrued interest thereon and all fees (including, for the avoidance of doubt, any break funding payment) and other obligations of the Borrower accrued hereunder and under any other Loan Document, shall become due and payable immediately, in each case without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower, and (iii) require cash collateral for the LC Exposure in accordance with Section 2.04(h) hereof; and in the case of any event with respect to the Borrower described in clause (h) or (i) of this Article, the Commitment shall automatically terminate and the principal of the Loans then outstanding, and cash collateral for the LC Exposure, together with accrued interest thereon and all fees (including, for the avoidance of doubt, any break funding payments) and other obligations of the Borrower accrued hereunder and under any other Loan Documents, shall automatically become due and payable, in each case without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower. Upon the occurrence and during the continuance of an Event of Default, the Lender may increase the rate of interest applicable to the Loans and other Obligations as set forth in this Agreement and exercise any rights and remedies provided to the Lender under the Loan Documents or at law or equity, including all remedies provided under the UCC.
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ARTICLE VIII
Miscellaneous
SECTION 8.01. Notices.
(a) Except in the case of notices and other communications expressly permitted to be given by telephone (and subject to paragraph (b) below), all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by fax, as follows:
(i) |
if to any Loan Party, to it in care of the Borrower at: |
FIGS, Inc.
2834 Colorado Ave, Suite 100
Santa Monica, CA 90404
Attention: Catherine Spear
Email:
With a copy to: FIGS Legal (legal@wearfigs.com)
(ii) |
if to JPMorgan Chase Bank, N.A. at: |
JPMorgan Chase Bank, N.A.
Middle Market Servicing
10 South Dearborn, Floor L2 Suite IL1-1145
Chicago, IL, 60603-2300
Attention: WLS Operation Manager
With a copy to:
JPMorgan Chase Bank, N.A.
560 Mission Street, 4th Floor
San Francisco, CA 94105
Attention: Haley Heslip
Phone:
Email:
All such notices and other communications (i) sent by hand or overnight courier service, or mailed by certified or registered mail, shall be deemed to have been given when received, (ii) sent by fax shall be deemed to have been given when sent, provided that if not given during normal business hours for the recipient, such notice or communication shall be deemed to have been given at the opening of business on the next Business Day of the recipient, or (iii) delivered through Electronic Systems to the extent provided in paragraph (b) below shall be effective as provided in such paragraph.
(b) Notices and other communications to the Lender hereunder may be delivered or furnished by using Electronic Systems pursuant to procedures approved by the Lender; provided that the foregoing shall not apply to notices pursuant to Article II or to compliance and no Default certificates delivered pursuant to Sections 5.01(d) and 5.01(e) unless otherwise stated or agreed by the Lender. Each of the Lender and the Borrower (on behalf of the Loan Parties) may, in its discretion, agree to accept notices and other communications to it hereunder by using Electronic Systems pursuant to procedures approved by it; provided that approval of such procedures may be limited to particular notices or communications. All such notices and other communications (i) sent to an e-mail address shall be deemed received upon the senders receipt of an acknowledgement from the intended recipient (such as by the return receipt requested function,
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as available, return e-mail or other written acknowledgement), provided that if not given during the normal business hours of the recipient, such notice or communication shall be deemed to have been given at the opening of business on the next Business Day for the recipient, and (ii) posted to an Internet or intranet website shall be deemed received upon the deemed receipt by the intended recipient, at its e-mail address as described in the foregoing clause (i), of notification that such notice or communication is available and identifying the website address therefor; provided that, for both clauses (i) and (ii) above, if such notice, e-mail or other communication is not sent during the normal business hours of the recipient, such notice or communication shall be deemed to have been sent at the opening of business on the next Business Day of the recipient.
(c) Any party hereto may change its address, facsimile number or e-mail address for notices and other communications hereunder by notice to the other parties hereto.
SECTION 8.02. Waivers; Amendments.
(a) No failure or delay by the Lender in exercising any right or power hereunder or under any other Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Lender hereunder and under any other Loan Document are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provision of any Loan Document or consent to any departure by any Loan Party therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) of this Section, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. Without limiting the generality of the foregoing, the making of a Loan or issuance of a Letter of Credit shall not be construed as a waiver of any Default, regardless of whether the Lender may have had notice or knowledge of such Default at the time.
(b) Neither this Agreement nor any other Loan Document nor any provision hereof or thereof may be waived, amended or modified except (i) in the case of this Agreement, pursuant to an agreement or agreements in writing entered into by the Borrower and the Lender or (ii) in the case of any other Loan Document, pursuant to an agreement or agreements in writing entered into by the Lender and the Loan Party or Loan Parties that are parties thereto.
SECTION 8.03. Expenses; Indemnity; Damage Waiver.
(a) The Loan Parties, jointly and severally, shall pay all (i) reasonable out-of-pocket expenses incurred by the Lender and its Affiliates, including the reasonable fees, charges and disbursements of counsel for the Lender (whether outside counsel or the allocated costs of its internal legal department), in connection with the credit facilities provided for herein, the preparation and administration of the Loan Documents and any amendments, modifications or waivers of the provisions of the Loan Documents (whether or not the transactions contemplated hereby or thereby shall be consummated; provided that the aggregate amount of such expenses in connection with the documentation and negotiation of the Loan Documents which the Borrower shall pay shall not exceed $35,000), (ii) reasonable out-of-pocket expenses incurred by the Lender in connection with the issuance, amendment, renewal or extension of any Letter of Credit or any demand for payment thereunder and (iii) reasonable out-of-pocket expenses incurred by the
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Lender, including the fees, charges and disbursements of any counsel for the Lender (whether outside counsel or the allocated costs of its internal legal department), in connection with the enforcement, collection or protection of its rights in connection with the Loan Documents, including its rights under this Section, or in connection with the Loans made or Letters of Credit issued hereunder, including all such reasonable out-of-pocket expenses incurred during any workout, restructuring or negotiations in respect of such Loans or Letters of Credit. Expenses being reimbursed by the Loan Parties under this Section include, without limiting the generality of the foregoing, reasonable fees, costs and expenses incurred in connection with:
(A) appraisals and insurance reviews;
(B) field examinations and the preparation of Reports based on the fees charged by a third party retained by the Lender or the internally allocated fees for each Person employed by the Lender with respect to each field examination;
(C) background checks regarding senior management and/or key investors, as deemed necessary or appropriate in the sole discretion of the Lender;
(D) sums paid or incurred to take any action required of any Loan Party under the Loan Documents that such Loan Party fails to pay or take; and
(E) forwarding loan proceeds, collecting checks and other items of payment, and establishing and maintaining the accounts and lock boxes, and costs and expenses of preserving and protecting the Collateral.
All of the foregoing fees, costs and expenses may be charged to the Borrower as Revolving Loans or to another deposit account, all as described in Section 2.16(c).
(b) The Loan Parties, jointly and severally, shall indemnify the Lender, and each Related Party of the Lender (each such Person being called an Indemnitee) against, and hold each Indemnitee harmless from, any and all losses, claims, damages, penalties, incremental taxes, liabilities and related expenses, including the reasonable fees, charges and disbursements of any counsel for any Indemnitee, incurred by or asserted against any Indemnitee arising out of, in connection with, or as a result of (i) the execution or delivery of the Loan Documents or any agreement or instrument contemplated thereby, the performance by the parties hereto of their respective obligations thereunder or the consummation of the Transactions or any other transactions contemplated hereby, (ii) any Loan or Letter of Credit or the use of the proceeds therefrom (including any refusal by the Lender to honor a demand for payment under a Letter of Credit if the documents presented in connection with such demand do not strictly comply with the terms of such Letter of Credit), (iii) any actual or alleged presence or Release of Hazardous Materials on or from any property owned or operated by a Loan Party, or any Environmental Liability related in any way to a Loan Party or Subsidiary, (iv) the failure of a Loan Party to deliver to the Lender the required receipts or other required documentary evidence with respect to a payment made by such Loan Party for Taxes pursuant to Section 2.15, or (v) any actual or prospective claim, litigation, investigation, arbitration or proceeding relating to any of the foregoing, whether or not such claim, litigation, investigation, arbitration or proceeding is brought by any Loan Party or their respective equity holders, Affiliates, creditors or any other third Person
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and whether based on contract, tort or any other theory and regardless of whether any Indemnitee is a party thereto; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, penalties, liabilities or related expenses are determined by a court of competent jurisdiction by final and non-appealable judgment to have resulted from the gross negligence or willful misconduct of such Indemnitee. This Section 8.03(b) shall not apply with respect to Taxes other than any Taxes that represent losses or damages arising from any non-Tax claim.
(c) To the extent permitted by applicable law, no party hereto shall assert, and each party hereto hereby waives, any claim against any other party hereto, (i) for any damages arising from the use by others of information or other materials obtained through telecommunications, electronic or other information transmission systems (including the Internet), or (ii) on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement, any other Loan Document, or any agreement or instrument contemplated hereby or thereby, the Transactions, any Loan or Letter of Credit or the use of the proceeds thereof; provided that, nothing in this paragraph (c) shall relieve any Loan Party of any obligation it may have to indemnify an Indemnitee against special, indirect, consequential or punitive damages asserted against such Indemnitee by a third party.
(d) All amounts due under this Section shall be payable promptly after written demand therefor.
SECTION 8.04. Successors and Assigns.
(a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby (including any Affiliate of the Lender that issues any Letter of Credit), except that the Borrower may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of the Lender (and any attempted assignment or transfer by the Borrower without such consent shall be null and void). Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby (including any Affiliate of the Lender that issues any Letter of Credit), Participants (to the extent provided in paragraph (c) of this Section) and, to the extent expressly contemplated hereby, the Related Parties of the Lender) any legal or equitable right, remedy or claim under or by reason of this Agreement.
(b) The Lender may assign to one or more assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it) to one or more purchasers whether or not related to the Bank.
(c) The Lender may, without the consent of, or notice to, the Borrower, sell participations to one or more banks or other entities (a Participant) in all or a portion of the Lenders rights and/or obligations under this Agreement (including all or a portion of its Commitment and/or Letters of Credit and/or the Loans owing to it); provided that (i) the Lenders obligations under this Agreement shall remain unchanged; (ii) the Lender shall remain solely responsible to the other parties hereto for the performance of such obligations; and (iii) the
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Borrower shall continue to deal solely and directly with the Lender in connection with the Lenders rights and obligations under this Agreement. The Borrower agrees that each Participant shall be entitled to the benefits of Sections 2.13, 2.14 and 2.15 (subject to the requirements and limitations therein) to the same extent as if it were the Lender and had acquired its interest by assignment pursuant to paragraph (b) of this Section; provided that such Participant shall not be entitled to receive any greater payment under Section 2.13 or 2.15, with respect to any participation, than its participating Lender would have been entitled to receive, except to the extent such entitlement to receive a greater payment results from a Change in Law that occurs after the Participant acquired the applicable participation.
To the extent permitted by law, each Participant also shall be entitled to the benefits of Section 8.08 as though it were the Lender. If the Lender shall sell a participation, it shall, acting solely for this purpose as a non-fiduciary agent of the Borrower, maintain a register on which it enters the name and address of each Participant and the principal amounts (and stated interest) of each Participants interest in the Loans or other obligations under this Agreement or any other Loan Document (the Participant Register); provided that the Lender shall have no obligation to disclose all or any portion of the Participant Register (including the identity of any Participant or any information relating to a Participants interest in any Commitment, Loans, Letters of Credit or its other obligations under this Agreement or any other Loan Document) to any Person except to the extent that such disclosure is necessary to establish that such Commitment, Loan, Letter of Credit or other obligation is in registered form under Section 5f.103-1(c) of the U.S. Treasury Regulations. The entries in the Participant Register shall be conclusive absent manifest error, and the Lender shall treat each Person whose name is recorded in the Participant Register as the owner of such participation for all purposes of this Agreement notwithstanding any notice to the contrary.
(d) The Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of the Lender, including without limitation any pledge or assignment to secure obligations to a Federal Reserve Bank, and this Section shall not apply to any such pledge or assignment of a security interest; provided that no such pledge or assignment of a security interest shall release the Lender from any of its obligations hereunder or substitute any such pledgee or assignee for the Lender as a party hereto.
SECTION 8.05. Survival. All covenants, agreements, representations and warranties made by the Loan Parties in the Loan Documents and in the certificates or other instruments delivered in connection with or pursuant to this Agreement or any other Loan Document shall be considered to have been relied upon by the other parties hereto and shall survive the execution and delivery of the Loan Documents and the making of any Loans and issuance of any Letters of Credit, regardless of any investigation made by any such other party or on its behalf and notwithstanding that the Lender may have had notice or knowledge of any Default or incorrect representation or warranty at the time any credit is extended hereunder, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any fee or any other amount payable under this Agreement is outstanding and unpaid or any Letter of Credit is outstanding and so long as the Commitment has not expired or terminated. The provisions of Sections 2.13, 2.14, 2.15 and Section 8.03 shall survive and remain in full force and effect regardless of the consummation of the transactions contemplated hereby, the repayment of the Loans, the expiration or termination of the Letters of Credit and the Commitment or the termination of this Agreement or any other Loan Document or any provision hereof or thereof.
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SECTION 8.06. Counterparts; Integration; Effectiveness; Electronic Execution.
(a) This Agreement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Agreement, the other Loan Documents and any separate letter agreements with respect to fees payable to the Lender constitute the entire contract among the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. Except as provided in Section 4.01, this Agreement shall become effective when it shall have been executed by the Lender and when the Lender shall have received counterparts hereof which, when taken together, bear the signatures of each of the other parties hereto, and thereafter shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns.
(b) Delivery of an executed counterpart of a signature page of this Agreement by fax, emailed pdf. or any other electronic means that reproduces an image of the actual executed signature page shall be effective as delivery of a manually executed counterpart of this Agreement. The words execution, signed, signature, delivery, and words of like import in or relating to any document to be signed in connection with this Agreement and the transactions contemplated hereby or thereby shall be deemed to include Electronic Signatures, deliveries or the keeping of records in electronic form, each of which shall be of the same legal effect, validity or enforceability as a manually executed signature, physical delivery thereof or the use of a paper-based recordkeeping system, as the case may be, to the extent and as provided for in any applicable law, including the Federal Electronic Signatures in Global and National Commerce Act, the New York State Electronic Signatures and Records Act, or any other similar state laws based on the Uniform Electronic Transactions Act.
SECTION 8.07. Severability. Any provision of any Loan Document held to be invalid, illegal or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability without affecting the validity, legality and enforceability of the remaining provisions thereof; and the invalidity of a particular provision in a particular jurisdiction shall not invalidate such provision in any other jurisdiction.
SECTION 8.08. Right of Setoff. If an Event of Default shall have occurred and be continuing, the Lender and each of its Affiliates is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other obligations at any time owing by the Lender or any Affiliate to or for the credit or the account of any Loan Party against any and all of the Secured Obligations, irrespective of whether or not the Lender shall have made any demand under this Agreement or any other Loan Document and although such obligations of the Loan Parties may be contingent or unmatured or are owed to a branch office or Affiliate of the Lender different from the branch office or Affiliate holding such deposit or obligated on such indebtedness. The rights of the Lender under this Section are in addition to other rights and remedies (including other rights of setoff) which the Lender may have.
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SECTION 8.09. Governing Law; Jurisdiction; Consent to Service of Process.
(a) The Loan Documents (other than those containing a contrary express choice of law provision) shall be governed by and construed in accordance with the internal laws of the State of California, but giving effect to federal laws applicable to national banks.
(b) Each of the parties hereto hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any U.S. federal or California State court sitting in San Francisco, California, and any appellate court from any thereof, in any action or proceeding arising out of or relating to any Loan Documents, the transactions relating hereto or thereto, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may (and any such claims, cross-claims or third party claims brought against the Lender or any of its Related Parties may only) be heard and determined in such state court or, to the extent permitted by law, in such federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement or any other Loan Document shall affect any right that the Lender may otherwise have to bring any action or proceeding relating to this Agreement or any other Loan Document against any Loan Party or its properties in the courts of any jurisdiction.
(c) Each Loan Party hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or any other Loan Document in any court referred to in paragraph (b) of this Section. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.
(d) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 8.01. Nothing in this Agreement or any other Loan Document will affect the right of any party to this Agreement to serve process in any other manner permitted by law.
SECTION 8.10. WAIVER OF JURY TRIAL. (a) EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE OR OTHER AGENT (INCLUDING ANY ATTORNEY) OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.
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(b) If this jury waiver is not enforceable, then any and all disputes or controversies of any nature between them arising at any time shall be decided by a reference to a private judge, mutually selected by the parties (or, if they cannot agree, by the Presiding Judge of the San Francisco County, California Superior Court) appointed in accordance with California Code of Civil Procedure Section 638. Nothing in this paragraph shall limit the right of any party at any time to exercise self-help remedies, foreclose against collateral, or obtain provisional remedies. The private judge shall also determine all issues relating to the applicability, interpretation, and enforceability of this paragraph.
SECTION 8.11. Headings. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and shall not affect the construction of, or be taken into consideration in interpreting, this Agreement.
SECTION 8.12. Confidentiality. The Lender agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its and its Affiliates directors, officers, employees and agents, including accountants, legal counsel and other advisors (collectively, Representatives) having a need to know such Information (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (b) to the extent requested by any Governmental Authority (including any self-regulatory authority, such as the National Association of Insurance Commissioners), (c) to the extent required by any Requirement of Law or by any subpoena or similar legal process; provided that, to the extent not otherwise prohibited by such Requirement of Law, subpoena, or legal process, the Lender provides the Loan Parties with prompt written notice of such disclosure and makes a reasonable effort to assist, at the Borrowers sole expense, the Loan Parties in obtaining a protective order preventing or limiting the disclosure and/or requiring that the Information so disclosed be used only for the purposes for which the Law or regulation required, or for which the order was issued, (d) to any other party to this Agreement, (e) in connection with the exercise of any remedies hereunder or under any other Loan Document or any suit, action or proceeding relating to this Agreement or any other Loan Document or the enforcement of rights hereunder or thereunder, (f) subject to an agreement containing provisions substantially the same as those of this Section, to (x) any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Agreement or (y) any actual or prospective counterparty (or its advisors) to any swap or derivative transaction relating to the Loan Parties and their obligations, (g) with the prior consent of the Borrower, or (h) to any Person providing a Guarantee of all or any portion of the Secured Obligations. For the purposes of this Section, Information means all information received from the Borrower or any other Loan Party relating to the Borrower, such other Loan Party, or the Borrowers or such other Loan Partys business, as applicable, other than any such information that is available to the Lender on a non-confidential basis prior to disclosure by the Borrower or such other Loan Party; provided that, in the case of information received from a Loan Party after the date hereof, such information is clearly identified at the time of delivery as confidential. Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information. The Lender shall be responsible for any breach of this Section by any of its Representatives except for breaches committed by any such Representative that has executed its own confidentiality agreement with the Loan Parties.
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SECTION 8.13. Nonreliance; Violation of Law. The Lender hereby represents that it is not relying on or looking to any margin stock (as defined in Regulation U) for the repayment of the Borrowings provided for herein. Anything contained in this Agreement to the contrary notwithstanding, the Lender shall not be obligated to extend credit to the Borrower in violation of any Requirement of Law.
SECTION 8.14. USA PATRIOT Act. The Lender is subject to the requirements of the USA PATRIOT Act and hereby notifies each Loan Party that pursuant to the requirements of the USA PATRIOT Act, it is required to obtain, verify and record information that identifies such Loan Party, which information includes the name and address of such Loan Party and other information that will allow the Lender to identify such Loan Party in accordance with the USA PATRIOT Act.
SECTION 8.15. Disclosure. Each Loan Party hereby acknowledges and agrees that the Lender and/or its Affiliates from time to time may hold investments in, make other loans to or have other relationships with, any of the Loan Parties and their respective Affiliates.
SECTION 8.16. Interest Rate Limitation. Notwithstanding anything herein to the contrary, if at any time the interest rate applicable to any Loan, together with all fees, charges and other amounts which are treated as interest on such Loan under applicable law (collectively the Charges), shall exceed the maximum lawful rate (the Maximum Rate) which may be contracted for, charged, taken, received or reserved by the Lender holding such Loan in accordance with applicable law, the rate of interest payable in respect of such Loan hereunder, together with all Charges payable in respect thereof, shall be limited to the Maximum Rate and, to the extent lawful, the interest and Charges that would have been payable in respect of such Loan but were not payable as a result of the operation of this Section shall be cumulated and the interest and Charges payable to the Lender in respect of other Loans or periods shall be increased (but not above the Maximum Rate therefor) until such cumulated amount, together with interest thereon at the NYFRB Rate to the date of repayment, shall have been received by the Lender.
SECTION 8.17. No Fiduciary Duty, Etc.
(a) The Borrower acknowledges and agrees, and acknowledges its Subsidiaries understanding, that the Lender will not have any obligations except those obligations expressly set forth herein and in the other Loan Documents and the Lender is acting solely in the capacity of an arms length contractual counterparty to the Borrower with respect to the Loan Documents and the transactions contemplated herein and therein and not as a financial advisor or a fiduciary to, or an agent of, the Borrower or any other person. The Borrower agrees that it will not assert any claim against the Lender based on an alleged breach of fiduciary duty by the Lender in connection with this Agreement and the transactions contemplated hereby. Additionally, the Borrower acknowledges and agrees that the Lender is not advising the Borrower as to any legal, tax, investment, accounting, regulatory or any other matters in any jurisdiction. The Borrower shall consult with its own advisors concerning such matters and shall be responsible for making its own independent investigation and appraisal of the transactions contemplated herein or in the other Loan Documents, and the Lender shall have no responsibility or liability to the Borrower with respect thereto.
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(b) The Borrower further acknowledges and agrees, and acknowledges its Subsidiaries understanding, that the Lender, together with its Affiliates, is a full service securities or banking firm engaged in securities trading and brokerage activities as well as providing investment banking and other financial services. In the ordinary course of business, the Lender may provide investment banking and other financial services to, and/or acquire, hold or sell, for its own accounts and the accounts of customers, equity, debt and other securities and financial instruments (including bank loans and other obligations) of, the Borrower and other companies with which the Borrower may have commercial or other relationships. With respect to any securities and/or financial instruments so held by the Lender or any of its customers, all rights in respect of such securities and financial instruments, including any voting rights, will be exercised by the holder of the rights, in its sole discretion.
(c) In addition, the Borrower acknowledges and agrees, and acknowledges its Subsidiaries understanding, that the Lender and its Affiliates may be providing debt financing, equity capital or other services (including financial advisory services) to other companies in respect of which the Borrower may have conflicting interests regarding the transactions described herein and otherwise. The Lender will not use confidential information obtained from the Borrower by virtue of the transactions contemplated by the Loan Documents or its other relationships with the Borrower in connection with the performance by the Lender of services for other companies, and the Lender will not furnish any such information to other companies. The Borrower also acknowledges that the Lender has no obligation to use in connection with the transactions contemplated by the Loan Documents, or to furnish to the Borrower, confidential information obtained from other companies.
SECTION 8.18. Reserved.
SECTION 8.19. Acknowledgement Regarding Any Supported QFCs. To the extent that the Loan Documents provide support, through a guarantee or otherwise, for Swap Agreements or any other agreement or instrument that is a QFC (such support QFC Credit Support and each such QFC a Supported QFC), the parties acknowledge and agree as follows with respect to the resolution power of the Federal Deposit Insurance Corporation under the Federal Deposit Insurance Act and Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (together with the regulations promulgated thereunder, the U.S. Special Resolution Regimes) in respect of such Supported QFC and QFC Credit Support (with the provisions below applicable notwithstanding that the Loan Documents and any Supported QFC may in fact be stated to be governed by the laws of the State of California and/or of the United States or any other state of the United States):
In the event a Covered Entity that is party to a Supported QFC (each, a Covered Party) becomes subject to a proceeding under a U.S. Special Resolution Regime, the transfer of such Supported QFC and the benefit of such QFC Credit Support (and any interest and obligation in or under such Supported QFC and such QFC Credit Support, and any rights in property securing such Supported QFC or such QFC Credit Support) from such Covered Party will be effective to the same extent as the transfer would be effective under the U.S. Special Resolution Regime if the Supported QFC and such QFC Credit Support (and any such interest, obligation and rights in property) were governed by the laws of the United States or a state of the United States. In the event a Covered Party or a BHC Act Affiliate of a Covered Party becomes subject to a proceeding
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under a U.S. Special Resolution Regime, Default Rights under the Loan Documents that might otherwise apply to such Supported QFC or any QFC Credit Support that may be exercised against such Covered Party are permitted to be exercised to no greater extent than such Default Rights could be exercised under the U.S. Special Resolution Regime if the Supported QFC and the Loan Documents were governed by the laws of the United States or a state of the United States.
ARTICLE IX
Loan Guaranty
SECTION 9.01. Guaranty. Each Loan Guarantor (other than those that have delivered a separate Guaranty) hereby agrees that it is jointly and severally liable for, and, as a primary obligor and not merely as surety, absolutely and unconditionally and irrevocably guarantees to the Secured Parties, the prompt payment when due, whether at stated maturity, upon acceleration or otherwise, and at all times thereafter, of the Secured Obligations and all costs and expenses including, without limitation, all court costs and reasonable attorneys and paralegals fees (including allocated costs of in-house counsel and paralegals) and expenses paid or incurred by the Lender in endeavoring to collect all or any part of the Secured Obligations from, or in prosecuting any action against, the Borrower, any Loan Guarantor or any other guarantor of all or any part of the Secured Obligations (such costs and expenses, together with the Secured Obligations, collectively the Guaranteed Obligations); provided, however, that the definition of Guaranteed Obligations shall not create any guarantee by any Loan Guarantor of (or grant of security interest by any Loan Guarantor to support, as applicable) any Excluded Swap Obligations of such Loan Guarantor for purposes of determining any obligations of any Loan Guarantor). Each Loan Guarantor further agrees that the Guaranteed Obligations may be extended or renewed in whole or in part without notice to or further assent from it, and that it remains bound upon its guarantee notwithstanding any such extension or renewal. All terms of this Loan Guaranty apply to and may be enforced by or on behalf of any domestic or foreign branch or Affiliate of the Lender that extended any portion of the Guaranteed Obligations.
SECTION 9.02. Guaranty of Payment. This Loan Guaranty is a guaranty of payment and not of collection. Each Loan Guarantor waives any right to require the Lender to sue the Borrower, any Loan Guarantor, any other guarantor of, or any other Person obligated for all or any part of the Guaranteed Obligations (each, an Obligated Party), or otherwise to enforce its payment against any collateral securing all or any part of the Guaranteed Obligations.
SECTION 9.03. No Discharge or Diminishment of Loan Guaranty.
(a) Except as otherwise provided for herein, the obligations of each Loan Guarantor hereunder are unconditional and absolute and not subject to any reduction, limitation, impairment or termination for any reason (other than the Payment in Full of the Guaranteed Obligations), including: (i) any claim of waiver, release, extension, renewal, settlement, surrender, alteration, or compromise of any of the Guaranteed Obligations, by operation of law or otherwise; (ii) any change in the corporate existence, structure or ownership of the Borrower or any other Obligated Party liable for any of the Guaranteed Obligations; (iii) any insolvency, bankruptcy, reorganization or other similar proceeding affecting any Obligated Party, or their assets or any resulting release or discharge of any obligation of any Obligated Party; or (iv) the existence of any claim, setoff or other rights which any Loan Guarantor may have at any time against any Obligated Party, the Lender or any other Person, whether in connection herewith or in any unrelated transactions.
81
(b) The obligations of each Loan Guarantor hereunder are not subject to any defense or setoff, counterclaim, recoupment, or termination whatsoever by reason of the invalidity, illegality, or unenforceability of any of the Guaranteed Obligations or otherwise, or any provision of applicable law or regulation purporting to prohibit payment by any Obligated Party, of the Guaranteed Obligations or any part thereof.
(c) Further, the obligations of any Loan Guarantor hereunder are not discharged or impaired or otherwise affected by: (i) the failure of the Lender to assert any claim or demand or to enforce any remedy with respect to all or any part of the Guaranteed Obligations; (ii) any waiver or modification of or supplement to any provision of any agreement relating to the Guaranteed Obligations; (iii) any release, non-perfection, or invalidity of any indirect or direct security for the obligations of the Borrower for all or any part of the Guaranteed Obligations or any obligations of any other Obligated Party liable for any of the Guaranteed Obligations; (iv) any action or failure to act by the Lender with respect to any collateral securing any part of the Guaranteed Obligations; or (v) any default, failure or delay, willful or otherwise, in the payment or performance of any of the Guaranteed Obligations, or any other circumstance, act, omission or delay that might in any manner or to any extent vary the risk of such Loan Guarantor or that would otherwise operate as a discharge of any Loan Guarantor as a matter of law or equity (other than the Payment in Full of the Guaranteed Obligations).
SECTION 9.04. Defenses Waived. To the fullest extent permitted by applicable law, each Loan Guarantor hereby waives any defense based on or arising out of any defense of the Borrower or any Loan Guarantor or the unenforceability of all or any part of the Guaranteed Obligations from any cause, or the cessation from any cause of the liability of the Borrower, any Loan Guarantor or any other Obligated Party, other than the Payment in Full of the Guaranteed Obligations. Without limiting the generality of the foregoing, each Loan Guarantor irrevocably waives acceptance hereof, presentment, demand, protest and, to the fullest extent permitted by law, any notice not provided for herein, as well as any requirement that at any time any action be taken by any Person against any Obligated Party, or any other Person. Each Loan Guarantor confirms that it is not a surety under any state law and shall not raise any such law as a defense to its obligations hereunder. The Lender may, at its election, foreclose on any Collateral held by it by one or more judicial or nonjudicial sales, accept an assignment of any such Collateral in lieu of foreclosure or otherwise act or fail to act with respect to any collateral securing all or a part of the Guaranteed Obligations, compromise or adjust any part of the Guaranteed Obligations, make any other accommodation with any Obligated Party or exercise any other right or remedy available to it against any Obligated Party, without affecting or impairing in any way the liability of such Loan Guarantor under this Loan Guaranty, except to the extent the Guaranteed Obligations have been Paid in Full. To the fullest extent permitted by applicable law, each Loan Guarantor waives any defense arising out of any such election even though that election may operate, pursuant to applicable law, to impair or extinguish any right of reimbursement or subrogation or other right or remedy of any Loan Guarantor against any Obligated Party or any security.
82
SECTION 9.05. Rights of Subrogation. No Loan Guarantor will assert any right, claim or cause of action, including, without limitation, a claim of subrogation, contribution or indemnification that it has against any Obligated Party, or any collateral, until the Loan Parties and the Loan Guarantors have fully performed all their obligations to the Lender.
SECTION 9.06. Reinstatement; Stay of Acceleration. If at any time any payment of any portion of the Guaranteed Obligations (including a payment effected through exercise of a right of setoff) is rescinded or must otherwise be restored or returned upon the insolvency, bankruptcy, or reorganization of the Borrower or otherwise (including pursuant to any settlement entered into by a Secured Party in its discretion), each Loan Guarantors obligations under this Loan Guaranty with respect to that payment shall be reinstated at such time as though the payment had not been made and whether or not the Lender is in possession of this Loan Guaranty. If acceleration of the time for payment of any of the Guaranteed Obligations is stayed upon the insolvency, bankruptcy or reorganization of the Borrower, all such amounts otherwise subject to acceleration under the terms of any agreement relating to the Guaranteed Obligations shall nonetheless be payable by the Loan Guarantors forthwith on demand by the Lender.
SECTION 9.07. Information. Each Loan Guarantor assumes all responsibility for being and keeping itself informed of the Borrowers financial condition and assets, and of all other circumstances bearing upon the risk of nonpayment of the Guaranteed Obligations and the nature, scope and extent of the risks that each Loan Guarantor assumes and incurs under this Loan Guaranty, and agrees that the Lender shall not have any duty to advise any Loan Guarantor of information known to it regarding those circumstances or risks.
SECTION 9.08. Termination. The Lender may continue to make loans or extend credit to the Borrower based on this Loan Guaranty until five (5) days after it receives written notice of termination from any Loan Guarantor. Notwithstanding receipt of any such notice, each Loan Guarantor will continue to be liable to the Lender for any Guaranteed Obligations created, assumed or committed to prior to the fifth day after receipt of the notice, and all subsequent renewals, extensions, modifications and amendments with respect to, or substitutions for, all or any part of such Guaranteed Obligations. Nothing in this Section 9.08 shall be deemed to constitute a waiver of, or eliminate, limit, reduce or otherwise impair any rights or remedies the Lender may have in respect of, any Default or Event of Default that shall exist under Article VII hereof as a result of any such notice of termination.
SECTION 9.09. Taxes. Each payment of the Guaranteed Obligations will be made by each Loan Guarantor without withholding for any Taxes, unless such withholding is required by law. If any Loan Guarantor determines, in its sole discretion exercised in good faith, that it is so required to withhold Taxes, then such Loan Guarantor may so withhold and shall timely pay the full amount of withheld Taxes to the relevant Governmental Authority in accordance with applicable law. If such Taxes are Indemnified Taxes, then the amount payable by such Loan Guarantor shall be increased as necessary so that, net of such withholding (including such withholding applicable to additional amounts payable under this Section), the Lender receives the amount it would have received had no such withholding been made.
SECTION 9.10. Maximum Liability. Notwithstanding any other provision of this Loan Guaranty, the amount guaranteed by each Loan Guarantor hereunder shall be limited to the extent, if any, required so that its obligations hereunder shall not be subject to avoidance under Section 548 of the Bankruptcy Code or under any applicable state Uniform Fraudulent Transfer
83
Act, Uniform Fraudulent Conveyance Act, Uniform Voidable Transactions Act or similar statute or common law. In determining the limitations, if any, on the amount of any Loan Guarantors obligations hereunder pursuant to the preceding sentence, it is the intention of the parties hereto that any rights of subrogation, indemnification or contribution which such Loan Guarantor may have under this Loan Guaranty, any other agreement or applicable law shall be taken into account.
SECTION 9.11. Contribution.
(a) To the extent that any Loan Guarantor shall make a payment under this Loan Guaranty (a Guarantor Payment) which, taking into account all other Guarantor Payments then previously or concurrently made by any other Loan Guarantor, exceeds the amount which otherwise would have been paid by or attributable to such Loan Guarantor if each Loan Guarantor had paid the aggregate Guaranteed Obligations satisfied by such Guarantor Payment in the same proportion as such Loan Guarantors Allocable Amount (as defined below) (as determined immediately prior to such Guarantor Payment) bore to the aggregate Allocable Amounts of each of the Loan Guarantors as determined immediately prior to the making of such Guarantor Payment, then, following indefeasible payment in full in cash of the Guarantor Payment, the Payment in Full of the Guaranteed Obligations and the termination of this Agreement, such Loan Guarantor shall be entitled to receive contribution and indemnification payments from, and be reimbursed by, each other Loan Guarantor for the amount of such excess, pro rata based upon their respective Allocable Amounts in effect immediately prior to such Guarantor Payment.
(b) As of any date of determination, the Allocable Amount of any Loan Guarantor shall be equal to the excess of the fair saleable value of the property of such Loan Guarantor over the total liabilities of such Loan Guarantor (including the maximum amount reasonably expected to become due in respect of contingent liabilities, calculated, without duplication, assuming each other Loan Guarantor that is also liable for such contingent liability pays its ratable share thereof), giving effect to all payments made by other Loan Guarantors as of such date in a manner to maximize the amount of such contributions.
(c) This Section 9.11 is intended only to define the relative rights of the Loan Guarantors, and nothing set forth in this Section 9.11 is intended to or shall impair the obligations of the Loan Guarantors, jointly and severally, to pay any amounts as and when the same shall become due and payable in accordance with the terms of this Loan Guaranty.
(d) The parties hereto acknowledge that the rights of contribution and indemnification hereunder shall constitute assets of the Loan Guarantor or Loan Guarantors to which such contribution and indemnification is owing.
(e) The rights of the indemnifying Loan Guarantors against other Loan Guarantors under this Section 9.11 shall be exercisable upon the Payment in Full of the Guaranteed Obligations and the termination of this Agreement.
SECTION 9.12. Liability Cumulative. The liability of each Loan Party as a Loan Guarantor under this Article IX is in addition to and shall be cumulative with all liabilities of each Loan Party to the Lender under this Agreement and the other Loan Documents to which such Loan Party is a party or in respect of any obligations or liabilities of the other Loan Parties, without any limitation as to amount, unless the instrument or agreement evidencing or creating such other liability specifically provides to the contrary.
84
SECTION 9.13. Keepwell. Each Qualified ECP Guarantor hereby jointly and severally absolutely, unconditionally and irrevocably undertakes to provide such funds or other support as may be needed from time to time by each other Loan Party to honor all of its obligations under this Guarantee in respect of a Swap Obligation (provided, however, that each Qualified ECP Guarantor shall only be liable under this Section 9.13 for the maximum amount of such liability that can be hereby incurred without rendering its obligations under this Section 9.13 or otherwise under this Loan Guaranty voidable under applicable law relating to fraudulent conveyance or fraudulent transfer, and not for any greater amount). Except as otherwise provided herein, the obligations of each Qualified ECP Guarantor under this Section 9.13 shall remain in full force and effect until the termination of all Swap Obligations. Each Qualified ECP Guarantor intends that this Section 9.13 constitute, and this Section 9.13 shall be deemed to constitute, a keepwell, support, or other agreement for the benefit of each other Loan Party for all purposes of Section 1a(18)(A)(v)(II) of the Commodity Exchange Act.
[Signature Page Follows]
85
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written.
FIGS, INC., as the Borrower | ||
By: |
/s/ Catherine Spear |
|
Name: | Catherine Spear | |
Title: | Co-Chief Executive Officer | |
JPMORGAN CHASE BANK, N.A., as the Lender | ||
By: |
|
|
Name: |
|
|
Title: |
|
[Signature Page to Credit Agreement]
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written.
FIGS, INC., as the Borrower | ||
By: |
|
|
Name: | Catherine Spear | |
Title: | Co-Chief Executive Officer | |
JPMORGAN CHASE BANK, N.A., as the Lender | ||
By: |
/s/ Haley Heslip |
|
Name: |
Haley Heslip |
|
Title: |
VP |
[Signature Page to Credit Agreement]
1. SCHEDULE 3.05 - Properties.
2. SCHEDULE 3.06 - Litigation and Environmental Matters.
3. SCHEDULE 3.15 - Capitalization and Subsidiaries.
4. SCHEDULE 3.23 - Affiliate Transactions.
5. SCHEDULE 6.01 - Existing Indebtedness
6. SCHEDULE 6.02 - Existing Liens
7. SCHEDULE 6.04 - Existing Investments
8. SCHEDULE 6.10 - Existing Restrictions
Exhibit A
Exhibit B
Exhibit C
Exhibit D
Exhibit 10.10
OFFICE LEASE
2834 COLORADO AVENUE
2834 COLORADO AVENUE, LLC,
a Delaware limited liability company,
as Landlord
and
FIGS, INC.,
a Delaware corporation,
as Tenant
TABLE OF CONTENTS
Page | ||||
ARTICLE 1 PREMISES, BUILDING, PROJECT, AND COMMON AREAS |
5 | |||
ARTICLE 2 LEASE TERM |
7 | |||
ARTICLE 3 BASE RENT |
11 | |||
ARTICLE 4 ADDITIONAL RENT |
12 | |||
ARTICLE 5 USE OF PREMISES |
25 | |||
ARTICLE 6 SERVICES AND UTILITIES |
27 | |||
ARTICLE 7 REPAIRS |
31 | |||
ARTICLE 8 ADDITIONS AND ALTERATIONS |
32 | |||
ARTICLE 9 COVENANT AGAINST LIENS |
35 | |||
ARTICLE 10 INSURANCE |
36 | |||
ARTICLE 11 DAMAGE AND DESTRUCTION |
39 | |||
ARTICLE 12 NONWAIVER |
41 | |||
ARTICLE 13 CONDEMNATION |
42 | |||
ARTICLE 14 ASSIGNMENT AND SUBLETTING |
43 | |||
ARTICLE 15 SURRENDER OF PREMISES; OWNERSHIP AND REMOVAL OF TRADE FIXTURES |
47 | |||
ARTICLE 16 HOLDING OVER |
48 | |||
ARTICLE 17 ESTOPPEL CERTIFICATES |
49 | |||
ARTICLE 18 SUBORDINATION |
49 | |||
ARTICLE 19 DEFAULTS; REMEDIES |
50 | |||
ARTICLE 20 COVENANT OF QUIET ENJOYMENT |
53 | |||
ARTICLE 21 TENANTS DOGS |
54 | |||
ARTICLE 22 LETTER OF CREDIT |
55 | |||
ARTICLE 23 SIGNS; ROOF RIGHTS |
57 |
i
ARTICLE 24 COMPLIANCE WITH LAW |
59 | |||
ARTICLE 25 LATE CHARGES |
60 | |||
ARTICLE 26 LANDLORDS RIGHT TO CURE DEFAULT; PAYMENTS BY TENANT |
61 | |||
ARTICLE 27 ENTRY BY LANDLORD |
61 | |||
ARTICLE 28 TENANT PARKING |
62 | |||
ARTICLE 29 MISCELLANEOUS PROVISIONS |
63 |
EXHIBITS
A |
OUTLINE OF PREMISES |
B |
TENANT WORK LETTER |
C |
FORM OF NOTICE OF LEASE TERM DATES |
D |
RULES AND REGULATIONS |
E |
FORM OF TENANTS ESTOPPEL CERTIFICATE |
F |
MARKET RENT ANALYSIS |
G |
COLORADO CREATIVE STUDIOS DEVELOPMENT AGREEMENT |
H |
MONUMENT SIGNAGE |
I |
RESOLUTION OF ARBITRABLE ISSUES |
J |
FORM OF LETTER OF CREDIT |
ii
INDEX
Page | ||||
Abated Months |
3 | |||
Abatement Event |
52 | |||
Additional Rent |
12 | |||
Adjacent Building |
5 | |||
Advocate Arbitrators |
8 | |||
Affiliate |
46 | |||
Alterations |
32 | |||
Applicable Laws |
59 | |||
Applicable Reassessment |
21 | |||
Approved Bank |
55 | |||
Approved Working Drawings |
82 | |||
Architect |
80 | |||
ASHRAE |
27 | |||
Bank Prime Loan |
60 | |||
Base Building |
33 | |||
Base Rent |
11 | |||
Base Year |
12 | |||
Base, Shell and Core |
6 | |||
Bicycle Storage Area |
26 | |||
Bicycles |
26 | |||
Brokers |
67 | |||
Builders All Risk |
33 | |||
Building |
5 | |||
Building Hours |
27 | |||
Building Operating Expenses |
14 | |||
Building Structure |
31 | |||
Building Systems |
31 | |||
Change in Ownership |
20 | |||
Close-Out Package |
87 | |||
Code |
77 | |||
Common Areas |
5 | |||
Construction Documents |
80 | |||
Contract |
83 | |||
Control |
46 | |||
Coordination Fee |
84 | |||
Cosmetic Alterations |
32 | |||
Cost Pools |
21 | |||
Cost Saving Capital Expenditures |
13 | |||
Damage Termination Date |
41 | |||
Damage Termination Notice |
41 | |||
Delay Notice |
76 | |||
Density Standard |
75 | |||
Development Agreement |
25 |
iii
Direct Expenses |
12 | |||
Drawing Change Notice |
82 | |||
Electric Car Charging Stations |
26 | |||
Eligibility Period |
53 | |||
Energy Disclosure Requirements |
71 | |||
Engineers |
81 | |||
Estimate |
22 | |||
Estimate Statement |
22 | |||
Estimated Excess |
23 | |||
Excess |
22 | |||
Expense Year |
12 | |||
Final Costs |
84 | |||
Final Order |
35 | |||
Final Retention |
79 | |||
Final Space Plan |
82 | |||
Final Working Drawings |
82 | |||
First Class Buildings |
27 | |||
Fitch |
56 | |||
Force Majeure |
66 | |||
Force Majeure Work Delay |
75 | |||
Garage |
26 | |||
Hazardous Substance |
25 | |||
Holidays |
27 | |||
HVAC |
27 | |||
HVAC Design Standard |
27 | |||
Impact Day of Delay |
6 | |||
Indoor Air Quality Standard |
28 | |||
Intentionally Omitted |
6 | |||
Landlord |
1 | |||
Landlord Delay |
76 | |||
Landlord Parties |
36 | |||
Landlord Repair Notice |
39 | |||
Landlords Completion Notice |
39 | |||
Landlords Drawing Contribution |
77 | |||
Lease |
1 | |||
Lease Commencement Date |
6 | |||
Lease Expiration Date |
6 | |||
Lease Term |
6 | |||
Lease Year |
6 | |||
Leasing Costs |
10 | |||
Letter of Credit |
55 | |||
Lines |
69 | |||
|
66 | |||
Management Fee Cap |
17 | |||
Market Rent |
7 | |||
Monument Sign |
59 |
iv
Moodys |
57 | |||
MPOE |
32 | |||
Neutral Audit |
25 | |||
Non Contribution Items |
80 | |||
Notices |
67 | |||
Objectionable Name |
60 | |||
Operating Expenses |
12 | |||
Option Interest Notice |
7 | |||
Option Rent |
7 | |||
Option Rent Notice |
8 | |||
Option Term |
7 | |||
Original Improvements |
39 | |||
Other Improvements |
71 | |||
Outside Agreement Date |
8 | |||
Outside Restoration Date |
42 | |||
Over-Allowance Amount |
85 | |||
Payment Notice |
81 | |||
Permits |
84 | |||
Permitted Capital Expenditures |
14 | |||
Permitted Transferee |
47 | |||
Permitted Transferee Assignee |
48 | |||
Plan Check Drawings |
84 | |||
Post-Delivery BSC Work |
6 | |||
Premises |
4 | |||
Prepaid First Months Rent |
11 | |||
Prime +2% Rate |
13 | |||
Project |
5 | |||
Project Operating Expenses |
14 | |||
Proposition 13 |
19 | |||
Proposition 13 Protection Amount |
21 | |||
Proposition 13 Purchase Price |
21 | |||
Protection Period |
20 | |||
Rating Agencies |
57 | |||
Reassessment |
20 | |||
Record Set |
89 | |||
Refusal Notice |
81 | |||
Renovations |
70 | |||
Rent |
12 | |||
Rent Abatement |
11 | |||
Rent Abatement Period |
11 | |||
Required Parking Passes |
3 | |||
Review Period |
25 | |||
S&P |
57 | |||
Secured Areas |
63 | |||
Self Help Notice |
35 | |||
Sick Building |
29 |
v
SNDA |
50 | |||
Space Plan Delivery Date |
79 | |||
Specialty Alterations |
35 | |||
Statement |
22 | |||
Subject Space |
44 | |||
Submittal Date |
80 | |||
Substantial Nuisance |
55 | |||
Summary |
1 | |||
Superior Holders |
50 | |||
Supplemental HVAC Equipment |
32 | |||
Tax Expenses |
19 | |||
Tax Increase |
20 | |||
TCCs |
4 | |||
Tenant |
1 | |||
Tenant Change |
84 | |||
Tenant Energy Use Disclosure |
72 | |||
Tenant Improvement Allowance |
78 | |||
Tenant Improvement Allowance Items |
79 | |||
Tenant Improvements |
78 | |||
Tenant Parties |
37 | |||
Tenant Work Letter |
5 | |||
Tenants Agents |
85 | |||
Tenants Contractor |
85 | |||
Tenants Dogs |
55 | |||
Tenants Security System |
30 | |||
Tenants Share |
22 | |||
Termination |
9 | |||
Termination Date |
9 | |||
Termination Fee |
10 | |||
Termination Notice |
10 | |||
Termination Option |
9 | |||
Transfer Notice |
44 | |||
Transfer Premium |
46 | |||
Transferee |
44 | |||
Transfers |
44 | |||
Underlying Documents |
14 | |||
Ventilation for Acceptable Indoor Air Quality |
28 |
vi
2834 COLORADO AVENUE
OFFICE LEASE
This Office Lease (the Lease), dated as of the date set forth in Section 1 of the Summary of Basic Lease Information (the Summary), below, is made by and between 2834 COLORADO AVENUE, LLC, a Delaware limited liability company (Landlord), and FIGS INC., a Delaware corporation (Tenant).
SUMMARY OF BASIC LEASE INFORMATION
TERMS OF LEASE | DESCRIPTION | |
1. Date: |
November 26, 2018 | |
2. Premises (Article 1). |
||
2.1 Building: |
That certain four (4)-story building commonly known as the Shift Building and currently located at 2834 Colorado Avenue, Santa Monica, California, including all walkways, plazas, patios and parking areas. Landlord and Tenant hereby agree that the Building contains a total rentable area of approximately 139,298 rentable square feet. | |
2.2 Premises: |
Approximately 26,118 rentable square feet of space on the ground floor of the Building, as further set forth in Exhibit A to this Lease; provided, however, notwithstanding the foregoing, except to the extent expressly provided herein, Tenant shall not have any rights to the roof, exterior walls, Building systems or utility raceways of the Building. | |
2.3 Project: |
That certain project containing approximately 200,215 rentable square feet of space, commonly known as Santa Monica Gateway and consisting of two (2) buildings (including the Building) located in Santa Monica, California, as further set forth in Section 1.1.2 of this Lease. |
1
Period During Lease Term |
Monthly Base
Rental Rate Per Rentable Square Foot |
Monthly Installment
of Base Rent* |
||||||
Lease Year 1 |
$ | 5.75 | $ | 150,178.50 | ** | |||
Lease Year 2 |
$ | 5.95 | $ | 155,402.10 | ||||
Lease Year 3 |
$ | 6.16 | $ | 160,886.88 | ||||
Lease Year 4 |
$ | 6.38 | $ | 166,632.84 | ||||
Lease Year 5 |
$ | 6.60 | $ | 172,378.80 | ||||
Lease Year 6 |
$ | 6.83 | $ | 178,385.94 | ||||
Lease Year 7 |
$ | 7.07 | $ | 184,654.26 | ||||
Lease Year 8 |
$ | 7.32 | $ | 191,183.76 | ||||
Lease Year 9 |
$ | 7.57 | $ | 197,713.26 | ||||
Lease Year 10 |
$ | 7.84 | $ | 204,765.12 | ||||
Lease Year 11 |
$ | 8.11 | $ | 211,816.98 |
The foregoing Base Rent schedule shall be subject to adjustment upon confirmation of the rentable square footage of the Premises as set forth in Section 1.1.4 of the Lease. Pursuant to the terms of Article 28, below, in addition to the foregoing Base Rent, Tenant shall also be responsible for paying to Landlord, as additional Base Rent, an amount equivalent to the parking charges that Tenant would otherwise be responsible for based on the number of spaces Tenant is obligated to rent under Article 28, below, at the Buildings then posted parking rates (with the allocation between reserved and unreserved spaces to be based on the number of reserved and unreserved spaces allocated to Tenant), including any applicable taxes that are assessed with respect thereto.
2
* |
Notwithstanding the foregoing Base Rent schedule (exclusive of parking charges), with respect to the first month of each of the successive five (5) calendar quarters following the Lease Commencement Date (the Abated Months), Tenants obligation to pay the Monthly Installment of Base Rent shall be abated for the first month of each such calendar quarter pursuant to the terms of Section 3.2 of the Lease (for illustration purposes only, if the Lease Commencement Date occurs on August 1, 2019, then Tenant shall have no obligation to pay Base Rent with respect to the following calendar months: October 2019, January 2020, April 2020, July 2020, and October 2020). |
** |
Notwithstanding the foregoing Base Rent schedule (exclusive of parking charges), during the initial ten (10) months of the Lease Term, Tenant shall only be responsible for paying Base Rent with respect to 18,000 rentable square feet of the Premises, in the amount of One Hundred Three Thousand Five Hundred Dollars ($103,500.00) per month (i.e., the product of 18,000 rentable square feet and $5.75 per rentable square foot). |
5. Base Year (Article 4): |
Calendar year 2019 | |
6. Tenants Share of the Building (Article 4): |
18.56% | |
7. Tenants Share of the Project (Article 4): |
Approximately 13.04% (based upon the Premises containing approximately 26,118 rentable square feet of space and the Project containing approximately 200,215 rentable square feet of space), subject to adjustment as set forth in Section 1.1.4 of this Lease. | |
8. Permitted Use (Article 5): |
General office and studio production operations, subject to the terms and conditions set forth in Section 5.1 of the Lease. | |
9. Security Deposit (Article 22): |
Letter of Credit in the amount of $1,900,000 | |
10. Parking Pass Ratio (Article 28): |
Tenant shall be obligated to lease three (3) unreserved parking passes for every 1,000 rentable square feet of the Premises (the Required Parking Passes). Tenant shall have the right, but not the obligation, to lease an additional 5 unreserved parking pass for every 1,000 rentable square feet of the Premises, upon the terms and conditions and at the rates provided in Article 28 hereof. |
3
11. Address of Tenant (Section 29.18): |
Prior to the Lease Commencement Date:
Figs, Inc. 11390 W Olympic Blvd, Suite 350 Los Angeles, California 90064 Attention: Catherine Spear
Following the Lease Commencement Date:
At the Premises Attention: Catherine Spear
With at all times a copy to:
Sheppard, Mullin, Richter & Hampton LLP 333 South Hope Street, 43rd Floor Los Angeles, California 90071 Attention: Pamela L. Westhoff |
|
11. Address of Landlord (Section 29.18): |
See Section 29.18 of the Lease. | |
12. Brokers (Section 29.24): |
LPC West, Inc. (for Landlord) CBRE, INC. (for Tenant) |
|
13. Tenant Improvement Allowance (Exhibit B): |
An amount equal to $75.00 per rentable square foot of the Premises. |
4
ARTICLE 1
PREMISES, BUILDING, PROJECT, AND COMMON AREAS
1.1 Premises, Building, Project and Common Areas.
1.1.1 The Premises. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the premises set forth in Section 2.2 of the Summary (the Premises). The outline of the Premises is set forth in Exhibit A attached hereto and the Premises has the number of rentable square feet as set forth in Section 2.2 of the Summary. The parties hereto agree that the lease of the Premises is upon and subject to the terms, covenants and conditions (TCCs) herein set forth, and Tenant covenants as a material part of the consideration for this Lease to keep and perform each and all of such terms, covenants and conditions by it to be kept and performed and that this Lease is made upon the condition of such performance. The parties hereto hereby acknowledge that the purpose of Exhibit A is to show the location of the Premises in the Building, as that term is defined in Section 1.1.2, below, only, and such Exhibit is not meant to constitute an agreement, representation or warranty as to the construction of the Premises, the precise area thereof or the specific location of the Common Areas, as that term is defined in Section 1.1.3, below, or the elements thereof or of the accessways to the Premises or the Project, as that term is defined in Section 1.1.2, below. It is understood and agreed that Landlord shall have no right to relocate Tenant to other space in the Project at any time during the Lease Term or Option Terms. Except as specifically set forth in this Lease and in the Tenant Work Letter attached hereto as Exhibit B (the Tenant Work Letter), subject to the express TCCs of this Lease, including but not limited to Landlords ongoing maintenance and repair obligations, Landlord shall not be obligated to provide or pay for any improvement work or services related to the improvement of the Premises. Tenant also acknowledges that neither Landlord nor any agent of Landlord has made any representation or warranty regarding the condition of the Premises, the Building or the Project or with respect to the suitability of any of the foregoing for the conduct of Tenants business, except as specifically set forth in this Lease and the Tenant Work Letter.
1.1.2 The Building and the Project. The Premises are a part of the building set forth in Section 2.1 of the Summary (the Building). The Building is one (1) of two (2) buildings located at the Project. The term Project, as used in this Lease, shall mean (i) the Building and the Common Areas, (ii) the other building located immediately south adjacent to the Building (the Adjacent Building), (iii) the land consisting of approximately 1.76 acres (which may be improved with landscaping, parking facilities and other improvements) upon which the Building, the Adjacent Building, and the Common Areas are located, consisting of an aggregate of approximately 200,215 rentable square feet (subject to adjustment from time to time by Landlord), and (iv) at Landlords discretion, any additional real property, areas, land, buildings or other improvements added thereto outside of the Project.
1.1.3 Common Areas. Tenant shall have the non-exclusive right to use in common with other tenants in the Project, and subject to the rules and regulations referred to in Article 5 of this Lease, those portions of the Project which are provided, from time to time, for use in common by Landlord, Tenant and any other tenants of the Project (such areas, together with such other portions of the Project designated by Landlord, in its discretion, including certain areas designated to be shared by Landlord and certain tenants, are collectively referred to herein as the
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Common Areas). The manner in which the Common Areas are maintained and operated shall be at the reasonable discretion of Landlord (but shall at least be consistent with the provision of Article 7 below and the manner in which the common areas of the First Class Buildings, as defined in Section 6.1 below, are maintained and operated) and the use thereof shall be subject to such reasonable rules, regulations and restrictions as Landlord may make from time to time. Landlord reserves the right to close temporarily, make alterations or additions to, or change the location of elements of the Project and the Common Areas, provided that, in connection therewith, Landlord shall perform such closures, alterations, additions or changes in a commercially reasonable manner and, in connection therewith, shall use commercially reasonable efforts to minimize any material interference with Tenants use of and access to the Premises. Any such closures, alterations or additions will be subject to the terms of Section 19.5.2 below.
1.1.4 Intentionally Omitted.
1.1.5 Delivery.
1.1.5.1 Concurrently with the mutual execution and delivery of this Lease, Landlord shall deliver to Tenant the base, shell and core of the Premises (collectively, the Base, Shell and Core), in good working condition and, without reference to any tenant improvements to be constructed in the Premises, in compliance with Applicable Laws (as that term is defined in Article 24 below). Notwithstanding the foregoing, for purposes of this Section 1.1.5, the Base, Shell and Core shall not include the common corridor and demising wall to separate the Premises from the adjacent coffee store (the Post-Delivery BSC Work). Landlord agrees to complete the Post-Delivery BSC Work as soon as commercially reasonable following the delivery of the Premises to Tenant and in a manner that does not materially delay the completion by Tenant of its Tenant Improvements in the Premises.
1.1.5.2 Notwithstanding the foregoing, if Tenant determines that the Base, Shell and Core were not in good condition or were not in compliance with Applicable Laws, rules and regulations as of the Lease Commencement Date, or if it is determined that there exist any defects in the Base, Shell and Core and such non-compliance or defects are not due to the tenant improvements constructed in the Premises or Tenants particular use of, or activities or work in, the Premises, Landlord shall remedy such defects or correct such non-compliance at Landlords cost within a commercially reasonable time after Landlords receipt of written notice thereof (provided that such notice must be received within one hundred eighty (180) days following the Lease Commencement Date). Furthermore, to the extent of the number of days of delay in both the Substantial Completion (as that term is defined in Article 4 of the Tenant Work Letter) of the Tenant Improvements and the ability of Tenant to conduct business from the Premises caused by such failure (each such day of delay to herein be referred to as an Impact Day of Delay), Tenant shall be entitled to a credit of one (1) day of Base Rent for each Impact Day of Delay.
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ARTICLE 2
LEASE TERM
2.1 Lease Term. The TCCs and provisions of this Lease shall be effective as of the date of this Lease. The term of this Lease (the Lease Term) shall be as set forth in Section 3.1 of the Summary, shall commence on the date set forth in Section 3.2 of the Summary (the Lease Commencement Date), and shall terminate on the date set forth in Section 3.3 of the Summary (the Lease Expiration Date) unless this Lease is sooner terminated as hereinafter provided. If Landlord is unable for any reason to deliver possession of the Premises to Tenant on any specific date, then, except as expressly set forth in this Lease, Landlord shall not be subject to any liability for its failure to do so, and such failure shall not affect the validity of this Lease or the obligations of Tenant hereunder. For purposes of this Lease, the term Lease Year shall mean each consecutive twelve (12) month period during the Lease Term; provided, however, that the first Lease Year shall commence on the Lease Commencement Date and end on the last day of the month in which the first anniversary of the Lease Commencement Date occurs (or if such Lease Commencement Date is the first day of a calendar month, then the first Lease Year shall commence on such Lease Commencement Date and end on the day immediately preceding the first anniversary of such Lease Commencement Date), and the second and each succeeding Lease Year shall commence on the first day of the next calendar month; and further provided that the last Lease Year shall end on the Lease Expiration Date. At any time during the Lease Term, Landlord may deliver to Tenant a notice in the form as set forth in Exhibit C, attached hereto, as a confirmation only of the information set forth therein, which Tenant shall execute and return to Landlord within fifteen (15) business days of receipt thereof; provided, however, that if such notice is not factually correct, then Tenant shall make such changes as are necessary to make such notice factually correct and shall thereafter return such notice to Landlord within said fifteen (15) business day period. Tenants failure to execute and return such notice to Landlord within such time shall be conclusive upon Tenant that the information set forth in such notice is as specified therein.
2.2 Option Terms.
2.2.1 Option Right. Landlord hereby grants to the Original Tenant, any Affiliate of Tenant, and any Permitted Transferee Assignee, two (2) options to extend the Lease Term for a period of five (5) years each (each an Option Term and each such option, an Option to Extend). The Options to Extend shall be exercisable only by notice delivered by Original Tenant, an Affiliate, or a Permitted Transferee Assignee, as applicable, to Landlord as provided in Section 2.2.3 below; provided that, as of the date of delivery of such notice, Tenant has not received notice that Tenant is in Default. The rights contained in this Section 2.2 shall be personal to the Original Tenant, any Affiliate, and any Permitted Transferee Assignee and may only be exercised by the Original Tenant, an Affiliate, or a Permitted Transferee Assignee (and not any other assignee or sublessee or Transferee of Tenants interest in this Lease) provided that the Original Tenant, the Affiliate, or such Permitted Transferee Assignee has not subleased more than fifty percent (50%) of the rentable square footage of the Premises pursuant to a sublease or subleases then in effect. In the event that Tenant (or any Affiliate or Permitted Transferee Assignee) fails to timely and appropriately exercise its Option to Extend in accordance with the terms of this Section 2.2, then such Option to Extend shall automatically terminate and shall be of no further force or effect.
2.2.2 Option Rent. The Rent payable by Tenant during each Option Term shall be equal to one hundred percent (100%) of the Market Rent, as such Market Rent is determined pursuant to Exhibit F, attached to this Lease (such rent payable during each Option Term, the Option Rent) and the Base Year for each Option Term shall be the calendar year immediately preceding the calendar year in which such Option Term commences. Except as set
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forth in the preceding sentence or as otherwise expressly set forth in this Lease, all of the terms of this Lease shall apply during the applicable Option Term and the Lease Expiration Date shall be extended to the last day of the applicable Option Term. The calculation of the Market Rent shall be derived from a review of, and comparison to, the Net Equivalent Lease Rates of the Comparable Transactions, as provided for in Exhibit F.
2.2.3 Exercise of Options. An Option to Extend shall be exercised by Tenant, if at all, and only in the following manner: (i) Tenant shall deliver written notice (the Option Interest Notice) to Landlord not more than ten (10) months nor less than seven (7) months prior to the expiration of the initial Lease Term, stating that Tenant is interested in exercising its Option to Extend; (ii) Landlord shall, within thirty (30) days following Landlords receipt of the Option Interest Notice, deliver notice (the Option Rent Notice) to Tenant setting forth Landlords good faith determination of the Option Rent; and (iii) if Tenant wishes to exercise such option for the applicable Option Term, Tenant shall, on or before the date occurring thirty (30) days after Tenants receipt of the Option Rent Notice for the applicable Option Term, deliver written notice thereof to Landlord, and upon, and concurrent with, such exercise, Tenant may, at its option, accept or reject the Option Rent set forth in the Option Rent Notice. If Tenant exercises its option to extend the Lease for the applicable Option Term but fails to accept or reject the Option Rent set forth in the Option Rent Notice for the applicable Option Term, then Tenant shall be deemed to have rejected the Option Rent set forth in the Option Rent Notice for the applicable Option Term.
2.2.4 Determination of Option Rent. In the event Tenant timely and appropriately exercises its Option to Extend, but rejects (or is deemed to reject) the Option Rent set forth in the Option Rent Notice pursuant to Section 2.2.3, above, then Landlord and Tenant shall attempt to agree upon the Option Rent using their best good-faith efforts. If Landlord and Tenant fail to reach agreement upon the Option Rent on or before the date that is sixty (60) days prior to the expiration of the Lease Term (the Outside Agreement Date), then the Option Rent shall be determined by arbitration pursuant to the terms of this Section 2.2.4. Each party shall make a separate determination of the Option Rent, within five (5) days following the Outside Agreement Date, and such determinations shall be submitted to arbitration in accordance with Sections 2.2.4.1 through 2.2.4.4, below.
2.2.4.1 Landlord and Tenant shall each appoint one arbitrator who shall by profession be a MAI appraiser who shall have been active over the ten (10) year period ending on the date of such appointment in the appraising of first class commercial office properties in Santa Monica, California, and who shall not (i) have previously represented either party or either partys affiliates during the prior ten (10) year period or (ii) been paid a commission by either party during the prior ten (10) year period. The determination of the arbitrators shall be limited solely to the issue area of whether Landlords or Tenants submitted Option Rent is the closest to the actual Option Rent as determined by the arbitrators, taking into account the requirements of Section 2.2.2 of this Lease. Each such arbitrator shall be appointed within fifteen (15) days after the Outside Agreement Date. Landlord and Tenant may consult with their selected arbitrators prior to appointment and may select an arbitrator who is favorable to their respective positions (including an arbitrator who has previously represented Landlord and/or Tenant, as applicable). The arbitrators so selected by Landlord and Tenant shall be deemed Advocate Arbitrators.
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2.2.4.2 The two (2) Advocate Arbitrators so appointed shall within ten (10) days of the date of the appointment of the last Advocate Arbitrator agree upon and appoint an independent third arbitrator who shall be qualified under the same criteria set forth hereinabove for qualification of the initial two (2) arbitrators.
2.2.4.3 The three (3) arbitrators shall within thirty (30) days of the appointment of the third arbitrator reach a decision as to whether the parties shall use Landlords or Tenants submitted Option Rent and shall notify Landlord and Tenant thereof.
2.2.4.4 The decision of the majority of the three (3) arbitrators shall be binding upon Landlord and Tenant.
2.2.4.5 If either Landlord or Tenant fails to appoint an Advocate Arbitrator within fifteen (15) days after the Outside Agreement Date, then the Advocate Arbitrator appointed by one of them shall reach a decision, notify Landlord and Tenant thereof, and such Advocate Arbitrators decision shall be binding upon Landlord and Tenant.
2.2.4.6 If the two (2) Advocate Arbitrators fail to agree upon and appoint a third arbitrator, or if both parties fail to appoint an arbitrator, then the appointment of the third arbitrator or any arbitrator shall be dismissed and the matter to be decided shall be forthwith submitted to arbitration under the provisions of the American Arbitration Association, but subject to the instruction set forth in this Section 2.2.4.
2.2.4.7 The cost of the arbitration shall be paid by Landlord and Tenant equally; provided that Tenant shall pay the cost of its Appointed Arbitrator, Landlord shall pay the cost of its Appointed Arbitrator, and Landlord and Tenant shall each pay one half (1/2) of the fees of the third arbitrator.
2.3 Construction Entry. Concurrently with the mutual execution and delivery of this Lease, Landlord shall deliver the Premises to Tenant for the commencement by Tenant of its tenant improvement work therein. Notwithstanding the foregoing, in no event shall Tenant enter the Premises until such time as Tenant has provided Landlord with evidence that Tenant has fulfilled its obligation to provide insurance pursuant to the provisions of this Lease. Such early entry in and of itself will not advance the Lease Commencement Date unless Tenant commences to conduct business from the Premises. All of the provisions of this Lease shall apply to Tenant and Landlord during any early entry, including, without limitation, the indemnities set forth in this Lease, but excluding Tenants obligation to pay any Rent, parking costs, or utility costs, until the Lease Commencement Date has occurred, whereupon such obligations shall immediately commence. Tenant shall be obligated to reimburse Landlord for all actual costs incurred by Landlord in connection with security or other measures incurred by Landlord in order to accommodate Tenants construction schedule or efforts. During any such early entry, Landlord shall not be responsible for any loss, including theft, damage or destruction to any work or material installed or stored by Tenant at the Premises or for any injury to Tenant or its agents, employees, contractors, subcontractors, subtenants, assigns, licensees or invitees. Landlord shall have the right to post appropriate notices of non-responsibility in connection with any early entry by Tenant.
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2.4 Termination Option. Subject to the terms and conditions set forth in this Section 2.4, Tenant shall have the one-time option (the Termination Option) to terminate this Lease with respect to the entire Premises (the Termination), effective as of the last day of the seventh (7th) full calendar year that follows the Lease Commencement Date (the Termination Date) only (but on no other date) (for illustration purposes only, if the Lease Commencement Date occurs on August 1, 2019, then the Termination Date shall be July 31, 2026), upon the following terms and conditions (if the following terms and conditions are not timely and completely satisfied, then, at Landlords option, the Termination Option shall be null and void with no further force and effect):
2.4.1 Tenant shall give Landlord written notice (the Termination Notice) of Tenants unconditional and irrevocable election to exercise the Termination Option at least nine (9) months prior to the Termination Date (time being of the essence).
2.4.2 There shall exist no event of Default under the Lease (beyond the expiration of any applicable notice and cure periods set forth in this Lease) on the date Landlord receives the Termination Notice or on the Termination Date (provided that either of such conditions may be waived by Landlord in Landlords sole and absolute discretion).
2.4.3 Tenant shall pay to Landlord an amount equal to the Termination Fee (defined below) in immediately available funds on or before the Termination Date (time being of the essence). The Termination Fee shall mean the unamortized Leasing Costs (defined below) as of the Termination Date, as determined by Landlord, based upon an amortization period from the Lease Commencement Date until the Expiration Date (amortized with interest at five percent (5%) per annum) plus six (6) months of Base Rent (including parking charges) for the 6-month period immediately following the Termination Date. The term Leasing Costs shall mean the sum of (x) all brokerage commissions paid by Landlord in connection with this Lease with respect to the entire Premises, plus (y) the Tenant Improvement Allowance, plus (z) the amount of the Rent Abatement (as defined in Section 3.2 below). If Tenant does not timely pay the Termination Fee to Landlord as set forth herein then, at Landlords option, in addition to all other rights and remedies of Landlord, (A) the Termination Option (and Termination Notice) shall be null and void with no force and effect, and this Lease shall continue in full force and effect as if Tenant had not elected to terminate this Lease, and/or (B) Landlord may treat the same as an event of Default under this Lease and Landlord may pursue all of its available rights and remedies in connection therewith.
2.4.4 In the event Tenant timely and properly exercises the Termination Option, the Lease shall terminate effective as of the Termination Date, and Base Rent and all other monetary obligations under the Lease shall be paid through and apportioned as of the Termination Date, and neither Landlord nor Tenant shall have any rights, liabilities or obligations accruing under the Lease after the Termination Date, except for such rights and liabilities which, by the terms of the Lease are obligations of the Tenant or Landlord which expressly survive the expiration of the Lease.
2.4.5 Notwithstanding the foregoing or anything to the contrary herein, the Termination Option shall automatically terminate and become null and void upon (i) the failure of Tenant to timely or properly exercise the Termination Option (unless such condition is waived in writing by Landlord in its sole and absolute discretion); or (ii) Tenants right to possession of the Premises being terminated prior to the exercise of the Termination Option.
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2.4.6 The Termination Option shall be personal to the Original Tenant and any Affiliate of Tenant to whom this Lease has been assigned and may be exercised only by the Original Tenant and any Affiliate of Tenant to whom this Lease has been assigned while occupying the entire Premises, and may not be exercised or be assigned, voluntarily or involuntarily, by or to any person or entity other than the Original Tenant and any Affiliate of Tenant to whom this Lease has been assigned.
ARTICLE 3
BASE RENT
3.1 Base Rent. Commencing on the Lease Commencement Date (as the same may be delayed by the provisions of Section 1.1.4 above), Tenant shall pay, without prior notice or demand, to Landlord or Landlords agent at the management office of the Project, or, at Landlords option, at such other place as Landlord may from time to time designate in writing, by a check for currency which, at the time of payment, is legal tender for private or public debts in the United States of America, base rent (Base Rent) as set forth in Section 4 of the Summary, payable in equal monthly installments as set forth in Section 4 of the Summary in advance on or before the first day of each and every calendar month during the Lease Term, without any setoff or deduction whatsoever except as expressly set forth elsewhere in this Lease. It is acknowledged and agreed that during the initial ten (10) months of the Lease Term, Tenant shall only be responsible for paying Base Rent with respect to 18,000 rentable square feet of the Premises, in the amount set forth in Section 4 of the Summary. The Base Rent for the first full month of the Lease Term shall be paid within thirty (30) days of Tenants execution of this Lease (the Prepaid First Months Rent) and shall be applied to the first payment(s) of Base Rent owing hereunder until fully utilized. If any Rent payment date (including the Lease Commencement Date) falls on a day of the month other than the first day of such month or if any payment of Rent is for a period which is shorter than one month, the Rent for any fractional month shall be prorated based on the number of days in each fractional month at issue. All other payments or adjustments required to be made under the terms of this Lease that require proration on a time basis shall be prorated on the same basis.
3.2 Abated Base Rent. Provided that Tenant is not then in Default, then during the Abated Months (the Rent Abatement Period), Tenant shall not be obligated to pay any Base Rent otherwise attributable to the Premises (exclusive of parking charges) during such Rent Abatement Period (the Rent Abatement). Tenant acknowledges and agrees that the foregoing Rent Abatement has been granted to Tenant as additional consideration for entering into this Lease, and for agreeing to pay the rental and performing the terms and conditions otherwise required under this Lease. If Tenant shall be in default under this Lease, and shall fail to cure such default within the notice and cure period, if any, permitted for cure pursuant to terms and conditions of the Lease, or if this Lease is terminated for any reason as a result of such default, then the dollar amount of the unapplied portion of the Rent Abatement as of the date of such default or termination, as the case may be, shall be converted to a credit to be applied to the Base Rent applicable at the end of the Lease Term and Tenant shall immediately be obligated to begin paying Base Rent for the Premises in full.
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ARTICLE 4
ADDITIONAL RENT
4.1 General Terms. In addition to paying the Base Rent specified in Article 3 of this Lease, Tenant shall pay, following the Lease Commencement Date, the amount by which Tenants Share of the annual Direct Expenses, as those terms are defined in Sections 4.2.9 and 4.2.2 of this Lease, exceeds Tenants Share of the amount of Direct Expenses applicable to the Base Year, as that term is defined in Section 4.2.1, below; provided, however, that in no event shall any decrease in Direct Expenses for any Expense Year, as that term is defined in Section 4.2.3 below, below Direct Expenses for the Base Year entitle Tenant to any decrease in Base Rent or any credit against sums due under this Lease; provided further that Tenant shall have no obligation to pay for any Operating Expenses attributable to the initial twelve (12) months of the Lease Term. Such payments by Tenant, together with any and all other amounts payable by Tenant to Landlord pursuant to the terms of this Lease, are hereinafter collectively referred to as the Additional Rent, and the Base Rent and the Additional Rent are herein collectively referred to as Rent. All amounts due under this Article 4 as Additional Rent shall be payable for the same periods and in the same manner as the Base Rent. Without limitation on other obligations of Tenant which survive the expiration of the Lease Term, the obligations of Tenant to pay the Additional Rent and of Landlord to reconcile and reimburse Tenant for overpayments of Additional Rent provided for in this Article 4 shall survive the expiration of the Lease Term.
4.2 Definitions of Key Terms Relating to Additional Rent. As used in this Article 4, the following terms shall have the meanings hereinafter set forth:
4.2.1 Base Year shall mean the period set forth in Section 5 of the Summary.
4.2.2 Direct Expenses shall mean Operating Expenses and Tax Expenses.
4.2.3 Expense Year shall mean each calendar year in which any portion of the Lease Term falls, through and including the calendar year in which the Lease Term expires.
4.2.4 Operating Expenses shall mean all expenses, costs and amounts which Landlord pays or accrues during any Expense Year because of or in connection with the ownership, management, maintenance, security, repair, or operation of the Building, the Project, or any portion thereof, subject to the exclusions from Operating Expenses set forth herein. Without limiting the generality of the foregoing, Operating Expenses shall specifically include any and all of the following actually paid or accrued by Landlord: (i) the cost of supplying all utilities to the Building (to the extent that such utilities are not paid directly by Tenant), the cost of operating, repairing, or maintaining the utility, telephone, mechanical, sanitary, storm drainage, and elevator systems, and the cost of maintenance and service contracts in connection therewith; (ii) the cost of licenses, certificates, permits and inspections and the cost of contesting any governmental
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enactments which may affect Operating Expenses, and the costs incurred in connection with a governmentally-mandated transportation system management program or similar program or any transportation system management program or similar program in which Tenant participates or is provided the opportunity to participate; (iii) the cost of all insurance carried by Landlord in connection with the Project (including, without limitation, commercial general liability insurance, physical damage insurance covering damage or other loss caused by fire, earthquake, flood and other water damage, explosion, vandalism and malicious mischief, theft or other casualty, rental interruption insurance and such insurance as may be required by any lessor under any present or future ground or underlying lease of the Building or the Project or any holder of a mortgage, trust deed or other encumbrance now or hereafter in force against the Building or the Project or any portion thereof); (iv) the cost of landscaping, relamping, and all supplies, tools, equipment and materials used in the operation, repair and maintenance of the Project, or any portion thereof; (v) costs incurred in connection with the parking areas servicing the Project; (vi) fees and other costs, including management fees (not to exceed three percent (3%) of all gross receipts for the Building (as fully grossed up for a 95% occupancy level), consulting fees, legal fees (subject to exclusion (u) below) and accounting fees (related to the Operating Expenses), of all contractors and consultants incurred by Landlord in connection with the management, operation, maintenance and repair of the Project; (vii) payments under any equipment rental agreement; (viii) the fair rental value of any management office space (provided, however, that if and to the extent that the personnel in such management office perform management responsibilities for other properties in addition to the Project, then the rental value of such management office shall be equitably allocated between the Project and such other properties; provided further, however, upon request from Tenant not more than once in any twelve (12) month period, Landlord shall inform Tenant of any personnel in such management office that performs management responsibilities for other properties in addition to the Project); (ix) wages, salaries and other compensation and benefits, including taxes levied thereon, of all persons engaged in the operation, maintenance and/or security of the Project (other than persons generally considered to be higher in rank than the position of the Project General Manager), provided that in no event shall staffing levels or salaries exceed those typical in the First Class Buildings for the services provided hereunder unless otherwise approved by Tenant in writing; (x) costs under any instrument pertaining to the sharing of costs by the Project; (xi) operation, repair, maintenance and, subject to the limitation set forth clause (xiv) below, replacement of all systems and equipment and components thereof of the Building; (xii) the cost of alarm, security and other services, the cost of janitorial services provided to Common Areas (to the extent not paid for directly by Tenant), and subject to the limitation set forth clause (xiv) below, the cost of replacement of ceiling tiles and fixtures in Common Areas, maintenance and replacement of curbs and walkways, and repair to roofs; (xiii) amortization (including interest on the unamortized cost at an interest rate (the Prime +2% Rate) equal to the floating commercial loan rate announced from time to time by Wells Fargo Bank, or its successor, as its prime rate, plus two percent (2%) (the Prime +2% Rate) over the useful life as Landlord shall reasonably determine, using generally accepted accounting principles, consistently applied, of the cost of acquiring or the rental expense of personal property used in the maintenance, operation and repair of the Project, or any portion thereof; (xiv) the cost of capital improvements, replacements or other capital costs incurred in connection with the Project following completion of the initial construction thereof and the date all building systems are fully operational (A) which are reasonably intended by Landlord, based upon qualified third party advice, to effect savings in the operation, cleaning or maintenance of the Project, or any portion thereof, or to reduce current
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or future Operating Expenses to the extent of cost savings (Cost Saving Capital Expenditures), (B) which are intended for enhancing the safety and security of the Project and its occupants, to the extent such improvements are consistent with the practices of landlords of the First Class Building, or (C) that are required under any governmental law or regulation first enacted or which first became effective following the date hereof (the costs described in clauses (xiii) and (xiv)(A), (B) and (C) being referred to collectively as Permitted Capital Expenditures); provided, however, that the cost of Permitted Capital Expenditures shall (subject to the limitation set forth above with respect to Landlords ability to pass through the cost of Cost Saving Capital Expenditures) be amortized with interest at the Prime +2% Rate over the useful life of the capital item in question, in accordance with sound generally accepted accounting principles; (xv) costs, fees, charges or assessments imposed by, or resulting from any mandate imposed on Landlord by, any federal, state or local government for fire and police protection, trash removal, community services, or other services which do not constitute Tax Expenses as that term is defined in Section 4.2.7, below; and (xvi) payments under any easement, license, operating agreement, declaration, restrictive covenant, or instrument pertaining to the sharing of costs by Landlord with respect to the Building, including, without limitation, any covenants, conditions and restrictions affecting the Project, and reciprocal easement agreements affecting the Project, any parking licenses, and any agreements with transit agencies affecting the Project (collectively, Underlying Documents).
4.2.5 Building Operating Expenses shall mean Operating Expenses relating exclusively to the repair, maintenance, replacement, and operation of the Building.
4.2.6 Project Operating Expenses shall mean all Operating Expenses other than Building Operating Expenses.
4.2.7 Notwithstanding the foregoing, for purposes of this Lease, the following items shall be excluded from Operating Expenses:
(a) cost of repairs or other work incurred by reason of fire, windstorm or other casualty or by the exercise of the right of eminent domain to the extent Landlord is compensated through proceeds or insurance or condemnation awards, or would have been so reimbursed if Landlord had in force all of the insurance required to be carried by Landlord under this Lease;
(b) except as otherwise provided below, the cost and expense of correcting defects in the construction of the Project or repairs that are covered by warranties;
(c) costs, including fines or penalties, incurred due to a violation of Applicable Laws in force and effect as of the Lease Commencement Date relating to the Project, but not including on-going recurring compliance costs (by way of example only, costs to comply with an existing Applicable Law requiring periodic elevator maintenance, or related to fire-extinguisher inspections, shall be included in Operating Expenses);
(d) costs incurred due to the presence of Hazardous Substances (as defined in Section 5.2), except to the extent caused by the release or emission thereof by Tenant;
(e) charitable and political contributions or reserves of any kind;
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(f) depreciation, interest and principal payments on mortgages and other debt costs, if any, penalties and interest, and any other costs which would properly be capitalized, other than Permitted Capital Expenditures;
(g) fees payable by Landlord for management of the Project to the extent in excess of the management fees being paid by landlords of the First Class Buildings, adjusted and grossed up to reflect a one hundred percent (100%) occupancy of the Project;
(h) intentionally omitted;
(i) Landlords and Landlords managing agents general corporate or partnership overhead and general administrative expenses, and all costs associated with the operation of the business of the ownership or entity which constitutes Landlord, as distinguished from the costs of Building operations, management, maintenance or repair, including, but not limited to, costs of entity accounting and legal matters, costs of any disputes with any ground lessor or mortgagee, costs of acquiring, selling syndicating, financing, mortgaging or hypothecating any of the Landlords interest in all or any part of the Project and/or Common Areas;
(j) costs (including permit, license and inspection fees) incurred in renovating or otherwise improving or decorating, painting or redecorating space for tenants or other occupants or in renovating or redecorating vacant space, including the cost of alterations or improvements to the Premises or to the premises of any other tenant or occupant of the Project and any cash or other consideration paid by Landlord on account of, with respect to, or in lieu of the improvement or alteration work described herein;
(k) costs, including, without limitation, legal fees, space planners fees, advertising and promotional expenses (except as otherwise set forth above), and brokerage fees, in connection with the original construction or development, or original or future leasing of, the Project and related facilities;
(l) Intentionally Omitted;
(m) costs for which the Landlord is to be reimbursed by any tenant (other than as a reimbursement of Operating Expenses) or occupant of the Project or by insurance by its carrier or any tenants carrier or by anyone else (or would have been reimbursed if Landlord had carried the insurance required to be carried by Landlord under the terms of this Lease), including, without limitation, the cost of providing any janitorial services or utilities to any other tenants space (or occupiable space) in the Project and electric power costs for which any tenant directly contracts with the local public service company or for which Landlord is otherwise not obligated to pay;
(n) costs of all items and services for which Tenant reimburses Landlord or pays to third parties or which Landlord provides selectively to one or more tenants or occupants of the Project (other than Tenant);
(o) depreciation and amortization except as permitted pursuant to items (xii) and (xiii), above;
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(p) costs incurred due to violation by Landlord or its managing agent or any tenant of the terms and conditions of any lease;
(q) payments to subsidiaries or affiliates of Landlord, for management or other services in or to the Project, or for supplies or other materials to the extent that the costs of such services, supplies, or materials exceed the costs that would have been paid had the services, supplies or materials been provided by parties unaffiliated with the Landlord on a competitive basis;
(r) intentionally omitted;
(s) any compensation and benefits paid to personnel working in or managing a food service or health club or other commercial concession operated by Landlord or Landlords managing agent;
(t) marketing, advertising and promotional costs and cost of signs in or on the Project identifying the owner of the Building or Project or other tenants signs;
(u) leasing commissions, attorneys fees, costs and disbursements and other expenses incurred in connection with negotiations or disputes with tenants or other occupants or prospective tenants or other occupants, or associated with the enforcement of any leases or the defense of Landlords title to or interest in the Project or any part thereof or Common Areas or any part thereof;
(v) intentionally omitted;
(w) costs of repair or replacement for any item covered by a warranty to the extent actually covered by the warranty;
(x) costs of which Landlord is actually reimbursed by its insurance carrier or by any tenants insurance carrier or by any other entity;
(y) costs, fees, dues, contributions or similar expenses for political or charitable organizations;
(z) bad debt loss, rent loss, or reserves for bad debt or rent loss;
(aa) acquisition or insurance costs for sculptures, paintings, or other art;
(bb) the wages and benefits of any employee who does not devote substantially all of his or her employed time to the Project unless such wages and benefits are prorated to reflect time spent on operating and managing the Project vis-à-vis time spent on matters unrelated to operating and managing the Project;
(cc) Tax Expenses and costs expressly excluded from Tax Expenses;
(dd) the cost of tenant newsletters and Building promotional gifts, events or parties for existing occupants, and any costs related to the celebration or acknowledgment of holidays in excess of costs consistent with the general practice of landlords of the First Class Buildings and any costs for parties for prospective occupants;
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(ee) costs associated with the marketing of the Building for sale or lease or the actual sale of the Building, and costs, fees, dues, contributions or similar expenses for industry associations or similar organizations and entertainment expenses and travel expenses of Landlord, its employees, agents, partners and affiliates;
(ff) fees payable by Landlord for management of the Project in excess of three percent (3%) (the Management Fee Cap) of Landlords gross base rental revenues from the leasing of space in the Project, adjusted and grossed up to reflect a ninety-five percent (95%) occupancy of the Project with all tenants paying full rent (without regard to abatement or other credits), including base rent, pass-throughs, and parking fees (but excluding the cost of after-hours services or utilities) from the Project for any calendar year or portion thereof;
(gg) costs of any artwork;
(hh) costs or fees to the extent arising from the negligence or willful misconduct of Landlord or its agents, employees, vendors, contractors, or providers of materials or services;
(ii) any costs or expenses which, if included within Operating Expenses, would constitute double counting or a double charge for the same item or category of expense;
(jj) penalties for any late payment by Landlord;
(kk) except as provided in item (ll), below, deductibles payable by Landlord under Landlords insurance policies; and
(ll) amounts (A) as a result of damage caused by earthquakes or terrorist acts, (B) which are in excess of a commercially reasonable deductible amount with respect to same, (C) which are not allowed as Permitted Capital Expenditures, above, and (D) which are not required by Applicable Laws; provided that nothing contained in this item (ll) shall supersede, limit or alter the terms of item (f), above,
4.2.7.1 Notwithstanding the foregoing, if any portion of the Premises, the Building and/or the Project is covered by a warranty at any time during the Base Year or any subsequent Expense Year, then Operating Expenses for the Base Year and such subsequent Expense Year shall be considered to be increased by the amount that Landlord would have incurred during the Base Year or such subsequent Expense Year with respect to the items or matters covered by the warranty had the warranty not been effective during the Base Year or such subsequent Expense Year.
4.2.7.2 If Landlord does not carry earthquake insurance for the Building during the entire Base Year but subsequently obtains earthquake insurance for the Building during the Lease Term, then from and after the date upon which Landlord obtains such earthquake insurance and continuing throughout the period during which Landlord maintains such insurance, Operating Expenses for the Base Year shall be deemed to be increased by the amount
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of the premium Landlord would have incurred had Landlord maintained such insurance for the same period of time during the Base Year as such insurance is maintained by Landlord during such subsequent Expense Year. Further, Landlord shall obtain competitive pricing for earthquake insurance in each year such coverage is obtained and shall keep Tenant informed of the premium price comparisons and required coverage levels.
4.2.7.3 If Landlord is not furnishing any particular work or service (the cost of which, if performed by Landlord, would be included in Operating Expenses) to a tenant who has undertaken to perform such work or service in lieu of the performance thereof by Landlord, and such work or service for such tenant was included in Operating Expenses for the Base Year, then Operating Expenses shall be deemed increased by an amount equal to the additional Operating Expenses which would reasonably have been incurred during such period by Landlord if it had at its own expense furnished such work or service to such tenant in the same manner as was calculated and included in the Base Year. Further, if other than as a result of any legal or governmental requirements or other occurrence(s) beyond the reasonable control of Landlord following the Base Year any new category of operating expenses is added to Operating Expenses, then during such time as the costs relating to such new category are included in the Buildings expenses, the calculation of the Operating Expenses for the Base Year shall be increased to reflect such Operating Expenses as would have been incurred had such new category item been included in the Base Year, giving due consideration to what the costs for such new category would have been in the Base Year.
4.2.7.4 If the Project is not fully operational and ninety-five percent (95%) leased and occupied during all or a portion of the Base Year or any Expense Year (inclusive of the Base Year), Landlord shall make an appropriate adjustment to the components of Operating Expenses for such year to determine the amount of Operating Expenses that would have been incurred had the Project been fully operational and ninety-five percent (95%) leased and occupied with Tenant paying full rent; and the amount so determined shall be deemed to have been the amount of Operating Expenses for the Base Year or such Expense Year, as applicable. It is acknowledged that the foregoing gross-up calculation is necessary such that Operating Expenses for the Base Year will not be artificially low if the Buildings use and specific occupancy is ramping up during the Base Year such that actual Base Year Operating Expenses do not reflect at least ninety-five percent (95%) use and occupancy of the Building. In such event, monthly Operating Expenses for a period of six (6) months following the date the Building is fully occupied by Tenant will be extrapolated to calculate Base Year Operating Expenses for purposes of this Lease.
4.2.7.5 Landlord shall not (1) make a profit by charging items to Operating Expenses that are otherwise also charged separately to others, and (2) subject to Landlords right to adjust the components of Operating Expenses described above in this Section 4.2.4, collect Operating Expenses from Tenant and all other tenants in the Building in an amount in excess of one hundred percent (100%) of what Landlord incurs for the items included in Operating Expenses.
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4.2.8 Taxes.
4.2.8.1 Tax Expenses shall mean all federal, state, county, or local governmental or municipal taxes, fees, charges or other impositions of every kind and nature, whether general, special, ordinary or extraordinary (including, without limitation, real estate taxes, general and special assessments, transit taxes, leasehold taxes or taxes based upon the receipt of rent, including gross receipts or sales taxes applicable to the receipt of rent, unless required to be paid by Tenant, personal property taxes imposed upon the fixtures, machinery, equipment, apparatus, systems and equipment, appurtenances, furniture and other personal property used in connection with the Project, or any portion thereof), which shall be paid or accrued during any Expense Year (without regard to any different fiscal year used by such governmental or municipal authority) because of or in connection with the ownership, leasing and operation of the Project, or any portion thereof. For purposes of this Lease, Tax Expenses for the Base Year and each Expense Year shall be calculated as if (i) the Project had been fully leased, occupied and operational for the entire Base Year and/or Expense Year, as applicable, and (ii) all tenant improvements in the Project were fully constructed and fully assessed for real estate tax purposes for the entire Base Year and/or Expense Year; and (iii) as Tenant and all other tenants in the Project were paying full rent for the entire Base Year and/or Expense Year, as applicable (disregarding any credits, abatements and offsets).
4.2.8.2 Tax Expenses shall include, without limitation: (i) any tax on the rent, right to rent or other income from the Project, or any portion thereof, or as against the business of leasing the Project, or any portion thereof; (ii) any assessment, tax, fee, levy or charge in addition to, or in substitution, partially or totally, of any assessment, tax, fee, levy or charge previously included within the definition of real property tax, it being acknowledged by Tenant and Landlord that Proposition 13 was adopted by the voters of the State of California in the June 1978 election (Proposition 13) and that assessments, taxes, fees, levies and charges may be imposed by governmental agencies for such services as fire protection, street, sidewalk and road maintenance, refuse removal and for other governmental services formerly provided without charge to property owners or occupants, and, in further recognition of the decrease in the level and quality of governmental services and amenities as a result of Proposition 13, Tax Expenses shall also include any governmental or private assessments or the Projects contribution towards a governmental or private cost-sharing agreement for the purpose of augmenting or improving the quality of services and amenities normally provided by governmental agencies; (iii) any assessment, tax, fee, levy, or charge allocable to or measured by the area of the Premises or the Rent payable hereunder, including, without limitation, any business or gross income tax or excise tax with respect to the receipt of such rent, or upon or with respect to the possession, leasing, operating, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises, or any portion thereof; (iv) any assessment, tax, fee, levy or charge, upon this transaction or any document to which Tenant is a party, creating or transferring Tenants interest or Tenants estate in the Premises; and (v) all of the real estate taxes and assessments imposed upon or with respect to the Building and all of the real estate taxes and assessments imposed on the land and improvements comprising the Project.
4.2.8.3 Tax refunds (net of all costs incurred by Landlord in connection with obtaining such refund) shall be credited against Tax Expenses and refunded to Tenant regardless of when received, based on the Expense Year to which the refund is applicable, provided that Tenant shall only be entitled to a refund to the extent Tenant paid more in Additional Rent for such Expense Year than Tenant should have paid had such tax refund been applied against
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Tax Expenses for such Expense Year. If Tax Expenses for any period during the Lease Term or any extension thereof are increased after payment thereof for any reason, including, without limitation, error or reassessment by applicable governmental or municipal authorities, Tenant shall pay Landlord within thirty (30) days following demand accompanied by reasonably detailed back-up documentation, Tenants Share of any such increased Tax Expenses included by Landlord as Tax Expenses pursuant to the terms of this Lease. Notwithstanding anything to the contrary contained in this Section 4.2.8 (except as set forth in Section 4.2.8.1 above), there shall be excluded from Tax Expenses (i) all excess profits taxes, franchise taxes, gift taxes, capital stock taxes, inheritance and succession taxes, estate taxes, federal and state income taxes, and other taxes to the extent applicable to Landlords general or net income (as opposed to taxes on gross rents or receipts which are included in the definition of Tax Expenses pursuant to the terms of this Section 4.2.8), (ii) any items included as Operating Expenses, (iii) any items paid by Tenant under Section 4.5 of this Lease (as well as any similar items payable by other Project tenants pursuant to similar provisions contained in their leases), (iv) tax penalties incurred as a result of Landlords failure to make payments and/or to file any tax or informational returns when due, (v) any taxes, assessments or fees payable in connection with or as a condition to the development or construction of the Project, such as taxes, assessment or fees imposed upon Landlord under any development agreement or similar entitlements for the construction or development (but not operation) of the Project, and (vi) any assessments on real property or improvements located outside of the Project. All assessments which can be paid by Landlord in installments, shall be paid by Landlord in the maximum number of installments permitted by law and shall be included as Tax Expenses in the year in which the installment is actually paid.
4.2.8.4 Proposition 13 Protection.
4.2.8.4.1 Tenants Payment of Certain Property Taxes. In the event that during the first five (5) years of the initial Lease Term (the Protection Period), any sale or change in ownership of the Project is consummated with a party unaffiliated with Landlord (a Change in Ownership), and as a result thereof, and to the extent that in connection therewith, the Project or any portion thereof is reassessed (the Reassessment) for real estate tax purposes by the appropriate governmental authority pursuant to the terms of Proposition 13, then the terms of this Section 4.2.8.4 shall apply to such Reassessment of the Project.
4.2.8.4.2 Tax Increase. For purposes of this Section 4.2.8.4.2, the term Tax Increase shall mean that portion of Tax Expenses attributable to any Reassessment (if any) that occurs during the Protection Period. Accordingly, the term Tax Increase shall not include any portion of Tax Expenses, which (A) is attributable to assessments which existed or were pending immediately prior to the Reassessment (which assessments were conducted during, and included in, such Reassessment and which do not arise out of result from any Reassessment occurring during the Protection Period due to a Change of Ownership), (B) is attributable to the annual inflationary increase of real estate taxes, (C) is attributable to the Tenant Improvements, or (D) is attributable to any Reassessment occurring outside of the Protection Period due to a Change in Ownership.
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4.2.8.4.3 Protection. Notwithstanding anything to the contrary contained herein, but subject to Section 4.2.8.4.5 below, if a Reassessment occurs during the Protection Period (but not any other period of the Lease Term, including any extension or renewal of the Lease Term), then any Tax Increase from such Reassessment shall not be included in Real Estate Taxes during such Protection Period. Tenant shall be entitled to no other protections against Tax Increases hereunder, except as expressly provided in this Section 4.2.8.4.3.
4.2.8.4.4 Landlords Right to Purchase the Proposition 13 Protection Amount. The amount of Real Estate Taxes which Tenant is not obligated to pay or will not be obligated to pay during the Protection Period in connection with a Reassessment pursuant to the terms of this Section 4.2.8.4 shall be sometimes referred to hereafter as a Proposition 13 Protection Amount. If the occurrence of a Reassessment is reasonably foreseeable by Landlord and the Proposition 13 Protection Amount attributable to such Reassessment can be reasonably quantified or estimated for each calendar year commencing with the year in which the Reassessment will occur, the terms of this Section 4.2.8.4.3 shall apply to each such Reassessment. Upon notice to Tenant, Landlord shall have the right (but not the obligation) to purchase the Proposition 13 Protection Amount relating to the applicable Reassessment (the Applicable Reassessment), at any time during the initial Lease Term, by paying to Tenant an amount equal to the Proposition 13 Purchase Price, as that term is defined below. As used herein, Proposition 13 Purchase Price shall mean the present value of the Proposition 13 Protection Amount remaining during the initial Lease Term, as of the date of payment of the Proposition 13 Purchase Price by Landlord. Such present value shall be calculated (x) by using the portion of the Proposition 13 Protection Amount attributable to each remaining year of the initial Lease Term (as though the portion of such Proposition 13 Protection Amount benefited Tenant at the beginning of each month of each year of the Lease Term), as the amounts to be discounted, and (y) by using discount rates for each amount to be discounted equal to eight percent (8%) per annum. Upon such payment of the Proposition 13 Purchase Price, the provisions of Section 4.2.8.4 of this Lease shall not apply to any Tax Increase attributable to the Applicable Reassessment, and Tenant shall have no further protection whatsoever under Section 4.2.8.4, and Tenant shall be fully responsible for the entire Tax Increase. Since Landlord will be estimating the Proposition 13 Purchase Price because a Reassessment has not yet occurred, then when such Reassessment occurs, if Landlord has underestimated the Proposition 13 Purchase Price, Tenants Base Rent next due shall be promptly credited with the amount of such underestimation, and if Landlord overestimates the Proposition 13 Purchase Price, then Tenant shall pay the amount of the overestimation to Landlord within forty-five (45) days after written demand.
4.2.8.4.5 Termination of Prop 13 Protection. Notwithstanding anything to the contrary set forth in this Section 4.2.8.4, if a ROFO Purchase Notice or ROFR Purchase Notice is delivered to Tenant pursuant to Article 30 below after the sixth (6th) anniversary of the Lease Commencement Date and Tenant does not elect to exercise its right or otherwise loses the right to purchase the Project pursuant to said Article 30, Tenant shall thereafter have no further protection against a Tax Increase pursuant to Section 4.2.8.4 as a result of a Reassessment that occurs after said 6th anniversary.
4.2.9 Tenants Share shall mean (a) with respect to Building Operating Expenses, 18.75% (based upon the Premises containing approximately 26,118 rentable square feet and the Building containing approximately 139,298 rentable square feet), and (b) with respect to Project Operating Expenses, approximately 13.04% (based upon the Premises containing approximately 26,118 rentable square feet of space and the Project containing approximately 200,215 rentable square feet of space).
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4.3 Cost Pools. Landlord shall have the right, from time to time, to equitably allocate some or all of the Direct Expenses for the Project among different portions or occupants of the Project (the Cost Pools) based on the estimated benefit derived by each such group of occupants that is the subject of the particular Cost Pool, and such allocations shall be reasonably determined by Landlord in accordance with generally accepted commercial lease accounting practices. Such Cost Pools may include, but shall not be limited to, the office space tenants of the Project, and the retail space tenants of the Project. The Direct Expenses within each such Cost Pool shall be allocated and charged to the tenants within such Cost Pool in an equitable manner and on a reasonably consistent basis year-over-year.
4.4 Calculation and Payment of Additional Rent. If for any Expense Year ending or commencing within the Lease Term, Tenants Share of Direct Expenses for such Expense Year exceeds Tenants Share of Direct Expenses applicable to the Base Year (but subject to the exclusion with respect to Operating Expenses attributable to the initial twelve (12) months of the Lease Term, as set forth above in Section 4.1), then Tenant shall pay to Landlord, in the manner set forth in Section 4.4.1, below, and as Additional Rent, an amount equal to the excess (the Excess).
4.4.1 Statement of Actual Direct Expenses and Payment by Tenant. Landlord shall give to Tenant following the end of each Expense Year, a statement (the Statement) which shall state in general the major categories the Direct Expenses incurred or accrued for the Base Year or such preceding Expense Year, as applicable (inclusive of a reasonable description of any Permitted Capital Expenditures which are included in Operating Expenses and, if applicable, the calculations made by Landlord to adjust Direct Expenses pursuant to the final paragraph of Section 4.2.4 and the final sentence of Section 4.2.8.3), and which shall indicate the amount of the Excess. Landlord shall use commercially reasonable efforts to deliver such Statement to Tenant on or before May 1 following the end of the Expense Year to which such Statement relates. Upon receipt of the Statement for each Expense Year commencing or ending during the Lease Term, if an Excess is present, Tenant shall pay, within thirty (30) days after receipt of the Statement, the full amount of the Excess for such Expense Year, less the amounts, if any, paid during such Expense Year as Estimated Excess, as that term is defined in Section 4.4.2, below, and if Tenant paid more as Estimated Excess than the actual Excess, Tenant shall receive a credit in the amount of Tenants overpayment against Rent next due under this Lease. The failure of Landlord to timely furnish the Statement for any Expense Year shall not prejudice Landlord or Tenant from enforcing its rights under this Article 4. Even though the Lease Term has expired and Tenant has vacated the Premises, when the final determination is made of Tenants Share of Direct Expenses for the Expense Year in which this Lease terminates, if an Excess is present, Tenant shall, within thirty(30) days after receipt of the Statement, pay to Landlord such amount, and if Tenant paid more as Estimated Excess than the actual Excess, Landlord shall, within thirty (30) days, deliver a check payable to Tenant in the amount of the overpayment. The provisions of this Section 4.4.1 shall survive the expiration or earlier termination of the Lease Term. Notwithstanding the immediately preceding sentence, Tenant shall not be responsible for Tenants Share of any Direct Expenses attributable to any Expense Year which are first billed to Tenant more than eighteen (18) months after the Lease Expiration Date, provided that in any event Tenant shall be responsible for Tenants Share of Direct Expenses levied by any governmental authority or by any public utility companies at any time following the Lease Expiration Date which are attributable to any Expense Year.
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4.4.2 Statement of Estimated Direct Expenses. In addition, Landlord shall give Tenant a yearly expense estimate statement (the Estimate Statement) which shall set forth in the general major categories Landlords reasonable estimate (the Estimate) of what the total amount of Direct Expenses for the then-current Expense Year shall be and the estimated excess (the Estimated Excess) as calculated by comparing the Direct Expenses for such Expense Year, which shall be based upon the Estimate, to the amount of Direct Expenses for the Base Year. Landlord shall use commercially reasonable efforts to deliver such Estimate Statement to Tenant on or before May 1 following the end of the Expense Year to which such Estimate Statement relates. The failure of Landlord to timely furnish the Estimate Statement for any Expense Year shall not preclude Landlord from enforcing its rights to collect any Additional Rent under this Article 4, nor shall Landlord be prohibited from revising any Estimate Statement or Estimated Excess theretofore delivered to the extent necessary. Thereafter, Tenant shall pay, on the first day of the next calendar month which occurs at least thirty (30) days after receipt of the Estimate Statement, a fraction of the Estimated Excess for the then-current Expense Year (reduced by any amounts paid pursuant to the second to last sentence of this Section 4.4.2). Such fraction shall have as its numerator the number of months which have elapsed in such current Expense Year, including the month of such payment, and twelve (12) as its denominator. Until a new Estimate Statement is furnished (which Landlord shall have the right to deliver to Tenant at any time), Tenant shall pay monthly, with the monthly Base Rent installments, an amount equal to one-twelfth (1/12) of the total Estimated Excess set forth in the previous Estimate Statement delivered by Landlord to Tenant. Throughout the Lease Term, Landlord shall maintain books and records with respect to Direct Expenses in accordance with generally accepted real estate accounting and management practices, consistently applied.
4.5 Taxes and Other Charges for Which Tenant Is Directly Responsible.
4.5.1 Tenant shall be liable for and shall pay thirty (30) days before delinquency, taxes levied against Tenants equipment, furniture, fixtures and any other personal property located in or about the Premises. If any such taxes on Tenants equipment, furniture, fixtures and any other personal property are levied against Landlord or Landlords property or if the assessed value of Landlords property is increased by the inclusion therein of a value placed upon such equipment, furniture, fixtures or any other personal property and if Landlord pays the taxes based upon such increased assessment, which Landlord shall have the right to do regardless of the validity thereof but only under proper protest if requested by Tenant, Tenant shall repay to Landlord the taxes so levied against Landlord or the proportion of such taxes resulting from such increase in the assessment, as the case may be, within thirty (30) days of Tenants receipt of an invoice and reasonable supporting documentation therefor.
4.5.2 If the tenant improvements in the Premises, whether installed and/or paid for by Landlord or Tenant and whether or not affixed to the real property so as to become a part thereof, are assessed for real property tax purposes at a valuation higher than the valuation at which tenant improvements conforming to Landlords building standard in other space in the Building are assessed, then the Tax Expenses levied against Landlord or the property by reason of such excess assessed valuation shall be deemed to be taxes levied against personal property of Tenant and shall be governed by the provisions of Section 4.5.1, above. Landlord and Tenant hereby agree that the valuation of Landlords building standard tenant improvements shall be equal to $75.00 per rentable square foot.
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4.5.3 Subject to the terms of Section 4.2.8, above, Tenant shall pay prior to delinquency any rent tax or sales tax, service tax, transfer tax or value added tax, or any other applicable tax on the gross rent payable by Tenant under this Lease, or (ii) taxes assessed upon or with respect to the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises pursuant to this Lease.
4.6 Landlords Books and Records. Following Tenants receipt of a Statement, Tenant shall have the right by written notice to Landlord to commence an audit of Landlords books concerning the Direct Expenses for the Expense Year which are the subject to such Statement, within one (1) year following the delivery of such Statement (the Review Period) and complete the same within ninety (90) days thereafter. Following the giving of such written notice, Tenant shall have the right during Landlords regular business hours taking into account the workload of Landlords employees involved in the audit at the time of the audit request and on reasonable prior notice, to audit, at Landlords corporate offices (or such other location as mutually agreed upon by Landlord and Tenant), at Tenants sole cost, Landlords records, provided that Tenant is not then in Default. The audit of Landlords records may be conducted only by a reputable certified public accountant, subject to Landlords approval, which approval shall not be unreasonably withheld. Any accounting firm selected by Tenant in connection with the audit (i) shall be a reputable certified public accounting firm which has previous experience in auditing financial operating records of landlords of office buildings; (ii) shall not be retained by Tenant on a contingency fee basis (i.e. Tenant must be billed based on the actual time and materials that are incurred by the accounting firm in the performance of the audit), a copy of the executed audit agreement, between Tenant and auditor, shall be provided to Landlord prior to the commencement of the audit; and (iii) at Landlords option, both Tenant and its agent shall be required to execute a commercially reasonable confidentially agreement prepared by Landlord. Any audit report prepared by Tenants auditors shall be delivered concurrently to Landlord and Tenant within the Review Period. If, after such audit of Landlords records, Tenant disputes the amount of Direct Expenses for the year under audit, Landlord and Tenant shall meet and attempt in good faith to resolve the dispute. If the parties are unable to resolve the dispute within sixty (60) days after completion of Tenants audit, then, at Tenants request, a certified public accounting firm selected by Landlord, and reasonably approved by Tenant, shall conduct an audit of the relevant Direct Expenses (the Neutral Audit), provided, however, such certified public accountant shall not be the accountant who conducted Landlords initial calculation of Direct Expenses. Tenant shall pay all costs and expenses of the Neutral Audit unless the final determination in such Neutral Audit is that Landlord overstated Direct Expenses in the Statement for the year being audited by more than three percent (3%) in which case Landlord shall pay all costs and expenses of the Neutral Audit, as well as Tenants reasonable out-of-pocket costs actually incurred by Tenant in the review of Landlords books and records. Additionally, if the parties agree or it is determined (whether or not through arbitration) that Landlord overstated Direct Expenses by more than three percent (3%), Landlord shall pay Tenants reasonable out of pocket costs incurred in the audit of Landlords books and records. In any
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event, Landlord will reimburse or provide a credit for any overstatement of Direct Expenses and Tenant shall pay to Landlord any understatement of Direct Expenses. If the Direct Expenses for the Base Year are adjusted as a result of such Neutral Audit, then any such change in the Direct Expenses for the Base Year shall be included in the foregoing calculation to determine if the Direct Expenses were overstated by more than three percent (3%). To the extent Landlord and Tenant fail to otherwise reach mutual agreement regarding Direct Expenses, the foregoing audit and Neutral Audit procedures shall be the sole methods to be used by Tenant to dispute the amount of any Direct Expenses payable by Tenant pursuant to the terms of the Lease.
ARTICLE 5
USE OF PREMISES
5.1 Permitted Use. Tenant shall use the Premises solely for the Permitted Use set forth in Section 7 of the Summary and Tenant shall not use or permit the Premises or the Project to be used for any other purpose or purposes whatsoever without the prior written consent of Landlord, which may be withheld in Landlords reasonable discretion. Without limiting the foregoing, Tenants use must comply with and is subject to the terms of the Colorado Creative Studios Development Agreement (the Development Agreement) referenced in Exhibit G attached hereto.
5.2 Prohibited Uses. The uses prohibited under this Lease shall include, without limitation, use of the Premises or a portion thereof for (i) offices of any agency or bureau of the United States or any state or political subdivision thereof; (ii) offices or agencies of any foreign governmental or political subdivision thereof; (iii) offices of any health care professionals or service organization; (iv) schools or other training facilities which are not ancillary to corporate, executive or professional office use; (v) retail use or the operation of any restaurant offering services to the public; (vi) a data or call center; or (vii) communications firms such as radio and/or television stations. Tenant further covenants and agrees that Tenant shall not use, or suffer or permit any person or persons to use, the Premises or any part thereof for any use or purpose contrary to the provisions of the Rules and Regulations set forth in Exhibit D, attached hereto, or in violation of the laws of the United States of America, the State of California, or the ordinances, regulations or requirements of the local municipal or county governing body or other lawful authorities having jurisdiction over the Project) including, without limitation, any such laws, ordinances, regulations or requirements relating to Hazardous Substances. Tenant shall not do or permit anything to be done in or about the Premises which will in any way damage the reputation of the Project or obstruct or interfere with the rights of other tenants or occupants of the Building, or injure or annoy them or use or allow the Premises to be used for any unlawful purpose, nor shall Tenant cause, maintain or permit any nuisance in, on or about the Premises. Tenant shall comply with all recorded covenants, conditions, and restrictions now or hereafter affecting the Project. Except for small quantities customarily used in business offices, Tenant shall not cause or permit any Hazardous Substance to be kept, maintained, used, stored, produced, generated or disposed of (into the sewage or waste disposal system or otherwise) on or in the Premises by Tenant or Tenants agents, employees, contractors, invitees, assignees or sublessees, without first obtaining Landlords written consent. Tenant shall immediately notify, and shall direct Tenants agents,
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employees contractors, invitees, assignees and sublessees to immediately notify, Landlord of any incident in, on or about the Premises, the Building or the Project that would require the filing of a notice under any federal, state, local or quasi-governmental law (whether under common law, statute or otherwise), ordinance, decree, code, ruling, award, rule, regulation or guidance document now or hereafter enacted or promulgated, as amended from time to time, in any way relating to or regulating any Hazardous Substance. As used herein, Hazardous Substance means any substance which is toxic, ignitable, reactive, or corrosive and which is regulated by any local government, the State of California, or the United States government. Hazardous Substance includes any and all material or substances which are defined as hazardous waste, extremely hazardous waste or a hazardous substance pursuant to state, federal or local governmental law. Hazardous Substance also includes asbestos, polychlorobiphenyls (i.e., PCBs) and petroleum.
5.3 Electric Car Charging Stations. As part of the Base, Shell and Core, Landlord shall provide no less than ten (10) Electric Car Charging Stations in the Garage (as that term is defined in Section 5.4.1) for use by Tenant on a non-exclusive basis. Landlord shall have the right to develop and implement rules and procedures for the operation and use thereof, including making determinations of fees to be charged for such use. Landlord shall be entitled to all fees generated through the operation of the Electric Car Charging Stations.
5.4 Tenants Bicycles. Tenants employees shall be permitted to bring their bicycles (Bicycles) into the designated portions of the Garage (defined below), subject to the provisions of this Section 5.4, and such additional reasonable rules and regulations as may be promulgated by Landlord from time to time (in Landlords reasonable discretion) that do not unreasonably interfere with Tenants employees ability to park their bicycles as contemplated herein and provided to Tenant, and only to the extent such Bicycles are used for commuting to and from work by such employees. AT NO TIME ARE RIDERS ALLOWED TO RIDE ANY BICYCLE IN THE PREMISES, THE GARAGE, THE BUILDING, OR ANYWHERE ELSE WITHIN THE PROPERTY. RIDERS MUST ALWAYS WALK THEIR BICYCLES WITHIN THE PROPERTY BOUNDARIES. Storage of any Bicycle anywhere on the Project other than as expressly set forth in this Section 5.4 is prohibited. Tenant shall keep its employees informed of these rules and regulations and any modifications thereto.
5.4.1 Bicycle Storage Area. Tenants employees shall have the non-exclusive right, on a first come, first served basis, at no cost to Tenant, to utilize that portion of the Buildings parking garage (the Garage) designated by Landlord for the parking of operable non-motorized Bicycles by Tenants employees and invitees (the Bicycle Storage Area). Motorized vehicles of any kind, including motorcycles and mopeds, are prohibited in the Bicycle Storage Area, as is the storage of any property other than Bicycles. Each rider shall use the Bicycle Storage Area at his or her sole risk. Landlord specifically reserves the right to reasonably change the location, size, configuration, design, layout and all other aspects of the Bicycle Storage Area at any time (provided that no such action will materially diminish the capacity of the Bicycle Storage Area on other than a temporary basis), and Tenant acknowledges and agrees that Landlord may, upon no less than one (1) business days prior written notice (except in the event of an emergency, where no prior notice shall be required), without incurring any liability to Tenant and without any abatement of Rent under this Lease, from time to time, temporarily close-off or restrict access to the Bicycle Storage Area for purposes of permitting or facilitating any such construction, alteration or improvements. It is further understood and agreed
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that, if necessary in order to comply with any local or governmental rules and regulations relating to transportation or environmental considerations, Landlord and Tenant will work together to accommodate any required increase in the Bicycle Storage Area. Landlord has no obligation to provide any security whatsoever in connection with the Bicycle Storage Area except as expressly set forth in this Section 5.4.1. Landlord shall provide twenty-four (24) hours per day, seven (7) days per week, reasonable access control services for the Bicycle Storage Area in a manner materially consistent with the services provided by landlords of the First Class Buildings. Notwithstanding the foregoing, except to the extent arising out of the negligence or willful misconduct of Landlord, Landlord shall in no case be liable for personal injury or property damage for any error with regard to the admission to or exclusion from the Bicycle Storage Area of any person not authorized to enter the Project. Upon the expiration or earlier termination of this Lease, Tenant shall have removed all Bicycles belonging to its employees from the Bicycle Storage Area and Tenant, at Tenants sole cost and expense, shall repair all damage to the Bicycle Storage Area caused by the removal of Tenants property therefrom, and if Tenant fails to repair such damage, Landlord may undertake such repair on account of Tenant and Tenant shall pay to Landlord upon demand the cost of such repair. If Tenant fails to remove any Bicycles at the expiration or earlier termination of this Lease, Landlord may dispose of said Bicycles in such lawful manner as it shall determine in its sole and absolute discretion.
ARTICLE 6
SERVICES AND UTILITIES
6.1 Standard Tenant Services. Landlord shall provide the following services on all days (unless otherwise stated below) during the Lease Term, as necessary to operate and maintain the Project as a first class office building project offering amenities, character and operational qualities (including, without limitation, maintenance, quality and timeliness of provision of services) generally consistent with those currently provided at the following office buildings (so long as same are leased to third party tenants): the office building located at 2700 Colorado Boulevard, Water Garden and Colorado Center (such other buildings to be herein referred to collectively as the First Class Buildings).
6.1.1 Subject to limitations imposed by all governmental rules, regulations and guidelines applicable thereto, Landlord shall provide heating and air conditioning (HVAC) when necessary for normal comfort for normal office use in the Premises in accordance with HVAC Design Standards (defined below), from 8:00 A.M. to 6:00 P.M. Monday through Friday and 9:00 A.M. to 1:00 P.M. on Saturday (the Building Hours) (i.e., the HVAC is intended to bring the temperature within the HVAC Design Standard by 8:00 A.M. each Monday through Friday, and the Building engineers shall use their best efforts to start up the HVAC system at such times each day as applicable to ensure the foregoing standards are met by the required time), except for the date of observation of New Years Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, Christmas Day and, at Landlords discretion, other locally or nationally recognized holidays (collectively, the Holidays). In the event Tenant subsequently requests a minor adjustment(s) to the Building Hours from time to time, Landlord further agrees to use its commercially reasonable efforts to accommodate any such request. The Building HVAC System serving the Premises shall be designed to maintain temperatures for the comfortable occupancy of the Premises in a manner comparable to that provided at First Class Buildings, based upon
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population load per floor of not more than one person per 200 square feet of usable area, 0.15 CFM per rentable square foot of outside air, tenant power and light at 5 watts per rentable square foot (HVAC Design Standard). During the Lease Term, Landlord shall also use its commercially reasonable efforts to cause the HVAC and indoor air quality of the Premises to materially comply with, for the entire Lease Term, the standards set forth in Standard 62.1-2016 for office occupancy (Ventilation for Acceptable Indoor Air Quality), including both the requirements of the Ventilation Rate Procedure and Indoor Air Quality Procedure and the maintenance requirements, recommendations and guidelines contained therein, promulgated by the American Society of Heating, Refrigerating and Air Conditioning Engineers (ASHRAE) (collectively, the Indoor Air Quality Standard). In the event the indoor air quality delivered to the Premises by the HVAC (excluding any air delivered by any supplemental system installed by Tenant) fails to meet the Indoor Air Quality Standard on a sustained basis as a result of a condition not caused by (A) Tenants use of the Premises (for non-general office use) or (B) any act or omission of Tenant or Tenants Parties (including Tenants occupancy density), then such condition shall be referred to as a Sick Building. Upon Tenants reasonable periodic request, Landlord shall have its personnel adjust the thermostats in the Premises at no additional cost to Tenant. If Tenant desires to use heat, ventilation or air conditioning during hours other than Building Hours (exclusive of any separately metered utilities for Tenants Supplemental HVAC, as that term is defined in Section 6.6 below), (i) Tenant shall give Landlord such prior notice, as Landlord shall from time to time establish as appropriate, of Tenants desired use, (ii) Landlord shall supply such heat, ventilation or air conditioning to Tenant at such hourly cost to Tenant as Landlord shall from time to time establish, and (iii) Tenant shall pay such cost as Additional Rent. Landlord confirms that after-hours heating and air-conditioning is available to the Premises at the current rate of Seventy-Five and 00/100 Dollars ($75) per hour per floor of the Premises. Tenant shall cooperate fully with Landlord at all times and abide by all regulations and requirements that Landlord may reasonably prescribe for the proper functioning and protection of the HVAC, electrical, mechanical and plumbing systems.
6.1.2 Subject to the other terms of this Lease, Landlord shall provide adequate electrical wiring and facilities and power for normal general office use in the total amount of five (5) watts connected load per rentable square foot of the Premises. In connection with the foregoing, (i) four (4) watts connected load per rentable square foot of the Premises shall be furnished at one hundred twenty (120) volts for Tenants incidental equipment use, and (ii) one (1) watt connected load per rentable square foot of the Premises shall be furnished at two hundred seventy-seven (277) volts for Tenants lighting. In addition, to the extent required by applicable code, Landlord shall provide emergency generator power for emergency lighting in the Building. Tenant shall bear the cost of replacement of lamps, starters and ballasts for non-Building standard lighting fixtures within the Premises (Landlord, as part of Operating Expenses, will replace Building standard lamps, starters and ballasts). Tenant agrees that all lighting installed in the Premises shall comply with all requirements of Title 24 (as applicable to the Premises). Tenant shall reasonably cooperate with Landlord at all times and abide by all regulations and requirements that Landlord may reasonably prescribe for the proper functioning and protection of the Building electrical systems.
6.1.3 Landlord shall provide city water from the regular Building outlets for drinking, lavatory and toilet purposes in the Common Areas.
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6.1.4 Landlord shall provide cleaning and janitorial services to the Premises and to the Common Areas of the Project (including all building exteriors and the Garage) in a manner consistent with the First Class Buildings. Landlord shall also provide maintenance services to all Common Areas of the Project as necessary to maintain and operate the Project in a manner consistent with the First Class Buildings. In the event that Landlord fails to provide such services to all Common Areas of the Project, Tenant shall deliver to Landlord written notice setting forth in reasonable detail the nature of the failures and lapses. Upon receipt of such notice, unless Landlord disputes such claimed failures in good faith, Landlord covenants and agrees to promptly remedy any such failure of janitorial services either by enforcing its contract with the existing janitorial service provider, or by replacing the existing janitorial service provider with a new provider reasonably acceptable to Tenant who is qualified and obligated to perform the full scope of the janitorial and maintenance services required by the terms of this Lease.
6.1.5 Landlord shall provide a third party property manager for the Project as necessary to perform property management functions at least equal (in terms of response time and quality of service, among other factors) to the performance of property managers of the First Class Buildings. To the extent consistent with the First Class Buildings, Landlord shall have a parking attendant available on-site (in the parking facility) and an engineer available to service the Building during the Projects normal business hours.
6.1.6 Landlord shall provide non-exclusive, non-attended automatic passenger elevator service during the Building Hours, and shall have one (1) elevator available at all other times. Landlord shall provide non-exclusive use of the Building loading dock(s) and freight elevator(s) (if any) for deliveries to Tenant at all times allowed pursuant to the requirements of the City of Santa Monica, but otherwise in accordance with the Buildings rules and regulations.
6.1.7 Subject to Landlords rules, regulations, and restrictions and the terms of this Lease, Landlord shall permit Tenant, at no additional charge to Tenant, to utilize Tenants Share of the risers, raceways, shafts and conduit in the Building that is available for use by the tenants and occupants of the Building.
6.1.8 Landlord shall provide security and access-control services 24 hours per day, 7 days per week, 365 days per year, for the Project and Building parking facility in a manner materially consistent with the First Class Buildings. Upon advance request from Tenant, and subject to the availability of a security personnel at such time, such services shall include a security escort to Tenants employees and invitees traveling to and from the Building to their vehicles after dark. Notwithstanding the foregoing, except to the extent arising from the negligence or willful misconduct of Landlord, Landlord shall in no case be liable for personal injury or property damage for any error with regard to the admission to or exclusion from the Building or the Project of any person.
6.1.9 Landlord hereby agrees that Tenant shall have the right at Tenants sole expense to install or utilize Tenants own security measures (such as a security system, card-key system, and a remotely monitored camera security system) within (but not outside) any portions of its Premises which are not shared, so long as such systems and services are compatible with Building systems and reasonably approved by Landlord (Tenants Security System). Tenants Security System shall be subject to Landlords prior review and approval (not to be unreasonably
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withheld), and the installation thereof shall be deemed an Alteration and shall be performed pursuant to Article 8 of this Lease, below. In addition, Tenant shall coordinate the selection, installation and operation of Tenants Security System with Landlord in order to ensure that Tenants Security System is compatible with Landlords Building security systems and equipment, and to the extent that Tenants Security System is not compatible with Landlords Building systems and equipment, Tenant shall not be entitled to install and/or operate the Tenants Security System. Tenant shall be solely responsible, at Tenants sole cost and expense, for the monitoring, operation and removal of Tenants Security System.
6.1.10 Subject to Applicable Laws and the other provisions of this Lease, and except in the event of an emergency, Tenant shall have access to the above utilities and the Building, the Premises and the Common Areas (other than common areas requiring access with a Building engineer), the Garage and freight elevator, twenty-four (24) hours per day, seven (7) days per week, every day of the year; provided, however, that Tenant shall only be permitted to have access to and use of the loading dock, and other limited-access areas of the Building during all times allowed pursuant to the requirements of the City of Santa Monica. On or before the Lease Commencement Date, Landlord shall deliver to Tenant one (1) Building key card per 250 rentable square feet of the Premises, at no charge to Tenant. Tenant shall have the right to deliver written notice to Landlord requesting additional key cards, from time to time, provided that such additional key cards shall be at the prevailing rate charged by Landlord for such cards from time to time (which rate as of the date of this Lease is Twenty-Five and 00/100 Dollars ($25.00) per key card).
6.2 Intentionally Omitted.
6.3 Interruption of Use. Unless any failure or delay or diminution is the result of Landlords negligence or breach of this Lease, Tenant agrees that Landlord shall not be liable for damages, by abatement of Rent or otherwise (except as specifically set forth in Section 19.5.2 of this Lease), for failure to furnish or delay in furnishing any service (including telephone and telecommunication services), or for any diminution in the quality or quantity thereof, when such failure or delay or diminution is occasioned, in whole or in part, by breakage, repairs, replacements, or improvements, by any strike, lockout or other labor trouble, by inability to secure electricity, gas, water, or other fuel at the Building or the Project after reasonable effort to do so, by any riot or other dangerous condition, emergency, accident or casualty whatsoever, by act or default of Tenant or other parties, or by any other cause; and such failures or delays or diminution shall never be deemed to constitute an eviction or disturbance of Tenants use and possession of the Premises or relieve Tenant from paying Rent (except as specifically set forth in Section 19.5.2 of this Lease) or performing any of its obligations under this Lease. Furthermore, Landlord shall not be liable under any circumstances for a loss of, or injury to, property or for injury to, or interference with, Tenants business, including, without limitation, loss of profits, however occurring, through or in connection with or incidental to a failure to furnish any of the services or utilities as set forth in this Article 6.
6.4 Use of Shafts and Utility Connections. Landlord shall have reasonable access through existing Building shafts to other portions of the Building (including the roof, mechanical floors and tenant spaces [including the Premises]), or to utility connections outside the Building, for the installation, repair, and maintenance of ducts, pipes, connections, and equipment for cables, conduits, transmitters, receivers, and other office, computer, communications and word and data
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processing equipment and facilities, including any technological devices not yet developed, whether similar or dissimilar to the foregoing, which may hereafter become necessary or desirable for any permitted use of the Project; provided, however, that to the extent such shafts or utility connections are located within the Premises, such access shall not materially and unreasonably interfere with Tenants occupancy of the Premises (Landlords efforts in such regard will include, where reasonably possible, limiting the performance of any such work which might be disruptive to weekends or the evening and the cleaning of any work area prior to the commencement of the next business day).
6.5 Telecommunications Services. As part of the Base, Shell and Core, Landlord has installed and shall maintain a Main Point of Entry located in the Building (the MPOE), through which telecommunications services will be routed. Tenant shall be allowed to contract with such telecommunications, internet and data service providers as Tenant may elect, and all such providers will be provided nondiscriminatory access at no charge as necessary to provide service to the Building. Tenant shall also have the right to install wi-fi, cell booster, and other systems and equipment necessary or desirable for Tenants business operations at the Building and in the Common Areas.
6.6 Supplemental HVAC. Pursuant to and in accordance with the terms of the Tenant Work Letter attached hereto as Exhibit B, Tenant shall cause supplemental HVAC equipment to be installed as part of the Tenant Improvements within the server room located within the Premises (collectively, the Supplemental HVAC Equipment). Tenants use and maintenance of the Supplemental HVAC Equipment shall be at Tenants sole cost and expense and Tenant shall at all times maintain the Supplemental HVAC Equipment in good condition and repair. Pursuant to the Work Letter, a separate meter for the Supplemental HVAC Equipment shall be installed as part of the Tenant Improvements. The Supplemental HVAC Equipment shall be separately metered at Tenants sole cost and expense, and all costs and utility charges relating to the operation, maintenance and repair of such Supplemental HVAC Equipment shall be paid for by Tenant. If Tenant elects to install any additional supplemental HVAC equipment pursuant to the terms of Article 8 below, Tenant shall install and operate the additional supplemental HVAC equipment in compliance with Applicable Laws and shall at all times maintain the additional supplemental HVAC equipment in good condition and repair. Upon the expiration or earlier termination of this Lease, Tenant shall surrender the Supplemental HVAC Equipment and any additional supplemental HVAC equipment to Landlord in good condition, normal wear and tear excepted.
ARTICLE 7
REPAIRS
Landlord shall at all times during the Lease Term maintain in good condition and operating order and in a manner reasonably commensurate with the maintenance standards of owners of First Class Buildings, the structural portions of the Building, including, without limitation, the foundation, floor slabs, ceilings, roof, columns, beams, shafts, stairs, stairwells, escalators, elevators, base building restrooms and all Common Areas (collectively, the Building Structure), and the Base Building mechanical, electrical, life safety, plumbing, sprinkler and HVAC systems installed or furnished by Landlord (collectively, the Building Systems). Except as specifically set forth in this Lease to the contrary, Tenant shall not be required to repair the
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Building Structure and/or the Building Systems except to the extent required because of Tenants use of the Premises. Tenant shall, at Tenants own expense, pursuant to the terms of this Lease, including without limitation, Article 8 hereof, keep the Premises, including all improvements, fixtures and furnishings therein, and the floor or floors of the Building on which the Premises are located, in good order, repair and condition (ordinary wear and tear excepted) at all times during the Lease Term. In addition, Tenant shall, at Tenants own expense, but under the supervision and subject to the prior reasonable approval of Landlord, pursuant to the terms of this Lease, including without limitation Article 8 hereof, promptly and adequately repair all damage to the Premises and replace or repair all damaged, broken, or worn fixtures and appurtenances, except for damage caused by ordinary wear and tear or beyond the reasonable control of Tenant; provided however, that, at Landlords option, or if Tenant fails to commence to make such repairs within ten (10) business days following notice from Landlord, Landlord may, but need not, make such repairs and replacements, and Tenant shall pay Landlord the cost thereof. Subject to the provisions of the final sentence of Section 6.4, above, Landlord may, but shall not be required to, enter the Premises at all reasonable times (upon no less than one (1) business days prior notice to Tenant, except in the event of an emergency, where no prior notice shall be required) to make such repairs, alterations, improvements or additions to the Premises or to the Project or to any equipment located in the Project as Landlord shall desire or deem necessary or as Landlord may be required to do by governmental or quasi-governmental authority or court order or decree. Tenant hereby waives any and all rights under and benefits of subsection 1 of Section 1932 and Sections 1941 and 1942 of the California Civil Code or under any similar law, statute, or ordinance now or hereafter in effect.
ARTICLE 8
ADDITIONS AND ALTERATIONS
8.1 Landlords Consent to Alterations. Except for Cosmetic Alterations (as that term is defined below) and alterations made pursuant to the terms of Section 8.6 below, Tenant may not make any improvements, alterations, additions or changes to the Premises or any mechanical, plumbing or HVAC facilities or systems pertaining to the Premises (collectively, the Alterations) without first procuring the prior written consent of Landlord to such Alterations, which consent shall be requested by Tenant not less than ten (10) business days prior to the commencement thereof, and which consent shall not be unreasonably withheld by Landlord, provided it shall be deemed reasonable for Landlord to withhold its consent to any Alteration which may adversely affect the Building Structure (taking into account the fact that the Building is a post-tension building) or Building Systems or is visible from the exterior of the Building, or negatively impacts or impairs the Buildings LEED certification. Notwithstanding the foregoing, Tenant shall be permitted to make strictly cosmetic, non-structural additions and alterations (Cosmetic Alterations) following five (5) business days notice to Landlord, but without Landlords prior consent, to the extent that such Cosmetic Alterations (i) do not affect the Building Structure, Building Systems or equipment, (ii) are not visible from the exterior of the Building, (iii) do not require a building or construction permit, (iv) cost less than $25,000.00 for a particular job of work, and (v) do not negatively impair or impact the Buildings LEED certification. The construction of the initial improvements to the Premises shall be governed by the terms of the Tenant Work Letter and not the terms of this Article 8.
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8.2 Manner of Construction. Landlord may impose, as a condition of its consent to any and all Alterations or repairs of the Premises or about the Premises, such requirements as Landlord in its reasonable discretion may deem desirable, including, but not limited to, the requirement that Tenant utilize for such purposes only contractors, subcontractors, materials, mechanics and materialmen selected by Tenant and reasonably approved by Landlord, the requirement that upon Landlords request, Tenant shall, at Tenants expense, remove any Specialty Alterations (defined below) upon the expiration or any early termination of the Lease Term. Tenant shall construct such Alterations and perform such repairs in a good and workmanlike manner, in conformance with any and all applicable federal, state, county or municipal laws, rules and regulations and pursuant to a valid building permit, issued by the City of Santa Monica, all in conformance with Landlords reasonable construction rules and regulations. In the event Tenant performs any Alterations in the Premises which require or give rise to governmentally required changes to the Base Building, as that term is defined below, then Landlord shall, at Tenants expense, make such changes to the Base Building. The Base Building shall mean the Base, Shell and Core, including the Building Structure and the Building Systems, further including the Building Systems on the floor or floors on which the Premises are located as well as the Common Areas. In performing the work of any such Alterations, Tenant shall have the work performed in such manner so as not to obstruct access to the Project or any portion thereof, by any other tenant of the Project, and so as not to obstruct the business of Landlord or other tenants in the Project. In addition to Tenants obligations under Article 9 of this Lease, upon completion of any Alterations, Tenant agrees to cause a Notice of Completion to be recorded in the office of the Recorder of the County of Los Angeles in accordance with Section 3093 of the Civil Code of the State of California or any successor statute, and Tenant shall deliver to the Project management office a reproducible copy of the as built or record drawings of the Alterations as well as all permits, approvals and other documents issued by any governmental agency in connection with the Alterations.
8.3 Payment for Improvements. If payment is made directly to contractors, Tenant shall, at Tenants cost, comply with Landlords reasonable requirements for final lien releases and waivers in connection with Tenants payment for work to contractors. For purposes of determining the cost of an Alteration, work done in phases or stages shall be considered part of the same Alteration, and any Alteration shall be deemed to include all trades and materials involved in accomplishing a particular result.
8.4 Construction Insurance. In addition to the requirements of Article 10 of this Lease, in the event that Tenant makes any Alterations which do not constitute purely Cosmetic Alterations, then prior to the commencement of such Alterations, Tenant shall provide Landlord with evidence that Tenant carries Builders All Risk insurance in an amount at least equal to the replacement value of the Alterations, liability insurance insuring Tenant and each of Tenants contractors against construction-related risks, and if applicable, workers compensation and such other reasonable and customary coverage required of contractors working in First Class Buildings. It is further understood and agreed that all of such Alterations shall be insured by Tenant pursuant to Article 10 of this Lease immediately upon completion thereof. In addition, in connection with any Alterations which do not constitute purely Cosmetic Alterations, Tenant shall reimburse Landlord for Landlords reasonable, actual, out-of-pocket costs and expenses actually incurred in connection with Landlords review of Tenants work.
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8.5 Landlords Property. All Alterations, improvements, fixtures, equipment and/or appurtenances which may be installed or placed in or about the Premises, from time to time, shall be at the sole cost of Tenant and shall be and become the property of Landlord, except that Tenant may remove any Alterations, improvements, fixtures and/or equipment which Tenant can substantiate to Landlord have not been paid for with any Tenant improvement allowance funds provided to Tenant by Landlord, provided Tenant repairs any damage to the Premises and Building caused by such removal and returns the affected portion of the Premises to the condition existing prior to the installation of such Alteration, improvement, fixture, equipment and/or appurtenance as reasonably determined by Landlord. Furthermore, Landlord may, by written notice to Tenant prior to the end of the Lease Term, or given following any earlier termination of this Lease, require Tenant, at Tenants expense, to remove any Specialty Alterations and to repair any damage to the Premises and Building and return the affected portion of the Premises to the condition existing prior to the installation of such Specialty Alteration (reasonable wear and tear excepted) as reasonably determined by Landlord; provided; however, that notwithstanding the foregoing, upon request by Tenant at the time of Tenants request for Landlords consent to any Alteration or improvement, Landlord shall notify Tenant whether the applicable Alteration or improvement constitutes a Specialty Alteration that will be required to be removed pursuant to the terms of this Section 8.5. If Tenant fails to complete any required removal and/or to repair any damage caused by the required removal of any Specialty Alterations, and return the affected portion of the Premises to the condition existing prior to the installation of such Specialty Alteration (reasonable wear and tear excepted) as reasonably determined by Landlord, Landlord may do so and may charge the actual and reasonable cost thereof to Tenant. Tenant hereby protects, defends, indemnifies and holds Landlord harmless from any liability, cost, obligation, expense or claim of lien in any manner relating to the installation, placement, removal or financing of any such Alterations, improvements, fixtures and/or equipment in, on or about the Premises, which obligations of Tenant shall survive the expiration or earlier termination of this Lease. As used herein, Specialty Alterations shall mean any Alteration or Tenant Improvements that is not a normal and customary general office improvement, including, but not limited to improvements which (i) perforate, penetrate or require reinforcement of a floor slab (including, without limitation, interior stairwells or high-density filing or racking systems), (ii) consist of the installation of a raised flooring system, (iii) consist of the installation of a vault or other similar device or system intended to secure the Premises or a portion thereof in a manner that exceeds the level of security necessary for ordinary office space, (iv) involve material plumbing connections (such as, for example but not by way of limitation, kitchens, saunas, showers, and executive bathrooms outside of the Building core and/or special fire safety systems), (v) consist of the dedication of any material portion of the Premises to non-office usage (such as classrooms, bicycle storage rooms or kitchens), (vi) internal stairwells between floors; (vii) screening rooms; or (viii) can be seen from outside the Premises.
8.6 Self Help. Notwithstanding the foregoing, in the event that Landlord fails to make any repairs to the Premises which Landlord is required to make pursuant to the terms of this Lease (which failure to repair materially and adversely affects Tenants use of the Premises) within thirty (30) days after written notice from Tenant (or one (1) business day after written notice in the case of an emergency involving the likelihood of imminent harm to person or material damage to property), then Tenant may give Landlord an additional five (5) business days written notice (or additional one (1) business days written notice in the case of emergency as described above) (such additional notice, a Self Help Notice) specifying that Tenant is going to take such required action
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(which notice must describe in detail the action required of Landlord pursuant to this Lease, and state in the subject line in boldface, ALL CAPS that LANDLORDS ATTENTION IS REQUIRED. IF LANDLORD FAILS TO COMMENCE PERFORMANCE OF ITS OBLIGATIONS WITHIN FIVE (5) BUSINESS DAYS [ONE (1) BUSINESS DAY] FOLLOWING THE DATE OF THIS NOTICE, TENANT SHALL EXERCISE ITS SELF HELP REMEDY PURSUANT TO SECTION 8.6 OF THE LEASE). If Landlord has not commenced to repair such problem (or reasonably objected to the required action described in Tenants notice) within such five (5) business day period (or one (1) business day period in the case of an emergency) after receipt of the Self Help Notice from Tenant (which Self Help Notice must conform with the foregoing requirements), then Tenant shall have the right to perform the required action of Landlord in a good and professional manner in accordance with all applicable laws (using vendors pre-approved by Landlord) and, provided that Landlord has not reasonably disputed or objected to the required action described in Tenants notice, Landlord shall reimburse Tenant for the actual and reasonable costs thereof (except to the extent Tenant would otherwise ultimately have been responsible for such costs under this Lease, including through Operating Expenses) within thirty (30) days after presentation of a reasonably detailed invoice demonstrating the expenses incurred by Tenant. In no event shall Tenant be entitled to offset any amounts owed by Landlord to Tenant under this Lease; provided, however, if Tenant prevails in any arbitration proceeding pursuant to the terms of Exhibit I attached hereto confirming Landlords obligation to reimburse Tenant (a Final Order), then Tenant may offset the amount of such Final Order against Base Rent to the extent Landlord has not paid the same to Tenant.
ARTICLE 9
COVENANT AGAINST LIENS
Tenant shall keep the Project, Building and Premises free from any liens or encumbrances arising out of the work performed, materials furnished or obligations incurred by or on behalf of Tenant (other than by Landlord or Landlords contractors), and shall protect, defend, indemnify and hold Landlord harmless from and against any claims, liabilities, judgments or costs (including, without limitation, reasonable attorneys fees and costs) arising out of same or in connection therewith. Tenant shall give Landlord notice at least twenty (20) days prior to the commencement of any such work on the Premises (or such additional time as may be necessary under applicable laws) to afford Landlord the opportunity of posting and recording appropriate notices of non-responsibility. Tenant shall remove any such lien or encumbrance by bond or otherwise within ten (10) business days after written notice by Landlord, and if Tenant shall fail to do so, Landlord may pay the amount necessary to remove such lien or encumbrance, without being responsible for investigating the validity thereof. The amount so paid shall be deemed Additional Rent under this Lease payable within thirty (30) days following demand, without limitation as to other remedies available to Landlord under this Lease. Nothing contained in this Lease shall authorize Tenant to do any act which shall subject Landlords title to the Project, Building or Premises to any liens or encumbrances whether claimed by operation of law or express or implied contract.
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ARTICLE 10
INSURANCE
10.1 Indemnification and Waiver. Except to the extent arising from the negligence or willful misconduct of, or breach of this Lease, by Landlord or any Landlord Parties (defined below) but subject to Section 10.5 below, Tenant hereby assumes all risk of damage to property or injury to persons in, upon or about the Premises from any cause whatsoever and agrees that Landlord, its parent, its partners, subpartners and their respective officers, agents, servants, employees, and independent contractors (collectively, Landlord Parties) shall not be liable for, and are hereby released from any responsibility for, any damage either to person or property or resulting from the loss of use thereof, which damage is sustained by Tenant or by other persons claiming through Tenant. Subject to Section 10.5 below, Tenant shall indemnify, defend, protect, and hold harmless the Landlord Parties for any loss, cost, damage, expense and liability (including without limitation court costs and reasonable attorneys fees) to the extent incurred in connection with or arising from (a) any occurrence within the Premises, (b) the negligence or willful misconduct of Tenant or of any person claiming by, through or under Tenant, or of the contractors, agents or employees of Tenant who are at the Project at Tenants requests, as well as guests of Tenant occurring in, on or about the Project but outside of the Premises, or (c) any breach of the terms of this Lease, either prior to, during, or after the expiration of the Lease Term, provided that the terms of the foregoing indemnity shall not apply to the negligence or willful misconduct of Landlord or any Landlord Party. Should Landlord be named as a defendant in any suit brought against Tenant for which Tenants indemnity obligation is applicable, Tenant shall pay to Landlord its reasonable and actual out-of-pocket costs and expenses incurred in such suit, including without limitation, its actual professional fees such as appraisers, accountants and attorneys fees. Subject to Section 10.5 below, Landlord shall indemnify, defend, protect, and hold harmless Tenant, its partners, and their respective officers, agents, servants, employees, and independent contractors (collectively, Tenant Parties) from any and all loss, cost, damage, expense and liability (including without limitation reasonable attorneys fees) arising from the negligence or willful misconduct of, or breach of this Lease by, Landlord or any Landlord Party in, on or about the Project, except to the extent caused by the negligence or willful misconduct of the Tenant Parties. Should Tenant be named as a defendant in any suit brought against Landlord for which Landlords indemnity obligation is applicable, Landlord shall pay to Tenant its reasonable and actual out-of-pocket costs and expenses incurred in such suit, including without limitation, its actual professional fees such as appraisers, accountants and attorneys fees. Notwithstanding anything to the contrary set forth in this Lease, either partys agreement to indemnify the other party as set forth in this Section 10.1 shall be ineffective to the extent the matters for which such party agreed to indemnify the other party are covered by insurance required to be carried by the non-indemnifying party pursuant to this Lease. Further, Tenants agreement to indemnify Landlord and Landlords agreement to indemnify Tenant pursuant to this Section 10.1 are not intended to and shall not relieve any insurance carrier of its obligations under policies required to be carried pursuant to the provisions of this Lease, to the extent such policies cover, or if carried, would have covered the matters, subject to the parties respective indemnification obligations; nor shall they supersede any inconsistent agreement of the parties set forth in any other provision of this Lease. The provisions of this Section 10.1 shall survive the expiration or sooner termination of this Lease with respect to any claims or liability arising in connection with any event occurring prior to such expiration or termination.
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10.2 Landlords Fire and Casualty Insurance. Landlord shall insure the Building during the Lease Term against loss or damage due to fire and other casualties covered within the classification of fire and extended coverage, vandalism coverage and malicious mischief, sprinkler leakage, water damage and special extended coverage. Such coverage shall be in such amounts, from such companies, and on such other terms and conditions, as Landlord may from time to time reasonably determine. Landlord shall also carry rent continuation insurance. Additionally, at the option of Landlord, such insurance coverage may include the risks of earthquakes and/or flood damage and additional hazards, a rental loss endorsement and one or more loss payee endorsements in favor of the holders of any mortgages or deeds of trust encumbering the interest of Landlord in the Building or the ground or underlying lessors of the Building, or any portion thereof. Tenant shall, at Tenants expense, promptly following notice, comply with all insurance company requirements pertaining to the use of the Premises. If Tenants conduct or use of the Premises causes any increase in the premium for such insurance policies then Tenant shall reimburse Landlord for any such increase. Tenant, at Tenants expense, shall comply with all rules, orders, regulations or requirements of the American Insurance Association (formerly the National Board of Fire Underwriters) and with any similar body.
10.3 Tenants Insurance. Tenant shall maintain the following coverages in the following amounts.
10.3.1 Commercial General Liability Insurance covering the insured against claims of bodily injury, personal injury and property damage (including loss of use thereof) arising out of Tenants operations, and contractual liabilities (covering the performance by Tenant of its indemnity agreements) on an occurrence form including a Broad Form endorsement covering the insuring provisions of this Lease and the performance by Tenant of the indemnity agreements set forth in Section 10.1 of this Lease, for limits of liability not less than reflected below. Such insurance shall contain a cross-liability clause or endorsement:
Bodily Injury and Property Damage Liability |
$5,000,000 each occurrence $5,000,000 annual aggregate Per location 0% Self-Insured retention |
|
Personal Injury Liability |
$3,000,000 annual aggregate 0% Self-Insured retention
Notwithstanding the foregoing, the above limits may be satisfied by a general liability policy in the amount of $1,000,000 each occurrence and $2,000,000 annual aggregate for each instance of bodily injury or property damage liability, and an umbrella policy of not less than $4,000,000 (i.e., providing a total coverage of $5,000,000 each occurrence and $5,000,000 annual aggregate for each instance of bodily injury or property damage liability) so long as all other requirements under this Article 10 are met. |
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10.3.2 Physical Damage Insurance covering (i) all office furniture, business and trade fixtures, office equipment, free-standing cabinet work, movable partitions, merchandise and all other items of Tenants property on the Premises installed by, for, or at the expense of Tenant, (ii) the Tenant Improvements, as that term is defined in Section 2.1 of the Tenant Work Letter, and any other improvements which exist in the Premises as of the Lease Commencement Date (excluding the Base Building) (the Original Improvements), and (iii) all other improvements, alterations and additions to the Premises. Such insurance shall be written on an all risks of physical loss or damage basis, for the full replacement cost value (subject to reasonable deductible amounts) new without deduction for depreciation of the covered items and in amounts that meet any co-insurance clauses of the policies of insurance and shall include coverage for damage or other loss caused by fire or other peril including, but not limited to, vandalism and malicious mischief, theft, water damage of any type, including sprinkler leakage, bursting or stoppage of pipes, and explosion, and providing business interruption coverage for a period of one (1) year.
10.3.3 Automobile Liability with minimum limits of $1,000,000 combined single limit for owned (if any), non-owned and hired automobile.
10.3.4 Workers Compensation State Statutory Limits and Employers Liability with minimum limits of $1,000,000 or other similar insurance pursuant to all applicable state and local statutes and regulations.
10.3.5 Business Income Interruption for one (1) year plus Extra Expense insurance in such amounts as will reimburse Tenant for actual direct or indirect loss of earnings attributable to the risks outlined in Section 10.3.2 above.
10.4 Form of Policies. The minimum limits of policies of insurance required of Tenant under this Lease shall in no event limit the liability of Tenant under this Lease. Such insurance shall (i) name Landlord, and any other party the Landlord reasonably specifies in writing, as an additional insured, including Landlords managing agent, if any; (ii) cover the liability assumed by Tenant under this Lease, including, but not limited to, Tenants obligations under Section 10.1 of this Lease; (iii) be issued by an insurance company having a rating of not less than A-VII in Bests Insurance Guide or which is otherwise acceptable to Landlord and licensed to do business in the State of California; (iv) be primary insurance as to all claims thereunder and provide that any insurance carried by Landlord is excess and is non-contributing with any insurance requirement of Tenant; (v) be in form and content reasonably acceptable to Landlord (it being acknowledged that Landlords receipt of Tenants certificates of insurance evidencing the coverage required pursuant to the terms of this Article 10 shall be deemed acceptable to Landlord); and (vi) use commercially reasonable efforts to obtain the agreement of the insurer to give prior notice to Landlord of any cancellation or termination of coverage. Tenant shall deliver said policy or policies or certificates thereof to Landlord on or before the Lease Commencement Date and before the expiration dates thereof. In the event Tenant shall fail to procure such insurance, or to deliver such policies or certificate, Landlord may, at its option with notice to Tenant, procure such policies for the account of Tenant, and the cost thereof shall be paid to Landlord within five (5) days after delivery to Tenant of bills therefor.
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10.5 Subrogation. Landlord and Tenant intend that their respective property loss risks shall be borne by reasonable insurance carriers to the extent above provided, and Landlord and Tenant hereby agree to look solely to, and seek recovery only from, their respective insurance carriers in the event of a property loss to the extent that such coverage is agreed to be provided hereunder or is actually covered by insurance maintained by a party hereto. Accordingly, notwithstanding any other provision of this Lease to the contrary, the parties each hereby waive all rights and claims against each other for such losses, and waive all rights of subrogation of their respective insurers, provided such waiver of subrogation shall not affect the right to the insured to recover thereunder. The parties agree that their respective insurance policies are now, or shall be, endorsed such that the waiver of subrogation shall not affect the right of the insured to recover thereunder, so long as no material additional premium is charged therefor.
10.6 Additional Insurance Obligations. Tenant shall carry and maintain during the entire Lease Term, at Tenants sole cost and expense, increased amounts of the insurance required to be carried by Tenant pursuant to this Article 10 and such other reasonable types of insurance coverage and in such reasonable amounts covering the Premises and Tenants operations therein, as may be reasonably requested by Landlord; provided, however, that in no event shall such new or increased amounts or types of insurance exceed that required of comparable tenants by landlords of the First Class Buildings.
ARTICLE 11
DAMAGE AND DESTRUCTION
11.1 Repair of Damage to Premises by Landlord. Tenant shall promptly notify Landlord of any damage to the Premises resulting from fire or any other casualty. If the Premises or any Common Areas serving or providing access to the Premises or any Building Systems necessary for the use and occupancy of the Premises shall be damaged by fire or other casualty, Landlord will, as soon as reasonably possible following the date of the damage, deliver to Tenant an estimate of the time necessary to repair the damage in question such that the Premises may be used by and accessible to Tenant and the Building and Common Areas operable in a manner consistent with the operation prior to such damage; such notice will be based upon the review and opinions of Landlords architect and contractor (Landlords Completion Notice). Landlord shall promptly and diligently, subject to reasonable delays for insurance adjustment or other matters beyond Landlords reasonable control, and subject to all other terms of this Article 11, restore the Base Building and such Common Areas. Such restoration shall be to substantially the same condition of the Base Building and the Common Areas prior to the casualty, except for modifications required by zoning and building codes and other laws or by the holder of a mortgage on the Building or the Project or any other modifications to the Common Areas deemed desirable by Landlord, provided that access to the Premises and any common restrooms serving the Premises shall not be materially impaired. Upon the occurrence of any damage to the Premises, upon notice (the Landlord Repair Notice) to Tenant from Landlord delivered on or before the date that is sixty (60) days after the date of the damage, Tenant shall assign to Landlord (or to any party designated by Landlord) rights to receive insurance proceeds payable to Tenant under Tenants insurance required under clauses (ii) and (iii) of Section 10.3.2 of this Lease, and Landlord shall repair any injury or damage to the Tenant Improvements and the Original Improvements and shall return such Tenant Improvements and Original Improvements to their original condition (any such
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work will be competitively bid by Landlord to ensure that Landlord receives commercially reasonable pricing for the performance of such work so that, to the extent reasonably possible, the cost of such work does not unnecessarily exceed the proceeds of Tenants insurance); provided that if the cost of such repair by Landlord exceeds the amount of insurance proceeds received by Landlord from Tenants insurance carrier, as assigned by Tenant, the portion of the cost of such repairs which is not so covered by Tenants insurance proceeds shall be paid by Tenant to Landlord prior to Landlords commencement of repair of the damage. In the event that Landlord does not deliver the Landlord Repair Notice within sixty (60) days following the date the casualty becomes known to Landlord, Tenant shall, at its sole cost and expense, repair any injury or damage to the Tenant Improvements and the Original Improvements installed in the Premises and shall return such Tenant Improvements and Original Improvements to their original condition, or an alternate condition described by Tenant (but subject to Landlords prior written approval). Whether or not Landlord delivers a Landlord Repair Notice, prior to the commencement of construction, Tenant shall submit to Landlord, for Landlords review and approval, all plans, specifications and working drawings relating thereto (it being acknowledged that the cost to prepare such plans may be paid for out of the applicable insurance proceeds received by Tenant), and Landlord shall approve the contractors to perform such improvement work. Landlord shall not be liable for any inconvenience or annoyance to Tenant or its visitors, or injury to Tenants business resulting in any way from such damage or the repair thereof; provided however, that if such fire or other casualty shall have damaged the Premises, Common Areas or Building Systems necessary to Tenants occupancy, Landlord shall allow Tenant a proportionate abatement of Rent, during the time and to the extent the Premises are unfit for occupancy for the purposes permitted under this Lease, and not occupied by Tenant as a result thereof; provided, further, however, that if the damage or destruction is due to the negligence or willful misconduct of Tenant or any of its agents, employees, contractors, invitees or guests, Tenant shall be responsible for any reasonable, applicable insurance deductible (which shall be payable to Landlord upon demand, not to materially exceed the levels of deductibles for such insurance then maintained by owners of First Class Buildings). In the event that Landlord shall not deliver the Landlord Repair Notice, Tenants right to rent abatement pursuant to the preceding sentence shall terminate as of the date which is reasonably determined by Landlord to be the date Tenant should have completed repairs to the Premises assuming Tenant used reasonable due diligence in connection therewith.
11.2 Landlords Option to Repair. Notwithstanding the terms of Section 11.1 of this Lease, Landlord may elect not to rebuild and/or restore the Premises, Building and/or the Project, and instead terminate this Lease, by notifying Tenant in writing of such termination within sixty (60) days after the date of discovery of the damage, such notice to include a termination date giving Tenant sixty (60) days to vacate the Premises, but Landlord may so elect only if the Building or the Project shall be damaged by fire or other casualty or cause, whether or not the Premises are affected, and one or more of the following conditions is present: (i) in Landlords reasonable judgment, as set forth in Landlords Completion Notice, the repairs cannot reasonably be completed so as to render the Premises suitable for occupancy within two hundred seventy (270) days after the date of discovery of the damage (when such repairs are made without the payment of overtime or other premiums); (ii) the holder of any mortgage on the Building or the Project or ground lessor with respect to the Building or the Project shall require that the insurance proceeds or any portion thereof be used to retire the mortgage debt, or shall terminate the ground lease (if any), as the case may be; (iii) at least Two Million Dollars ($2,000,000.00) of the cost of repair of the damage is not fully covered by Landlords insurance policies; or (iv) the damage materially
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affects the Building and occurs during the last twelve (12) months of the Lease Term; provided, however, that if such fire or other casualty shall have damaged the Premises or a portion thereof or Common Areas necessary to Tenants occupancy and as a result of such damage the Premises are unfit for occupancy, and provided that Landlord does not elect to terminate this Lease pursuant to Landlords termination right as provided above, and either (a) the repairs cannot, in the reasonable opinion of Landlords contractor, as set forth in Landlords Completion Notice, be completed within two hundred seventy (270) days after being commenced, or (b) the damage occurs during the last twelve months of the Lease Term and will reasonably require in excess of ninety (90) days to repair, Tenant may elect, no earlier than sixty (60) days after the date of the damage and not later than the later of (A) forty-five (45) days following the date of delivery of Landlords Completion Notice, and (B) ninety (90) days after the date of the damage, to terminate this Lease by written notice to Landlord effective as of the date specified in the notice, which date shall not be less than thirty (30) days nor more than sixty (60) days after the date such notice is given by Tenant. In addition, if such restoration is not substantially complete on or before the later of (i) the date that occurs fifteen (15) months after the date of discovery of the damage, and (ii) the date that occurs one hundred eighty (180) days after the expiration of the estimated period of time to substantially complete such restoration, as set forth in Landlords Completion Notice (the Outside Restoration Date), then Tenant shall have the additional right during the first ten (10) business days of each calendar month following the Outside Restoration Date until such repairs are complete, to terminate this Lease by delivery of written notice to Landlord (the Damage Termination Notice), which termination shall be effective on a date specified by Tenant in such Damage Termination Notice (the Damage Termination Date), which Damage Termination Date shall not be less than ten (10) business days, nor greater than thirty (30) days, following the date such Damage Termination Notice was delivered to Landlord. In the event this Lease is terminated in accordance with the terms of this Section 11.2, Tenant shall assign to Landlord (or to any party designated by Landlord) all insurance proceeds payable to Tenant under Tenants insurance required under subsections (ii) and (iii) of Section 10.3.2 of this Lease.
11.3 Waiver of Statutory Provisions. The provisions of this Lease, including this Article 11, constitute an express agreement between Landlord and Tenant with respect to any and all damage to, or destruction of, all or any part of the Premises, the Building or the Project, and any statute or regulation of the State of California, including, without limitation, Sections 1932(2) and 1933(4) of the California Civil Code, with respect to any rights or obligations concerning damage or destruction in the absence of an express agreement between the parties, and any other statute or regulation, now or hereafter in effect, shall have no application to this Lease or any damage or destruction to all or any part of the Premises, the Building or the Project.
ARTICLE 12
NONWAIVER
No provision of this Lease shall be deemed waived by either party hereto unless expressly waived in a writing signed thereby. The waiver by either party hereto of any breach of any term, covenant or condition herein contained shall not be deemed to be a waiver of any subsequent breach of same or any other term, covenant or condition herein contained. The subsequent acceptance of Rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, other than the failure of Tenant
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to pay the particular Rent so accepted, regardless of Landlords knowledge of such preceding breach at the time of acceptance of such Rent. No acceptance of a lesser amount than the Rent herein stipulated shall be deemed a waiver of Landlords right to receive the full amount due, nor shall any endorsement or statement on any check or payment or any letter accompanying such check or payment be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlords right to recover the full amount due. No receipt of monies by Landlord from Tenant after the termination of this Lease shall in any way alter the length of the Lease Term or of Tenants right of possession hereunder, or after the giving of any notice shall reinstate, continue or extend the Lease Term or affect any notice given Tenant prior to the receipt of such monies, it being agreed that after the service of notice or the commencement of a suit, or after final judgment for possession of the Premises, Landlord may receive and collect any Rent due, and the payment of said Rent shall not waive or affect said notice, suit or judgment. No payment of Rent by Tenant after a breach by Landlord shall be deemed a waiver of any breach by Landlord.
ARTICLE 13
CONDEMNATION
If the whole or any material part of the Premises, Building or the Project shall be taken by power of eminent domain or condemned by any competent authority for any public or quasi-public use or purpose, or if any adjacent property or street shall be so taken or condemned, or reconfigured or vacated by such authority in such manner as to require the use, reconstruction or remodeling of any material part of the Premises, Building or the Project, or if Landlord shall grant a deed or other instrument in lieu of such taking by eminent domain or condemnation, Landlord shall have the option to terminate this Lease effective as of the date possession is required to be surrendered to the authority; provided, however, that to the extent that the Premises are not adversely affected by such taking and Landlord continues to operate the Building as an office building, Landlord may not terminate this Lease. If more than twenty-five percent (25%) of the rentable square feet of the Premises is taken, or if access to the Premises is substantially impaired, in each case for a period in excess of one hundred eighty (180) days, Tenant shall have the option to terminate this Lease effective as of the date possession is required to be surrendered to the authority. Tenant shall not because of such taking assert any claim against Landlord or the authority for any compensation because of such taking and Landlord shall be entitled to the entire award or payment in connection therewith, except that Tenant shall have the right to file any separate claim available to Tenant for any taking of Tenants personal property and fixtures belonging to Tenant and removable by Tenant upon expiration of the Lease Term pursuant to the terms of this Lease, and for moving expenses, so long as such claims do not diminish the award available to Landlord, its ground lessor with respect to the Building or the Project or its mortgagee, and such claim is payable separately to Tenant. All Rent shall be apportioned as of the date of such termination. If any part of the Premises shall be taken, and this Lease shall not be so terminated, the Rent shall be proportionately abated. Tenant hereby waives any and all rights it might otherwise have pursuant to Section 1265.130 of The California Code of Civil Procedure. Notwithstanding anything to the contrary contained in this Article 13, in the event of a temporary taking of all or any portion of the Premises for a period of one hundred and eighty (180) days or less, then this Lease shall not terminate but the Base Rent and the Additional Rent shall be abated for the period of such taking in proportion to the ratio that the amount of rentable square feet of the Premises taken bears to the total rentable square feet of the Premises. Landlord shall be entitled to receive the entire award made in connection with any such temporary taking.
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ARTICLE 14
ASSIGNMENT AND SUBLETTING
14.1 Transfers. Except as otherwise specifically provided or permitted in this Article 14, Tenant shall not, without the prior written consent of Landlord (not to be unreasonably withheld, conditioned, or delayed), assign, mortgage, pledge, hypothecate, encumber, or permit any lien to attach to, or otherwise transfer, this Lease or any interest hereunder, permit any assignment, or other transfer of Tenants interest in this Lease or any interest hereunder by operation of law, sublet the Premises or any part thereof, or enter into any license or concession agreements or otherwise permit the occupancy or use of the Premises or any part thereof by any persons other than Tenant and its employees and contractors (all of the foregoing are hereinafter sometimes referred to collectively as Transfers and any person to whom any Transfer is made or sought to be made is hereinafter sometimes referred to as a Transferee). If Tenant desires Landlords consent to any Transfer, Tenant shall notify Landlord in writing, which notice (the Transfer Notice) shall include (i) the proposed effective date of the Transfer, which shall not be less than twenty (20) days nor more than one hundred eighty (180) days after the date of delivery of the Transfer Notice, (ii) a description of the portion of the Premises to be transferred (the Subject Space), (iii) all of the terms of the proposed Transfer and the consideration therefor, including calculation of the Transfer Premium, as that term is defined in Section 14.3 below, in connection with such Transfer, the name and address of the proposed Transferee, and a copy of all existing executed and/or proposed documentation pertaining to the proposed Transfer, including all existing operative documents to be executed to evidence such Transfer or the agreements incidental or related to such Transfer, provided that Landlord shall have the right to require Tenant to utilize Landlords standard Transfer documents in connection with the documentation of such Transfer, (iv) current financial statements of the proposed Transferee certified by an officer, partner or owner thereof, business credit and personal references and history of the proposed Transferee (provided that Landlord must request such additional information within five (5) business days following the date Tenant delivers the Transfer Notice to Landlord), (v) any other information required by Landlord which will enable Landlord to determine the financial responsibility, character, and reputation of the proposed Transferee, nature of such Transferees business and proposed use of the Subject Space, which information is requested within five (5) business days following Tenants submission to Landlord of the items described in clauses (i), (ii), (iii), (iv) and (vi) of this Section 14.1, and (vi) upon Landlords request, an executed estoppel certificate from Tenant in the form attached hereto as Exhibit E. Any Transfer requiring Landlords consent which is made without Landlords prior written consent shall, at Landlords option, be null, void and of no effect, and shall, at Landlords option, constitute a Default by Tenant under this Lease if not rescinded or terminated within ten (10) business days following notice from Tenant. Whether or not Landlord consents to any proposed Transfer, Tenant shall pay Landlords review and processing fees, as well as any reasonable professional fees (including, without limitation, attorneys, accountants, architects, engineers and consultants fees) incurred by Landlord, provided that such amount shall not be in excess of $2,000.00 in the aggregate, for a Transfer which (as reasonably determined by Landlord) does not require (A) analysis of Transfer documentation, or (B) negotiation of a consent document, within thirty (30) days after written request by Landlord.
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14.2 Landlords Consent. Landlord shall not unreasonably withhold its consent to any proposed Transfer of the Subject Space to the Transferee on the terms specified in the Transfer Notice and shall grant or withhold such consent within thirty (30) days following the date upon which Landlord receives a complete Transfer Notice from Tenant (i.e., a Transfer Notice that includes all documents and information required pursuant to Section 14.1 of this Lease, above). If Landlord fails to timely deliver to Tenant notice of Landlords consent, or the withholding of consent, to a proposed Transfer, Tenant may send a second (2nd) notice to Landlord, which notice must contain the following inscription, in bold faced lettering: SECOND NOTICE DELIVERED PURSUANT TO ARTICLE 14 OF LEASE. FAILURE TO TIMELY RESPOND WITHIN TWO (2) BUSINESS DAYS SHALL RESULT IN DEEMED APPROVAL OF ASSIGNMENT OR SUBLEASE. If Landlord fails to deliver notice of Landlords consent to, or the withholding of Landlords consent, to the proposed assignment or sublease within such 2-day period, Landlord shall be deemed to have granted its consent to the proposed Transfer. If Landlord at any time timely delivers notice to Tenant or Landlords withholding of consent to a proposed assignment or sublease, Landlord shall specify in reasonable detail in such notice, the basis for such withholding of consent. Without limitation as to other reasonable grounds for withholding consent, the parties hereby agree that it shall be reasonable under this Lease and under any applicable law for Landlord to withhold consent to any proposed Transfer where one or more of the following apply:
14.2.1 The Transferee is of a character or reputation or engaged in a business which is not consistent with the quality of the Building or the Project;
14.2.2 The Transferee intends to use the Subject Space for purposes which are not permitted under applicable zoning requirements;
14.2.3 The Transferee is either a governmental agency or instrumentality thereof; provided, however, that Tenant shall be entitled to assign, sublet or otherwise transfer to a governmental agency or instrumentality thereof to the extent Landlord has leased or has permitted the lease of space to a comparable (in terms of security, foot traffic, prestige, eminent domain and function oriented issues) governmental agency or instrumentality thereof in comparably located space of comparable size;
14.2.4 The Transferee is not a party of reasonable financial worth and/or financial stability in light of the responsibilities to be undertaken in connection with the Transfer on the date consent is requested; or
14.2.5 The proposed Transfer would cause a violation of another lease for space in the Project, or would give an occupant of the Project a right to cancel its lease.
14.2.6 Either the proposed Transferee, or any person or entity which directly or indirectly, controls, is controlled by, or is under common control with, the proposed Transferee, is then currently engaged in active negotiations with Landlord (meaning letters of intent or lease proposals have been exchanged between the parties), for space within the Project (and, in such latter instance, Landlord has [or reasonably anticipates it will have] available space in the Project suitable to meet such proposed Transferees occupancy needs).
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If Landlord consents to any Transfer pursuant to the terms of this Section 14.2, Tenant may within six (6) months after Landlords consent (or deemed consent), but not later than the expiration of said six-month period, enter into such Transfer of the Premises or portion thereof, upon substantially the same terms and conditions as are set forth in the Transfer Notice furnished by Tenant to Landlord pursuant to Section 14.1 of this Lease, provided that if there are any changes in the terms and conditions from those specified in the Transfer Notice such that Landlord would initially have been entitled to refuse its consent to such Transfer under this Section 14.2, Tenant shall again submit the Transfer to Landlord for its approval and other action under this Article 14. Notwithstanding anything to the contrary in this Lease, if Tenant or any proposed Transferee claims that Landlord has unreasonably withheld or delayed its consent under Section 14.2 or otherwise has breached or acted unreasonably under this Article 14, their sole remedies shall be a suit for contract damages (other than damages for injury to, or interference with, Tenants business including, without limitation, loss of profits, however occurring) or a declaratory judgment and an injunction for the relief sought without any monetary damages, and Tenant hereby waives the provisions of Section 1995.310 of the California Civil Code, or any successor statute, and all other remedies, including, without limitation, any right at law or equity to terminate this Lease, on its own behalf and, to the extent permitted under all applicable laws, on behalf of the proposed Transferee.
14.3 Transfer Premium. If Landlord consents to a Transfer, as a condition thereto which the parties hereby agree is reasonable, Tenant shall pay to Landlord fifty percent (50%) of any Transfer Premium, as that term is defined in this Section 14.3, received by Tenant from such Transferee. It is understood and agreed that no Transfer Premium shall be payable with respect to any transfer to a Permitted Transferee as provided below in Section 14.7. Transfer Premium shall mean all rent, additional rent or other consideration payable by such Transferee in connection with the Transfer in excess of the Rent and Additional Rent payable by Tenant under this Lease during the term of the Transfer on a per rentable square foot basis if less than all of the Premises is transferred, after deducting the reasonable expenses incurred by Tenant for (i) any changes, alterations and improvements to the Premises in connection with the Transfer, (ii) any free base rent reasonably provided to the Transferee, (iii) marketing costs associated with such Transfer, (iv) reasonable attorneys fees incurred in the documentation and negotiation of such Transfer and (v) any brokerage commissions in connection with the Transfer. Transfer Premium shall also include, but not be limited to, key money, bonus money or other cash consideration paid by Transferee to Tenant in connection with such Transfer, and any payment in excess of fair market value for services rendered by Tenant to Transferee or for assets, fixtures, inventory, equipment, or furniture transferred by Tenant to Transferee in connection with such Transfer. For purposes of calculating any such effective rent all such concessions shall be amortized on a straight-line basis over the relevant term.
14.4 Effect of Transfer. If Landlord consents to a Transfer, (i) the terms and conditions of this Lease shall in no way be deemed to have been waived or modified, (ii) such consent shall not be deemed consent to any further Transfer by either Tenant or a Transferee, (iii) Tenant shall deliver to Landlord, promptly after execution, an original executed copy of all documentation pertaining to the Transfer in form reasonably acceptable to Landlord, (iv) Tenant shall furnish
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upon Landlords request a complete statement, certified by an independent certified public accountant, or Tenants chief financial officer, setting forth in detail the computation of any Transfer Premium Tenant has derived and shall derive from such Transfer, and (v) no Transfer relating to this Lease or agreement entered into with respect thereto, whether with or without Landlords consent, shall relieve Tenant or any guarantor of the Lease from any liability under this Lease, including, without limitation, in connection with the Subject Space. Landlord or its authorized representatives shall have the right at all reasonable times and upon reasonable prior written notice to audit the books, records and papers of Tenant relating to any Transfer, and shall have the right to make copies thereof. If the Transfer Premium respecting any Transfer shall be found understated, Tenant shall, within thirty (30) days after demand, pay the deficiency, and if understated by more than two percent (2%), Tenant shall pay Landlords reasonable costs of such audit.
14.5 Intentionally Omitted.
14.6 Occurrence of Default. Any Transfer hereunder shall be subordinate and subject to the provisions of this Lease, and if this Lease shall be terminated during the term of any Transfer, Landlord shall have the right to: (i) treat such Transfer as cancelled and repossess the Subject Space by any lawful means, or (ii) require that such Transferee attorn to and recognize Landlord as its landlord under any such Transfer. If Tenant shall be in Default, and Landlord has terminated (or is diligently pursuing the termination of) this Lease, Landlord is hereby irrevocably authorized, as Tenants agent and attorney-in-fact, to direct any Transferee to make all payments under or in connection with the Transfer directly to Landlord (which Landlord shall apply towards Tenants obligations under this Lease) until such Default is cured. Such Transferee shall rely on any representation by Landlord that Tenant is in Default hereunder, without any need for confirmation thereof by Tenant. Upon any assignment, the assignee shall assume in writing all obligations and covenants of Tenant thereafter to be performed or observed under this Lease. No collection or acceptance of rent by Landlord from any Transferee shall be deemed a waiver of any provision of this Article 14 or the approval of any Transferee or a release of Tenant from any obligation under this Lease, whether theretofore or thereafter accruing. In no event shall Landlords enforcement of any provision of this Lease against any Transferee be deemed a waiver of Landlords right to enforce any term of this Lease against Tenant or any other person. If Tenants obligations hereunder have been guaranteed, Landlords consent to any Transfer shall not be effective unless the guarantor also consents to such Transfer.
14.7 Deemed Consent Transfers. Notwithstanding anything to the contrary contained in this Lease, (A) an assignment or subletting of all or a portion of the Premises to an Affiliate of Tenant (an entity which is controlled by, controls, or is under common control with, Tenant as of the date of the assignment or subletting), (B) an assignment of Tenants interest in this Lease to an entity which acquires all or substantially all of the stock or assets of Tenant and has a tangible net worth equal to or greater than that of Tenant immediately prior to such assignment, or (C) an assignment of this Lease to an entity which is the resulting or surviving entity of a merger or consolidation of Tenant during the Lease Term and has a tangible net worth equal to or greater than that of Tenant immediately prior to such assignment, shall not be deemed a Transfer requiring Landlords consent (nor Tenants payment of any Transfer Premium) under this Article 14 or triggering Landlords rights under Section 14.3 (any such assignee or sublessee described in items (A) through (C) of this Section 14.7 hereinafter referred to as a Permitted Transferee),
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provided that (i) Tenant notifies Landlord at least five (5) business days prior to the effective date of any such assignment or sublease (unless such prior notice is prohibited by applicable law or the terms of an applicable confidentiality agreement, in which event Tenant shall notify Landlord as soon as permissible) and promptly supplies Landlord with any documents or information reasonably requested by Landlord regarding such transfer or transferee as set forth above, (ii) such assignment or sublease is not a subterfuge by Tenant to avoid its obligations under this Lease, and (iii) no assignment relating to this Lease, whether with or without Landlords consent, shall relieve Tenant from any liability under this Lease, and, in the event of an assignment of Tenants entire interest in this Lease, the liability of Tenant and such transferee shall be joint and several. An assignee of Tenants entire interest in this Lease who qualifies as a Permitted Transferee may also be referred to herein as a Permitted Transferee Assignee. Control, as used in this Section 14.7, shall mean the ownership, directly or indirectly, of at least twenty-five percent (25%) of the voting securities of, or possession of the right to vote, in the ordinary direction of its affairs, of at least twenty-five percent (25%) of the voting interest in, any person or entity, or an ownership interest in an entity that includes a right to appoint a member of the board of directors of such entity.
14.8 Recapture. Notwithstanding anything to the contrary contained in this Section, if Tenant delivers a Transfer Notice to Landlord with respect to Subject Space that comprises substantially all of the space then leased by Tenant, and if the term of such assignment or sublease (as set forth in the Transfer Notice) is for substantially the remainder of the current Lease Term, then Landlord shall have the option, by giving notice to Tenant within twenty (20) days after receipt of any such Transfer Notice, to recapture the Subject Space. Such recapture notice shall cancel and terminate this Lease with respect to the Subject Space as of the effective date of the proposed Transfer (or upon the demise of the Subject Space separate from the Premises if the Subject Space being recaptured is less than the entire Premises). Upon request of either party, the parties shall execute written confirmation of the foregoing. The provisions of this Section shall not apply to any Permitted Transfer.
ARTICLE 15
SURRENDER OF PREMISES; OWNERSHIP AND
REMOVAL OF TRADE FIXTURES
15.1 Surrender of Premises. No act or thing done by Landlord or any agent or employee of Landlord during the Lease Term shall be deemed to constitute an acceptance by Landlord of a surrender of the Premises unless such intent is specifically acknowledged in writing by Landlord. The delivery of keys to the Premises to Landlord or any agent or employee of Landlord shall not constitute a surrender of the Premises or effect a termination of this Lease, whether or not the keys are thereafter retained by Landlord, and notwithstanding such delivery Tenant shall be entitled to the return of such keys at any reasonable time upon request until this Lease shall have been properly terminated. Subject to the terms of this Article 15, the voluntary or other surrender of this Lease by Tenant, whether accepted by Landlord or not, or a mutual termination hereof, shall not work a merger, and at the option of Landlord shall operate as an assignment to Landlord of all subleases or subtenancies affecting the Premises or terminate any or all such sublessees or subtenancies.
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15.2 Removal of Tenant Property by Tenant. Upon the expiration of the Lease Term, or upon any earlier termination of this Lease, Tenant shall, subject to the provisions of this Article 15, quit and surrender possession of the Premises to Landlord in good order and condition, reasonable wear and tear, damage caused by casualty (which shall be governed by the terms of Article 11 of this Lease) and repairs which are specifically made the responsibility of Landlord hereunder excepted. Landlord and Tenant hereby acknowledge and agree that except as specifically provided herein, Tenants rights and obligations regarding the removal of Tenants improvements in the Premises shall be governed by the terms of Article 8 of this Lease. Upon such expiration or termination, Tenant shall, without expense to Landlord, remove or cause to be removed from the Premises all debris and rubbish, and such items of furniture, equipment, business and trade fixtures, free-standing cabinet work, movable partitions and other articles of personal property, including all voice and data cabling, owned by Tenant or installed or placed by Tenant at its expense in the Premises, and such similar articles of any other persons claiming under Tenant, as Landlord may, in its sole discretion, require to be removed, and Tenant shall repair at its own expense all damage to the Premises and Building resulting from such removal. Notwithstanding anything contained in this Lease to the contrary, upon the expiration or earlier termination of this Lease, Tenant shall not be obligated to remove or restore any of the initial Tenant Improvements except as set forth in Article 8 of this Lease, Tenant may leave floor and wall coverings in their existing as-is condition, and Tenant shall have no obligation to repaint or install new floor coverings or to repair any floor penetrations caused by Tenants Permitted Use (so long as same are in the ordinary course of general office improvements).
ARTICLE 16
HOLDING OVER
If Tenant holds over after the expiration of the Lease Term or earlier termination thereof, with or without the express or implied consent of Landlord, such tenancy shall be from month-to-month only, and shall not constitute a renewal hereof or an extension for any further term, and in such case Rent shall be payable at a monthly rate equal to (i) one hundred twenty-five percent (125%) of the Base Rent applicable during the last rental period of the Lease Term under this Lease for the first (1st) two (2) months of such holdover, and (ii) one hundred fifty percent (150%) thereafter plus one hundred percent (100%) of all Additional Rent. Such month-to-month tenancy shall be subject to every other applicable term, covenant and agreement contained herein. Nothing contained in this Article 16 shall be construed as consent by Landlord to any holding over by Tenant, and Landlord expressly reserves the right to require Tenant to surrender possession of the Premises to Landlord as provided in this Lease upon the expiration or other termination of this Lease. The provisions of this Article 16 shall not be deemed to limit or constitute a waiver of any other rights or remedies of Landlord provided herein or at law. If Tenant fails to surrender the Premises upon the termination or expiration of this Lease, provided Landlord notifies Tenant in writing at least thirty (30) days prior to such liabilities accruing, in addition to any other liabilities to Landlord accruing therefrom, Tenant shall protect, defend, indemnify and hold Landlord harmless from all loss, costs (including reasonable attorneys fees) and liability resulting from such failure, including, without limiting the generality of the foregoing, any claims made by any succeeding tenant founded upon such failure to surrender and any lost profits to Landlord resulting therefrom.
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ARTICLE 17
ESTOPPEL CERTIFICATES
Within ten (10) business days following a request in writing by Landlord or Tenant, Tenant or Landlord, as applicable, shall execute, and deliver to the other an estoppel certificate, which shall be substantially in the form of Exhibit E, attached hereto (or such other commercially reasonable form as may be required by any prospective mortgagee or purchaser of the Project, or any portion thereof, or any assignee or sublessee), indicating therein any exceptions thereto that may exist at that time, and shall also contain any other information reasonably requested by the requesting party, Landlords mortgagee or prospective mortgagee or purchasers or Tenants Transferee. Tenant shall execute and deliver whatever other instruments may be reasonably required for such purposes. Failure of Tenant or Landlord to timely execute and deliver such estoppel certificate or other instrument shall, if such failure is not cured within three (3) business days after receipt of an additional written notice from the other, constitute an acceptance of the Premises and an acknowledgment by the failing party that statements included in the estoppel certificate are true and correct, without exception.
ARTICLE 18
SUBORDINATION
This Lease shall be subject and subordinate to all present and future ground or underlying leases of the Building or the Project and to the lien of any mortgage, trust deed or other encumbrances now or hereafter in force against the Building or the Project or any part thereof, if any, and to all renewals, extensions, modifications, consolidations and replacements thereof, and to all advances made or hereafter to be made upon the security of such mortgages or trust deeds, unless the holders of such mortgages, trust deeds or other encumbrances, or the lessors under any applicable ground lease or underlying leases, require in writing that this Lease be superior thereto (collectively, the Superior Holders). Landlord shall cause the holder of any deed of trust encumbering the Project to execute and deliver to Tenant a subordination, non-disturbance and attornment agreement (a SNDA) in a commercially reasonable form concurrently with Landlords execution and delivery of this Lease. In consideration of and a condition precedent to Tenants agreement to subordinate this Lease to any future mortgage, trust deed or other encumbrances, shall be the receipt by Tenant of an SNDA executed by Landlord and the appropriate Superior Holder. Tenant covenants and agrees in the event any proceedings are brought for the foreclosure of any such mortgage or deed in lieu thereof (or if any ground lease is terminated), to attorn, without any deductions or set-offs whatsoever, to the lienholder or purchaser or any successors thereto upon any such foreclosure sale or deed in lieu thereof (or to the ground lessor), if so requested to do so by such purchaser or lienholder or ground lessor, and to recognize such purchaser or lienholder or ground lessor as the lessor under this Lease, provided such lienholder or purchaser or ground lessor shall agree to accept this Lease and not disturb Tenants occupancy, so long as Tenant timely pays the rent and observes and performs the terms, covenants and conditions of this Lease to be observed and performed by Tenant. Landlords interest herein may be assigned as security at any time to any lienholder. Tenant shall, within ten (10) days of request by Landlord, execute such further instruments or assurances as Landlord may reasonably deem necessary to evidence or confirm the subordination or superiority of this Lease to any such mortgages, trust deeds, ground leases or underlying leases. Tenant waives the provisions of any current or future statute, rule or law which may give or purport to give Tenant any right or election to terminate or otherwise adversely affect this Lease and the obligations of the Tenant hereunder in the event of any foreclosure proceeding or sale.
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ARTICLE 19
DEFAULTS; REMEDIES
19.1 Events of Default. The occurrence of any of the following shall constitute a Default of this Lease by Tenant:
19.1.1 Any failure by Tenant to pay any Rent or any other charge required to be paid under this Lease, or any part thereof, within five (5) business days after Tenants receipt of written notice from Landlord that said amount was not paid when due; or
19.1.2 Any failure by Tenant to observe or perform any other provision, covenant or condition of this Lease to be observed or performed by Tenant where such failure continues for thirty (30) days after written notice thereof from Landlord to Tenant; provided that if the nature of such default is such that the same cannot reasonably be cured within a thirty (30) day period, Tenant shall not be deemed to be in default if it diligently commences such cure within such period and thereafter diligently proceeds to rectify and cure such default; or
19.1.3 Abandonment of the Premises by Tenant pursuant to California Civil Code Section 1951.3; or
19.1.4 The failure by Tenant to observe or perform according to the provisions of Articles 5, 10, 14, 17 or 18 of this Lease where such failure continues for more than five (5) business days after notice from Landlord; or
The notice periods provided herein are in lieu of, and not in addition to, any notice periods provided by law.
19.2 Remedies Upon Default. Upon the occurrence of any event of default by Tenant beyond the expiration of any applicable notice and cure periods set forth in this Lease, Landlord shall have, in addition to any other remedies available to Landlord at law or in equity (all of which remedies shall be distinct, separate and cumulative), the option to pursue any one or more of the following remedies, each and all of which shall be cumulative and nonexclusive, without any notice or demand whatsoever (except as required by law).
19.2.1 Terminate this Lease, in which event Tenant shall immediately surrender the Premises to Landlord, and if Tenant fails to do so, Landlord may, without prejudice to any other remedy which it may have for possession or arrearages in rent, enter upon and take possession of the Premises and expel or remove Tenant and any other person who may be occupying the Premises or any part thereof, without being liable for prosecution or any claim or damages therefor; and Landlord may recover from Tenant the following:
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(i) The worth at the time of any unpaid rent which has been earned at the time of such termination; plus
(ii) The worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus
(iii) The worth at the time of award of the amount by which the unpaid rent for the balance of the Lease Term after the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus
(iv) Any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenants failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, specifically including but not limited to, brokerage commissions and advertising expenses incurred, expenses of remodeling the Premises or any portion thereof for a new tenant, whether for the same or a different use, and any special concessions made to obtain a new tenant; and
(v) At Landlords election, such other amounts in addition to (but to the extent not duplicative of) or in lieu of the foregoing as may be permitted from time to time by applicable law.
The term rent as used in this Section 19.2 shall be deemed to be and to mean all sums of every nature required to be paid by Tenant pursuant to the terms of this Lease, including without limitation Base Rent, Tenants Share of Direct Expenses and parking charges, whether to Landlord or to others. As used in Section 19.2.1(i) and (ii), above, the worth at the time of award shall be computed by allowing interest at the rate set forth in Article 25 of this Lease, but in no case greater than the maximum amount of such interest permitted by law. As used in Section 19.2.1(iii) above, the worth at the time of award shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%).
19.2.2 Landlord shall have the remedy described in California Civil Code Section 1951.4 (lessor may continue lease in effect after lessees breach and abandonment and recover rent as it becomes due, if lessee has the right to sublet or assign, subject only to reasonable limitations). Accordingly, if Landlord does not elect to terminate this Lease on account of any default by Tenant, Landlord may, from time to time, without terminating this Lease, enforce all of its rights and remedies under this Lease, including the right to recover all rent as it becomes due.
19.2.3 Landlord shall at all times have the rights and remedies (which shall be cumulative with each other and cumulative and in addition to those rights and remedies available under Sections 19.2.1 and 19.2.2, above, or any law or other provision of this Lease), without prior demand or notice except as required by applicable law, to seek any declaratory, injunctive or other equitable relief, and specifically enforce this Lease, or restrain or enjoin a violation or breach of any provision hereof.
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19.3 Subleases of Tenant. Whether or not Landlord elects to terminate this Lease on account of any default by Tenant, as set forth in this Article 19, Landlord shall have the right to terminate any and all subleases, licenses, concessions or other consensual arrangements for possession entered into by Tenant and affecting the Premises or may, in Landlords sole discretion, succeed to Tenants interest in such subleases, licenses, concessions or arrangements. In the event of Landlords election to succeed to Tenants interest in any such subleases, licenses, concessions or arrangements, Tenant shall, as of the date of notice by Landlord of such election, have no further right to or interest in the rent or other consideration receivable thereunder.
19.4 Efforts to Relet. No re-entry or repossession, repairs, maintenance, changes, alterations and additions, reletting, appointment of a receiver to protect Landlords interests hereunder, or any other action or omission by Landlord shall be construed as an election by Landlord to terminate this Lease or Tenants right to possession, or to accept a surrender of the Premises, nor shall the same operate to release Tenant in whole or in part from any of Tenants obligations hereunder, unless express written notice of such intention is sent by Landlord to Tenant. Tenant hereby irrevocably waives any right otherwise available under any law to redeem or reinstate this Lease.
19.5 Landlord Default.
19.5.1 General. Notwithstanding anything to the contrary set forth in this Lease, Landlord shall not be in default in the performance of any obligation required to be performed by Landlord pursuant to this Lease unless Landlord fails to perform such obligation within thirty (30) days after the receipt of notice from Tenant specifying in detail Landlords failure to perform; provided, however, if the nature of Landlords obligation is such that more than thirty (30) days are required for its performance, then Landlord shall not be in default under this Lease if it shall commence such performance within such thirty (30) day period and thereafter diligently pursues the same to completion. Upon any such default by Landlord under this Lease, Tenant may, except as otherwise specifically provided in this Lease to the contrary, exercise any of its rights provided at law or in equity; provided that Tenant hereby waives any claim for punitive, consequential or speculative damages, including claims of lost profit or lost opportunity. Landlord and Tenant acknowledge and agree that the terms of this Section 19.5.1 shall not alter Tenants self-help rights under the terms of Section 8.6 of this Lease, and that such self-help rights are separate and independent from Tenants rights under the terms of this Section 19.5.1.
19.5.2 Abatement of Rent. In the event that Tenant is prevented from using, and does not use, the Premises or any portion thereof, as a result of (i) any repair, maintenance or alteration performed by Landlord, or which Landlord failed to perform, after the Lease Commencement Date and required by this Lease, which substantially interferes with Tenants use of the Premises, the Project parking facilities and/or the Building, (ii) any failure to provide services, utilities or access to the Premises, the Project parking facilities and/or the Building as required by this Lease, or (iii) the presence of Hazardous Substances in, on or around the Premises, the Building or the Project which could pose a health risk to occupants of the Premises and which was not brought to the Project by Tenant or any Tenant Parties (either such set of circumstances as set forth in items (i)-(iii), above, to be known as an Abatement Event), then Tenant shall give Landlord notice of such Abatement Event (which notice, for the purpose of determining the effective date of delivery, will be deemed given when delivered to the Projects property management office during Building Hours), and if such Abatement Event continues for four (4) consecutive business days or ten (10) business days in any twelve (12) month period after Landlords receipt of any such notice (the Eligibility Period), then the Base Rent, Tenants
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Share of Direct Expenses, and Tenants obligation to pay for parking (to the extent not utilized by Tenant) shall be abated or reduced, as the case may be, after expiration of the Eligibility Period for such time that Tenant continues to be so prevented from using, and does not use for the normal conduct of Tenants business, the Premises or a portion thereof, in the proportion that the rentable area of the portion of the Premises that Tenant is prevented from using, and does not use, bears to the total rentable area of the Premises; provided, however, in the event that Tenant is prevented from using, and does not use, a portion of the Premises for a period of time in excess of the Eligibility Period and the remaining portion of the Premises is not sufficient to allow Tenant to effectively conduct its business therein, and if Tenant does not conduct its business from such remaining portion, then for such time after expiration of the Eligibility Period during which Tenant is so prevented from effectively conducting its business therein, the Base Rent and Tenants Share of Direct Expenses for the entire Premises and Tenants obligation to pay for parking shall be abated for such time as Tenant continues to be so prevented from using, and does not use, the Premises. If, however, Tenant reoccupies any portion of the Premises during such period, the Rent allocable to such reoccupied portion, based on the proportion that the rentable area of such reoccupied portion of the Premises bears to the total rentable area of the Premises, shall be payable by Tenant from the date Tenant reoccupies such portion of the Premises. To the extent an Abatement Event is caused by an event covered by Articles 11 or 13 of this Lease, then Tenants right to abate rent shall be governed by the terms of such Article 11 or 13, as applicable, and the Eligibility Period shall not be applicable thereto. Such right to abate Base Rent and Tenants Share of Direct Expenses shall be Tenants sole and exclusive remedy for rent abatement at law or in equity for an Abatement Event. Except as provided in this Section 19.5.2, nothing contained herein shall be interpreted to mean that Tenant is excused from paying Rent due hereunder. To the extent Tenant has prepaid rent (as it does each month since Rent is due on the first day of each month) and Tenant is subsequently entitled to an abatement, such prepaid, and subsequently abated, Rent shall be (A) credited to the Rent next coming due under this Lease, or, if the Lease Term has expired or the Lease has been terminated in accordance with the terms hereof, (B) refunded to Tenant within thirty (30) days following such expiration or earlier termination.
ARTICLE 20
COVENANT OF QUIET ENJOYMENT
Landlord covenants that Tenant, on paying the Rent, charges for services and other payments herein reserved and on keeping, observing and performing all the other terms, covenants, conditions, provisions and agreements herein contained on the part of Tenant to be kept, observed and performed, shall, during the Lease Term, peaceably and quietly have, hold and enjoy the Premises subject to the terms, covenants, conditions, provisions and agreements hereof without interference by any persons lawfully claiming by or through Landlord. The foregoing covenant is in lieu of any other covenant express or implied.
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ARTICLE 21
TENANTS DOGS
21.1 In General. Subject to applicable laws and the provisions of this Section 21.1, and further subject to any additional reasonable rules and regulations as may be promulgated by Landlord from time to time, Tenant shall be permitted to bring up to a maximum of five (5) non-aggressive, fully-domesticated, fully-vaccinated, and potty-trained dogs into the Premises (which dogs are currently owned by Tenant or its employees). The aforementioned dogs shall, individually or collectively, be referred to herein as Tenants Dogs. Tenant agrees that all Tenants Dogs shall be less than eighty (80) pounds in weight each. Tenant represents and warrants that none of Tenants Dogs are of the following breeds of dog (or a mix comprised of one or more of the following): Pit Bull, Chow, Alaskan Malamutes, Rottweiler, Doberman, Husky, Rhodesian Ridgeback or Presa Canario. Tenants Dogs shall enter the Premises only through an entrance designated by Landlord and shall not be permitted in any Building lobbies. Tenants Dogs shall be strictly controlled and supervised at all times by Tenants employees (including, without limitation, by keeping Tenants Dogs on leashes at all times while in the Common Areas). Within fifteen (15) days following Tenants receipt of Landlords request therefor, Tenant shall provide Landlord with satisfactory evidence showing that all current vaccinations, flea treatments, and training certifications (if any) have been received by Tenants Dogs. Tenants Dogs must have both heartworm and flea and tick prevention on a monthly basis, and none of Tenants Dogs shall be brought to the Building in the event one (1) of Tenants Dogs becomes ill or contracts a disease that could potentially threaten the health or wellbeing of any occupants of the Building (which diseases may include, but shall not be limited to, rabies, leptospirosis and Lyme disease). Tenant shall not permit any objectionable dog related noises or odors to emanate from the Premises, and in no event shall Tenants Dogs be kept in the Building overnight. Without limiting the foregoing, in no event shall Tenant allow opened dog food to be left out for more than one (1) day. Tenants Dogs shall not be permitted to enter into any core area bathrooms in the Building at any time. Tenants Dogs shall not bark excessively or otherwise create a nuisance at the Building. All bodily waste generated by Tenants Dogs in or about the Building or the Common Areas outside the Building shall be immediately removed and disposed of in trash receptacles designated by Landlord, and any areas of the Building affected by such waste shall be cleaned and otherwise sanitized to a condition consistent with Landlords commercially reasonable standards applicable thereto. Tenants Dogs shall not be permitted to enter the Building if Tenants Dogs previously exhibited dangerously aggressive behavior. Tenants Dogs shall not interfere with other tenants, licensees, invitees or those having business in the Building. Notwithstanding any provision to the contrary contained in the Lease, Landlord shall have the right at any time to (i) rescind Tenants right to have Tenants Dogs in the Building if, in Landlords reasonable discretion, at least three (3) times in a twelve (12) month period, any of Tenants Dogs are found to be a substantial nuisance to the Building (for purposes hereof, Tenants Dogs may found to be a substantial nuisance if, without limitation, any of Tenants Dogs repeatedly defecates in the common areas or damages the Building or any property at the Building that is not in the Premises) (the Substantial Nuisance), or (ii) rescind Tenants right to have a particular dog in the Building if, in Landlords reasonable discretion, that dog (a) commits an act which is a Substantial Nuisance; (b) Landlord receives complaints from any Building tenant as a result of that dog being present at or outside of the Building, not including the Premises; or (c) Landlord receives any notice of violation or default of any Applicable Laws or any covenants, conditions, restrictions or matters of record affecting the Building as a result of that dog.
21.2 Costs and Expenses. Tenant shall be fully responsible for all costs and expenses associated with Tenants Dogs, relating to the costs of repairing any damage caused by Tenants Dogs to the Building or any common areas outside of the Building to Landlords satisfaction. Tenant shall pay to Landlord, within five (5) business days after demand therefor, all costs incurred by Landlord in connection with Tenants Dogs presence in the Building, relating to janitorial, waste disposal, landscaping, signage, repair, administrative, and legal costs and expenses.
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21.3 Indemnity. Without limiting the other provisions of this Lease, Tenant hereby agrees to protect, defend, indemnify and hold Landlord and its subsidiaries, partners, and affiliates and their respective members, shareholders, officers, directors, agents, employees and contractors, and each of them, harmless from and against any and all third party claims arising from Tenants Dogs in the Building, including (i) all actual damages arising or resulting from Tenants Dogs in the Building, (ii) any violation of any applicable laws, regulations, ordinances or any covenants, conditions, restrictions or matters of record affecting the Building and (ii) any personal injuries or property damage. The foregoing indemnity shall survive the expiration or earlier termination of the Lease.
21.4 Rights Personal to Original Tenant. Tenants right to bring Tenants Dogs into the Premises pursuant to this Article 21 is personal to the Tenant.
ARTICLE 22
LETTER OF CREDIT
22.1 Letter of Credit. Tenant shall deposit with Landlord promptly following the mutual execution and delivery of this Lease (and the effectiveness of this Lease shall be expressly conditioned upon such deposit of the Letter of Credit by Tenant with Landlord), an unconditional (except to the extent the same may be conditioned to the extent set forth in this Section), clean, unconditional, irrevocable, renewable and transferable letter of credit (together with all renewals and replacements thereof, the Letter of Credit) substantially in the form attached hereto as Exhibit J, and in the amount of the Security Deposit (set forth in Item 9 of the Summary), which amount, in either case, shall be reduced from time to time in accordance with the provisions of this Article 22, issued by and drawn on a bank which is a member of the New York Clearing House and which has a banking office dedicated to the administration and payment of letters of credit in the State of California (or permits draws by facsimile or overnight mail to an office outside the State of California), which bank must be reasonably satisfactory to Landlord, for the account of Landlord, for an initial term of not less than one (1) year and shall provide for its automatic renewal from year to year unless terminated by the issuing bank or replaced by Tenant with another bank reasonably acceptable to Landlord by notice to Landlord given not less than thirty (30) days prior to its expiration date by registered or certified mail (and the final expiration date of the final Letter of Credit shall be no earlier than thirty (30) days following the end of the Term), as security for the faithful performance and observance by Tenant of the terms, conditions and provisions of this Lease, including the surrender of possession of the Premises to Landlord as herein provided. Landlord hereby approves First Choice Bank as issuing bank, provided that U.S. Bank National Association acts as confirming bank with respect to such Letter of Credit (each, an Approved Bank). Additionally, the Letter of Credit (i) may be drawn at the State of California banking office of the issuer (or by facsimile or overnight mail to an office outside the State of California) and must allow for draws to be made at sight pursuant to a form of draw request which has been reasonably approved by Landlord; (ii) must allow for one draw in the whole amount or multiple partial draws upon certification from Landlord that the amounts are being drawn in accordance with the terms of this Lease (and Landlord shall not, as a condition to any draw, be required to
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deliver any certificate, affidavit or other writing to the issuer expressing the specific basis for the draw; nor shall the issuer have the right to inquire as to the basis for the draw or require instruction or authorization from any party other than Landlord; nor shall issuer be permitted to withhold a draw, when requested by Landlord, as a result of any instruction from any other party); (iii) shall be freely transferable, in whole, but not in part, by Landlord to any purchaser of the Project, or any lender with a first lien security interest in the Project; (iv) shall be governed by (A) the International Standby Practices (SP 98 published by the International Chamber of Commerce) or (B) the United Nations Convention on Independent Guarantees and Standby Letters of Credit; and (v) shall otherwise be in such form and shall be subject to such requirements as Landlord may reasonably require. Without limiting the generality of the foregoing, but without contradicting the express terms set forth above, the Letter of Credit must be issued by a bank or financial institution (except to the extent the same is an Approved Bank) reasonably acceptable to Landlord (x) that is chartered under the laws of the United States, any state thereof or the District of Columbia, and which is insured by the Federal Deposit Insurance Corporation, (y) whose long-term debt ratings on bank level senior debt obligations are rated in not lower than the second highest category by at least two of Fitch Ratings Ltd. (Fitch), Moodys Investors Service, Inc. (Moodys) and Standard & Poors Ratings Services (S&P) or their respective successors (collectively, the Rating Agencies) (which, as of the date hereof, shall mean AA from Fitch, Aa from Moodys or AA from S&P) and (z) which has a short-term deposit rating at the bank level in the highest category from at least two Rating Agencies (which shall mean F1 from Fitch, P-1 from Moodys and A-1 from S&P).
Tenant shall be required to maintain the Letter of Credit in the amount of the Security Deposit in full force and effect throughout the Term of the Lease, or otherwise deposit the applicable amount of cash with Landlord. Accordingly, Tenant shall renew any Letter of Credit from time to time, at least thirty (30) days prior to the expiration thereof, and deliver to Landlord a new Letter of Credit in the amount of the Security Deposit or an endorsement to the Letter of Credit, and any other evidence reasonably required by Landlord, that the Letter of Credit has been renewed for a period of at least one (1) year. If Tenant fails to renew the Letter of Credit as aforesaid, Landlord may present the Letter of Credit for payment on or after the date which is ten (10) Business Days prior to the expiration thereof and retain the proceeds thereof as security in lieu of the Letter of Credit. Upon delivery to Landlord of any new or replacement Letter of Credit, Landlord shall return to Tenant for cancellation, together with any reasonable evidence required by the issuer authorizing cancellation, any Letter of Credit then held by Landlord. If Tenant shall have fully complied with all of the covenants and conditions of the Lease, the Letter of Credit shall be returned to Tenant or, if Landlord has drawn on the Letter of Credit, the remaining proceeds of the Letter of Credit which are in excess of sums due the Landlord shall be repaid to Tenant, without interest, within thirty (30) days after the expiration or termination of the Lease, delivery of possession of the Premises by Tenant to Landlord in accordance with the Lease, and the satisfaction by Tenant of all of its obligations under the Lease.
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Notwithstanding anything to the contrary contained in this Lease, the Security Deposit shall be reduced in accordance with the following schedule:
Reduction Date |
Reduction Amount |
Security Deposit Amount after
Reduction |
||||||
Last day of the 48th month of the initial Term |
$ | 271,428.57 | $ | 1,628,571.50 | ||||
Last day of the 60th month of the initial Term |
$ | 271,428.57 | $ | 1,357,143.00 | ||||
Last day of the 72nd month of the initial Term |
$ | 271,428.57 | $ | 1,085,714.50 | ||||
Last day of the 84th month of the initial Term |
$ | 271,428.57 | $ | 814,286.00 | ||||
Last day of the 96th month of the initial Term |
$ | 271,428.57 | $ | 542,856.43 | ||||
Last day of the 108th month of the initial Term |
$ | 271,428.57 | $ | 271,428.57 | ||||
Last day of the 120th month of the initial Term |
$ | 316,666.66 | $ | -0- |
Tenant agrees and acknowledges that the foregoing Security Deposit reduction schedule is conditioned upon no event of Default occurring (beyond the expiration of any applicable notice and cure periods set forth in this Lease) on more than three (3) occasions during any twelve (12) month period and/or no event of Default existing under this Lease (beyond the expiration of any applicable notice and cure periods set forth in this Lease). In the event an event of Default occurs (beyond the expiration of any applicable notice and cure periods set forth in this Lease) on more than three (3) occasions during any twelve (12) month period and/or an event of Default exists under this Lease (beyond the expiration of any applicable notice and cure periods set forth in this Lease), then the foregoing reduction schedule shall be null and void and Tenant not be entitled to any further reduction of the Security Deposit.
To the extent Tenant is permitted to replace or reduce the Letter of Credit pursuant to the terms hereof, Landlord agrees to reasonably cooperate with Tenant, at no cost or expense to Landlord, in connection with Tenants efforts to effectuate any such replacement or reduction.
ARTICLE 23
SIGNS; ROOF RIGHTS
23.1 Within Premises. Subject to Landlords prior written approval, in its reasonable discretion, and provided all signs are in keeping with the quality, design and style of the Building and the Project, Tenant, at its sole cost and expense, may install identification signage anywhere in the Premises, provided that such signs must not be visible from the exterior of the Building.
23.2 Prohibited Signage and Other Items. Any signs, notices, logos, pictures, names or advertisements which are installed which are visible from the exterior of the Premises and that have not been separately approved by Landlord may be removed at the sole expense of Tenant upon three (3) business days prior written notice by Landlord. Except as described in Section 23.3
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below, Tenant may not install any signs on the exterior or roof of the Project or the Common Areas. Any signs, window coverings, or blinds (even if the same are located behind the Landlord-approved window coverings for the Building), or other items visible from the exterior of the Premises or Building, shall be subject to the prior approval of Landlord, in its sole discretion.
23.3 Exterior Signage.
23.3.1 Monument Signage. As of the mutual execution and delivery of this Lease and continuing throughout the Lease Term, as the same may be extended, and subject to obtaining all required governmental approvals, Original Tenant and any Affiliate or Permitted Transferee Assignee, at Tenants sole cost and expense, shall have the non-exclusive right to install (including the fabrication of the sign panel) its name and logo on one (1) monument sign to be installed by Landlord, in the approximate location set forth and as generally shown on Exhibit H attached hereto (the Monument Sign). As shown in Exhibit H, Landlord confirms that Tenants sign panel shall be in the second highest position on the Monument Sign. Notwithstanding the foregoing, Landlord shall have the right to assume responsibility for the fabrication of Tenants Monument Sign panel, in which event Tenant shall reimburse Landlord for Landlords reasonable cost of such fabrication within twenty (20) days following a written request therefor. Landlord shall work with Tenant to obtain City approval of such Monument Sign. Any such installation, repair and/or maintenance shall be subject to compliance with Applicable Laws and Landlords prior approval, which approval shall not be unreasonably withheld, conditioned or delayed. Landlord shall be entitled to grant exterior signage rights to other tenants in the Project, so long as Tenants right to install and maintain signage at the Project as set forth in this Article 23 (including Tenants right to the Monument Sign) is not diminished or affected as a result. Landlord and Tenant shall use commercially reasonable efforts to complete the installation of Tenants Monument Sign in a timely manner following the mutual execution and delivery of this Lease, and the parties acknowledge and agree that, to the extent the requirements set forth in this Section 23.2.1 are satisfied prior to the Lease Commencement Date, Tenant shall be permitted to install the Monument Sign prior to the Lease Commencement Date.
23.3.2 Signage Rights to Other Tenants. Subject to the terms of Article 23, Landlord is entitled to grant exterior signage rights to third parties.
23.3.3 Removal of Signage. Upon the expiration or earlier termination of this Lease (or the termination of any of Tenants signage rights as described in Section 23.3 above), Tenant shall, at Tenants sole cost and expense, cause all of Tenants applicable signage to be removed (including the Monument Sign panel) and shall cause such signage to be restored to the condition existing prior to the placement of such signage. If Tenant fails to remove such signage as provided in the immediately preceding sentence within thirty (30) days following the expiration or earlier termination of this Lease (or termination of Tenants signage rights), then Landlord may perform such work, and all costs and expenses incurred by Landlord in so performing such work shall be reimbursed by Tenant to Landlord within thirty (30) days after Tenants receipt of an invoice therefor. The immediately preceding sentence shall survive the expiration or earlier termination of this Lease. Any signs, notices, logos, pictures, names or advertisements which are installed and that have not been individually approved by Landlord may be removed upon notice by Landlord at the sole expense of Tenant.
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23.4 Name Change. If Tenant changes its name at any time, Tenant shall have the right, at Tenants cost, to make such changes to its signage as necessary to reflect the changed name, and may modify or change existing signs to do so. Any such changes or alterations to existing signage at the Project shall be subject to compliance with Applicable Laws and Landlords prior approval as to the shape, size and location of any such changes or alterations, which approval shall not be unreasonably withheld, conditioned or delayed. To the extent Tenant desires to change the name and/or logo set forth on new or existing signs, such name and/or logo shall not have a name which relates to an entity which is of a character or reputation, or is associated with a political faction or orientation, which is inconsistent with the quality of the Project, or which would otherwise reasonably offend a landlord of the First Class Buildings (an Objectionable Name).
23.5 Building Directory. Landlord shall, at its expense, provide a proportionate share of Tenant identification on the main directory located in the Building lobby. Any changes to Tenants identification on such directory shall be made by Landlord at Tenants sole expense.
ARTICLE 24
COMPLIANCE WITH LAW
Tenant shall not do anything or permit anything to be done in or about the Premises which will in any way conflict with any law, statute, ordinance or other governmental rule, regulation or requirement now in force or which may hereafter be enacted or promulgated (collectively, Applicable Laws). At its sole cost and expense, Tenant shall promptly comply with all Applicable Laws which relate to (i) Tenants use of the Premises, (ii) any Alterations made by Tenant to the Premises, and any Tenant Improvements in the Premises, or (iii) the Base Building, but as to the Base Building, only to the extent such obligations are triggered by Alterations made by Tenant to the Premises, or triggered by the Tenant Improvements to the extent such Tenant Improvements are not normal and customary business office improvements, or triggered by Tenants use of the Premises. Tenant shall not, however, be responsible for the cost of complying with Applicable Laws to the extent that any such compliance is required as a result of the Base Building (including the Base, Shell and Core constructed by Landlord) failing to comply with Applicable Laws in effect as of the date of delivery of the Premises to Tenant and unrelated to any of the items set forth in subparagraphs (i), (ii) and (iii) of the preceding sentence. Should any standard or regulation now or hereafter be imposed on Tenant by a state, federal or local governmental body charged with the establishment, regulation and enforcement of occupational, health or safety standards for employers, employees, landlords or tenants, then Tenant agrees, at its sole cost and expense, to comply promptly with such standards or regulations; provided, however, that Landlord shall be responsible for any changes to the Building Structure and the Building Systems (except to the extent triggered by any of the items identified in subparagraph (i), (ii) or (iii) above). Tenant shall be responsible, at its sole cost and expense, to make all alterations to the Premises as are required to comply with the governmental rules, regulations, requirements or standards described in this Article 24; provided that except as specifically stated in this Article 24, Tenant shall not be obligated to make any changes to the Building Structure or the Building Systems. The judgment of any court of competent jurisdiction or the admission of Tenant in any judicial action, regardless of whether Landlord is a party thereto, that Tenant has violated any of said governmental measures, shall be conclusive of that fact as between Landlord and Tenant. Tenant shall promptly pay all fines, penalties and damages that may arise out of or be
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imposed because of its failure to comply with the provisions of this Article 24. Landlord shall comply with all Applicable Laws relating to the Common Areas and the Base Building, provided that compliance with such Applicable Laws is not the responsibility of Tenant under this Lease, and provided further that Landlords failure to comply therewith would prohibit Tenant from obtaining or maintaining a certificate of occupancy for the Premises (or its legal equivalent), or would unreasonably and materially affect the safety of Tenants employees or invitees, would materially adversely affect Tenants use of, or access to, the Premises, or create a material health hazard for Tenants employees. In the event any hazardous materials exist (A) in the Premises prior to Landlords delivery to Tenant of the Premises for the construction of the Tenant Improvements, or (B) in the Base Building, and in each case such hazardous materials are (I) not brought onto the Premises or the Base Building by Tenant, and (II) required by law to be removed from the Premises or the Base Building, as applicable, Landlord shall remove such hazardous materials at its sole cost and expense. Landlord shall be permitted to include in Operating Expenses any costs or expenses incurred by Landlord under this Article 24 to the extent consistent with the terms of Section 4.2.4 above. Landlord hereby acknowledges and agrees that nothing contained in this Article 24 shall be deemed to alter or modify Landlords obligation, as set forth in the Tenant Work Letter, to deliver the Premises and the Base Building to Tenant in the conditions required by the terms of the Tenant Work Letter, including, as applicable, the Schedules attached thereto.
ARTICLE 25
LATE CHARGES
If any installment of Rent or any other sum due from Tenant shall not be received by Landlord or Landlords designee within five (5) business days after said amount is due, then Tenant shall pay to Landlord a late charge equal to five percent (5%) of the overdue amount plus any attorneys fees incurred by Landlord by reason of Tenants failure to pay Rent and/or other charges when due hereunder; notwithstanding the foregoing to the contrary, Tenant shall be entitled to notice of non-payment and a five (5) business day grace period prior to the imposition of such late charge on the first (1st) occasion in any Lease Year in which any installment of Rent is not timely paid by Tenant. The late charge shall be deemed Additional Rent and the right to require it shall be in addition to all of Landlords other rights and remedies hereunder or at law and shall not be construed as liquidated damages or as limiting Landlords remedies in any manner. In addition to the late charge described above, any Rent or other amounts owing hereunder which are not paid within ten (10) business days after the date they are due shall bear interest from the date when due until paid at a rate per annum equal to the lesser of (i) the annual Bank Prime Loan rate cited in the Federal Reserve Statistical Release Publication H.15(519), published weekly (or such other comparable index as Landlord and Tenant shall reasonably agree upon if such rate ceases to be published) plus two (2) percentage points, and (ii) the highest rate permitted by applicable law.
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ARTICLE 26
LANDLORDS RIGHT TO CURE DEFAULT; PAYMENTS BY TENANT
26.1 Landlords Cure. All covenants and agreements to be kept or performed by Tenant under this Lease shall be performed by Tenant at Tenants sole cost and expense and without any reduction of Rent, except to the extent, if any, otherwise expressly provided herein. If Tenant shall fail to perform any obligation under this Lease, and such failure shall continue in excess of the time allowed under Section 19.1.2, above, unless a specific time period is otherwise stated in this Lease, Landlord may, but shall not be obligated to, after the delivery of reasonable prior notice to Tenant, make any such payment or perform any such act on Tenants part without waiving its rights based upon any default of Tenant and without releasing Tenant from any obligations hereunder.
26.2 Tenants Reimbursement. Except as may be specifically provided to the contrary in this Lease, Tenant shall pay to Landlord, within thirty (30) days following delivery by Landlord to Tenant of statements therefor: (i) sums equal to expenditures reasonably made and obligations incurred by Landlord in connection with the remedying by Landlord of Tenants Defaults pursuant to the provisions of Section 26.1; (ii) sums equal to all losses, costs, liabilities, damages and expenses referred to in Article 10 of this Lease; and (iii) sums equal to all expenditures made and obligations incurred by Landlord in collecting or attempting to collect any past due Rent, including, without limitation, all legal fees and other amounts so expended. Tenants obligations under this Section 26.2 shall survive the expiration or sooner termination of the Lease Term.
ARTICLE 27
ENTRY BY LANDLORD
Landlord reserves the right at all reasonable times and upon not less than forty-eight (48) hours notice to Tenant (except in the case of an emergency) to enter the Premises to (i) inspect them; (ii) show the Premises to prospective investors, purchasers, or to current or prospective mortgagees, ground or underlying lessors or insurers or tenants; (iii) post notices of nonresponsibility; or (iv) alter, improve or repair the Premises or the Building, or for structural alterations, repairs or improvements to the Building or the Buildings systems and equipment. Notwithstanding anything to the contrary contained in this Article 27, Landlord may enter the Premises at any time to (A) perform services required of Landlord; (B) take possession due to any Default of this Lease in the manner provided herein; and (C) perform any covenants of Tenant which Tenant fails to perform following applicable notice and cure periods. Landlord shall use commercially reasonable efforts to minimize interference with the conduct of Tenants business in connection with such entries into the Premises. Landlord shall use good faith efforts to ensure that the performance of any such work of repairs or alterations shall not materially interfere with Tenants use of the Premises (or any portion thereof) for Tenants business purposes (Landlords efforts in such regard will include, where reasonably possible, limiting the performance of any such work which might be disruptive to weekends or the evening and the cleaning of any work area prior to the commencement of the next business day). Landlord may make any such entries without the abatement of Rent (except as specifically set forth in Section 19.5.2 of this Lease) and may take such reasonable steps as required to accomplish the stated purposes. Tenant hereby waives any claims for damages or for any injuries or inconvenience to or interference with Tenants business, lost profits, any loss of occupancy or quiet enjoyment of the Premises, and any other loss occasioned thereby. For each of the above purposes, Landlord shall at all times have a key with which to unlock all the doors in the Premises, excluding Tenants vaults, safes and special security areas designated in advance by Tenant. In an emergency, Landlord shall have the right to use any means that Landlord may deem proper to open the doors in and to the Premises.
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Notwithstanding anything to the contrary set forth in this Article 27, Tenant may designate in writing certain reasonable areas of the Premises as Secured Areas should Tenant require such areas for the purpose of securing certain valuable property or confidential information. In connection with the foregoing, Landlord shall not enter such Secured Areas except in the event of an emergency. Landlord need not clean any area designated by Tenant as a Secured Area and shall only maintain or repair such secured areas to the extent (i) such repair or maintenance is required in order to maintain and repair the Base Building; (ii) as required by Applicable Law, or (iii) in response to specific requests by Tenant and in accordance with a schedule reasonably designated by Tenant, subject to Landlords reasonable approval. Any entry into the Premises by Landlord in the manner hereinbefore described shall not be deemed to be a forcible or unlawful entry into, or a detainer of, the Premises, or an actual or constructive eviction of Tenant from any portion of the Premises. With respect to any entry onto the Premises made by Landlord in accordance with the terms of this Section 27.1, Tenant shall have the right to have a representative of Tenant accompany Landlord within the Premises, provided that such representative is made available at the time of Landlords entrance onto the Premises, and provided that such representative does not unreasonably interfere with Landlord. No provision of this Lease shall be construed as obligating Landlord to perform any repairs, alterations or decorations except as otherwise expressly agreed to be performed by Landlord herein.
ARTICLE 28
TENANT PARKING
Subject to the terms of this Article 28 and Landlords obligations under the Development Agreement, Tenant shall have the obligation to rent from Landlord, commencing on the Lease Commencement Date, the amount of unreserved parking passes set forth in Section 10 of the Summary. In addition, Tenant shall have the right, but not the obligation, to lease an additional one-half (0.5) unreserved parking pass for every 1,000 rentable square feet of the Premises, upon the terms and conditions and at the rates provided in Article 28 hereof. Tenant shall pay to Landlord for automobile parking passes on a monthly basis at the rates provided herein based on the location of such parking passes; provided, however, during the first Lease Year of the Lease Term, Tenant shall be entitled to rent the unreserved parking passes at a rate of Two Hundred Ten and 00/100 Dollars ($210.00) per unreserved parking pass per month and Three Hundred Twenty and 00/100 Dollars ($320.00) per reserved parking pass per month; and provided further, that commencing on the first anniversary of the Lease Commencement Date and on each anniversary of the Lease Commencement Date throughout the Lease Term (as the same may be extended), such rates shall increase by three and one-half percent (3.5%) per annum, calculated on a cumulative and compounded basis. The foregoing parking passes may only be utilized by Tenant, its Permitted Transferee Assignees or Affiliates and any other assignee, sublessee, or transferee of the Tenants interest in this Lease. In addition, Tenant shall be responsible for the full amount of any taxes imposed by any governmental authority in connection with the renting of such parking passes by Tenant or the use of the parking facility by Tenant. Tenants continued right to use the parking passes is conditioned upon Tenant abiding by all rules and regulations which are prescribed from time to time for the orderly operation and use of the parking facility where the parking passes are located, including any sticker or other identification system established by Landlord, Tenants cooperation in seeing that Tenants employees and visitors also comply with such rules and regulations and Tenant not being in Default under this Lease. Landlord specifically
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reserves the right to change the size, configuration, design, layout and all other aspects of the Project parking facility at any time and Tenant acknowledges and agrees that Landlord may, without incurring any liability to Tenant and without any abatement of Rent under this Lease, from time to time, temporarily (for not more than three [3] days unless due to force majeure) close-off or restrict access to the Project parking facility for purposes of permitting or facilitating any such development at the Project, construction, alteration or improvements; provided, however, that Landlord will use reasonable efforts to provide Tenant with reasonable advance notice of any such anticipated temporary close-off or restriction in access to the parking facility; provided, however, that Landlord shall not relocate Tenants reserved parking spaces. Landlord may delegate its responsibilities hereunder to a parking operator in which case such parking operator shall have all the rights of control attributed hereby to the Landlord. The parking passes rented by Tenant pursuant to this Article 28 are provided to Tenant solely for use by Tenants own personnel and such passes may not be transferred, assigned, subleased or otherwise alienated by Tenant, except in connection with a Transfer of the Premises pursuant to Article 14 of this Lease, without Landlords prior approval. Tenant may validate visitor parking by such method or methods as the Landlord may establish, at the validation rate from time to time generally applicable to visitor parking. Landlord shall cause the parking areas to be staffed in a manner reasonably determined by Landlord for efficient and effective parking operations at the Project.
ARTICLE 29
MISCELLANEOUS PROVISIONS
29.1 Terms; Captions. The words Landlord and Tenant as used herein shall include the plural as well as the singular. The necessary grammatical changes required to make the provisions hereof apply either to corporations or partnerships or individuals, men or women, as the case may require, shall in all cases be assumed as though in each case fully expressed. The captions of Articles and Sections are for convenience only and shall not be deemed to limit, construe, affect or alter the meaning of such Articles and Sections.
29.2 Binding Effect. Subject to all other provisions of this Lease, each of the covenants, conditions and provisions of this Lease shall extend to and shall, as the case may require, bind or inure to the benefit not only of Landlord and of Tenant, but also of their respective heirs, personal representatives, successors or assigns, provided this clause shall not permit any assignment by Tenant contrary to the provisions of Article 14 of this Lease.
29.3 No Air Rights. No rights to any view or to light or air over any property, whether belonging to Landlord or any other person, are granted to Tenant by this Lease. If at any time any windows of the Premises are temporarily darkened or the light or view therefrom is obstructed by reason of any repairs, improvements, maintenance or cleaning in or about the Project, the same shall be without liability to Landlord and without any reduction or diminution of Tenants obligations under this Lease.
29.4 Modification of Lease. Should any current or prospective mortgagee or ground lessor for the Building or the Project require a modification of this Lease, which modification will not cause an increased cost or expense to Tenant or in any other way materially and adversely change the rights and obligations of Tenant hereunder, then and in such event, Tenant agrees that
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this Lease may be so modified and agrees to execute (or make good faith comments to) whatever documents are reasonably required therefor and to deliver the same to Landlord within thirty (30) days following a request therefor. At the request of Landlord or any mortgagee or ground lessor, Tenant agrees to execute (or make good faith comments to) a short form of Lease and deliver the same to Landlord within thirty (30) days following the request therefor.
29.5 Transfer of Landlords Interest. Tenant acknowledges that Landlord has the right to transfer all or any portion of its interest in the Project or Building and in this Lease, and Tenant agrees that in the event of any such transfer, Landlord shall automatically be released from all liability under this Lease arising from and after the date of such transfer and Tenant agrees to look solely to such transferee for the performance of Landlords obligations hereunder after the date of transfer and such transferee shall be deemed to have fully assumed and be liable for all obligations of this Lease to be performed by Landlord, including the return of any security deposit, and Tenant shall attorn to such transferee. Tenant further acknowledges that Landlord may assign its interest in this Lease to a mortgage lender as additional security and agrees that such an assignment shall not release Landlord from its obligations hereunder and that Tenant shall continue to look to Landlord for the performance of its obligations hereunder.
29.6 Prohibition Against Recording. Except as provided in Section 29.4 of this Lease, neither this Lease, nor any memorandum, affidavit or other writing with respect thereto, shall be recorded by Tenant or by anyone acting through, under or on behalf of Tenant.
29.7 Landlords Title. Landlords title is and always shall be paramount to the title of Tenant. Nothing herein contained shall empower Tenant to do any act which can, shall or may encumber the title of Landlord.
29.8 Relationship of Parties. Nothing contained in this Lease shall be deemed or construed by the parties hereto or by any third party to create the relationship of principal and agent, partnership, joint venturer or any association between Landlord and Tenant.
29.9 Application of Payments. Landlord shall have the right to apply payments received from Tenant pursuant to this Lease, regardless of Tenants designation of such payments, to satisfy any obligations of Tenant hereunder, in such order and amounts as Landlord, in its sole discretion, may elect.
29.10 Time of Essence. Time is of the essence with respect to the performance of every provision of this Lease in which time of performance is a factor.
29.11 Partial Invalidity. If any term, provision or condition contained in this Lease shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term, provision or condition to persons or circumstances other than those with respect to which it is invalid or unenforceable, shall not be affected thereby, and each and every other term, provision and condition of this Lease shall be valid and enforceable to the fullest extent possible permitted by law.
29.12 No Warranty. In executing and delivering this Lease, Tenant has not relied on any representations, including, but not limited to, any representation as to the amount of any item comprising Additional Rent or the amount of the Additional Rent in the aggregate or that Landlord is furnishing the same services to other tenants, at all, on the same level or on the same basis, or any warranty or any statement of Landlord which is not set forth herein or in one or more of the exhibits attached hereto.
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29.13 Landlord Exculpation. The liability of Landlord or the Landlord Parties to Tenant in a suit brought by Tenant against Landlord for a breach by Landlord of the terms of this Lease shall be limited solely and exclusively to an amount which is equal to the interest of Landlord in the Project, including any condemnation, awards, rental, sales or insurance proceeds received by Landlord in connection with the Building. Neither Landlord, nor any of the Landlord Parties shall have any personal liability therefor, and Tenant hereby expressly waives and releases such personal liability on behalf of itself and all persons claiming by, through or under Tenant. The limitations of liability contained in this Section 29.13 shall inure to the benefit of Landlords and the Landlord Parties present and future partners, beneficiaries, officers, directors, trustees, shareholders, agents and employees, and their respective partners, heirs, successors and assigns. Under no circumstances shall any present or future partner of Landlord (if Landlord is a partnership), or trustee or beneficiary (if Landlord or any partner of Landlord is a trust), have any liability for the performance of Landlords obligations under this Lease. Notwithstanding any contrary provision herein, neither Landlord nor the Landlord Parties shall be liable under any circumstances for injury or damage to, or interference with, Tenants business, including but not limited to, loss of profits, loss of rents or other revenues, loss of business opportunity, loss of goodwill or loss of use, in each case, however occurring; similarly, except with respect to Tenants violations of the provisions of this Lease regarding Hazardous Materials and Tenants holding over in the Premises following the expiration or sooner termination of this Lease, Tenant shall not be liable under any circumstances for injury or damage to, or interference with, Landlords business, including, but not limited to, loss of profits or other revenues (not including, however, loss of rents), loss of business opportunity, loss of goodwill or loss of use, in each case, however occurring.
29.14 Entire Agreement. It is understood and acknowledged that there are no oral agreements between the parties hereto affecting this Lease and this Lease constitutes the parties entire agreement with respect to the leasing of the Premises and supersedes and cancels any and all previous negotiations, arrangements, brochures, agreements and understandings, if any, between the parties hereto or displayed by Landlord to Tenant with respect to the subject matter thereof, and none thereof shall be used to interpret or construe this Lease. None of the terms, covenants, conditions or provisions of this Lease can be modified, deleted or added to except in writing signed by the parties hereto.
29.15 Right to Lease. Landlord reserves the absolute right to effect such other tenancies in the Project as Landlord in the exercise of its sole business judgment shall determine to best promote the interests of the Building or the Project. Tenant does not rely on the fact, nor does Landlord represent, that any specific tenant or type or number of tenants shall, during the Lease Term, occupy any space in the Building or the Project.
29.16 Force Majeure. Any prevention, delay or stoppage due to strikes, lockouts, labor disputes, acts of God, inability to obtain services, labor, or materials or reasonable substitutes therefor, governmental actions, civil commotions, fire or other casualty, and other causes beyond the reasonable control of the party obligated to perform, except with respect to the obligations
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imposed with regard to Rent and other charges to be paid by Tenant pursuant to this Lease (collectively, a Force Majeure), shall excuse the performance of such party for a period equal to any such prevention, delay or stoppage and, therefore, if this Lease specifies a time period for performance of an obligation of either party, that time period shall be extended by the period of any delay in such partys performance caused by a Force Majeure. The provisions of this Section 29.16 shall not, however, delay (i) the trigger date for Tenants right to abatements in Rent as set forth in Section 19.5.2 above, or (ii) the date upon which Tenant may exercise its right to terminate this Lease following casualty described in Section 11.2 above except as expressly set forth in Section 11.2. In the event that either party is delayed from performing any obligation hereunder as a result of Force Majeure, such party shall promptly give notice to the other party of the delay in question, specifying in such notice the nature of the delay and, without any such estimate being deemed a representation or warranty, such partys good faith estimate of the length of the delay in question.
29.17 Waiver of Redemption by Tenant. Tenant hereby waives, for Tenant and for all those claiming under Tenant, any and all rights now or hereafter existing to redeem by order or judgment of any court or by any legal process or writ, Tenants right of occupancy of the Premises after any termination of this Lease.
29.18 Notices. All notices, demands, statements, designations, approvals or other communications (collectively, Notices) given or required to be given by either party to the other hereunder or by law shall be in writing, shall be (A) sent by United States certified or registered mail, postage prepaid, return receipt requested (Mail), (B) transmitted by telecopy, if such telecopy is promptly followed by a Notice sent by Mail, (C) delivered by a nationally recognized overnight courier, or (D) delivered personally. Any Notice shall be sent, transmitted, or delivered, as the case may be, to Tenant at the appropriate address set forth in Section 10 of the Summary, or to such other place as Tenant may from time to time designate in a Notice to Landlord, or to Landlord at the addresses set forth below, or to such other places as Landlord may from time to time designate in a Notice to Tenant. Any Notice will be deemed given (i) three (3) days after the date it is posted if sent by Mail, (ii) the date the telecopy is transmitted, (iii) the date the overnight courier delivery is made, or (iv) the date personal delivery is made. As of the date of this Lease, any Notices to Landlord must be sent, transmitted, or delivered, as the case may be, to the following addresses:
2834 Colorado Avenue, LLC
5446 Cleon Avenue
North Hollywood, CA 91601
Attention: Jack Walter
and
Elkins Kalt Weintraub Reuben Gartside LLP
2049 Century Park East, Suite 2700
Los Angeles, CA 90067-3202
Attention: Scott M. Kalt, Esq.
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29.19 Joint and Several. If there is more than one Tenant, the obligations imposed upon Tenant under this Lease shall be joint and several.
29.20 Authority. Each individual executing this Lease on behalf of Landlord and Tenant hereby represent and warrant that Landlord or Tenant (as applicable) is a duly formed and existing entity qualified to do business in California and that each person signing on behalf of Landlord and Tenant is authorized to do so.
29.21 Attorneys Fees. In the event that either Landlord or Tenant should bring suit for the possession of the Premises, for the recovery of any sum due under this Lease, or because of the breach of any provision of this Lease or for any other relief against the other, then all costs and expenses, including reasonable attorneys fees, incurred by the prevailing party therein shall be paid by the other party, which obligation on the part of the other party shall be deemed to have accrued on the date of the commencement of such action and shall be enforceable whether or not the action is prosecuted to judgment.
29.22 Governing Law; WAIVER OF TRIAL BY JURY. This Lease shall be construed and enforced in accordance with the laws of the State of California. IN ANY ACTION OR PROCEEDING ARISING HEREFROM, LANDLORD AND TENANT HEREBY CONSENT TO (I) THE JURISDICTION OF ANY COMPETENT COURT WITHIN THE STATE OF CALIFORNIA, (II) SERVICE OF PROCESS BY ANY MEANS AUTHORIZED BY CALIFORNIA LAW, AND (III) IN THE INTEREST OF SAVING TIME AND EXPENSE, TRIAL WITHOUT A JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER OF THE PARTIES HERETO AGAINST THE OTHER OR THEIR SUCCESSORS IN RESPECT OF ANY MATTER ARISING OUT OF OR IN CONNECTION WITH THIS LEASE, THE RELATIONSHIP OF LANDLORD AND TENANT, TENANTS USE OR OCCUPANCY OF THE PREMISES, AND/OR ANY CLAIM FOR INJURY OR DAMAGE, OR ANY EMERGENCY OR STATUTORY REMEDY. IN THE EVENT LANDLORD COMMENCES ANY SUMMARY PROCEEDINGS OR ACTION FOR NONPAYMENT OF BASE RENT OR ADDITIONAL RENT, TENANT SHALL NOT INTERPOSE ANY COUNTERCLAIM OF ANY NATURE OR DESCRIPTION (UNLESS SUCH COUNTERCLAIM SHALL BE MANDATORY) IN ANY SUCH PROCEEDING OR ACTION, BUT SHALL BE RELEGATED TO AN INDEPENDENT ACTION AT LAW.
29.23 Submission of Lease. Submission of this instrument for examination or signature by Tenant does not constitute a reservation of, option for or option to lease, and it is not effective as a lease or otherwise until execution and delivery by both Landlord and Tenant.
29.24 Brokers. Landlord and Tenant hereby warrant to each other that they have had no dealings with any real estate broker or agent in connection with the negotiation of this Lease, excepting only the real estate brokers or agents specified in Section 12 of the Summary (the Brokers), and that they know of no other real estate broker or agent who is entitled to a commission in connection with this Lease. Each party agrees to indemnify and defend the other party against and hold the other party harmless from any and all claims, demands, losses, liabilities, lawsuits, judgments, costs and expenses (including without limitation reasonable attorneys fees) with respect to any leasing commission or equivalent compensation alleged to be owing on account of any dealings with any real estate broker or agent, other than the Brokers, occurring by, through, or under the indemnifying party. The Brokers shall be compensated by Landlord pursuant to the provisions of a separate agreement.
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29.25 Independent Covenants. This Lease shall be construed as though the covenants herein between Landlord and Tenant are independent and not dependent and Tenant hereby expressly waives the benefit of any statute to the contrary and agrees that if Landlord fails to perform its obligations set forth herein, Tenant shall not be entitled to make any repairs or perform any acts hereunder at Landlords expense or to any setoff of the Rent or other amounts owing hereunder against Landlord.
29.26 Project or Building Name and Signage. Landlord shall have the right at any time to change the name of the Project or Building and to install, affix and maintain any and all signs on the exterior and on the interior (outside of the Premises) of the Project or Building as Landlord may, in Landlords sole discretion, desire; provided, however, that if Tenant has installed exterior signage pursuant to the provisions of Section 23.3 above, Landlord will not install signage which covers or blocks visibility of Tenants signage unless required pursuant to Applicable Law (in which event, Landlord will use commercially efforts to cooperate with Tenant in determining a suitable alternate location for Tenants exterior signage and allow Tenant to relocate its exterior signage to such alternate location at Landlords cost). Tenant shall not use the name of the Project or Building or use pictures or illustrations of the Project or Building in advertising or other publicity or for any purpose other than as the address of the business to be conducted by Tenant in the Premises, without the prior written consent of Landlord.
29.27 Counterparts. This Lease may be executed in counterparts with the same effect as if both parties hereto had executed the same document. Both counterparts shall be construed together and shall constitute a single lease.
29.28 Confidentiality. Tenant acknowledges that the content of this Lease and any related documents (including the availability of any expansion space or any and all notices and information provided to Tenant pursuant to Section 1.2 above) are confidential information. Tenant shall keep such confidential information strictly confidential and shall not disclose such confidential information to any person or entity other than Tenants investors, lenders, buyers, insurers, financial, legal, and space planning consultants or to the extent that disclosure is mandated by Applicable Law, the Securities Exchange Commission or the rules of any public exchange upon which Tenants shares are from time to time traded. Additionally, Tenant shall have the right to deliver a copy of this Lease (with economic terms redacted) to any proposed subtenant or assignee provided such subtenant or assignee agrees to keep the contents hereof confidential.
29.29 Transportation Management. Tenant shall fully comply with all present or future programs intended to manage parking, transportation or traffic in and around the Building, and in connection therewith, Tenant shall take responsible action for the transportation planning and management of all employees located at the Premises by working directly with Landlord, any governmental transportation management organization or any other transportation-related committees or entities.
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29.30 Building Renovations. It is specifically understood and agreed that Landlord has no obligation and has made no promises to alter, remodel, improve, renovate, repair or decorate the Premises, Building, or any part thereof and that no representations respecting the condition of the Premises or the Building have been made by Landlord to Tenant except as specifically set forth herein or in the Tenant Work Letter. However, Tenant hereby acknowledges that Landlord is currently developing the Project or may during the Lease Term renovate, improve, alter, or modify (collectively, the Renovations) the Project, the Building and/or the Premises. Tenant hereby agrees that such Renovations shall in no way constitute a constructive eviction of Tenant nor, subject to the provisions of Section 19.5.2 above, entitle Tenant to any abatement of Rent. Landlord shall have no responsibility and shall not be liable to Tenant for any injury to or interference with Tenants business arising from the Renovations, nor shall Tenant be entitled to any compensation or damages from Landlord for loss of the use of the whole or any part of the Premises or of Tenants personal property or improvements resulting from the Renovations, or for any inconvenience or annoyance occasioned by such Renovations.
29.31 No Violation. Tenant hereby warrants and represents that neither its execution of nor performance under this Lease shall cause Tenant to be in violation of any agreement, instrument, contract, law, rule or regulation by which Tenant is bound, and Tenant shall protect, defend, indemnify and hold Landlord harmless against any claims, demands, losses, damages, liabilities, costs and expenses, including, without limitation, reasonable attorneys fees and costs, arising from Tenants breach of this warranty and representation.
29.32 Communications and Computer Lines. Tenant may install, maintain, replace, remove or use any communications or computer wires and cables (collectively, the Lines) at the Building in or serving the Premises, provided that (i) Tenant shall obtain Landlords prior written consent, use an experienced and qualified contractor approved in writing by Landlord, and comply with all of the other provisions of Articles 7 and 8 of this Lease, (ii) an acceptable number of spare Lines and space for additional Lines shall be maintained for existing and future occupants of the Project, as determined in Landlords reasonable opinion, provided that Tenant shall always be entitled to, at a minimum, its proportionate share of such Lines based upon the rentable square footage of the Premises, (iii) the Lines therefor (including riser cables) shall be appropriately insulated to prevent excessive electromagnetic fields or radiation, and shall be surrounded by a protective conduit reasonably acceptable to Landlord, (iv) any new or existing Lines servicing the Premises shall comply with all applicable governmental laws and regulations, (v) as a condition to permitting the installation of new Lines, Landlord may require that Tenant remove existing Lines located in or serving the Premises and repair any damage in connection with such removal, and (vi) Tenant shall pay all costs in connection therewith. Landlord reserves the right to require that Tenant remove any Lines located in or serving the Premises which are installed in violation of these provisions, or which are at any time in violation of any laws or represent a dangerous or potentially dangerous condition.
29.33 Development of the Project.
29.33.1 Subdivision. Landlord reserves the right to further subdivide all or a portion of the Project. Tenant agrees to execute and deliver, upon demand by Landlord and in the form requested by Landlord, any additional documents needed to conform this Lease to the circumstances resulting from such subdivision.
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29.33.2 The Other Improvements. If portions of the Project or property adjacent to the Project (collectively, the Other Improvements) are owned by an entity other than Landlord, Landlord, at its option, may enter into an agreement with the owner or owners of any or all of the Other Improvements to provide (i) for reciprocal rights of access and/or use of the Project and the Other Improvements, (ii) for the common management, operation, maintenance, improvement and/or repair of all or any portion of the Project and the Other Improvements, (iii) for the allocation of a portion of the Direct Expenses to the Other Improvements and the operating expenses and taxes for the Other Improvements to the Project, and (iv) for the use or improvement of the Other Improvements and/or the Project in connection with the improvement, construction, and/or excavation of the Other Improvements and/or the Project. Nothing contained herein shall be deemed or construed to limit or otherwise affect Landlords right to convey all or any portion of the Project or any other of Landlords rights described in this Lease.
29.33.3 Construction of Project and Other Improvements. Tenant acknowledges that portions of the Project and/or the Other Improvements may be under construction following Tenants occupancy of the Premises, and that such construction may result in levels of noise, dust, obstruction of access, etc. which are in excess of that present in a fully constructed project. Subject to Section 19.5.2 above, Tenant will have no right to rental abatement or offset and hereby waives any claims of constructive eviction which may arise in connection with such construction.
29.34 Patriot Act and Executive Order 13224. Landlord and Tenant each represents, warrants and covenants that each party that (other than through the passive ownership of interests traded on a recognized securities exchange) constitutes, owns, controls, or is owned or controlled by such party, any guarantor hereof or any subtenant of Tenant is not, and at no time during the Lease Term will be, (i) in violation of any applicable laws relating to terrorism or money laundering, or (ii) among the parties identified on any list compiled pursuant to Executive Order 13224 for the purpose of identifying suspected terrorists or on the most current list published by the U.S. Treasury Department Office of Foreign Assets Control at its official website, http://www.treas.gov/ofac/tllsdn.pdf or any replacement website or other replacement official publication of such list.
29.35 Green Cleaning/Recycling Program. Tenant shall cooperate if and to the extent Landlord implements a green cleaning program and/or recycling program for the Project, and hereby agrees that the reasonable costs associated with any such green cleaning and/or recycling program shall be included in Operating Expenses.
29.36 Approvals. Whenever this Lease requires an approval, consent, determination, selection or judgment by either Landlord or Tenant, unless another standard is expressly set forth, such approval, consent, determination, selection or judgment and any conditions imposed thereby shall be reasonable and shall not be unreasonably withheld or delayed.
29.37 CASP. Landlord hereby advises Tenant that the Project has not undergone an inspection by a certified access specialist, and except to the extent expressly set forth in this Lease, Landlord shall have no liability or responsibility to make any repairs or modifications to the Premises or the Project in order to comply with accessibility standards. The following disclosure is hereby made pursuant to applicable California law:
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A Certified Access Specialist (CASp) can inspect the subject premises and determine whether the subject premises comply with all of the applicable construction-related accessibility standards under state law. Although state law does not require a CASp inspection of the subject premises, the commercial property owner or lessor may not prohibit the lessee or tenant from obtaining a CASp inspection of the subject premises for the occupancy or potential occupancy of the lessee or tenant, if requested by the lessee or tenant. The parties shall mutually agree on the arrangements for the time and manner of the CASp inspection, the payment of the fee for the CASp inspection, and the cost of making any repairs necessary to correct violations of construction-related accessibility standards within the premises. Cal. Civ. Code Section 1938(e). Any CASp inspection shall be conducted in compliance with reasonable rules in effect at the Building with regard to such inspections and shall be subject to Landlords prior written consent.
29.38 Energy Disclosure. Tenant acknowledges that, pursuant to California Public Resources Code Section 25402.10 and the regulations adopted pursuant thereto (collectively, together with any future law or regulation regarding disclosure of energy efficiency data with respect to the Building, Energy Disclosure Requirements), Landlord may be required in the future to disclose information concerning Tenants energy usage to certain third parties, including, without limitation, prospective purchasers, lenders and tenants of the Building (Tenant Energy Use Disclosure). Tenant shall cooperate with Landlord at no cost to Tenant with respect to any Tenant Energy Use Disclosure. Without limiting the generality of the foregoing, Tenant shall, within thirty (30) days following request from Landlord, disclose to Landlord all information reasonably requested by Landlord in connection with such Tenant Energy Use Disclosure, including, but not limited to, the amount of power or other utilities consumed within the Premises for which the meters for such utilities are in Tenants name, the number of employees working within the Premises, the operating hours for Tenants business in the Premises, and the type and number of equipment operated by Tenant in the Premises. Tenant acknowledges that this information shall be provided on a non-confidential basis and may be provided by Landlord to the applicable utility providers, the California Energy Commission (and other governmental entities having jurisdiction with respect to the Energy Disclosure Requirements), and any third parties to whom Landlord is required to make any Tenant Energy Use Disclosure. Tenant hereby (A) consents to all such Tenant Energy Use Disclosures, and (B) acknowledges that Landlord shall not be required to notify Tenant of any Tenant Energy Use Disclosure. Tenant agrees that Landlord shall not be liable for, and Tenant hereby releases Landlord from, any and all loss, cost, damage, expense and liability relating to, arising out of and/or resulting from any Tenant Energy Use Disclosure. In addition, Tenant represents to Landlord that any and all information provided by Tenant to Landlord pursuant to this paragraph shall be, to the best of Tenants knowledge, true and correct in all material respects. The terms of this paragraph shall survive the expiration or earlier termination of this Lease.
[Signature Page to Follow]
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IN WITNESS WHEREOF, Landlord and Tenant have caused this Lease to be executed the day and date first above written.
LANDLORD: | ||
2834 COLORADO AVENUE, LLC, a Delaware limited liability company | ||
By: |
/s/ Jack R. Walter |
|
Name: |
Jack Walter |
|
Title: |
Managing Member |
|
TENANT: | ||
FIGS, INC., a Delaware corporation | ||
By: |
/s/ Catherine Spear |
|
Name: |
Catherine Spear |
|
Title: |
Co-CEO |
Exhibit A
Exhibit B
Exhibit C
Exhibit D
Exhibit E
Exhibit F
Exhibit G
Exhibit H
Exhibit I
Exhibit J
Exhibit 10.13
FIGS, Inc.
2834 Colorado Avenue, Suite 100
Santa Monica, CA 90404
December 23, 2020
Jeffrey Lawrence
VIA EMAIL
Re: |
Offer of Employment |
Dear Jeffrey:
FIGS, Inc. (the Company) is pleased to offer you employment as the Companys Chief Financial Officer on the terms and conditions set forth in this letter agreement (the Agreement).
1. Commencement of Employment. Your employment with the Company as Chief Financial Officer will start on December 31, 2020 (the Start Date).
2. Duties. You will be responsible for all finance and accounting activities and will report to Catherine Spear. You shall devote your best efforts and full business time, skill and attention to the performance of your duties. You will also be expected to adhere to the general employment policies and practices of the Company that may be in effect from time to time, except that when the terms of this Agreement conflict with the Companys general employment policies or practices, this Agreement will control. You will work remotely from your home office and agree to travel on an as-needed basis. Subject to Section 7, the Company may change your position, duties, work location and compensation from time to time in its discretion, subject to the terms and conditions set forth herein. You agree that, during your employment with the Company, you will not engage in any other employment, occupation, consulting or other business activity, nor will you engage in any other activities that conflict with your obligations to the Company. Notwithstanding the foregoing, nothing herein shall prohibit you from serving on one (1) outside board of directors, subject to pre-approval by the Companys Board of Directors (the Board), which approval may be revoked by the Board in its reasonable discretion, provided that such commitment does not conflict with or otherwise interfere with your duties, obligations or responsibilities to the Company.
3. Salary. You will be paid an annual base salary of $500,000, less applicable deductions and withholdings, to be paid in accordance with the Companys payroll practices, as may be in effect from time to time.
4. Benefits. You will be eligible to participate in the Companys standard benefit programs, subject to the terms and conditions of such plans. The Company may, from time to time, change these benefits in its discretion. Additional information regarding these benefits is available for your review upon request.
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5. Stock Option. Subject to approval by the Board, the Company will grant you an option to purchase 227,468 shares of the Companys common stock (the Option). The Option shall vest over a four-year period, with one quarter (1/4) of the shares subject to the Option vesting on the one year anniversary of the Start Date and the remaining shares vesting equally over the following thirty-six (36) months of continuous service. The Option shall be issued pursuant to the terms and conditions of the Companys 2016 Equity Incentive Plan (the Plan), at an exercise price equal to 100% of the fair market value of the Companys common stock on the date of grant, as provided in the Plan and consistent with the requirements for an exemption from the application of Section 409A of the Internal Revenue Code (the Code), and shall be governed in all respects by the terms of the Plan, the grant notices and the option agreements. You will be eligible for additional option grants each year that you are employed with the Company, subject to board approval.
6. Performance Bonus. You will be eligible to earn an annual incentive bonus equal to $500,000. Whether you receive such a bonus, and the amount of any such bonus, shall be determined by the Board in its sole discretion, and shall be based upon achievement of performance objectives to be mutually agreed upon between you and the Board (or duly authorized committee thereof) and other criteria to be determined by the Board. Any bonus shall be paid within thirty (30) days after the Boards determination that a bonus shall be awarded but no later than seventy-five (75) days after the Companys fiscal year end. You must be employed on the day that your bonus (if any) is paid in order to earn the bonus. Therefore, if your employment is terminated either by you or the Company for any reason prior to the bonus being paid, you will not have earned the bonus and no partial or prorated bonus will be paid.
7. Severance.
(a) Termination For Cause; Resignation without Good Reason. If, at any time, the Company terminates your employment for Cause (as defined herein), or if you resign without Good Reason (as defined herein), or if either party terminates your employment as a result of your death or disability, you will receive your base salary accrued through your last day of employment, as well as any unused vacation (if applicable) accrued through your last day of employment. Under these circumstances, you will not be entitled to any other form of compensation from the Company, including any severance benefits.
(b) Termination without Cause; Resignation for Good Reason. If the Company terminates your employment without Cause, or you resign for Good Reason, and other than as a result of your death or disability, and provided such termination constitutes a separation from service (as defined under Treasury Regulation Section 1.409A-1(h), without regard to any alternative definition thereunder, a Separation from Service), then subject to your obligations below, you shall be entitled to receive the following severance benefits (collectively, the Severance Benefits):
(i) an amount equal to twelve (12) months of your then current base salary, less all applicable withholdings and deductions, paid over such twelve (12) month period, on the schedule described below (the Salary Continuation);
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(ii) if you timely elect continued coverage under COBRA for yourself and your covered dependents under the Companys group health plans following such termination or resignation of employment, then the Company shall pay the COBRA premiums necessary to continue your health insurance coverage in effect for yourself and your eligible dependents on the termination date until the earliest of (A) the close of the twelve (12) month period following the termination of your employment, (B) the expiration of your eligibility for the continuation coverage under COBRA, or (C) the date when you become eligible for substantially equivalent health insurance coverage in connection with new employment or self-employment; and
(iii) if your termination without Cause or resignation for Good Reason is effective within twelve (12) months following a Change in Control (as defined herein), then in addition to the benefits set forth in Section 7(b)(i) and (ii), the Company will also (A) pay you a lump-sum severance payment equal to your target bonus for the year in which your separation occurs, prorated for the amount of time that you were employed by the Company during such year (less deductions and withholdings); and (B) accelerate the vesting of the Option such that it will be deemed fully vested and exercisable as of your last day of employment with the Company. The lump sum severance payment described in this Section 7(b)(iii) will be paid to you with the first payment of the Salary Continuation set forth in Section 7(b)(i).
Such Severance Benefits are conditional upon (a) your continuing to comply with your obligations under your Employee Confidential Information and Invention Assignment Agreement; and (b) your delivering to the Company an effective, general release of claims in favor of the Company in a form acceptable to the Company within 60 days following your termination date. The Salary Continuation will be paid in equal installments on the Companys regular payroll schedule and will be subject to applicable tax withholdings over the period outlined above following the date of your termination date; provided, however, that no payments will be made prior to the 60th day following your Separation from Service. On the 60th day following your Separation from Service, the Company will pay you in a lump sum the Salary Continuation that you would have received on or prior to such date under the original schedule but for the delay while waiting for the 60th day in compliance with Code Section 409A and the effectiveness of the release, with the balance of the Salary Continuation being paid as originally scheduled.
8. Definitions.
(a) Cause. For purposes of this Agreement, Cause shall mean one or more of the following: (i) your willful failure substantially to perform your duties and responsibilities to the Company or violation of a Company policy; (ii) your commission of any act of fraud, embezzlement, dishonesty or any other misconduct that has caused or is reasonably expected to result in material injury to the Company; (iii) your unauthorized use or disclosure of any
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proprietary information or trade secrets of the Company or any other party to whom you owe an obligation of nondisclosure as a result of your relationship with the Company; or (iv) your material breach of any of your obligations under any written agreement or covenant with the Company. The determination as to whether you are being terminated for Cause shall be made in good faith by the Company and shall be final and binding. The foregoing definition does not in any way limit the Companys ability to terminate your employment at any time.
(b) Change in Control. For purposes of this Agreement, Change in Control means: (i) any consolidation or merger of the Company with or into any other corporation or other entity or person, other than any such consolidation or merger in which the holders of shares of capital stock of the Company immediately prior to such consolidation or merger continue to hold equity interests representing a majority of the voting power of the surviving entity (or, if the surviving entity is a wholly owned subsidiary, equity interests in its parent) immediately after such consolidation or merger; (ii) any transaction or series of related transactions in which in excess of 50% of the Companys voting power is transferred; provided, that a Change-of-Control shall not include any transaction or series of transactions principally for bona fide equity financing purposes in which cash is received by the Company or any successor or indebtedness of the Company is canceled or converted or a combination thereof; provided, further, that a Change-of-Control shall not include any transaction or series of transactions in which in excess of 50% of the voting power of Tulco, LLC is transferred; or (iii) a sale, transfer, lease, exclusive license or other disposition of all or substantially all of the assets of the Company in a single transaction or series of related transactions.
(c) Good Reason. For purposes of this Agreement, Good Reason means the occurrence of any of the following events without your consent: (i) a material reduction in your responsibilities or duties, provided, that neither a change in your title nor a reassignment following a Change of Control to a position that is substantially similar to the position held prior to such transaction shall constitute a material reduction in job responsibilities; (ii) a relocation of your work location to a location more than twenty-five (25) miles from the location at which you performed your duties immediately prior to the relocation; (iii) the Companys material breach of any of its obligations under this Agreement; or (iv) a material reduction in your base salary; provided, however, that any such termination shall only be deemed for Good Reason pursuant to this definition if: (A) you give the Company written notice, within thirty (30) days following the first occurrence of the condition(s) that you believe constitute(s) Good Reason, which notice shall describe such condition(s), of your intent to terminate for Good Reason; (B) the Company fails to remedy such condition(s) within thirty (30) days following receipt of such written notice (such 30-day period, the Cure Period); and (C) you voluntarily terminate your employment within thirty (30) days following the end of the Cure Period.
9. Section 409A. It is intended that all of the severance benefits and other payments payable under this letter satisfy, to the greatest extent possible, the exemptions from the application of Code Section 409A provided under Treasury Regulations 1.409A 1(b)(4), 1.409A 1(b)(5) and 1.409A 1(b)(9), and this letter will be construed to the greatest extent possible as consistent with those provisions. For purposes of Code Section 409A (including, without
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limitation, for purposes of Treasury Regulation Section 1.409A 2(b)(2)(iii)), your right to receive any installment payments under this letter (whether severance payments, reimbursements or otherwise) shall be treated as a right to receive a series of separate payments and, accordingly, each installment payment hereunder shall at all times be considered a separate and distinct payment. Notwithstanding any provision to the contrary in this letter, if you are deemed by the Company at the time of your Separation from Service to be a specified employee for purposes of Code Section 409A(a)(2)(B)(i), and if any of the payments upon Separation from Service set forth herein and/or under any other agreement with the Company are deemed to be deferred compensation, then to the extent delayed commencement of any portion of such payments is required in order to avoid a prohibited distribution under Code Section 409A(a)(2)(B)(i) and the related adverse taxation under Section 409A, such payments shall not be provided to you prior to the earliest of (i) the expiration of the six-month period measured from the date of your Separation from Service with the Company, (ii) the date of your death or (iii) such earlier date as permitted under Section 409A without the imposition of adverse taxation. Upon the first business day following the expiration of such applicable Code Section 409A(a)(2)(B)(i) period, all payments deferred pursuant to this paragraph shall be paid in a lump sum to you, and any remaining payments due shall be paid as otherwise provided herein or in the applicable agreement. No interest shall be due on any amounts so deferred.
10. Confidentiality Obligations. As condition of your employment, you must sign and abide by the Companys standard form of Employee Confidential Information and Invention Assignment Agreement, a copy of which is attached hereto as Exhibit A.
11. At-Will Employment. Your employment with Company will be at-will. This means that either you or Company may terminate your employment at any time, with or without Cause, and with or without advance notice.
12. Arbitration.
(a) Agreement to Arbitrate All Disputes. To ensure the timely and economical resolution of disputes that may arise between you and the Company, both you and the Company mutually agree that pursuant to the Federal Arbitration Act, 9 U.S.C. §1-16, and to the fullest extent permitted by applicable law, you will submit solely to final, binding and confidential arbitration any and all disputes, claims, or causes of action arising from or relating to: (i) the negotiation, execution, interpretation, performance, breach or enforcement of this Agreement; or (ii) your employment with the Company (including but not limited to all statutory claims); or (iii) the termination of your employment with the Company (including but not limited to all statutory claims). BY AGREEING TO THIS ARBITRATION PROCEDURE, BOTH YOU AND THE COMPANY WAIVE THE RIGHT TO RESOLVE ANY SUCH DISPUTES THROUGH A TRIAL BY JURY OR JUDGE OR THROUGH AN ADMINISTRATIVE PROCEEDING.
(b) Arbitrator Authority. The Arbitrator shall have the sole and exclusive authority to determine whether a dispute, claim or cause of action is subject to arbitration under this Arbitration section and to determine any procedural questions which grow out of such disputes, claims or causes of action and bear on their final disposition.
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(c) Individual Capacity Only. All claims, disputes, or causes of action under this Arbitration section, whether by you or the Company, must be brought solely in an individual capacity, and shall not be brought as a plaintiff (or claimant) or class member in any purported class or representative proceeding, nor joined or consolidated with the claims of any other person or entity. The Arbitrator may not consolidate the claims of more than one person or entity, and may not preside over any form of representative or class proceeding. To the extent that the preceding sentences in this paragraph are found to violate applicable law or are otherwise found unenforceable, any claim(s) alleged or brought on behalf of a class shall proceed in a court of law rather than by arbitration.
(d) Arbitration Process. Any arbitration proceeding under this Arbitration section shall be presided over by a single arbitrator and conducted by JAMS, Inc. (JAMS) in Los Angeles, CA under the then applicable JAMS rules for the resolution of employment disputes (available upon request and also currently available at http://www.jamsadr.com/rules-employment-arbitration/). You and the Company both have the right to be represented by legal counsel at any arbitration proceeding, at each partys own expense. The Arbitrator shall: (i) have the authority to compel adequate discovery for the resolution of the dispute; (ii) issue a written arbitration decision, to include the arbitrators essential findings and conclusions and a statement of the award; and (iii) be authorized to award any or all remedies that you or the Company would be entitled to seek in a court of law. The Company shall pay all JAMS arbitration fees in excess of the amount of court fees that would be required of you if the dispute were decided in a court of law.
(e) Excluded Claims. This Arbitration section shall not apply to any action or claim that cannot be subject to mandatory arbitration as a matter of law, including, without limitation, claims brought pursuant to the California Private Attorneys General Act of 2004, as amended, the California Fair Employment and Housing Act, as amended, and the California Labor Code, as amended, to the extent such claims are not permitted by applicable law to be submitted to mandatory arbitration and such applicable law is not preempted by the Federal Arbitration Act or otherwise invalid (collectively, the Excluded Claims). In the event you intend to bring multiple claims, including one of the Excluded Claims listed above, the Excluded Claims may be filed with a court, while any other claims will remain subject to mandatory arbitration.
(f) Injunctive Relief and Final Orders. Nothing in this Arbitration section is intended to prevent either you or the Company from obtaining injunctive relief in court to prevent irreparable harm pending the conclusion of any such arbitration. Any final award in any arbitration proceeding hereunder may be entered as a judgment in the federal and state courts of any competent jurisdiction and enforced accordingly.
13. Miscellaneous. This Agreement is the complete and exclusive statement of all of the terms and conditions of your employment with the Company, and supersedes and replaces
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any and all prior agreements or representations with regard to the subject matter hereof, whether written or oral. It is entered into without reliance on any promise or representation other than those expressly contained herein, and it cannot be modified, amended or extended except in a writing signed by you and a duly authorized member of the Board. This Agreement is intended to bind and inure to the benefit of and be enforceable by you and the Company, and our respective successors, assigns, heirs, executors and administrators, except that you may not assign any of your duties or rights hereunder without the express written consent of the Company. 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 invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but this Agreement will be reformed, construed and enforced as if such invalid, illegal or unenforceable provisions had never been contained herein. This Agreement shall be governed by the laws of the State of California.
This offer is subject to satisfactory proof of your right to work in the United States and satisfactory completion of a Company-required background check. If you agree to the terms and conditions set forth herein, please sign below by December 26, 2020.
We look forward to having you join us. If you have any questions about this Agreement, please do not hesitate to call me.
Best regards, |
FIGS, INC. |
/s/ Catherine Spear |
Catherine Spear |
Co-CEO |
/s/ Heather Hasson |
Heather Hasson |
Co-CEO |
Accepted and agreed: |
/s/ Jeffrey Lawrence |
Jeffrey Lawrence |
Date: 12 / 24 / 2020
EXHIBIT A
EMPLOYEE CONFIDENTIAL INFORMATION AND INVENTION ASSIGNMENT AGREEMENT
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the reference to our firm under the caption Experts and to the use of our report dated March 17, 2021 in the Registration Statement (Form S-1) and related Prospectus of FIGS, Inc. for the registration of shares of its Class A common stock.
/s/ Ernst & Young LLP |
Los Angeles, California
May 5, 2021
Exhibit 23.3
FIGS, Inc. |
April 20, 2021 |
2834 Colorado Avenue, Suite 100
Santa Monica, CA 90404
Dear FIGS, Inc.:
We, Frost & Sullivan of 3211 Scott Blvd, #203, Santa Clara, California, 95054, hereby consent to the filing with the Securities and Exchange Commission of a Registration Statement on Form S-1, and any amendments thereto (the Registration Statement) of FIGS, Inc., and any related prospectuses of (i) our name and all references thereto, and (ii) the statements set out in the Schedule hereto. We also hereby consent to the filing of this letter as an exhibit to the Registration Statement.
We further consent to the reference to our firm, under the caption Industry and Market Data in the Registration Statement, as acting in the capacity of an author of independent industry publications.
Yours faithfully,
/s/ Debbie Wong
Name: Debbie Wong
Designation: Vice President
For and on behalf of Frost & Sullivan
SCHEDULE
1. |
In 2020, the total addressable market of the healthcare apparel industry was an estimated $12.0 billion in the United States and $79.0 billion globally, according to an April 2021 Frost & Sullivan study that we commissioned. |
2. |
Supported by these key trends, the healthcare apparel industry is expected to demonstrate strong and consistent growth, with the total addressable market in the United States expected to grow by a 6.1% CAGR over the next five years, from approximately $12.0 billion in 2020 to approximately $16.0 billion in 2025, according to the Frost & Sullivan study. |
3. |
In 2020, the total addressable market of the U.S. healthcare apparel industry was approximately $12.0 billion, according to the Frost & Sullivan study. |
4. |
Among U.S. healthcare professionals and medical students, we have aided and unaided brand awareness of 55% and 22%, respectively, according to a survey performed by Frost & Sullivan. |
5. |
According to the Frost & Sullivan study, the number of healthcare professionals and medical students internationally is expected to grow from approximately 118 million in 2020 to an estimated 124 million in 2025, and the total addressable market for international healthcare apparel is expected to grow from an estimated $67.0 billion in 2020 to an estimated $86.0 billion in 2025. |
6. |
Certain information in this prospectus is based on the following research study, which we commissioned: Frost & Sullivan, US and Global Total Addressable Market (TAM) Assessment for the Medical Apparel Market, April 2021. The Frost & Sullivan study included a quantitative and qualitative analysis of the industry through primary and secondary research, including a quantitative survey, encompassing 200 respondents in the United States, all of whom were either professionals or medical students over the age of 18, wear scrubs to work or at school and own or have purchased at least one set of scrubs in the past 12 months. The Frost & Sullivan study calculated the U.S. and global total addressable markets for the healthcare apparel industry by identifying the total number of individuals in the engaged population (which is defined as healthcare professionals and medical students) and multiplying that number by the estimated average spend of the engaged population on medical apparel (based on data aggregated from the survey study). |